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 and geopolitical factors, including inflation and the conflict in Ukraine, 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 end-market demand.
On May 5, 2022, we discovered that we had been subject to a ransomware cyber attack. Upon becoming aware of the attack and in order to minimize any damage to our information technology environment, we suspended the use of several key systems, which, in turn, resulted in the closing of a majority of our production sites and parts operations. Our efforts to restore our systems and business operations are ongoing. Currently we anticipate restarting some the effected production sites and parts operations at the end of the week of May 9, 2022, with the balance progressively restarting during the week of May 16, 2022, although damage from the attack could require more in-depth, and lengthy, remediation and recovery than currently is expected. We have not fully assessed the impact of the attack, although we expect to be able to mitigate its effects on our operating results by increasing production over the remainder of 2022.
RESULTS OF OPERATIONS
For the three months ended March 31, 2022, we generated net income of approximately $151.8 million, or $2.03 per share, compared to approximately $150.8 million, or $1.99 per share, for the same period in 2021.
Net sales during the three months ended March 31, 2022 were approximately $2,685.7 million, which were approximately 12.9% higher than the same period in 2021. This increase was primarily the result of robust end-market demand and favorable pricing during the three months ended March 31, 2022 compared to the same period in 2021. Regionally, net sales were higher in all regions for the three months ended March 31, 2022 compared to 2021.
Income from operations for the three months ended March 31, 2022 was approximately $204.0 million compared to approximately $195.2 million for the same period in 2021. This increase was primarily the result of higher net sales and production volumes during the three months ended March 31, 2022, which helped to offset material, freight and labor cost inflation compared to the same period in 2021. Income from operations for the three months ended March 31, 2022 was also impacted by impairment charges recorded during the first quarter related to our joint ventures in Russia of approximately $36.0 million, as discussed below.
Regionally, income from operations in our Europe/Middle East (“EME”) region increased for the three months ended March 31, 2022 compared to the same period in 2021, primarily due to higher net sales and production volumes. In our North American region, income from operations decreased for the three months ended March 31, 2022 compared to the same period in 2021. The decrease was primarily due to a weaker sales mix primarily caused by chip-related supply chain constraints related to our Precision Planting business, as well as the impact of higher production costs. In our South American region, income from operations increased in the three months ended March 31, 2022 compared to the same period in 2021. The increase reflects significant increases in end-market demand and a favorable sales mix. In our Asia/Pacific/African (“APA”) region, income from operations increased for the three months ended March 31, 2022 compared to the same period in 2021, primarily due to higher net sales and a richer sales mix.
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Industry Market Conditions
Agricultural commodity prices continue to support favorable farm fundamentals resulting in strong demand for machinery. Despite favorable demand, supply chain constraints and limited global industry production have negatively impacted the level of retail sales in the first quarter of 2022. 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 for the first three months of 2022 decreased approximately 1% compared to the same period in 2021. Industry unit retail sales of combines for the first three months of 2022 decreased approximately 23% compared to the same period in 2021. Lower sales of smaller tractors, which declined from record levels in 2021, were partially offset by increased sales of high horsepower units. Despite continued strong demand, sales of large row-crop agricultural equipment declined from the same period in 2021 due to supply chain constraints, which limited deliveries.
In Western Europe, industry unit retail sales of tractors decreased approximately 6% for the first three months of 2022 compared to the same period in 2021. Industry unit retail sales of combines for the first three months of 2022 decreased approximately 10% compared to the first three months of 2021. Industry retail tractor sales were restricted by supply chain challenges during the first three months of 2022 compared to the same period in 2021.
In South America, industry unit retail sales of tractors increased approximately 9% for the first three months of 2022 compared to the same period in 2021. Industry unit retail sales of combines for the first three months of 2022 decreased approximately 3% compared to the first three months of 2021. The improved demand in tractors was primarily in Brazil and Argentina. Strong crop production levels as well as elevated commodity prices are supporting positive economic conditions for farmers who continue to replace aged fleets.
STATEMENTS OF OPERATIONS
Net sales for the three months ended March 31, 2022 were approximately $2,685.7 million compared to approximately $2,378.7 million for the same period in 2021. The following tables set forth, for the three months ended March 31, 2022, the impacts to net sales of currency translation by geographical segment (in millions, except percentages):
Three Months Ended March 31, Change Change Due to Currency Translation
2022 2021 $ % $ %
Europe/Middle East $ 1,403.1 $ 1,327.2 $ 75.9 5.7 % $ (123.8) (9.3) %
North America 701.0 611.1 89.9 14.7 % (1.6) (0.3) %
South America 356.4 240.5 115.9 48.2 % 15.4 6.4 %
Asia/Pacific/Africa 225.2 199.9 25.3 12.7 % (9.5) (4.8) %
$ 2,685.7 $ 2,378.7 $ 307.0 12.9 % $ (119.5) (5.0) %
Regionally, net sales in our EME region were higher during the three months ended March 31, 2022 compared to the same period in 2021. This increase was primarily due to increased net sales in many major markets, with the largest increases occurring in France and Scandinavia, offset by decreases in Russia and Ukraine. Net sales in North America increased during the three months ended March 31, 2022 compared to the same period in 2021. Higher net sales of tractors, as well as grain and protein equipment were partially offset by lower net sales of Precision Planting products. Net sales in South America increased during the three months ended March 31, 2022 compared to the same period in 2021. 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 grain and protein production equipment. In our APA region, net sales increased during the three months ended March 31, 2022 compared to the same period in 2021, primarily driven by net sales increases in Australia, Africa and Japan, partially offset by lower net sales in China.
We estimate our worldwide average price increase was approximately 8.0% during the three months ended March 31, 2022 compared to the same prior year period. Consolidated net sales of tractors and combines, which combined comprised approximately 59.2% of our net sales for the three months ended March 31, 2022, increased approximately 17.9% compared to the same periods in 2021. Unit sales of tractors and combines increased approximately 11.7% for the three months ended
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March 31, 2022 compared to the same period in 2021. 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 March 31,
2022 2021
$ % of
Net Sales $ % of
Net Sales
Gross profit $ 631.3 23.5 % $ 570.5 24.0 %
Selling, general and administrative expenses 271.1 10.1 % 260.6 11.0 %
Engineering expenses 100.3 3.7 % 96.3 4.0 %
Amortization of intangibles 15.3 0.6 % 17.5 0.7 %
Impairment charges 36.0 1.3 % — — %
Restructuring expenses 3.0 0.1 % 1.3 0.1 %
Bad debt expense 1.6 0.1 % (0.4) — %
Income from operations $ 204.0 7.6 % $ 195.2 8.2 %
Gross profit as a percentage of net sales decreased for the three months ended March 31, 2022 compared to the same period in 2021. The decrease was primarily as a result of material, freight and labor cost inflation, mostly offset by mitigating favorable pricing impacts. In addition, gross margins during the three months ended March 31, 2022 were negatively impacted by lower net sales of richer margin Precision Planting products due to chip-related supply chain constraints.
Global production hours increased approximately 6% in the three months ended March 31, 2022 compared to the same period in 2021. The increase was primarily due to the high levels of market demand during the three months ended March 31, 2022. Our production facilities continue to face supply chain and logistics disruptions as well as material, labor and freight cost inflation. These disruptions have impacted 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 factors to continue, which may impact production levels and net sales and margins in future periods.
We recorded approximately $0.3 million of stock compensation expense within cost of goods sold during both of the three months ended March 31, 2022 and 2021. 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 three months ended March 31, 2022 compared to the same periods in 2021, driven by the increases in net sales. We recorded approximately $6.7 million of stock compensation expense within SG&A expenses during the three months ended March 31, 2022 compared to approximately $6.5 million during the same period in 2021. Refer to Note 4 to our Condensed Consolidated Financial Statements for additional information on stock compensation expense.
We have joint ventures that operate in Russia primarily for the distribution of equipment and parts. Since 2018, our Russian joint venture partner has been subject to sanctions by the United States. Subsequent to these sanctions, we have participated in these joint ventures under time-limited general licenses from the Office of Foreign Assets Control (“OFAC”) of the U.S. Department of Treasury that, following their most recent extension on April 25, 2022, expire on May 25, 2022 and authorize the wind-down of activities. We are actively working to conclude our interest in the joint ventures. As a result, we assessed the fair value of our gross assets related to our joint ventures for potential impairment and recorded asset impairment charges of approximately $36.0 million during the three months ended March 31, 2022. Our sales in Russia and Ukraine were $153.2 million and $86.2 million, respectively, during the year ended December 31, 2021. Refer to Note 3 of our Condensed Consolidated Financial Statements for additional information.
The restructuring expenses of approximately $3.0 million recorded during the three months ended March 31, 2022 primarily related to severance and other related costs associated with the rationalization of certain European manufacturing operations. Refer to Note 3 to our Condensed Consolidated Financial Statements for additional information.
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Interest expense, net was approximately $0.4 million for the three months ended March 31, 2022 compared to approximately $3.4 million for the comparable period in 2021, resulting primarily from higher interest income in 2022 compared to 2021. See “Liquidity and Capital Resources” for further information.
Other expense, net was approximately $17.5 million for the three months ended March 31, 2022 compared to approximately $11.5 million for the comparable period in 2021. 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 $7.9 million for the three months ended March 31, 2022 compared to approximately $4.6 million for the comparable period in 2021. The increase in losses for the three months ended March 31, 2022 was primarily a result of higher interest rates as compared to 2021.
We recorded an income tax provision of approximately $60.2 million for the three months ended March 31, 2022 compared to approximately $43.6 million for the comparable period in 2021. 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 reserve against our net deferred tax assets in certain foreign jurisdictions.
Equity in net earnings of affiliates, which is primarily comprised of income from our AGCO Finance joint ventures, was approximately $11.1 million for the three months ended March 31, 2022 compared to approximately $14.7 million for the comparable period in 2021. The decrease was primarily due to a write-down of our investment in our Russian finance joint venture of approximately $4.8 million. Refer to “Finance Joint Ventures” for further information regarding our finance joint ventures and their results of operations.
Net loss (income) attributable to noncontrolling interests was approximately $14.8 million of losses during the three months ended March 31, 2022 compared to approximately $0.6 million of income in the same period in 2021. The losses during 2022 related to our joint venture partner's share of the impairment charges we recorded during 2022 related to our joint ventures in Russia, as previously discussed.
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 18 for additional information.
As of March 31, 2022, our investment in the finance joint ventures, which is included in “Investment in affiliates” on our Condensed Consolidated Balance Sheets, was approximately $377.3 million compared to $359.2 million as of December 31, 2021. The total finance portfolio in our finance joint ventures was approximately $10.9 billion as of both March 31, 2022 and December 31, 2021. The total finance portfolio as of March 31, 2022 included approximately $9.4 billion of retail receivables and $1.5 billion of wholesale receivables from our dealers. The total finance portfolio as of December 31, 2021 included approximately $9.2 billion of retail receivables and $1.7 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 2022, we made no additional investments in our finance joint ventures and there were no dividends paid from our finance joint ventures. For the three months ended March 31, 2022, 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 $11.3 million compared to approximately $14.3 million for the same period in 2021. In addition, during the three months ended March 31, 2022, we recorded a write-down of our investment in our Russian finance joint venture of approximately $4.8 million, reflected within “Equity in net earnings of affiliates” in our Condensed Consolidated Statements of Operations.
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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 April 2022 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):
March 31 2022 (1)
Credit facility, expires 2023 $ 600.0
1.002% Senior term loan due 2025 277.3
Senior term loans due between 2023 and 2028 355.5
0.800% Senior notes due 2028 665.6
Other long-term debt 7.5
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(1) The amounts above are gross of debt issuance costs of an aggregate amount of approximately $4.4 million.
In April 2022, we entered into a short-term revolving credit facility of €225.0 million with Coöperatieve Rabobank U.A., or “Rabobank”. The €225.0 million (or approximately $240.0 million) was borrowed on April 26, 2022, with a maturity date of March 31, 2023. Interest accrues on amounts outstanding under the credit facility, at our option, at either (1) the secured overnight financing rate (“SOFR”) for borrowings denominated in U.S. dollars or Euro Interbank Offered Rate (“EURIBOR”) for borrowings denominated in Euros plus a margin of 0.75%, 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%, or (iii) one-month adjusted term SOFR plus 1.0%, plus a margin of 0.75%. The credit facility contains covenants restricting, among other things, the incurrence of indebtedness and the making of certain payments, including dividends. We also have to fulfill financial covenants with respect to a total debt to EBITDA ratio and an interest coverage ratio.
On October 6, 2021, we issued €600.0 million (or approximately $665.6 million as of March 31, 2022) 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 optional and mandatory redemption in certain events.
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. The revolving credit facility requires that we be in compliance with applicable sanctions at the time of each draw. In light of the lack of clarity with respect to existing and potential sanctions involving our joint ventures in Russia, and considering the timing of our OFAC license expiration dates, as well as the timing of concluding our interests in the joint ventures in Russia, we elected to draw approximately $400.0 million under our credit facility during March 2022 in excess of our current requirements. Of that amount, $200.0 million was repaid prior to March 31, 2022. As of March 31, 2022, we had $600.0 million of outstanding borrowings under the revolving credit facility, and the ability to borrow approximately $200.0 million under the revolving credit facility. During April 2022, we borrowed $200.0 million under the revolving credit facility.
On April 15, 2020, we borrowed €117.5 million and $133.8 million under a term loan facility that had been added to our multi-currency revolving credit facility. While outstanding, the loans bore interest at one-month LIBOR plus a margin of 1.625%. We repaid the two loans on February 16, 2021 (for an aggregate amount of approximately $276.0 million as of that date). Refer to Note 6 to the Condensed Consolidated Financial Statements for additional information regarding our current facilities.
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 already are not available for loans denominated in other currencies. The interest rates reflected in our credit facility were designed to accommodate the discontinuation of LIBOR-based rates, and a shift to SOFR 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.
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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 $277.3 million as of March 31, 2022) from the European Investment Bank. The loan matures on January 24, 2025. Interest is payable on the term loan at 1.002% per annum, payable semi-annually in arrears.
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 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 October 2019, we repaid an aggregate amount of €56.0 million (or approximately $61.1 million) of two of these term loans. Additionally, 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, 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). On February 1, 2022, we repaid €72.5 million (or approximately $81.7 million) of one of our 2018 senior term loans due August 2023 with existing cash on hand. In aggregate, as of March 31, 2022 we have indebtedness of approximately €320.5 million (or approximately $355.5 million) under a total group of seven term loan agreements with remaining maturities ranging from August 2023 to August 2028. As of March 31, 2022, 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 August 2023 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 1.10% to 1.25% and maturity dates between October 2023 and August 2025.
As of March 31, 2022 and December 31, 2021, we had short-term borrowings due within one year of approximately $93.2 million and $90.8 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 March 31, 2022 and December 31, 2021, the cash received from receivables sold under the U.S., Canadian, European and Brazilian accounts receivable sales agreements was approximately $1.2 billion and $1.3 billion, respectively.
In addition, we sell certain trade receivables under factoring arrangements to other financial institutions around the world. As of March 31, 2022 and December 31, 2021, the cash received from these arrangements was approximately $181.2 million and $215.4 million, 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 March 31, 2022 and December 31, 2021, these finance joint ventures had approximately $87.8 million and $82.1 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
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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% and 29.7% at March 31, 2022 and December 31, 2021, respectively.
Cash Flows
Cash flows used in operating activities were approximately $576.5 million for the first three months of 2022 compared to cash flows used in operating activities of $315.3 million for the same period in 2021. The increase in cash flow used in operating activities during the three months ended March 31, 2022 was primarily as a result of a larger increase in inventories and a lower increase in accounts payable as compared to the same period in 2021. Supply chain disruptions have resulted in significantly higher raw material and work-in-process inventory levels during the first three months in 2022 as compared to the same period of prior year.
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 $2,201.8 million in working capital at March 31, 2022 as compared to $1,559.5 million at December 31, 2021 and $883.7 million at March 31, 2021. Accounts receivable and inventories, combined, as of March 31, 2022 were approximately $782.7 million and $959.4 million higher, respectively, than at December 31, 2021 and March 31, 2021. Accounts receivable and inventories, combined, at March 31, 2022 were higher than at December 31, 2021 and March 31, 2021 primarily due to higher net sales and production levels, as well as the significant impact of supply chain constraints.
Capital expenditures for the first three months of 2022 were approximately $66.3 million compared to $63.5 million for the same period in 2021. We anticipate capital expenditures for the full year of 2022 will be approximately $325.0 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
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 in this transaction as of December 31, 2021. On January 19, 2022, we received an additional 113,824 shares upon final settlement of our November 2021 ASR agreement. 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 as of December 31, 2021.
On April 28, 2022, our Board of Directors approved an increase to our quarterly dividend commencing in the second quarter of 2022 by 20% to $0.24 per common share and declared a special dividend of $4.50 per common share that will be paid during the second quarter of 2022.
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 March 31, 2022, we guaranteed indebtedness owed to third parties of approximately $24.9 million, primarily related to dealer and end-user financing of equipment. In addition, we had accrued approximately $22.4 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 $174.4 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 March 31, 2022, we had outstanding designated and non-designated foreign currency contracts with a gross notional amount of approximately $3.6 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 18 to our Condensed Consolidated Financial Statements, for further discussion of these matters.
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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 18 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 2022 compared to 2021 with improved demand across all major markets. Our net sales are expected to increase in 2022 compared to 2021, resulting from an increase in forecasted industry demand, as well as positive pricing, partially offset by unfavorable currency translation. Operating margins are expected to improve from 2021 levels, reflecting increased net sales and production volumes and favorable pricing, net of material and labor cost inflation. 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, 2021 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, 2021.
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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 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;
• the occurrence of cyber attacks, including ransomware attacks; and
• the war in Ukraine.
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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 quarters, suppliers of several key parts and components have not been able to meet our demand and we have had to adjust 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.
As previously discussed, we have joint ventures with a sanctioned entity that operate in Russia, and we participate in these joint ventures under time-limited general licenses from OFAC of the U.S. Department of the Treasury that, following their most recent extension on April 25, 2022, expire on May 25, 2022 and authorize the wind-down of activities. We are actively working to conclude our interest in the joint ventures. Accordingly, there could be other consequences related to conclusion of the joint ventures that we do not foresee.
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, 2021.
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.