AGCO CORP /DE 10-K

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Our common stock is listed on the New York Stock Exchange and trades under the symbol AGCO. As of the close of business on February 22, 2021, the closing stock price was $126.50, and there were 379 stockholders of record (this number does not include stockholders who hold their stock through brokers, banks and other nominees). Performance Graph The following presentation is a line graph of our cumulative total shareholder return on our common stock on an indexed basis as compared to the cumulative total return of the S&P Mid-Cap 400 Index, the MVIS Global Agribusiness Index and a self-constructed peer group (“Custom Peer Group Index”) for the five years ended December 31, 2020. The MVIS Global Agribusiness Index has been added to the performance chart during 2020 to replace the Custom Peer Group Index based upon the MVIS Global Agribusiness Index's closer alignment to our business. In the future, we will not include the Custom Peer Group Index. Our total returns in the graph are not necessarily indicative of future performance. Cumulative Total Return for the Years Ended December 31, 2015 2016 2017 2018 2019 2020 AGCO Corporation $ 100.00 $ 128.82 $ 160.39 $ 126.22 $ 176.74 $ 238.19 S&P Midcap 400 Index 100.00 120.74 140.35 124.80 157.49 179.00 MVIS Global Agribusiness Index 100.00 112.51 136.95 128.61 156.90 179.96 Custom Peer Group Index 100.00 142.46 206.15 175.30 227.23 304.62 The total return assumes that dividends were reinvested and is based on a $100 investment on December 31, 2015. The Custom Peer Group Index is a self-constructed peer group of companies that includes: Caterpillar Inc., CNH Industrial NV, Cummins Inc., Deere & Company, Eaton Corporation Plc., Ingersoll-Rand Plc., Navistar International Corporation, PACCAR Inc., Parker-Hannifin Corporation and Terex Corporation. 23 Table of Contents Issuer Purchases of Equity Securities There were no purchases of our common stock made by or on behalf of us during the three months ended December 31, 2020. Item 6. Selected Financial Data The following tables present our selected consolidated financial data. The data set forth below should be read together with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our historical Consolidated Financial Statements and the related notes. The Consolidated Financial Statements as of December 31, 2020 and 2019 and for the years ended December 31, 2020, 2019 and 2018 and the reports thereon are included in Item 8, “Financial Statements and Supplementary Data.” The historical financial data may not be indicative of our future performance. Years Ended December 31, 2020 2019 2018 2017 2016 (in millions, except per share data) Operating Data: Net sales $ 9,149.7 $ 9,041.4 $ 9,352.0 $ 8,306.5 $ 7,410.5 Gross profit 2,057.5 1,984.3 1,996.7 1,765.3 1,515.5 Income from operations 599.7 348.1 489.0 404.4 287.0 Net income 419.8 122.8 283.7 189.3 160.2 Net loss (income) attributable to noncontrolling interests 7.3 2.4 1.8 (2.9) (0.1) Net income attributable to AGCO Corporation and subsidiaries $ 427.1 $ 125.2 $ 285.5 $ 186.4 $ 160.1 Net income per common share — diluted $ 5.65 $ 1.63 $ 3.58 $ 2.32 $ 1.96 Cash dividends declared and paid per common share $ 0.63 $ 0.63 $ 0.60 $ 0.56 $ 0.52 Weighted average shares outstanding — diluted 75.6 77.0 79.7 80.2 81.7 As of December 31, 2020 2019 2018 2017 2016 (in millions, except number of employees) Balance Sheet Data: Cash and cash equivalents $ 1,119.1 $ 432.8 $ 326.1 $ 367.7 $ 429.7 Total assets 8,504.2 7,759.7 7,626.4 7,971.7 7,168.4 Total long-term debt, excluding current portion and debt issuance costs 1,256.7 1,191.8 1,275.3 1,618.1 1,610.0 Stockholders’ equity 3,018.0 2,907.0 2,993.5 3,095.3 2,837.2 Other Data: Number of employees 21,426 20,961 21,232 20,462 19,795 24 Table of Contents 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, seeding and tillage equipment, 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 ® , supported by our Fuse ® precision agriculture solutions. We distribute most of our products through a combination of approximately 3,250 dealers and distributors as well as associates and licensees. In addition, we provide retail and wholesale financing through our finance joint ventures with Rabobank. The COVID-19 pandemic created significant volatility in the global economy and 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 during the first half of 2020 was severely impacted by component availability, particularly during late March and throughout April, and therefore net sales levels during 2020 were directly impacted. The affected plants, primarily in Europe and South America, all resumed production in late April. During the third quarter of 2020, we were able to ramp up production and recover from supply chain disruptions experienced in the second quarter. 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 enacted cost saving measures, are working closely with our suppliers to maintain stable component availability, and are continuing to manage our cash flows and capital deployment to respond to the ongoing volatile environment. Financial Highlights 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 a function of the timing 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. 25 Table of Contents 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, 2020 (1) 2019 (1) 2018 (1) Net sales 100.0 % 100.0 % 100.0 % Cost of goods sold 77.5 78.1 78.6 Gross profit 22.5 21.9 21.4 Selling, general and administrative expenses 10.9 11.5 11.4 Engineering expenses 3.7 3.8 3.8 Amortization of intangibles 0.7 0.7 0.7 Impairment charges 0.2 2.0 — Restructuring expenses 0.2 0.1 0.1 Bad debt expense 0.2 0.1 0.1 Income from operations 6.6 3.9 5.3 Interest expense, net 0.2 0.2 0.6 Other expense, net 0.2 0.7 0.8 Income before income taxes and equity in net earnings of affiliates 6.1 2.9 3.9 Income tax provision 2.1 2.0 1.2 Income before equity in net earnings of affiliates 4.1 0.9 2.7 Equity in net earnings of affiliates 0.5 0.5 0.4 Net income 4.6 1.4 3.0 Net loss attributable to noncontrolling interests 0.1 — — Net income attributable to AGCO Corporation and subsidiaries 4.7 % 1.4 % 3.1 % ___________________________________ (1) Rounding may impact summation of amounts. 2020 Compared to 2019 Net income attributable to AGCO Corporation and subsidiaries for 2020 was $427.1 million, or $5.65 per diluted share, compared to $125.2 million, or $1.63 per diluted share for 2019. Net sales for 2020 were approximately $9,149.7 million, or 1.2% higher than 2019, primarily due to increased sales volumes in our South American region, partially offset by the negative impact of currency translation. Net sales were impacted by reduced production volumes caused by component availability and other impacts of the COVID-19 pandemic in the first half of 2020, but recovered in the second half of the year resulting from more normalized production levels and improved industry demand. Income from operations was $599.7 million in 2020 compared to $348.1 million in 2019. The increase in income from operations during 2020 was primarily the result of improved margins which benefited from positive pricing impacts, a favorable sales mix and cost control initiatives as compared to prior year. In addition, our 2019 income from operations included approximately $176.6 million of non-cash goodwill and other intangible asset impairment charges recorded during the fourth quarter of 2019 related to our grain storage and protein production systems operations in our Europe/Middle East (“EME”) region. Regionally, income from operations in EME decreased by approximately $52.9 million in 2020 compared to 2019, driven primarily by lower net sales (excluding positive currency translation impacts), as well as decreased production volumes and higher warranty costs. Sales volumes increased substantially in the second half of 2020 in the EME region, partially offsetting declines experienced in the second quarter due to production disruptions in our European operations. In our North American region, despite flat net sales levels, income from operations improved by approximately $72.1 million compared to the prior year. A favorable sales mix and expense control measures contributed to the improvement in the region. In South America, income from operations increased approximately $68.7 million in 2020 compared to 2019. The increase reflects increased net sales and production volumes, a richer margin product mix and cost containment efforts, partially offset by negative currency translation impacts. Income from operations in our Asia/Pacific/African (“APA”) region increased 26 Table of Contents approximately $18.7 million in 2020 compared to 2019, primarily due to higher net sales, a favorable sales mix and expense control efforts. Industry Market Conditions During 2020, the COVID-19 pandemic had a minimal impact on global crop production. However, the consumption of grain for food, fuel and livestock feed was negatively impacted by the economic constraints caused by the pandemic in the first half of the year. During the second half of 2020, grain consumption started to recover, consistent with improving economic activities and increased grain exports to China, thus reducing forecasts for ending grain inventories, and raising soft commodity prices. Consequently, global industry demand for farm equipment was mixed during 2020, but improved in the second half of the year across major markets. 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. In North America, industry unit retail sales of utility and high horsepower tractors increased approximately 10% in 2020 compared to 2019. Industry unit retail sales of combines for 2020 was flat compared to 2019. Retail sales growth was strongest for low horsepower tractors in 2020 compared to 2019, while retail sales of high horsepower tractors improved towards the end of 2020. The rise in commodity prices, along with the U.S. COVID-19 aid package for U.S. farmers and livestock producers, as well as an extended fleet age, all contributed to the improved demand. In Western Europe, industry unit retail sales of tractors for 2020 declined modestly compared to 2019. Industry unit retail sales of combines for 2020 increased approximately 1% compared to 2019. During 2020, industry sales were weakest in the markets of the United Kingdom and Scandinavia, partially offset by industry sales growth in Germany compared to 2019. Industry sales declined due largely to production constraints in the first half of 2020 caused by the COVID-19 pandemic. In addition, the impact of dry weather on certain grain markets was mostly offset by stronger grain export demand and supportive wheat prices. European dairy and livestock fundamentals stabilized after weakening earlier in 2020. In South America, industry unit retail sales of tractors for 2020 increased approximately 12% compared to 2019. Industry unit retail sales of combines for 2020 increased approximately 20% compared to 2019. Industry retail sales increased in Brazil and Argentina compared to the prior year, partially offset by weaker demand in most other South American markets. Robust crop production in Brazil and Argentina, as well as favorable exchange rates, supported positive economics for farmers. Results of Operations Net sales for 2020 were $9,149.7 million compared to $9,041.4 million for 2019, primarily as a result of improved market conditions in the second half of 2020 that offset reduced production volumes caused by component availability and other impacts of the COVID-19 pandemic in the first half of 2020. In addition, the following table sets forth, for the year ended December 31, 2020, the impact to net sales of currency translation by geographical segment (in millions, except percentages): Change Change due to Currency Translation 2020 2019 $ % $ % North America $ 2,175.0 $ 2,191.8 $ (16.8) (0.8) % $ (11.6) (0.5) % South America 873.8 802.2 71.6 8.9 % (221.8) (27.6) % EME 5,366.9 5,328.8 38.1 0.7 % 58.5 1.1 % APA 734.0 718.6 15.4 2.1 % 8.8 1.2 % $ 9,149.7 $ 9,041.4 $ 108.3 1.2 % $ (166.1) (1.8) % 27 Table of Contents Regionally, net sales in North America were flat in 2020 compared to 2019, with growth in sales of high horsepower tractors, replacement parts and Precision Planting equipment, offset by a reduction in sales of grain and protein equipment as well as sprayers. In the EME region, net sales were flat during 2020 compared to 2019, primarily due to increased sales in the second half of 2020 that helped to offset the lost production and supply chain constraints caused by the impacts from the COVID-19 pandemic experienced in the first half of 2020. Declines in net sales in France, Scandinavia and Central Europe were mostly offset by growth in Germany and Eastern Europe. Net sales increased in South America in 2020 compared to 2019, primarily due to sales increases in Brazil and Argentina, partially offset by decreased net sales in other South American markets. In the APA region, net sales increased in 2020 compared to 2019, primarily due to net sales increases in Australia and China, partially offset by net sales declines in Africa and smaller Asian markets. We estimate that worldwide average price increases were approximately 1.6% and 1.9% in 2020 and 2019, respectively. Consolidated net sales of tractors and combines, which comprised approximately 60.6% of our net sales in 2020, increased approximately 1.3% in 2020 compared to 2019. Unit sales of tractors and combines decreased approximately 1.1% during 2020 compared to 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. The following table sets forth, for the years ended December 31, 2020 and 2019, the percentage relationship to net sales of certain items included in our Consolidated Statements of Operations (in millions, except percentages): 2020 2019 $ % of Net Sales $ % of Net Sales (1) Gross profit $ 2,057.5 22.5 % $ 1,984.3 21.9 % Selling, general and administrative expenses 1,001.5 10.9 % 1,040.3 11.5 % Engineering expenses 342.6 3.7 % 343.4 3.8 % Amortization of intangibles 59.5 0.7 % 61.1 0.7 % Impairment charges 20.0 0.2 % 176.6 2.0 % Restructuring expenses 19.7 0.2 % 9.0 0.1 % Bad debt expense 14.5 0.2 % 5.8 0.1 % Income from operations $ 599.7 6.6 % $ 348.1 3.9 % ____________________________________ (1) Rounding may impact summation of amounts. Gross profit as a percentage of net sales increased during 2020 compared to 2019, primarily due to the benefits of improved pricing net of material costs and a favorable sales mix, partially offset by the impact of lower production volumes. Production hours decreased across all regions during 2020. Overall, global production hours decreased approximately 5% on a global basis during 2020 compared to 2019 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. While production hours recovered during the third quarter of 2020 from second quarter disruptions, our fourth quarter levels were flat compared to 2019 in order to facilitate dealer and company inventory reductions. The impacts of the COVID-19 pandemic continue to be unpredictable, and a range of factors could impact our future sales, including additional production and workforce constraints, government mandates and changing industry conditions impacted by commodity and protein prices, farmer sentiment and the other factors that we discuss under “Risk Factors.” We recorded stock compensation expense of approximately $1.1 million and $1.7 million during 2020 and 2019, respectively, within cost of goods sold, as is more fully explained in Note 1 of our Consolidated Financial Statements contained in Item 8, “Financial Statements and Supplementary Data.” Selling, general and administrative expenses (“SG&A expenses”) and engineering expenses, as a percentage of net sales, were lower during 2020 compared to 2019. The reduction in SG&A expenses as a percentage of net sales for 2020 was achieved through actions such as suspended merit compensation increases, reduced field sales and marketing activities and lower travel expenses. We recorded stock compensation expense of approximately $36.8 million and $40.0 million during 2020 and 2019, respectively, within SG&A expenses, as is more fully explained in Note 1 of our Consolidated Financial Statements contained in Item 8, “Financial Statements and Supplementary Data.” During 2020, we recorded a non-cash goodwill impairment charge of approximately $20.0 million related to a tillage and seeding equipment joint venture in which we own a 50% interest. The impairment charge was recorded as “Impairment charges” within our Consolidated Statements of Operations, with an offsetting benefit of approximately $10.0 million included 28 Table of Contents within “Net loss attributable to noncontrolling interests.” During 2019, we recorded a non-cash goodwill impairment charge of approximately $173.6 million associated with our grain storage and protein production systems operations in Europe/Middle East, as well as an impairment of long-lived intangible assets of approximately $3.0 million associated with brand and product rationalization within our grain storage and protein production systems operations in North America. These impairment charges are more fully described in “Critical Accounting Estimates - Goodwill, Other Intangible Assets and Long-Lived Assets” and Note 1 to our Consolidated Financial Statements contained in Item 8, “Financial Statements and Supplementary Data.” We recorded restructuring expenses of approximately $19.7 million and $9.0 million during 2020 and 2019, respectively. The restructuring expenses primarily related to severance and related costs associated with the rationalization of employee headcount at various manufacturing facilities and administrative offices located in the United States, Europe and South America during 2020, as well as the rationalization of our grain storage and protein production systems operations. In addition, during 2019 we recorded a loss of approximately $2.1 million within “Restructuring expenses” associated with the sale of our 50% interest in our USC, LLC joint venture. See Note 2 of our Consolidated Financial Statements contained in Item 8, “Financial Statements and Supplementary Data,” for additional information. Interest expense, net was $15.0 million for 2020 compared to $19.9 million for 2019. See “Liquidity and Capital Resources” for further information on our available funding. Other expense, net was $22.7 million in 2020 compared to $67.1 million in 2019. We have a minority equity interest in Tractors and Farm Equipment Limited (“TAFE”). During 2020, TAFE repurchased a portion of its common stock from us resulting in a gain of approximately $32.5 million recorded within “Other expense, net.” See Note 13 of our Consolidated Financial Statements contained in Item 8, “Financial Statements and Supplementary Data,” for additional information. In addition, losses on sales of receivables, primarily related to our accounts receivable sales agreements with our finance joint ventures in North America, Europe and Brazil, were approximately $24.1 million and $42.4 million in 2020 and 2019, respectively. The decrease in losses was primarily a result of lower accounts receivable balances and reduced interest rates in 2020 as compared to 2019. We recorded an income tax provision of $187.7 million in 2020 compared to $180.8 million in 2019. Our tax provision and effective tax rate are 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 for losses in jurisdictions where no income tax benefit is recorded. At December 31, 2020 and 2019, we had gross deferred tax assets of $360.9 million and $396.0 million, respectively, including $62.9 million and $72.0 million, respectively, related to net operating loss carryforwards. During 2019, we recognized a one-time income tax gain of approximately $21.8 million associated with the changing of Swiss federal and cantonal tax rates, as well as recognition of a deferred tax asset associated with the estimated value of a tax basis step-up of our Swiss subsidiary’s assets. During 2019, we also recorded a non-cash adjustment to establish a valuation allowance against our Brazilian net deferred income tax assets of approximately $53.7 million. At December 31, 2020, we had total valuation allowances as an offset to our gross deferred tax assets of approximately $181.0 million. This valuation allowance included allowances primarily against net operating loss carryforwards in Brazil, China, Hungary and the United Kingdom, as well as allowances against our net deferred taxes primarily in the U.S. and Brazil. At December 31, 2019, we had total valuation allowances as an offset to the gross deferred tax assets of approximately $169.1 million, primarily related to net operating loss carryforwards in Brazil, China, Hungary, the United Kingdom and the Netherlands, as well as allowances against our net deferred taxes in the U.S. and Brazil. Realization of the net deferred tax assets as of December 31, 2020 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. Refer to Note 5 of our Consolidated Financial Statements contained in Item 8, “Financial Statements and Supplementary Data,” for further information. Equity in net earnings of affiliates, which is primarily comprised of income from our AGCO Finance joint ventures, was $45.5 million in 2020 compared to $42.5 million in 2019, primarily due to higher net earnings from our AGCO Finance joint ventures. See “Finance Joint Ventures” for further information regarding our finance joint ventures and their results of operations and Note 4 of our Consolidated Financial Statements contained in Item 8, “Financial Statements and Supplementary Data,” for further information. 2019 Compared to 2018 A comparison of the results of operations for 2019 versus that of 2018 was included in our Annual Report on Form 10-K for the year ended December 31, 2019. 29 Table of Contents AGCO 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 AGCO 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 finance joint ventures, primarily through lines of credit. We do not guarantee the debt obligations of the joint ventures. In the United States and Canada, we guarantee certain minimum residual values to those joint ventures upon expiration of certain eligible leases between the finance joint ventures and end users. See “Commitments and Off-Balance Sheet Arrangements” and Note 11 to our Consolidated Financial Statements contained in Item 8, “Financial Statements and Supplementary Data,” for additional information. As of December 31, 2020, our capital investment in the finance joint ventures, which is included in “Investment in affiliates” on our Consolidated Balance Sheets, was approximately $395.3 million compared to $339.0 million as of December 31, 2019. The total finance portfolio in our finance joint ventures was approximately $10.7 billion and $9.6 billion as of December 31, 2020 and 2019, respectively. The total finance portfolio as of December 31, 2020 and 2019 included approximately $8.8 billion and $7.7 billion, respectively, of retail receivables and $1.9 billion of wholesale receivables from AGCO dealers as of both December 31, 2020 and 2019. 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 approximately $1.9 million of additional investments in our finance joint ventures, and there were no dividends paid from our finance joint ventures. Our finance joint ventures were restricted from paying dividends to us during 2020 as a result of COVID-19 pandemic banking regulations. During 2019, we did not make additional investments in our finance joint ventures, and we received dividends of approximately $40.5 million from certain of our finance joint ventures. Our share in the earnings of the finance joint ventures, included in “Equity in net earnings of affiliates” within our Consolidated Statements of Operations, was $45.0 million and $41.5 million for the years ended December 31, 2020 and 2019, respectively, with the increase in earnings primarily due to higher income in our U.S. and Canadian finance joint ventures during 2020 as compared to 2019, partially offset by lower income in certain of our European finance joint ventures. Outlook 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 and protein prices and general economic conditions. Our net sales are expected to increase in 2021 compared to 2020, resulting from improved forecasted industry demand, as well as positive pricing and foreign currency impacts. Gross and operating margins are expected to improve from 2020 levels, reflecting increased net sales and production volumes. Engineering expenses and other technology investments are expected to increase in 2021 compared to 2020 to support our product development plans as well as our precision agriculture and digital initiatives. 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 2021 relating to industry demand and other macroeconomic impacts of the COVID-19 pandemic. Refer to “Risk Factors” for further discussion of the COVID-19 pandemic. 30 Table of Contents 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 (in millions): December 31, 2020 Credit facility, expires 2023 $ 277.9 1.002% Senior term loan due 2025 (1) 306.7 Senior term loan due 2022 (1) 184.0 Senior term loans due between 2021 and 2028 (1) 806.0 Other long-term debt 10.5 ____________________________________ (1) The amounts above are gross of debt issuance costs of an aggregate amount of approximately $2.5 million. 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 $555.8 million as of December 31, 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 $277.9 million as of December 31, 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 2020. As of December 31, 2020, we had the ability to borrow approximately $277.9 million of 2020 term loans. Refer to Note 6 of our Consolidated Financial Statements contained in Item 8, “Financial Statements and Supplementary Data,” for further 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 December 31, 2020, we had no outstanding borrowings under the revolving credit facility, and the ability to borrow was approximately $800.0 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 $306.7 million as of December 31, 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. We had an additional term loan with the EIB in the amount of €200.0 million that was entered into in December 2014 and had a maturity date of January 15, 2020. We repaid this €200.0 million (or approximately $220.0 million) term loan in December 2019. In October 2018, we entered into a term loan agreement with Rabobank in the amount of €150.0 million (or approximately $184.0 million as of December 31, 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. 31 Table of Contents 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 December 31, 2020, we have indebtedness of approximately €657.0 million (or approximately $806.0 million as of December 31, 2020) under a total group of 12 term loan agreements with remaining maturities ranging from August 2021 to August 2028. Four of these term loan agreements in the aggregate of €264.0 million (or approximately $323.8 million gross of debt issuance costs as of December 31, 2020) will mature in August and October 2021. As of December 31, 2020 and 2019, we had short-term borrowings due within one year of approximately $33.8 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 upon either a base rate or the secured overnight financing rate depending on cost. 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. Refer to Note 6 to the Consolidated Financial Statements contained in Item 8, “Financial Statements and Supplementary Data,” for additional information regarding our current facilities, including the financial covenants contained in each debt instrument. 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 December 31, 2020 and 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 also are without recourse to us. As of December 31, 2020 and 2019, these finance joint ventures had approximately $85.2 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 also are 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 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 34.8% at December 31, 2020 compared to 30.4% at December 31, 2019. 32 Table of Contents Cash Flows Cash flows provided by operating activities were approximately $896.5 million during 2020 compared to approximately $695.9 million during 2019. The increase during 2020 was primarily due to an increased source of cash derived from operating assets and liabilities in 2020 compared to 2019. The reduction of inventory levels during 2020 resulted in a source of cash flow of approximately $119.7 million in 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 $1,005.6 million in working capital at December 31, 2020, as compared with $844.6 million at December 31, 2019. Accounts receivable and inventories, combined, at December 31, 2020 were approximately $48.8 million lower than at December 31, 2019, primarily due to inventory reduction efforts during the course of 2020. Share Repurchase Program During the three months ended March 31, 2020 and during 2019, we repurchased 970,141 and 1,794,256 shares of our common stock, respectively, for approximately $55.0 million and $130.0 million, respectively, either through accelerated share repurchase agreements with financial institutions or through open market transactions. All shares received 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 Consolidated Balance Sheets. We suspended share repurchases subsequent to March 31, 2020 in light of the COVID-19 pandemic and have not repurchased shares since that period. Contractual Obligations The future payments required under our significant contractual obligations, excluding foreign currency option and forward contracts, as of December 31, 2020 are as follows (in millions): Payments Due By Period Total 2021 2022 to 2023 2024 to 2025 2026 and Beyond Indebtedness (1) $ 1,614.1 $ 355.1 $ 769.3 $ 386.8 $ 102.9 Interest payments related to indebtedness (2) 50.6 16.8 21.2 9.4 3.2 Capital lease obligations 16.3 3.3 2.5 1.4 9.1 Operating lease obligations 190.9 47.6 66.3 32.5 44.5 Unconditional purchase obligations 116.9 106.2 10.5 0.2 — Other short-term and long-term obligations (3) 337.5 95.8 161.3 31.2 49.2 Total contractual cash obligations $ 2,326.3 $ 624.8 $ 1,031.1 $ 461.5 $ 208.9 Amount of Commitment Expiration Per Period Total 2021 2022 to 2023 2024 to 2025 2026 and Beyond Standby letters of credit and similar instruments $ 14.4 $ 14.4 $ — $ — $ — Guarantees 103.3 13.8 43.9 43.3 2.3 Total commercial commitments and letters of credit $ 117.7 $ 28.2 $ 43.9 $ 43.3 $ 2.3 _______________________________________ (1) Indebtedness amounts reflect the principal amount of our senior term loan, senior notes, credit facility and certain short-term borrowings, gross of any debt issuance costs. (2) Estimated interest payments are calculated assuming current interest rates over minimum maturity periods specified in debt agreements. Indebtedness may be repaid sooner or later than such minimum maturity periods. (3) Other short-term and long-term obligations include estimates of future minimum contribution requirements under our U.S. and non-U.S. defined benefit pension and postretirement plans. These estimates are based on current legislation in the countries we operate within and are subject to change. Other short-term and long-term obligations also include income tax liabilities related to uncertain income tax positions connected with ongoing income tax audits in various jurisdictions, based on the years of statutory expiration. The uncertain tax positions included above are gross of certain indirect favorable effects that relate to other tax jurisdictions. 33 Table of Contents Commitments and Off-Balance Sheet Arrangements Guarantees We maintain a remarketing agreement with our finance joint venture in the United States, whereby we are obligated to repurchase up to $6.0 million of repossessed equipment each calendar year. We believe any losses that might be incurred on the resale of this equipment will not materially impact our financial position or results of operations, due to the fact that the repurchase obligation would be equivalent to the fair value of the underlying equipment. At December 31, 2020, we guaranteed indebtedness owed to third parties of approximately $17.9 million, primarily related to dealer and end-user financing of equipment. Such guarantees generally obligate us to repay outstanding finance obligations owed to financial institutions if dealers or end users default on such loans through 2026. Losses under such guarantees historically have been insignificant. In addition, we generally would expect to be able to recover a significant portion of the amounts paid under such guarantees from the sale of the underlying financed farm equipment, as the fair value of such equipment is expected to offset a substantial portion of the amounts paid. We also have obligations to guarantee indebtedness owed to certain of our finance joint ventures if dealers or end users default on loans. Losses under such guarantees historically have been insignificant and the guarantees are not material. We believe the credit risk associated with all of these guarantees is not material to our financial position or results of operations. In addition, at December 31, 2020, we had accrued approximately $25.3 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 $85.4 million. Other At December 31, 2020, we had outstanding designated and non-designated foreign exchange contracts with a gross notional amount of approximately $3,722.4 million. The outstanding contracts as of December 31, 2020 range in maturity through December 2021. We also had outstanding designated steel commodity contracts with a gross notional amount of approximately $14.7 million that range in maturity through May 2021. See Note 10 of our Consolidated Financial Statements contained in Item 8, “Financial Statements and Supplementary Data,” for additional information. As discussed in “Liquidity and Capital Resources,” we sell a majority of our wholesale accounts receivable in North America, Europe and Brazil to our U.S., Canadian, European and Brazilian finance joint ventures. We also sell certain accounts receivable under factoring arrangements to financial institutions around the world. We have determined that these facilities should be accounted for as off-balance sheet transactions. Contingencies We are party to various claims and lawsuits arising in the normal course of business. We closely monitor these claims and lawsuits and frequently consult with our legal counsel to determine whether they may, when resolved, have a material adverse effect on our financial position or results of operations and accrue and/or disclose loss contingencies as appropriate. See Note 11 of our Consolidated Financial Statements contained in Item 8, “Financial Statements and Supplementary Data,” and Item 3, “Legal Proceedings,” for further information. Related Parties In the ordinary course of business, we engage in transactions with related parties. See Note 13 of our Consolidated Financial Statements contained in Item 8, “Financial Statements and Supplementary Data,” for information regarding related party transactions and their impact to our consolidated results of operations and financial position. 34 Table of Contents Foreign Currency Risk Management We have significant manufacturing locations in the United States, France, Germany, Finland, Italy, China and Brazil, and we purchase a portion of our tractors, combines and components from third-party foreign suppliers, primarily in various European countries and in Japan. We also sell products in approximately 140 countries throughout the world. The majority of our net sales outside the United States are denominated in the currency of the customer location, with the exception of sales in Middle East, Africa, Asia and parts of South America, where net sales are primarily denominated in British pounds, Euros or the United States dollar. We manage our transactional foreign currency exposure by hedging foreign currency cash flow forecasts and commitments arising from the anticipated settlement of receivables and payables and from future purchases and sales. Where naturally offsetting currency positions do not occur, we hedge certain, but not all, of our exposures through the use of foreign currency contracts. Our translation exposure resulting from translating the financial statements of foreign subsidiaries into United States dollars may be partially hedged from time to time. When practical, this translation impact is reduced by financing local operations with local borrowings. Our hedging policy prohibits use of foreign currency contracts for speculative trading purposes. The total notional value of our foreign currency instruments was $3,722.4 million and $3,133.0 million as of December 31, 2020 and 2019, respectively, inclusive of both those instruments that are designated and qualified for hedge accounting and non-designated derivative instruments. We enter into cash flow hedges to minimize the variability in cash flows of assets or liabilities or forecasted transactions caused by fluctuations in foreign currency exchange rates, and we enter into foreign currency contracts to economically hedge receivables and payables on our balance sheets that are denominated in foreign currencies other than the functional currency. In addition, we use derivative and non-derivative instruments to hedge a portion of our net investment in foreign operations against adverse movements in exchange rates. See Note 10 of our Consolidated Financial Statements contained in Item 8, “Financial Statements and Supplementary Data,” for further information about our hedging transactions and derivative instruments. Assuming a 10% change relative to the currency of the hedge contracts, the fair value of the foreign currency instruments could be negatively impacted by approximately $53.2 million as of December 31, 2020. Due to the fact that these instruments are primarily entered into for hedging purposes, the gains or losses on the contracts would largely be offset by losses and gains on the underlying firm commitment or forecasted transaction. Interest Rate Risk Our interest expense is, in part, sensitive to the general level of interest rates. We manage our exposure to interest rate risk through our mix of floating rate and fixed rate debt. From time to time, we enter into interest rate swap agreements to manage our exposure to interest rate fluctuations. See Notes 6 and 10 of our Consolidated Financial Statements contained in Item 8, “Financial Statements and Supplementary Data,” for additional information about our interest rate swap agreements. Based on our floating rate debt and our accounts receivable sales facilities outstanding at December 31, 2020, a 10% increase in interest rates, would have increased, collectively, “Interest expense, net” and “Other expense, net” for the year ended December 31, 2020 by approximately $3.4 million. Recent Accounting Pronouncements See Note 1 of our Consolidated Financial Statements contained in Item 8, “Financial Statements and Supplementary Data,” for information regarding recent accounting pronouncements and their impact to our consolidated results of operations and financial position. 35 Table of Contents Critical Accounting Estimates We prepare our Consolidated Financial Statements in conformity with U.S. generally accepted accounting principles. In the preparation of these financial statements, we make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The significant accounting policies followed in the preparation of the financial statements are detailed in Note 1 of our Consolidated Financial Statements contained in Item 8, “Financial Statements and Supplementary Data.” We believe that our application of the policies discussed below involves significant levels of judgment, estimates and complexity. Due to the levels of judgment, complexity and period of time over which many of these items are resolved, actual results could differ from those estimated at the time of preparation of the financial statements. Adjustments to these estimates would impact our financial position and future results of operations. Discount and Sales Incentive Allowances We provide various volume bonus and sales incentive programs with respect to our products. These sales incentive programs include reductions in invoice prices, reductions in retail financing rates, dealer commissions and dealer incentive allowances. In most cases, incentive programs are established and communicated to our dealers on a quarterly basis. The incentives are paid either at the time of the cash settlement of the receivable (which is generally at the time of retail sale), at the time of retail financing, at the time of warranty registration, or at a subsequent time based on dealer purchase volumes. The incentive programs are product line specific and generally do not vary by dealer. The cost of sales incentives associated with dealer commissions and dealer incentive allowances is estimated based upon the terms of the programs and historical experience, is based on a percentage of the sales price, and estimates for sales incentives are made and recorded at the time of sale for expected incentive programs using the expected value method. These estimates are reassessed each reporting period and are revised in the event of subsequent modifications to incentive programs, as they are communicated to dealers. The related provisions and accruals are made on a product or product-line basis and are monitored for adequacy and revised at least quarterly in the event of subsequent modifications to the programs. Interest rate subsidy payments, which are a reduction in retail financing rates, are recorded in the same manner as dealer commissions and dealer incentive allowances. Volume discounts are estimated and recognized based on historical experience, and related reserves are monitored and adjusted based on actual dealer purchase volumes and the dealers’ progress towards achieving specified cumulative target levels. Estimates of these incentives are based on the terms of the programs and historical experience. All incentive programs are recorded and presented as a reduction of revenue, due to the fact that we do not receive a distinct good or service in exchange for the consideration provided. In the United States and Canada, reserves for incentive programs related to accounts receivable not sold to our U.S. and Canadian finance joint ventures are recorded as “accounts receivable allowances” within our Consolidated Balance Sheets due to the fact that the incentives are paid through a reduction of future cash settlement of the receivable. Globally, reserves for incentive programs that will be paid in cash or credit memos, as is the case with most of our volume discount programs, as well as sales incentives associated with accounts receivable sold to our finance joint ventures, are recorded within “Accrued expenses” within our Consolidated Balance Sheets. At December 31, 2020, we had recorded an allowance for discounts and sales incentives of approximately $595.8 million that will be paid either through a reduction of future cash settlements of receivables and through credit memos to our dealers or through reductions in retail financing rates paid to our finance joint ventures. If we were to allow an additional 1% of sales incentives and discounts at the time of retail sale for those sales subject to such discount programs, our reserve would increase by approximately $25.7 million as of December 31, 2020. Conversely, if we were to decrease our sales incentives and discounts by 1% at the time of retail sale, our reserve would decrease by approximately $25.7 million as of December 31, 2020. Deferred Income Taxes and Uncertain Income Tax Positions We recorded an income tax provision of $187.7 million in 2020 compared to $180.8 million in 2019 and $110.9 million in 2018. Our tax provision and effective tax rate are 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 for losses in jurisdictions where no income tax benefit is recorded. During the three months ended September 30, 2019, we recorded a non-cash adjustment to establish a valuation allowance against our Brazilian net deferred income tax assets of approximately $53.7 million. In addition, we maintain a valuation allowance to fully reserve against our net deferred tax assets in the United States and certain other foreign jurisdictions. A valuation allowance is established when it is more likely than not that some portion or all of the deferred tax 36 Table of Contents assets will not be realized. We assessed the likelihood that our deferred tax assets would be recovered from estimated future taxable income and available tax planning strategies and determined that the adjustment to the valuation allowance was appropriate. In making this assessment, all available evidence was considered including the current economic climate, as well as reasonable tax planning strategies. We believe it is more likely than not that we will realize our remaining net deferred tax assets, net of the valuation allowance, in future years. Swiss tax reform was enacted during 2019 and eliminated certain preferential tax items as well as implemented new tax rates at both the federal and cantonal levels. During the three months ended December 31, 2019, we recognized a one-time income tax gain of approximately $21.8 million associated with the changing of Swiss federal and cantonal tax rates as well as recognition of a deferred tax asset associated with the estimated value of a tax basis step-up of our Swiss subsidiary’s assets. On December 22, 2017, The Tax Cuts and Jobs Act (“the 2017 Tax Act”) was enacted in the United States. The primary provisions of the 2017 Tax Act affecting us in 2018 were a reduction to the corporate tax rate from 35% to 21% and a transition from a worldwide corporate tax system to a primarily territorial tax system. Beginning in 2018, we were also subject to additional provisions of the 2017 Tax Act. The main provisions include a tax on global intangible low-taxed income (“GILTI”) and a limitation on the deductibility of certain executive compensation. The combined effect of these and other provisions did not have a material effect on our provision for income taxes in 2020 or 2019. During the three months ended December 31, 2018, we finalized our calculations related to the 2017 Tax Act’s one-time transition tax associated with the mandatory deemed repatriation of unremitted foreign earnings, and recorded an income tax benefit of approximately $8.4 million. At December 31, 2020 and 2019, we had gross deferred tax assets of $360.9 million and $396.0 million, respectively, including $62.9 million and $72.0 million, respectively, related to net operating loss carryforwards. At December 31, 2020 and 2019, we had total valuation allowances as an offset to our gross deferred tax assets of $181.0 million and $169.1 million, respectively, which included allowances primarily against net operating loss carryforwards in Brazil, China, Hungary, the United Kingdom and the Netherlands, as well as allowances against our net deferred taxes primarily in the U.S. and Brazil, as previously discussed. Realization of the remaining deferred tax assets as of December 31, 2020 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. We recognize income tax benefits from uncertain tax positions only when there is a more than 50% likelihood that the tax positions will be sustained upon examination by the taxing authorities based on the technical merits of the positions. As of December 31, 2020 and 2019, we had approximately $227.9 million and $210.7 million, respectively, of gross unrecognized tax benefits, all of which would impact our effective tax rate if recognized. As of December 31, 2020 and 2019, we had approximately $57.1 million and $51.0 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 in income tax expense. As of December 31, 2020 and 2019, we had accrued interest and penalties related to unrecognized tax benefits of approximately $39.4 million and $28.4 million, respectively. See Note 5 of our Consolidated Financial Statements for further discussion of our uncertain income tax positions. Pensions We sponsor defined benefit pension plans covering certain employees, principally in the United Kingdom, the United States, Germany, Switzerland, Finland, France, Norway and Argentina. Our primary plans cover certain employees in the United States and the United Kingdom. In the United States, we sponsor a funded, qualified defined benefit pension plan for our salaried employees, as well as a separate funded qualified defined benefit pension plan for our hourly employees. Both plans are closed to new entrants and frozen, and we fund at least the minimum contributions required under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code to both plans. In addition, we maintain an unfunded, nonqualified defined benefit pension plan for certain senior executives, which is our Executive Nonqualified Pension Plan (“ENPP”). The ENPP is also closed to new entrants. In the United Kingdom, we sponsor a funded defined benefit pension plan that provides an annuity benefit based on participants’ final average earnings and service. Participation in this plan is limited to certain older, longer service employees and existing retirees. This plan is closed to new participants. See Note 7 of our Consolidated Financial Statements contained in Item 8, “Financial Statements and Supplementary Data,” for additional information regarding costs and assumptions for employee retirement benefits. 37 Table of Contents Nature of Estimates Required. The measurement date for all of our benefit plans is December 31. The measurement of our pension obligations, costs and liabilities is dependent on a variety of assumptions provided by management and used by our actuaries. These assumptions include estimates of the present value of projected future pension payments to all plan participants, taking into consideration the likelihood of potential future events such as salary increases and demographic experience. These assumptions may have an effect on the amount and timing of future contributions. Assumptions and Approach Used. The assumptions used in developing the required estimates include, but are not limited to, the following key factors: • Discount rates • Inflation • Salary growth • Expected return on plan assets • Retirement rates and ages • Mortality rates For the years ended December 31, 2020, 2019 and 2018, we used a globally consistent methodology to set the discount rate in the countries where our largest benefit obligations exist. In the United States, the United Kingdom and the Euro Zone, we constructed a hypothetical bond portfolio of high-quality corporate bonds and then applied the cash flows of our benefit plans to those bond yields to derive a discount rate. The bond portfolio and plan-specific cash flows vary by country, but the methodology in which the portfolio is constructed is consistent. In the United States, the bond portfolio is large enough to result in taking a “settlement approach” to derive the discount rate, in which high-quality corporate bonds are assumed to be purchased and the resulting coupon payments and maturities are used to satisfy our U.S. pension plans’ projected benefit payments. In the United Kingdom and the Euro Zone, the discount rate is derived using a “yield curve approach,” in which an individual spot rate, or zero coupon bond yield, for each future annual period is developed to discount each future benefit payment and, thereby, determine the present value of all future payments. We use a spot yield curve to determine the discount rate applicable in the United Kingdom to measure the U.K. pension plan’s service cost and interest cost. Under the settlement and yield curve approaches, the discount rate is set to equal the single discount rate that produces the same present value of all future payments. The other key assumptions and methods were set as follows: • Our inflation assumption is based on an evaluation of external market indicators. • The salary growth assumptions reflect our long-term actual experience, the near-term outlook and assumed inflation. • The expected return on plan asset assumptions reflects asset allocations, investment strategy, historical experience and the views of investment managers, and reflects a projection of the expected arithmetic returns over ten years. • Determination of retirement rates and ages as well as termination rates, based on actual plan experience, actuarial standards of practice and the manner in which our defined benefit plans are being administered. • The mortality rates for the U.K. defined benefit pension plan was updated in 2020 to reflect the latest expected improvements in the life expectancy of the plan participants. The mortality rates for the U.S. defined benefit pension plans were updated in 2020 to reflect the Society of Actuaries’ most recent findings on the topic of mortality. • The fair value of assets used to determine the expected return on assets does not reflect any delayed recognition of asset gains and losses. The effects of actual results differing from our assumptions are accumulated and amortized over future periods and, therefore, generally affect our recognized expense in such periods. Our U.S. and U.K. defined benefit pension plans, including our ENPP, comprised approximately 86% of our consolidated projected benefit obligation as of December 31, 2020. If the discount rate used to determine the 2020 projected benefit obligation for our U.S. qualified defined benefit pension plans and our ENPP was decreased by 25 basis points, our projected benefit obligation would have increased by approximately $5.6 million at December 31, 2020, and our 2021 pension expense would increase by approximately $0.6 million. If the discount rate used to determine the 2020 projected benefit obligation for our U.S. qualified defined benefit pension plans and our ENPP was increased by 25 basis points, our projected benefit obligation would have decreased by approximately $5.3 million at December 31, 2020, and our 2021 pension expense would decrease by approximately $0.5 million. If the discount rate used to determine the projected benefit obligation for our U.K. defined benefit pension plan was decreased by 25 basis points, our projected benefit obligation would have increased by approximately $29.3 million at December 31, 2020, and our 2021 pension expense would increase by approximately $0.1 million. If the discount rate used to determine the projected benefit obligation for our U.K. defined benefit pension plan was increased by 25 basis points, our projected benefit obligation would have decreased by approximately $27.8 million at December 31, 2020, and our 2021 pension expense would decrease by approximately $0.2 million. In addition, if the expected 38 Table of Contents long-term rate of return on plan assets related to our U.K. defined benefit pension plan was increased or decreased by 25 basis points, our 2021 pension expense would decrease or increase by approximately $1.8 million each, respectively. The impact to our U.S. defined benefit pension plans for a 25-basis-point change in our expected long-term rate of return would decrease or increase our 2021 pension expense by approximately $0.1 million, respectively. Unrecognized actuarial net losses related to our defined benefit pension plans and ENPP were $385.1 million as of December 31, 2020 compared to $362.2 million as of December 31, 2019. The increase in unrecognized net actuarial losses between years primarily resulted from lower discount rates at December 31, 2020 compared to December 31, 2019. The unrecognized net actuarial losses will be impacted in future periods by actual asset returns, discount rate changes, currency exchange rate fluctuations, actual demographic experience and certain other factors. For some of our defined benefit pension plans, these losses, to the extent they exceed 10% of the greater of the plan’s liabilities or the fair value of assets (“the gain/loss corridor”), will be amortized on a straight-line basis over the periods discussed as follows. For our U.S. salaried, U.S. hourly and U.K. defined benefit pension plans, the population covered is predominantly inactive participants, and losses related to those plans, to the extent they exceed the gain/loss corridor, will be amortized over the average remaining lives of those participants while covered by the respective plan. For our ENPP, the population is predominantly active participants, and losses related to the plan will be amortized over the average future working lifetime of the active participants expected to receive benefits. As of December 31, 2020, the average amortization periods were as follows: ENPP U.S. Plans U.K. Plan Average amortization period of losses related to defined benefit pension plans 7 years 14 years 19 years Unrecognized prior service cost related to our defined benefit pension plans was $20.1 million as of December 31, 2020 compared to $22.5 million as of December 31, 2019. The decrease in the unrecognized prior service cost between years is due primarily to the amortization of unrecognized prior service cost related to prior plan amendments. The amortization of unrecognized prior service cost during 2020 also included the initial amortization impacts of an amendment to our ENPP during 2019. As of December 31, 2020, our unfunded or underfunded obligations related to our defined benefit pension plans and ENPP were approximately $225.1 million, primarily related to our defined benefit pension plans in Europe and the United States. In 2020, we contributed approximately $32.4 million towards those obligations, and we expect to fund approximately $35.7 million in 2021. Future funding is dependent upon compliance with local laws and regulations and changes to those laws and regulations in the future, as well as the generation of operating cash flows in the future. We currently have an agreement in place with the trustees of the U.K. defined benefit plan that obligates us to fund approximately £15.3 million per year (or approximately $20.9 million) towards that obligation through December 2021. The funding arrangement is based upon the current funded status and could change in the future as discount rates, local laws and regulations, and other factors change. See Note 7 of our Consolidated Financial Statements contained in Item 8, “Financial Statements and Supplementary Data,” for more information regarding the investment strategy and concentration of risk. Goodwill, Other Intangible Assets and Long-Lived Assets We test goodwill for impairment, at the reporting unit level, annually and when events or circumstances indicate that fair value of a reporting unit may be below its carrying value. A reporting unit is an operating segment or one level below an operating segment, for example, a component. We combine and aggregate two or more components of an operating segment as a single reporting unit if the components have similar economic characteristics. Our reportable segments are not our reporting units. Goodwill is evaluated for impairment annually as of October 1 using a qualitative assessment or a quantitative one-step assessment. If we elect to perform a qualitative assessment and determine the fair value of our reporting units more likely than not exceeds their carrying value of net assets, no further evaluation is necessary. For reporting units where we perform a one-step quantitative assessment, we compare the fair value of each reporting unit to its respective carrying value of net assets, including goodwill. If the fair value of the reporting unit exceeds its carrying value of net assets, the goodwill is not considered impaired. If the carrying value of net assets is higher than the fair value of the reporting unit, an impairment charge is recorded in the amount by which the carrying value exceeds the reporting unit’s fair value. We utilize a combination of valuation techniques, including an income approach, whereby the present value of future expected operating net cash flows are calculated using a discount rate; and a guideline public company method, whereby EBITDA and revenue multiples are derived from the market prices of stocks of companies that are engaged in the same or 39 Table of Contents similar lines of business and that are actively traded on a free and open market. Assumptions included in these approaches can positively and negatively impact the results of our assessments such as interest rates, sales and margin growth rates, tax rates, cost structures, market share, pricing, capital expenditures, working capital levels and the use of control premiums. We review our long-lived assets, which include intangible assets subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The evaluation for recoverability is performed at a level where independent cash flows may be attributed to either an asset or asset group. If we determine that the carrying amount of an asset or asset group is not recoverable based on the expected undiscounted future cash flows of the asset or asset group, an impairment loss is recorded equal to the excess of the carrying amounts over the estimated fair value of the long-lived assets. Estimates of future cash flows are based on many factors, including current operating results, expected market trends and competitive influences. We also evaluate the amortization periods assigned to our intangible assets to determine whether events or changes in circumstances warrant revised estimates of useful lives. Assets to be disposed of by sale are reported at the lower of the carrying amount or fair value, less estimated costs to sell. We make various assumptions, including assumptions regarding future cash flows, market multiples, growth rates and discount rates, in our assessments of the impairment of goodwill, other indefinite-lived intangible assets and long-lived assets. The assumptions about future cash flows and growth rates are based on the current and long-term business plans of the reporting unit or related to the long-lived assets. Discount rate assumptions are based on an assessment of the risk inherent in the future cash flows of the reporting unit or long-lived assets. These assumptions require significant judgments on our part, and the conclusions that we reach could vary significantly based upon these judgments. The COVID-19 pandemic has adversely impacted the global economy as a whole. Based on current macroeconomic conditions, we assessed our goodwill and other intangible assets for indications of impairment as of March 31, 2020, June 30, 2020 and September 30, 2020. As of June 30, 2020, we concluded there were indicators of impairment during the three months ended June 30, 2020 related to one of our smaller reporting units, which is a 50%-owned tillage and seeding equipment joint venture. We consolidate the reporting unit as we were determined to be the primary beneficiary of the joint venture. Deteriorating market conditions for the products the joint venture sells were negatively impacted by the COVID-19 pandemic in the second quarter, greater than initially expected. As a result, updated strategic reviews with revised forecasts indicated an impairment of the entire goodwill balance of this reporting unit was necessary as of June 30, 2020. During the three months ended June 30, 2020, an impairment charge of approximately $20.0 million was recorded as “Goodwill impairment charge” within our Consolidated Statements of Operations, with an offsetting benefit of approximately $10.0 million included within “Net loss attributable to noncontrolling interests.” The results of our goodwill and long-lived assets impairment analyses conducted as of October 1, 2020 indicated that no other indicators of impairment existed and no reduction in the carrying amount of goodwill and long-lived assets was required related to our other reporting units. Our goodwill impairment analysis conducted as of October 1, 2020 also indicated that the fair value in excess of the carrying value of our grain and protein production systems Europe/Middle East and North America reporting units was approximately 15% and approximately 19%, respectively. In response to weakening market conditions and resulting operating results, new management was put in place over the global grain and protein systems productions systems business in 2019, and from that time, full strategic reviews and operating decisions of the business have been conducted and launched, including several restructuring initiatives aimed at lowering operating costs, improving product portfolios and enhancing customer support, which management believes will result in improved long-term operating results. If market conditions and our overall results do not improve, we may incur an impairment charge related to this reporting units in the future under the one-step process described above. The goodwill associated with these reporting units as of December 31, 2020 was approximately $64.0 million and $523.0 million, respectively Our goodwill impairment analysis conducted as of October 1, 2019 indicated that the carrying value of the net assets of our grain storage and protein 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 within “Impairment charges” in our Consolidated Statements of Operations. This impairment charge was a substantial portion of the reporting unit’s goodwill balance. During the three months ended December 31, 2019, we also recorded a non-cash impairment charge of approximately $3.0 million within “Impairment charges” in our Consolidated Statements of Operations. The impairment charge related to certain long-lived intangible assets associated with our grain storage and protein production systems operations within North America due to the discontinuation of a certain brand name and related products and customers. 40 Table of Contents The results of our goodwill and long-lived assets impairment analyses conducted as of October 1, 2018 indicated that no reduction in the carrying amount of goodwill and long-lived assets was required. Numerous facts and circumstances are considered when evaluating the carrying amount of our goodwill. The fair value of a reporting unit is impacted by the reporting unit’s expected financial performance, which is dependent upon the agricultural industry and other factors that could adversely affect the agricultural industry, including but not limited to, declines in the general economy, increases in farm input costs, weather conditions, lower commodity and protein prices and changes in the availability of credit. The estimated fair value of the individual reporting units is assessed for reasonableness by reviewing a variety of indicators evaluated over a reasonable period of time. As of December 31, 2020, we had approximately $1,306.5 million of goodwill. While our annual impairment testing in 2020 supported the carrying amount of this goodwill, we may be required to re-evaluate the carrying amount in future periods, thus utilizing different assumptions that reflect the then current market conditions and expectations, and, therefore, we could conclude that an impairment has occurred. Recoverable Indirect Taxes Our Brazilian operations incur value added taxes (“VAT”) on certain purchases of raw materials, components and services. These taxes are accumulated as tax credits and create assets that are reduced by the VAT collected from our sales in the Brazilian market. We regularly assesses the recoverability of these tax credits, and establishes reserves when necessary against them, through analyses that include, amongst others, the history of realization, the transfer of tax credits to third parties as authorized by the government, anticipated changes in the supply chain and the future expectation of tax debits from our ongoing operations. We believe that these tax credits, net of established reserves are realizable. Our assessment of realization of these tax assets involves significant judgments on our part, and the conclusions that we reach could vary significantly based upon these judgments. We recorded approximately $91.2 million and $142.3 million, respectively, of VAT tax credits, net of reserves, as of December 31, 2020 and 2019.