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 COVID-19 pandemic and other economic factors continue to create volatility in the global economy, including employment disruptions and supply chain constraints and delays. These factors along with increasing industrial demand are negatively affecting our production, particularly caused by delays in our receipts of parts and components. Supply chain issues of particular concern include semiconductors, transportation and raw materials. We continue to face supplier bottlenecks and delays in all regions as we continue to work to mitigate the impact of these issues in order to meet increased end-market demand.
RESULTS OF OPERATIONS
For the three months ended June 30, 2021, we generated net income of approximately $282.8 million, or $3.73 per share, compared to approximately $69.7 million, or $0.93 per share, for the same periods in 2020. For the first six months ended June 30, 2021, we generated net income of approximately $433.6 million, or $5.71 per share, compared to approximately $134.4 million, or $1.78 per share, for the same period in 2020.
Net sales during the three and six months ended June 30, 2021 were approximately $2,879.3 million and $5,258.0 million, respectively, which were approximately 43.5% and 33.6% higher than the same periods in 2020. These increases were primarily the result of improved market demand during the three and six months ended June 30, 2021 compared to the same periods in 2020, which were impacted by extended COVID-related shut downs in both Europe and South America which adversely interrupted our operations. Regionally, net sales were higher in all regions for the three and six months ended June 30, 2021 compared to 2020.
Income from operations for the three months ended June 30, 2021 was approximately $290.3 million compared to approximately $97.3 million for the same period in 2020. Income from operations for the six months ended June 30, 2021 was approximately $485.5 million compared to approximately $197.7 million for the same period in 2020. These increases were primarily the result of higher net sales and production volumes, a favorable sales mix and improved pricing implemented during the three and six months ended June 30, 2021, which helped to offset material cost inflation compared to the same periods in 2020.
Regionally, income from operations in our Europe/Middle East (“EME”) region increased for the three and six months ended June 30, 2021 compared to the same periods in 2020, primarily due to higher net sales, partially offset by higher expenses. In our North American region, income from operations increased for the three and six months ended June 30, 2021 compared to the same periods in 2020. The increase was primarily due to higher net sales and production levels, as well as a favorable product mix and positive pricing impacts. In our South American region, income from operations increased in the three and six months ended June 30, 2021 compared to the same periods in 2020. The increase reflects higher net sales and production volumes, a richer product mix and improved pricing offsetting material cost inflation. In our Asia/Pacific/African (“APA”) region, income from operations increased for the three and six months ended June 30, 2021 compared to the same periods in 2020, primarily due to higher net sales and production levels.
Industry Market Conditions
The COVID-19 pandemic has had a minimal impact on global crop production in 2021. The re-opening of economies has also increased the demand for grain, putting pressure on global grain inventories, which remain at low levels. Agricultural commodity prices continue to support favorable farm economics resulting in increased demand for machinery. These improved conditions are expected to generate industry growth across all the major equipment markets in 2021. Future demand for
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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 for the first six months of 2021 increased approximately 22% compared to the same period in 2020. Industry unit retail sales of combines for the first six months of 2020 increased approximately 13% compared to the same period in 2020. Industry growth was most significant in the high horsepower tractor segment. Row crop farmers are taking advantage of improved commodity prices and projected healthy income levels to upgrade their extended aged fleet of equipment.
In Western Europe, industry unit retail sales of tractors increased approximately 27% for the first six months of 2021 compared to the same period in 2020. Industry unit retail sales of combines for the first six months of 2021 increased approximately 18% compared to the first six months of 2020. Industry production and demand was significantly reduced during the first half of 2020 as a result of COVID pandemic related shutdowns. During the first six months of 2021, industry sales increased across nearly all major markets compared to the same period in 2020. Higher wheat, dairy and livestock prices combined with healthy levels of crop production are generating positive farm economics and farmer sentiment.
In South America, industry unit retail sales of tractors and combines for the first six months of 2021 increased approximately 35% compared to the same period in 2020. The improved demand was primarily in Brazil, as well as in smaller export markets. A healthy first crop as well as favorable exchange rates are supporting positive economic conditions for farmers who continue to replace aged equipment.
STATEMENTS OF OPERATIONS
Net sales for the three months ended June 30, 2021 were approximately $2,879.3 million compared to approximately $2,006.8 million for the same period in 2020. Net sales for the six months ended June 30, 2021 were approximately $5,258.0 million compared to approximately $3,935.1 million for the same period in 2020. The following tables set forth, for the three and six months ended June 30, 2021, 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
2021 2020 $ % $ %
Europe/Middle East $ 1,635.2 $ 1,125.0 $ 510.2 45.4 % $ 131.5 11.7 %
North America 734.7 555.8 178.9 32.2 % 18.1 3.3 %
South America 278.3 178.5 99.8 55.9 % 5.1 2.9 %
Asia/Pacific/Africa 231.1 147.5 83.6 56.7 % 24.2 16.4 %
$ 2,879.3 $ 2,006.8 $ 872.5 43.5 % $ 178.9 8.9 %
Six Months Ended June 30, Change Change Due to Currency Translation
2021 2020 $ % $ %
Europe/Middle East $ 2,962.4 $ 2,238.3 $ 724.1 32.4 % $ 217.9 9.7 %
North America 1,345.8 1,107.7 238.1 21.5 % 23.8 2.1 %
South America 518.8 332.4 186.4 56.1 % (37.3) (11.2) %
Asia/Pacific/Africa 431.0 256.7 174.3 67.9 % 42.9 16.7 %
$ 5,258.0 $ 3,935.1 $ 1,322.9 33.6 % $ 247.3 6.3 %
Regionally, net sales in our EME region were higher during the three and six months ended June 30, 2021 compared to the same periods in 2020. These increases were primarily due to increased net sales in all major markets, with the largest increases occurring in Italy, Turkey and the United Kingdom. Net sales in North America increased during the three and six months ended June 30, 2021 compared to the same periods in 2020. These increases were primarily a result of higher net sales
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of tractors, replacement parts, as well as Precision Planting equipment. Net sales in South America increased during the three and six months ended June 30, 2021 compared to the same periods in 2020. Net sales increased across all South American markets, with the largest increase in Brazil, primarily as a result of higher net sales of combines, mid-size tractors, and grain and protein production equipment. In our APA region, net sales increased during the three and six months ended June 30, 2021 compared to the same periods in 2020, primarily driven by net sales increases in China and Australia, as well as recovery in Africa.
We estimate worldwide average price increases were approximately 4.5% and 4.2%, respectively, during the three and six months ended June 30, 2021 compared to the same prior year periods. Consolidated net sales of tractors and combines, which combined comprised approximately 58.2% and 57.5% of our net sales for the three and six months ended June 30, 2021, respectively, increased approximately 55.0% and 39.0% compared to the same periods in 2020, respectively. Unit sales of tractors and combines increased approximately 34.1% and 26.9%, respectively, for the three and six months ended June 30, 2021 compared to the same periods in 2020. 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 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,
2021 2020
$ % of
Net Sales (1)
$ % of
Net Sales (1)
Gross profit $ 692.4 24.0 % $ 432.7 21.6 %
Selling, general and administrative expenses 276.3 9.6 % 219.5 10.9 %
Engineering expenses 107.2 3.7 % 75.8 3.8 %
Amortization of intangibles 14.2 0.5 % 14.9 0.7 %
Goodwill impairment charge — — % 20.0 1.0 %
Restructuring expenses 4.7 0.2 % 3.8 0.2 %
Bad debt expense (0.3) — % 1.4 0.1 %
Income from operations $ 290.3 10.1 % $ 97.3 4.8 %
Six Months Ended June 30,
2021 2020
$ % of
Net Sales $ % of
Net Sales (1)
Gross profit $ 1,262.9 24.0 % $ 883.2 22.4 %
Selling, general and administrative expenses 536.9 10.2 % 467.1 11.9 %
Engineering expenses 203.5 3.9 % 160.7 4.1 %
Amortization of intangibles 31.7 0.6 % 29.9 0.8 %
Goodwill impairment charge — — % 20.0 0.5 %
Restructuring expenses 6.0 0.1 % 4.6 0.1 %
Bad debt expense (0.7) — % 3.2 0.1 %
Income from operations $ 485.5 9.2 % $ 197.7 5.0 %
(1) Rounding may impact the summation of amounts.
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Gross profit as a percentage of net sales increased for both the three and six months ended June 30, 2021 compared to the same periods in 2020. These increases were primarily due to the impact of higher production volumes and the benefit of improved pricing, which were partially offset by increased material costs.
Global production hours increased approximately 40% and 32%, respectively, in the three and six months ended June 30, 2021 compared to the same periods in 2020. The increase was primarily due to the suspension of production in our European and South American factories in late March and April of 2020. Our supply chain continues to be impacted by COVID-19-related disruptions as well as capacity constraints due to increased industrial demand. While we have been successful in mitigating most of the effects of these disruptions, we expect these risks to continue, which may impact production levels in future periods.
We recorded approximately $0.3 million and $0.6 million of stock compensation expense within cost of goods sold during the three and six months ended June 30, 2021, respectively, compared to approximately $0.3 million and $0.4 million for the comparable periods in 2020. See below and refer to Note 3 to our Condensed Consolidated Financial Statements for additional information on stock compensation expense.
Driven by the increases in net sales, selling, general and administrative expenses (“SG&A expenses”) and engineering expenses as a percentage of net sales were lower for the three and six months ended June 30, 2021 compared to the same periods in 2020. The absolute level of SG&A expenses increased in the first six months of 2021 following prior year actions to lower expenses while operations were suspended, such as reduced field sales and marketing activities and lower travel expenses. We recorded approximately $8.2 million and $14.7 million of stock compensation expense within SG&A expenses during the three and six months ended June 30, 2021, respectively, compared to approximately $10.1 million and $12.6 million during the same periods in 2020. Refer to Note 3 to our Condensed Consolidated Financial Statements for additional information on stock compensation expense.
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 owned 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.” During the three months ended June 30, 2021, we sold our 50% interest in the joint venture. Refer to Note 4 to our Condensed Consolidated Financial Statements for additional information.
The restructuring expenses of approximately $4.7 million and $6.0 million recorded during the three and six months ended June 30, 2021, respectively, primarily related to severance and related costs associated with the rationalization of certain manufacturing operations and administrative offices located in the United States, South America and Europe. Refer to Note 2 to our Condensed Consolidated Financial Statements for additional information.
Interest expense, net was approximately $2.2 million and $5.6 million for the three and six months ended June 30, 2021, respectively, compared to approximately $6.1 million and $9.5 million for the comparable periods in 2020, resulting primarily from higher interest income in 2021 compared to 2020. See “Liquidity and Capital Resources” for further information.
Other expense, net was approximately $14.6 million and $26.1 million for the three and six months ended June 30, 2021, respectively, compared to approximately $10.0 million and $22.5 million for the comparable periods in 2020. 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 $5.1 million and $9.7 million for the three and six months ended June 30, 2021, respectively, compared to approximately $4.3 million and $12.4 million for the comparable periods in 2020. These decreases in losses for the six months ended June 30, 2021 were primarily as a result of lower sales of accounts receivables as compared to 2020.
We recorded an income tax provision of approximately $7.7 million and $51.3 million for the three and six months ended June 30, 2021, respectively, compared to approximately $31.3 million and $60.7 million for the comparable periods in 2020. 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 Brazil and certain other foreign jurisdictions. During the three months ended June 30, 2021, our income tax provision includes the benefit of a reversal of approximately $67.8 million related to a valuation allowance previously established against our net
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deferred tax assets in the United States. Improvements in income in the United States during 2020 and year-to-date 2021, along with updated future projected income levels, supported the reversal of the valuation allowance.
Equity in net earnings of affiliates, which is primarily comprised of income from our AGCO Finance joint ventures, was approximately $18.6 million and $33.3 million for the three and six months ended June 30, 2021, respectively, compared to approximately $10.1 million and $21.3 million for the comparable periods in 2020, primarily due to higher 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 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, Off-Balance Sheet Arrangements and Contingencies” and Note 17. for additional information.
As of June 30, 2021, our investment in the finance joint ventures, which is included in “Investment in affiliates” on our Condensed Consolidated Balance Sheets, was approximately $426.6 million compared to $395.3 million as of December 31, 2020. The total finance portfolio in our finance joint ventures was approximately $10.8 billion and $10.7 billion as of June 30, 2021 and December 31, 2020, respectively. The total finance portfolio as of June 30, 2021 included approximately $9.0 billion of retail receivables and $1.8 billion of wholesale receivables from our dealers. The total finance portfolio as of December 31, 2020 included approximately $8.8 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 2021, we made no additional investments in our finance joint ventures and there were no dividends paid from our finance joint ventures. For the six months ended June 30, 2021, 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 $32.3 million compared to approximately $21.0 million for the same period in 2020.
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 2021 (1)
Credit facility expires 2023 $ 260.0
1.002% Senior term loan due 2025 296.8
Senior term loan due 2022 178.1
Senior term loans due between 2021 and 2028 779.9
Other long-term debt 9.1
____________________________________
(1) The amounts above are gross of debt issuance costs of an aggregate amount of approximately $1.8 million.
On April 9, 2020, we entered into an amendment to our credit facility to include incremental term loans (“2020 term loans”) that allow us to borrow aggregate principal amounts of €235.0 million and $267.5 million (or an aggregate of approximately $546.5 million as of June 30, 2021). 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
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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 of 2020 term loans. There were no other borrowings on the 2020 term loans subsequent to the initial borrowings in April 2020. On February 16, 2021, we repaid the 2020 term loans of €117.5 million and $133.8 million (or an aggregate of approximately $276.0 million as of February 16, 2021). As of June 30, 2021, we had the ability to borrow €117.5 million and $133.7 million, respectively, (or an aggregate of approximately $273.2 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 credit facility expires on 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, 2021, we had $260.0 million outstanding borrowings under the revolving credit facility, and the ability to borrow approximately $540.0 million under the revolving credit facility.
On January 25, 2019, we borrowed €250.0 million (or approximately $296.8 million as of June 30, 2021) from the European Investment Bank. The loan matures on 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 $178.1 million as of June 30, 2021). 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. 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, 2021 we have indebtedness of approximately €657.0 million (or approximately $779.9 million) under a total group of twelve term loan agreements with remaining maturities ranging from August 2021 to August 2028. Four of the term loan agreements in the aggregate amount of €264.0 million (or approximately $313.4 million net of debt issuance costs, as of June 30, 2021) will mature in August and October 2021.
As of June 30, 2021 and December 31, 2020, we had short-term borrowings due within one year of approximately $55.8 million and $33.8 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.
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, 2021 and December 31, 2020, the cash received from receivables sold under the U.S., Canadian, European and Brazilian accounts receivable sales agreements was approximately $1.4 billion and $1.5 billion, respectively.
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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, 2021 and December 31, 2020, these finance joint ventures had approximately $82.7 million and $85.2 million, respectively, of outstanding accounts receivable associated with these arrangements. These arrangements are accounted for as off-balance sheet transactions. In addition, we sell certain trade receivables under factoring arrangements to other financial institutions around the world. These arrangements are also accounted for as off-balance sheet transactions.
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 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 33.2% and 34.8% at June 30, 2021 and December 31, 2020, respectively.
Cash Flows
Cash flows used in operating activities were approximately $124.9 million for the first six months of 2021 compared to $221.6 million for the same period in 2020. The decrease in cash flow used in operating activities during the six months ended June 30, 2021 was primarily as a result of the increase in net income and accounts payable, largely offset by an increase in inventories as compared to the same period 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 approximately $1,108.9 million in working capital at June 30, 2021 as compared to $1,005.6 million at December 31, 2020 and $1,263.2 million at June 30, 2020. Accounts receivable and inventories, combined, as of June 30, 2021 were approximately $935.6 million and $693.7 million higher, respectively, than at December 31, 2020 and June 30, 2020. Accounts receivable and inventories, combined, at June 30, 2021 were higher than June 30, 2020 primarily due to higher net sales and production levels, as well as positive currency translation.
Capital expenditures for the first six months of 2021 were approximately $120.6 million compared to $117.5 million for the same period in 2020. We anticipate capital expenditures for the full year of 2021 will be approximately $300.0 million and will be used primarily to upgrade our system capabilities, improve our factory productivity, and to support the development and enhancement of new and existing products, including investments in smart farming, precision agriculture and digital technologies.
Share Repurchase and Dividends
During the three and six months ended June 30, 2021, we did not purchase any shares directly or enter into any accelerated share repurchase agreements. As of June 30, 2021, the remaining amount authorized to be repurchased under board-approved share repurchase authorizations was approximately $245.0 million, which has no expiration date. In addition, we increased our quarterly dividend commencing in the second quarter of 2021 by 25% to $0.20 per common share and declared a variable special dividend of $4.00 per share that was paid during the second quarter of 2021.
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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, 2021, we guaranteed indebtedness owed to third parties of approximately $19.3 million, primarily related to dealer and end-user financing of equipment. In addition, we had accrued approximately $24.9 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 $130.6 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, 2021, we had outstanding designated and non-designated foreign currency contracts with a gross notional amount of approximately $3.5 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.
OUTLOOK
Global industry demand for farm equipment is expected to be higher in 2021 compared to 2020 with improved demand across all major markets. Our net sales are expected to increase in 2021 compared to 2020, resulting from an increase in improved forecasted industry demand, as well as positive pricing and favorable currency translation. Gross and operating margins are expected to improve from 2020 levels, reflecting increased net sales and production volumes and the benefit of cost reduction initiatives. The improved profitability is expected to fund increases in engineering expenses and other technology investments 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 and other economic events may negatively impact our operations. 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. Refer to “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2020 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, 2020.
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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, material costs, pricing impacts, tax rates, compliance with loan covenants, capital expenditures, working capital and debt service requirements and the impacts of the COVID-19 pandemic 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.
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:
• general economic and capital market conditions;
• availability of credit to our retail customers;
• the worldwide demand for agricultural products;
• grain stock levels and the levels of new and used field inventories;
• cost of steel and other raw materials;
• energy costs;
• performance and collectability of the accounts receivable originated or owned by AGCO or our finance joint ventures;
• government policies and subsidies;
• uncertainty regarding changes in the international tariff regimes and their impact on the cost of the products that we sell;
• suspension of sales of agricultural products into China and the impact to global agricultural equipment demand, if any;
• weather conditions;
• interest and foreign currency exchange rates;
• pricing and product actions taken by competitors;
• commodity prices, acreage planted and crop yields;
• farm income, land values, debt levels and access to credit;
• pervasive livestock diseases;
• production disruptions, including due to component availability;
• production levels and capacity constraints at our facilities, including those resulting from plant expansions and systems upgrades;
• integration of recent and future acquisitions;
• our expansion plans in emerging markets;
• supply constraints;
• our cost reduction and control initiatives;
• our research and development efforts;
• dealer and distributor actions;
• regulations affecting privacy and data protection;
• technological difficulties
• the impact of the COVID-19 pandemic on product demand and production; and
• the occurrence of a cyber attack, including a ransomware attack.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
(continued)
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 I of our Annual Report on Form 10-K for the year ended December 31, 2020.
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.