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, supply chain constraints and delays in deliveries, as well as logistics interruptions. These factors along with increasing industrial demand are negatively affecting production levels, particularly caused by delays in the receipts of parts and components. Supply chain issues of particular concern include a wide range of parts and components with a portion arising from the global semiconductor shortage. We may continue to face supplier bottlenecks and delays in all regions as well as challenges with freight logistics, and 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 September 30, 2021, we generated net income of approximately $181.3 million, or $2.40 per share, compared to approximately $157.3 million, or $2.09 per share, for the same period in 2020. For the first nine months ended September 30, 2021, we generated net income of approximately $614.9 million, or $8.11 per share, compared to approximately $291.7 million, or $3.86 per share, for the same period in 2020.
Net sales during the three and nine months ended September 30, 2021 were approximately $2,725.1 million and $7,983.1 million, respectively, which were approximately 9.1% and 24.1% higher than the same periods in 2020. These increases were primarily the result of improved market demand during the three and nine months ended September 30, 2021 compared to the same periods in 2020, which were impacted by extended COVID-related production shutdowns in both Europe and South America during the first half of 2020. Regionally, net sales were higher in all regions for the three and nine months ended September 30, 2021 compared to 2020.
Income from operations for the three months ended September 30, 2021 was approximately $251.9 million compared to approximately $224.0 million for the same period in 2020. Income from operations for the nine months ended September 30, 2021 was approximately $737.4 million compared to approximately $421.7 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 nine months ended September 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 nine months ended September 30, 2021 compared to the same periods in 2020, primarily due to higher net sales and production volumes, partially offset by higher engineering expenses. In our North American region, income from operations increased for the nine months ended September 30, 2021 compared to the same period 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. Our third quarter income from operations in the region were negatively impacted by rising material costs and a weaker sales mix. In our South American region, income from operations increased in the three and nine months ended September 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 nine months ended September 30, 2021 compared to the same periods in 2020, primarily due to higher net sales and production levels.
Industry Market Conditions
Agricultural commodity prices continue to support favorable farm economics resulting in increased demand for machinery, resulting from farmers upgrading and replacing aging fleets. These improved conditions are generating industry
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growth across all the major equipment markets in 2021. 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. Despite current global supply chain disruptions, farmer economics are very healthy and continue to bolster market demand.
In North America, industry unit retail sales of utility and high horsepower tractors for the first nine months of 2021 increased approximately 17% compared to the same period in 2020. Industry unit retail sales of combines for the first nine months of 2021 increased approximately 20% compared to the same period in 2020. Industry growth was most significant in the high horsepower tractor segment. Row crop farmers in the region are taking advantage of improved commodity prices and projected healthy income levels to upgrade their fleets of equipment.
In Western Europe, industry unit retail sales of tractors increased approximately 18% for the first nine months of 2021 compared to the same period in 2020. Industry unit retail sales of combines for the first nine months of 2021 increased approximately 14% compared to the first nine 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 nine 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 increased approximately 23% for the first nine months of 2021 compared to the same period in 2020. Industry unit retail sales of combines for the first nine months of 2021 increased approximately 28% compared to the first nine months of 2020. The improved demand was primarily in Brazil, as well as in smaller South American export markets. Healthy crop production 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 September 30, 2021 were approximately $2,725.1 million compared to approximately $2,497.5 million for the same period in 2020. Net sales for the nine months ended September 30, 2021 were approximately $7,983.1 million compared to approximately $6,432.6 million for the same period in 2020. The following tables set forth, for the three and nine months ended September 30, 2021, the impacts to net sales of currency translation by geographical segment (in millions, except percentages):
Three Months Ended September 30, Change Change Due to Currency Translation
2021 2020 $ % $ %
Europe/Middle East $ 1,462.4 $ 1,405.9 $ 56.5 4.0 % $ 13.4 1.0 %
North America 638.7 582.2 56.5 9.7 % 7.1 1.2 %
South America 383.3 273.9 109.4 39.9 % 9.1 3.3 %
Asia/Pacific/Africa 240.7 235.5 5.2 2.2 % 10.1 4.3 %
$ 2,725.1 $ 2,497.5 $ 227.6 9.1 % $ 39.7 1.6 %
Nine Months Ended September 30, Change Change Due to Currency Translation
2021 2020 $ % $ %
Europe/Middle East $ 4,424.8 $ 3,644.2 $ 780.6 21.4 % $ 231.3 6.3 %
North America 1,984.5 1,689.9 294.6 17.4 % 30.9 1.8 %
South America 902.1 606.3 295.8 48.8 % (28.2) (4.7) %
Asia/Pacific/Africa 671.7 492.2 179.5 36.5 % 53.0 10.8 %
$ 7,983.1 $ 6,432.6 $ 1,550.5 24.1 % $ 287.0 4.5 %
Regionally, net sales in our EME region were higher during the three and nine months ended September 30, 2021 compared to the same periods in 2020. These increases were primarily due to increased net sales in nearly all major markets, with the largest increases occurring in Italy, Turkey and the United Kingdom. Net sales in North America increased during the
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three and nine months ended September 30, 2021 compared to the same periods in 2020. These increases were primarily a result of higher net sales of tractors, replacement parts, as well as Precision Planting equipment. Net sales in South America increased during the three and nine months ended September 30, 2021 compared to the same periods in 2020. Net sales increased across all South American markets, primarily as a result of higher net sales of high horsepower and mid-size tractors, as well as replacement parts and grain and protein production equipment. In our APA region, net sales increased during the nine months ended September 30, 2021 compared to the same period in 2020, primarily driven by net sales increases in China and Australia, as well as recovery in Africa.
We estimate our worldwide average price increases were approximately 6.3% and 5.2%, respectively, during the three and nine months ended September 30, 2021 compared to the same prior year periods. Consolidated net sales of tractors and combines, which combined comprised approximately 61.3% and 58.8% of our net sales for the three and nine months ended September 30, 2021, respectively, increased approximately 7.9% and 26.1% compared to the same periods in 2020, respectively. Unit sales of tractors and combines increased approximately 5.8% and 17.7%, respectively, for the three and nine months ended September 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 September 30,
2021 2020
$ % of
Net Sales $ % of
Net Sales
Gross profit $ 626.7 23.0 % $ 578.7 23.2 %
Selling, general and administrative expenses 266.1 9.8 % 251.3 10.1 %
Engineering expenses 92.8 3.4 % 82.0 3.3 %
Amortization of intangibles 14.1 0.5 % 14.8 0.6 %
Restructuring expenses 1.4 0.1 % 0.8 — %
Bad debt expense 0.4 — % 5.8 0.2 %
Income from operations $ 251.9 9.2 % $ 224.0 9.0 %
Nine Months Ended September 30,
2021 2020
$ % of
Net Sales $ % of
Net Sales (1)
Gross profit $ 1,889.6 23.7 % $ 1,461.9 22.7 %
Selling, general and administrative expenses 803.0 10.1 % 718.4 11.2 %
Engineering expenses 296.3 3.7 % 242.7 3.8 %
Amortization of intangibles 45.8 0.6 % 44.7 0.7 %
Goodwill impairment charge — — % 20.0 0.3 %
Restructuring expenses 7.4 0.1 % 5.4 0.1 %
Bad debt (credit) expense (0.3) — % 9.0 0.1 %
Income from operations $ 737.4 9.2 % $ 421.7 6.6 %
(1) Rounding may impact the summation of amounts.
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Gross profit as a percentage of net sales increased for the nine months ended September 30, 2021 compared to the same period in 2020. This increase was primarily due to the impact of higher production volumes and the benefit of improved pricing, which was partially offset by increased material costs.
Global production hours increased approximately 14% and 26%, respectively, in the three and nine months ended September 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, as well as stronger market demand during the nine months ended September 30, 2021. Our production facilities continue to face supply chain and logistics disruptions as well as material and freight cost inflation. These disruptions have intensified in recent weeks, impacting our ability to produce and ship units, which has also contributed to labor inefficiencies, and resulted in higher than anticipated raw material and work in process inventory levels. We expect these risks to continue, which may impact production levels and net sales and margins in future periods.
We recorded approximately $0.2 million and $0.8 million of stock compensation expense within cost of goods sold during the three and nine months ended September 30, 2021, respectively, compared to approximately $0.5 million and $0.9 million for the comparable periods in 2020. See below and refer to Note 4 to our Condensed Consolidated Financial Statements for additional information on stock compensation expense.
Selling, general and administrative expenses (“SG&A expenses”) and engineering expenses as a percentage of net sales were lower for the nine months ended September 30, 2021 compared to the same periods in 2020, driven by the increases in net sales. The absolute level of SG&A expenses increased in the first nine 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 $5.8 million and $20.5 million of stock compensation expense within SG&A expenses during the three and nine months ended September 30, 2021, respectively, compared to approximately $13.7 million and $26.3 million during the same periods in 2020. Refer to Note 4 to our Condensed Consolidated Financial Statements for additional information on stock compensation expense.
During the nine months ended September 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 5 to our Condensed Consolidated Financial Statements for additional information.
The restructuring expenses of approximately $1.4 million and $7.4 million recorded during the three and nine months ended September 30, 2021, respectively, primarily related to severance and other 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 3 to our Condensed Consolidated Financial Statements for additional information.
Interest expense, net was approximately $1.2 million and $6.8 million for the three and nine months ended September 30, 2021, respectively, compared to approximately $3.6 million and $13.1 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 $14.1 million and $40.2 million for the three and nine months ended September 30, 2021, respectively, compared to approximately $15.3 million and $37.8 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 $7.4 million and $17.1 million for the three and nine months ended September 30, 2021, respectively, compared to approximately $6.1 million and $18.5 million for the comparable periods in 2020. The decrease in losses for the nine months ended September 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 $70.1 million and $121.4 million for the three and nine months ended September 30, 2021, respectively, compared to approximately $57.2 million and $117.9 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 nine months ended September 30, 2021, our income tax provision
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includes the benefit of a reversal of approximately $67.8 million related to a valuation allowance previously established against our net deferred tax assets in the United States that we recorded as of June 30, 2021. 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 $15.9 million and $49.2 million for the three and nine months ended September 30, 2021, respectively, compared to approximately $10.2 million and $31.5 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 19 for additional information.
As of September 30, 2021, our investment in the finance joint ventures, which is included in “Investment in affiliates” on our Condensed Consolidated Balance Sheets, was approximately $432.7 million compared to $395.3 million as of December 31, 2020. The total finance portfolio in our finance joint ventures was approximately $10.7 billion as of both September 30, 2021 and December 31, 2020. The total finance portfolio as of September 30, 2021 included approximately $9.1 billion of retail receivables and $1.6 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 nine months ended September 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 $49.1 million compared to approximately $31.5 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 the funds we raised in October 2021 and 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):
September 30 2021 (1)
Credit facility expires 2023 $ 395.0
1.002% Senior term loan due 2025 289.7
Senior term loan due 2022 173.8
Senior term loans due between 2021 and 2028 677.8
Other long-term debt 9.0
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(1) The amounts above are gross of debt issuance costs of an aggregate amount of approximately $1.4 million.
On October 6, 2021, we issued €600.0 million (or approximately $692.5 million) of senior notes at an issue price of 99.993%. The notes mature on October 6, 2028, and interest is payable annually, in arrears, at 0.800%. The senior notes contain covenants restricting, among other things, the incurrence of certain secured indebtedness. The senior notes are subject to both
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optional and mandatory redemption in certain events.
During October 2021, we used the proceeds received from the senior notes to repay our €150.0 million (or approximately $173.4 million as of October 8, 2021) senior term loan due 2022, $370.0 million related to our multi-currency revolving credit facility, and two of our 2016 senior term loans due October 2021 with an aggregate amount oustanding of €192.0 million (or approximately $223.8 million as of October 19, 2021). In August 2021, prior to the issuance of the senior notes, we repaid two of our 2018 senior term loans due August 2021 with an aggregate amount of €72.0 million (or approximately $85.5 million as of August 1, 2021). We intend to use an additional aggregate amount of €73.5 million (or approximately $85.2 million as of September 30, 2021) of the proceeds from the issuance of the senior notes and existing cash to repay one of our 2016 senior term loans due October 2023 and one of our 2018 senior term loans due August 2023.
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 $539.8 million as of September 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 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 September 30, 2021, we had the ability to borrow €117.5 million and $133.7 million, respectively, (or an aggregate of approximately $269.8 million) of 2020 term loans. Refer to Note 6 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 September 30, 2021, we had $395.0 million outstanding borrowings under the revolving credit facility, and the ability to borrow approximately $405.0 million under the revolving credit facility. As mentioned previously, on October 15, 2021, we repaid $370.0 million of our multicurrency revolving credit facility as a result of the issuance of our 0.800% senior notes due 2028.
As described above, our credit facility allows us to select from among various interest rate options. Due to the phase-out of LIBOR, LIBOR-based rates no longer will be available for borrowings denominated in U.S. dollars after December 31, 2022, and for loans denominated in other currencies after December 31, 2021. The interest rates reflected in our credit facility were designed to accommodate the discontinuation of LIBOR-based rates, and a shift to the “Secured Overnight Financing Rate” or a base rate, and, as such, we do not believe that moving to other rates will have a materially adverse effect on our results of operations or financial position. In addition, the credit facility agreement also provides for an expedited amendment process once a replacement for LIBOR is established, which we may elect to utilize to add additional interest-rate alternatives.
On January 25, 2019, we borrowed €250.0 million (or approximately $289.7 million as of September 30, 2021) from the European Investment Bank. The loan matures on January 24, 2025. Interest was 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 $173.8 million as of September 30, 2021). Interest was payable on the term loan quarterly in arrears at an annual rate, equal to the Euro Interbank Offered Rate (“EURIBOR”) plus a margin ranging from 0.875% to 1.875% based on our credit rating. As mentioned previously, during October 2021, we repaid our senior term loan of €150.0 million (or approximately $173.4 million as of October 8, 2021) with the proceeds from our 0.800% senior notes due 2028.
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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.Additionally, as mentioned previously, we repaid €192.0 million (or approximately $223.8 million as of October 19, 2021) upon maturity of two 2016 senior term loans in October 2021. In August 2021, prior to the issuance of the senior notes due 2028, we repaid two of our 2018 senior term loans upon maturity with an aggregate amount of €72.0 million (or approximately $85.5 million as of August 1, 2021). The provisions of the term loan agreements are identical in nature with the exception of interest rate terms and maturities. In aggregate, as of September 30, 2021 we have indebtedness of approximately €585.0 million (or approximately $677.8 million) under a total group of ten term loan agreements with remaining maturities ranging from October 2021 to August 2028. As of October 31, 2021, as a result of further repayments discussed previously, we had indebtedness of €393.0 million (or approximately $456.7 million) through a group of eight remaining term loan agreements. As of September 30, 2021, for the term loans with a fixed interest rate, interest is payable in arrears on an annual basis, with interest rates ranging from 0.90% to 2.26% and maturity dates between October 2021 and August 2028. For the term loans with a floating interest rate, interest is payable in arrears on a semi-annual basis, with interest rates based on the EURIBOR plus a margin ranging from 0.90% to 1.25% and maturity dates between October 2021 and August 2025.
As of September 30, 2021 and December 31, 2020, we had short-term borrowings due within one year of approximately $77.8 million and $33.8 million, respectively.
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 September 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 $1.3 billion and $1.5 billion, respectively.
Our finance joint ventures in Europe, Brazil and Australia also provide wholesale financing directly to our dealers. The receivables associated with these arrangements are also without recourse to us. As of September 30, 2021 and December 31, 2020, these finance joint ventures had approximately $67.0 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 33.1% and 34.8% at September 30, 2021 and December 31, 2020, respectively.
Cash Flows
Cash flows provided by operating activities were approximately $41.5 million for the first nine months of 2021 compared to cash flows provided by operating activities of $224.1 million for the same period in 2020. The decrease in cash flow provided by operating activities during the nine months ended September 30, 2021 was primarily as a result of increases in
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inventories, offset by increases in net income and accounts payable as compared to the same period in 2020. Supply chain disruptions have resulted in higher raw material and work in process inventory levels.
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 $1,258.7 million in working capital at September 30, 2021 as compared to $1,005.6 million at December 31, 2020 and $1,087.2 million at September 30, 2020. Accounts receivable and inventories, combined, as of September 30, 2021 were approximately $964.5 million and $747.7 million higher, respectively, than at December 31, 2020 and September 30, 2020. Accounts receivable and inventories, combined, at September 30, 2021 were higher than at December 31, 2020 and September 30, 2020 primarily due to higher net sales and production levels, as well as the significant impact of supply chain constraints.
Capital expenditures for the first nine months of 2021 were approximately $198.7 million compared to $183.1 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 months ended September 30, 2021, we entered into an ASR agreement with a financial institution to repurchase an aggregate of $75.0 million of shares of its common stock. We received approximately 558,471 shares to date in this transaction. All shares received under the ASR agreements were retired upon receipt, and the excess of the purchase price over par value per share was recorded to a combination of “Additional paid-in capital” and “Retained earnings” within the our Condensed Consolidated Balance Sheets.
In November 2021, we entered into an ASR agreement with a financial institution to repurchase an aggregate of $60.0 million shares of our common stock. We received approximately 393,733 shares to date in this transaction. The specific number of shares we will ultimately repurchase will be determined at the completion of the term of the ASR based on the daily volume-weighted average share price of our common stock less an agreed upon discount. Upon settlement of the ASR, we may be entitled to receive additional shares of common stock or, under certain circumstances, be required to remit a settlement amount. We expect that additional shares will be received by us upon final settlement of its current ASR agreement, which expires during the first quarter of 2022. All shares received under the ASR agreement discussed above were retired upon receipt and the excess of the purchase price over par value per share was recorded to a combination of “Additional paid-in capital” and “Retained earnings” within our Condensed Consolidated Balance Sheets.
COMMITMENTS, OFF-BALANCE SHEET ARRANGEMENTS AND CONTINGENCIES
We are party to a number of commitments and other financial arrangements, which may include off-balance sheet arrangements. At September 30, 2021, we guaranteed indebtedness owed to third parties of approximately $23.2 million, primarily related to dealer and end-user financing of equipment. In addition, we had accrued approximately $24.3 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 $142.1 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 September 30, 2021, we had outstanding designated and non-designated foreign currency contracts with a gross notional amount of approximately $3.7 billion. Refer to “Liquidity and Capital Resources” and “Item 3. Quantitative and Qualitative Disclosures about Market Risk-Foreign Currency Risk Management,” as well as to Notes 12, 14 and 19 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 19 to our Condensed Consolidated Financial Statements for further discussion of these matters.
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OUTLOOK
Global industry demand for farm equipment is expected to 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 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, favorable pricing, net of material cost inflation, and the benefit of productivity actions. 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.
Our outlook is also based on current estimates of supplier component deliveries. If supply chain performance worsens, our results of operations will be adversely impacted. 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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Management’s Discussion and Analysis of Financial Condition and Results of Operations
(continued)
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 product embargoes and their impact on the cost of the products that we sell;
• 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 and raw material 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 cyber attacks, including ransomware attacks.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
(continued)
We depend on suppliers for components, parts and raw materials for our products, and any failure by our suppliers to provide products as needed, or by us to promptly address supplier issues, will adversely impact our ability to timely and efficiently manufacture and sell products. In recent weeks, suppliers of several key parts and components have not been able to meet our demand and we have had to decrease our production and shipments of units, which has also contributed to labor inefficiencies, and resulted in higher inventory levels. It is unclear when the supply chain issues will be resolved or what the ultimate impact on production, and consequently sales, will be.
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.
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.
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.