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Item 2. Management’s Discussion and Analysis

2022-08-09 compared with 2022-05-10 · 175 added, 128 removed, 178 unchanged (63% of the section changed)

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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.

These factors, along with increasing industrial demand, are negatively affecting production levels, particularly as a result of delays in the receipts of parts and components.

Supply chain issues of particular concern include a wide range of parts and components, including semiconductors.

We may continue to face supplier bottlenecks and delays in all regions as well as challenges with 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 cyberattack.

The attack resulted in the temporary closure of most of our production sites and parts operations.

A majority of the affected locations resumed operations within approximately two weeks after the attack was discovered.

As a result of the temporary closures, our production, sales and income from operations were negatively impacted during the second quarter of 2022.

Please see further discussion below.

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.

For the three months ended June 30, 2022, we generated net income of approximately $177.7 million, or $2.37 per share, compared to approximately $282.8 million, or $3.73 per share, for the same period in 2021.

For the six months ended June 30, 2022, we generated net income of approximately $329.5 million, or $4.40 per share, compared to approximately $433.6 million, or $5.71 per share, for the same period in 2021.

Net sales during the three and six months ended June 30, 2022 were approximately $2,945.2 million and $5,630.9 million, respectively, which were approximately 2.3% and 7.1% higher than the same periods in 2021.

These increases were primarily the result of robust end-market demand and favorable pricing during the three and six months ended June 30, 2022 compared to the same periods in 2021, which helped to offset the negative impacts of currency translation, supply chain constraints and the second quarter cyberattack.

Regionally, net sales were higher in all regions for the three and six months ended June 30, 2022 compared to 2021 excluding currency translation, as presented below.

Income from operations for the three months ended June 30, 2022 was approximately $263.5 million compared to approximately $290.3 million for the same period in 2021.

Income from operations for the six months ended June 30, 2022 was approximately $467.5 million compared to approximately $485.5 million for the same period in 2021.

These decreases were primarily the result of negative currency impacts, lower production volumes as a result of the second quarter cyberattack, as well as higher production costs associated with supply chain disruptions and the cyberattack.

Income from operations for the six months ended June 30, 2022 were 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.

During the three and six months ended June 30, 2022, income from operations in all regions was negatively impacted by supply chain disruptions and the second quarter cyberattack which affected sales and production levels as well as production costs.

In addition, income from operations in our Europe/Middle East region decreased for the three and six months ended June 30, 2022 compared to the same periods in 2021 due to negative currency impacts.

In our North American region, income from operations decreased for the three and six months ended June 30, 2022 compared to the same periods in 2021.

These decreases were also the result of a weaker sales mix.

In our South American region, income from operations increased in the three and six months ended June 30, 2022 compared to the same periods in 2021.

These increases reflect significant increases in end-market demand, positive pricing and a favorable sales mix.

In our Asia/Pacific/Africa (“APA”) region, income from

Management’s Discussion and Analysis of Financial Condition and Results of Operations

operations increased for the three and six months ended June 30, 2022 compared to the same periods in 2021, primarily due to a favorable sales mix and higher net sales during the six months ended June 30, 2022.

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.

Despite favorable demand, supply chain constraints and limited global industry production have negatively impacted the level of retail sales in the first six months 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.

In North America, industry unit retail sales of utility and high horsepower tractors for the first six months of 2022 decreased approximately 7% compared to the same period in 2021.

Industry unit retail sales of combines for the first six months of 2022 decreased approximately 8% 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 higher horsepower units.

In Western Europe, industry unit retail sales of tractors decreased approximately 10% for the first six months of 2022 compared to the same period in 2021.

Industry unit retail sales of combines for the first six months of 2022 decreased approximately 16% compared to the first six months of 2021.

Industry retail tractor sales were restricted by supply chain challenges during the first six months of 2022 compared to the same period in 2021.

In South America, industry unit retail sales of tractors increased approximately 7% for the first six months of 2022 compared to the same period in 2021.

Industry unit retail sales of combines for the first six months of 2022 decreased approximately 5% compared to the first six 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.

Healthy 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

Net sales for the three months ended June 30, 2022 were approximately $2,945.2 million compared to approximately $2,879.3 million for the same period in 2021.

Net sales for the six months ended June 30, 2022 were approximately $5,630.9 million compared to approximately $5,258.0 million for the same period in 2021.

The following tables set forth, for the three and six months ended June 30, 2022, 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

2022 2021 $ % $ %

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$ 2,945.2 $ 2,879.3 $ 65.9 2.3 % $ (216.5) (7.5) %

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

Six Months Ended June 30, Change Change Due to Currency Translation

2022 2021 $ % $ %

Europe/Middle East $ 2,870.7 $ 2,962.4 $ (91.7) (3.1) % $ (344.5) (11.6) %

North America 1,440.9 1,345.8 95.1 7.1 % (6.9) (0.5) %

South America 875.6 518.8 356.8 68.8 % 41.4 8.0 %

Asia/Pacific/Africa 443.7 431.0 12.7 2.9 % (26.0) (6.0) %

$ 5,630.9 $ 5,258.0 $ 372.9 7.1 % $ (336.0) (6.4) %

Regionally, net sales in our EME region were lower during the three and six months ended June 30, 2022 compared to the same periods in 2021.

These decreases were primarily due to negative foreign currency translation and lower volumes due to decreased production, offset by positive pricing impacts.

Net sales in North America increased during the three and six

Management’s Discussion and Analysis of Financial Condition and Results of Operations

March 31, 2022 compared to the same period in 2021.

months ended June 30, 2022 compared to the same periods in 2021.

These increases were primarily related to the impact of favorable pricing to mitigate inflationary cost pressures, as well as increased tractor sales, offset by lower net sales of combines and sprayers.

Net sales in South America increased during the three and six months ended June 30, 2022 compared to the same periods 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 sprayers and grain and protein production equipment.

In our APA region, net sales increased during the six months ended June 30, 2022 compared to the same periods in 2021, primarily driven by net sales increases in Australia and Japan, partially offset by lower net sales in China related to COVID-19 shut downs.

We estimate our worldwide average price increases were approximately 8.7% and 8.4%, respectively, during the three and six months ended June 30, 2022 compared to the same prior year periods.

Consolidated net sales of tractors and combines, which combined comprised approximately 59.5% and 59.3% of our net sales for the three and six months ended June 30, 2022, respectively, increased approximately 4.5% and 10.4% compared to the same periods in 2021.

Unit sales of tractors and combines increased approximately 13.3% and 12.5%, respectively, for the three and six months ended June 30, 2022 compared to the same periods 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,

Three Months Ended June 30,

Net Sales $ % of

Net Sales (1)

Gross profit $ 690.5 23.4 % $ 692.4 24.0 %

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Amortization of intangibles 15.4 0.5 % 14.2 0.5 %

Impairment charges 36.0 1.3 % — — %

Restructuring expenses 0.4 — % 4.7 0.2 %

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Income from operations $ 263.5 8.9 % $ 290.3 10.1 %

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.

Six Months Ended June 30,

Net Sales $ % of

Net Sales (1)

Gross profit $ 1,321.8 23.5 % $ 1,262.9 24.0 %

Selling, general and administrative expenses 573.6 10.2 % 536.9 10.2 %

Engineering expenses 207.4 3.7 % 203.5 3.9 %

Amortization of intangibles 30.7 0.5 % 31.7 0.6 %

Impairment charges 36.0 0.6 % — — %

Restructuring expenses 3.4 0.1 % 6.0 0.1 %

Bad debt (credit) expense 3.2 0.1 % (0.7) — %

Income from operations $ 467.5 8.3 % $ 485.5 9.2 %

Gross profit as a percentage of net sales decreased for both the three and six months ended June 30, 2022 compared to the same periods in 2021.

These decreases were primarily as a result of material, freight and labor cost inflation, mostly offset by mitigating favorable pricing impacts.

In addition, gross margins were negatively impacted by lower production and production inefficiencies resulting from the cyberattack during the second quarter of 2022.

Global production hours decreased approximately 8.3% and 1.3%, respectively, in the three and six months ended June 30, 2022 compared to the same periods in 2021.

These decreases were primarily due to supply chain challenges and the impact of the cyberattack on production.

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.

These disruptions have impacted our ability to produce and ship units, which has

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.

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, 2022, respectively, compared to approximately $0.3 million and $0.6 million for the comparable periods in 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.

Selling, general and administrative expenses (“SG&A expenses”) as a percentage of net sales were higher for the three months ended June 30, 2022 compared to the same period in 2021.

SG&A expenses as a percentage of net sales for the six months ended June 30, 2022 compared to the same period in 2021 were relatively flat.

We recorded approximately $10.3 million and $17.0 million of stock compensation expense within SG&A expenses during the three and six months ended June 30, 2022, respectively, compared to approximately $8.2 million and $14.7 million, respectively, during the same periods 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.

The restructuring expenses of approximately $0.4 million and $3.4 million, respectively, recorded during the three and six months ended June 30, 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.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.

Interest expense, net were approximately $5.9 million and $6.3 million, respectively, for the three and six months ended June 30, 2022 compared to approximately $2.2 million and $5.6 million, respectively, for the comparable periods in 2021, resulting primarily from increased debt levels and higher higher interest rates 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.

Other expense, net were approximately $21.7 million and $39.2 million, respectively, for the three and six months ended June 30, 2022 compared to approximately $14.6 million and $26.1 million, respectively, for the comparable periods 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 $10.2 million and $18.1 million, respectively, for the three and six months ended June 30, 2022 compared to approximately $5.1 million and $9.7 million, respectively, for the comparable periods in 2021.

This increase in losses for the six months ended June 30, 2022 was primarily a result of higher sales of accounts receivables and higher interest rates as compared to 2021.

We recorded an income tax provision of approximately $71.5 million and $131.7 million, respectively, for the three and six months ended June 30, 2022 compared to approximately $7.7 million and $51.3 million, respectively, for the comparable periods 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.

During the three months ended June 30, 2021, our income tax provision included 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.

Improvements in income in the United States during 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, were approximately $13.2 million and $24.3 million, respectively, for the three and six months ended June 30, 2022 compared to approximately $18.6 million and $33.3 million, respectively, for the comparable periods in 2021.

The decrease for the six months ended was primarily due to a write-down of our investment in our Russian finance joint venture of approximately $4.8 million recorded during the first quarter of 2022, as well as lower earnings in our European finance joint ventures.

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.

Net loss attributable to noncontrolling interests was approximately $0.1 million and $14.9 million, respectively, during the three and six months ended June 30, 2022 compared to net income attributable to noncontrolling interests of approximately $1.6 million and $2.2 million, respectively, in the same periods in 2021.

The losses during 2022 related to our Russia joint venture partner's share of the impairment charges we recorded in the first quarter of 2022.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

On May 5, 2022, we discovered that we had been subject to a ransomware cyberattack.

The attack resulted in the temporary closure of most of our production sites and parts operations.

A majority of the affected locations resumed operations within approximately two weeks after the attack was discovered.

There was some data exfiltration as a result of the attack, and a portion of the exfiltrated data subsequently was released publicly.

We do not have significant retail operations, and we do not believe that the exfiltrated data included privacy-protected consumer data.

While we currently do not believe that the exfiltration of data was consequential, we continue to evaluate the scope and consequences of the exfiltration.

Based on our current assessment, we do not believe the cost of remediation to the impacted systems will be material.

We are in the process of identifying and implementing appropriate changes to our systems to reduce the likelihood that future attacks and efforts to exfiltrate data will be successful.

To date, the cost of those efforts has not been consequential.

We have cyber insurance coverage and we plan to file a claim associated with the attack.

Because we already were experiencing supply chain issues at the time of the attack, we cannot accurately estimate the amount of lost revenue or operating income attributable to the attack.

We currently expect to be able to substantially mitigate the effects of the attack by increasing production over the remainder of 2022.

Russian Joint Ventures

We previously invested in two joint ventures that operated in Russia primarily for the manufacture and distribution of equipment and parts.

Beginning in 2018, our Russian joint venture partner became subject to sanctions by the United States.

Subsequent to the commencement of these sanctions, we obtained a time-limited general license from the Office of Foreign Assets Control (“OFAC”) of the U.S.

Department of Treasury that permitted us to continue our participation but which, following the most recent extension, expired on May 25, 2022.

Following that expiration, we “blocked” our interest in one of the joint ventures through a process acceptable to OFAC, which had the effect of suspending our role in that joint venture.

On July 8, 2022, OFAC issued a license authorizing us to divest and transfer our equity interests in both joint ventures to a third party.

We are actively working to conclude our interests in the joint ventures.

During the three months ended March 31, 2022, we assessed the fair value of our gross assets related to the joint ventures for potential impairments and recorded asset impairment charges of approximately $36.0 million.

Our sales in Russia and Ukraine were $153.2 million and $86.2 million, respectively, during the year ended December 31, 2021.

Our sales subsequent to that date also have not been material.

Refer to Note 3 of our Condensed Consolidated Financial Statements for additional information.

FINANCE JOINT VENTURES

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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.

As of June 30, 2022, our investment in the finance joint ventures, which is included in “Investment in affiliates” on our Condensed Consolidated Balance Sheets, was approximately $371.7 million compared to $359.2 million as of December 31, 2021.

The total finance portfolio in our finance joint ventures was approximately $10.5 billion and $10.9 billion as of June 30, 2022 and December 31, 2021, respectively.

The total finance portfolio as of June 30, 2022 included approximately $9.1 billion of retail receivables and $1.4 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.

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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.

For the six months ended June 30, 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 $24.6 million compared to approximately $32.3 million for the same period in 2021.

In addition, during the six months ended June 30, 2022, we recorded a write-down of our investment in our Russian

Management’s Discussion and Analysis of Financial Condition and Results of Operations

finance joint venture of approximately $4.8 million, reflected within “Equity in net earnings of affiliates” in our Condensed Consolidated Statements of Operations.

LIQUIDITY AND CAPITAL RESOURCES

Our financing requirements are subject to variations due to seasonal changes in inventory and receivable levels.

Our financing requirements generally 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)

We believe that the following facilities 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):

June 30, 2022 (1)

Credit facility, expires 2023 800.0

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(1) The amounts above are gross of debt issuance costs of an aggregate amount of approximately $4.0 million.

In June 2022, we entered into an uncommitted revolving credit facility that allows us to borrow up to €100.0 million (or approximately $104.1 million as of June 30, 2022).

The credit facility expires on December 31, 2026.

Any loans will bear interest at market rates.

As of June 30, 2022, we had no outstanding borrowings under the revolving credit facility and had the ability to borrow €100.0 million (or approximately $104.1 million).

In April 2022, we entered into a short-term revolving credit facility of €225.0 million with Coöperatieve Rabobank U.A., or “Rabobank”.

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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%.

On October 6, 2021, we issued €600.0 million (or approximately $624.8 million as of June 30, 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%.

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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.

The revolving credit facility requires that we are in compliance with applicable sanctions at the time of each draw.

As of June 30, 2022, we had $800.0 million of outstanding borrowings under the revolving credit facility and therefore had no availability to borrow 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.

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Refer to Note 6 to the Condensed Consolidated Financial Statements for additional information regarding our current facilities.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

As described above, our credit facility allows us to select from among various interest rate options.

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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.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.

On January 25, 2019, we borrowed €250.0 million (or approximately $260.4 million as of June 30, 2022) from the European Investment Bank.

The loan matures on January 24, 2025.

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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.

In October 2019, we repaid an aggregate amount of €56.0 million (or approximately $61.1 million) of two of the 2016 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.

On April 19, 2022, we repaid €1.0 million (or approximately $1.1 million) of one of our 2016 senior term loans due October 2023.

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.

In aggregate, as of June 30, 2022 we have indebtedness of approximately €319.5 million (or approximately $332.7 million) under a total group of seven term loan agreements with remaining maturities ranging from August 2023 to August 2028.

As of June 30, 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 loan with a floating interest rate, interest is payable in arrears on a semi-annual basis, with an interest rate based on the EURIBOR plus a margin of 1.10% and a maturity date of August 2025.

As of June 30, 2022 and December 31, 2021, we had short-term borrowings due within one year of approximately $320.8 million and $90.8 million, respectively.

The balance as of June 30, 2022 related to short-term borrowings includes the short-term revolving credit facility discussed previously of approximately $240.0 million.

We are in compliance with the financial covenants contained in these facilities and expect to continue to maintain such compliance.

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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.

As of June 30, 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.

As of June 30, 2022 and December 31, 2021, the cash received from these arrangements was approximately $174.9 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.

As of June 30, 2022 and December 31, 2021, these finance joint ventures had approximately $50.7 million and $42.6 million, respectively, of outstanding accounts receivable associated with these arrangements.

These arrangements are accounted for as off-balance sheet transactions.

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These arrangements are also accounted for as off-balance sheet transactions.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

In order to efficiently manage our liquidity, we generally pay vendors in accordance with negotiated terms.

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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

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 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.

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 40.7% and 29.7% at June 30, 2022 and December 31, 2021, respectively.

Cash flows used in operating activities were approximately $566.2 million for the first six months of 2022 compared to cash flows used in operating activities of $124.9 million for the same period in 2021.

The increase in cash flow used in operating activities during the six months ended June 30, 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 and lower second quarter production levels have resulted in significantly higher raw material and work-in-process inventory levels during the first six 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 had approximately $2,073.8 million in working capital at June 30, 2022 as compared to $1,559.5 million at December 31, 2021 and $1,108.9 million at June 30, 2021.

Accounts receivable and inventories, combined, as of June 30, 2022 were approximately $946.4 million and $765.6 million higher, respectively, than at December 31, 2021 and June 30, 2021.

Accounts receivable and inventories, combined, at June 30, 2022 were higher than at December 31, 2021 and June 30, 2021 primarily due to the impact of supply chain constraints.

Capital expenditures for the first six months of 2022 were approximately $139.2 million compared to $120.6 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.

During the three and six months ended June 30, 2022, we did not purchase any shares directly or enter into any accelerated share repurchase agreements.

As of June 30, 2022, the remaining amount authorized to be repurchased under board-approved share repurchase authorizations was approximately $110.0 million, which has no expiration date.

In addition, 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 variable dividend of $4.50 per common share that was paid during the second quarter of 2022.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.

At June 30, 2022, we guaranteed indebtedness owed to third parties of approximately $27.1 million, primarily related to dealer and end-user financing of equipment.

In addition, we had accrued approximately $20.2 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.

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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.

At June 30, 2022, we had outstanding designated and non-designated foreign currency contracts with a gross notional amount of approximately $3.4 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.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Contingencies

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Refer to Note 18 to our Condensed Consolidated Financial Statements for further discussion of these matters.

Global industry demand for farm equipment is expected to be higher in 2022 compared to 2021 with improved demand across all major markets.

Global industry demand for farm equipment generally is expected to be higher in 2022 compared to 2021 with improved demand in North America and South America, and relatively flat demand in Europe.

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.

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• our expansion plans in emerging markets;

• supply constraints;

• supply constraints, including energy shortages;

• our cost reduction and control initiatives;

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• the impact of the COVID-19 pandemic on product demand and production;

• the occurrence of cyber attacks, including ransomware attacks;

• the occurrence of future cyberattacks, including ransomware attacks;

• the war in Ukraine.

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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.

Recently suppliers of several key parts and components have not been able to meet our demand and we have had to decrease our production levels.

In addition, the potential of natural gas shortages in Europe, as well as predicted overall shortages in other energy sources, could also negatively impact our production and that of our supply chain in the future.

It is unclear when these supply chain disruptions will be restored 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 participated in these joint ventures under time-limited general licenses from OFAC of the U.S.

Department of the Treasury that expired on May 25, 2022.

Following that expiration, we “blocked” our interest in one of the joint ventures through a process acceptable to OFAC, which had the effect of terminating our role in that joint venture.

On July 8, 2022, OFAC issued a license authorizing us to divest and transfer our equity interests in both joint ventures to a third party.

We are actively working to conclude our interests in the joint ventures.

Accordingly, there could be other consequences related to the conclusion of the joint ventures that we do not foresee.

Any forward-looking statement should be considered in light of such important factors.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis