AGCO CORP /DE 10-Q

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 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 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 38 Table of Contents Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) 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 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 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. 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 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 $ % $ % Europe/Middle East $ 1,467.6 $ 1,635.2 $ (167.6) (10.3) % $ (220.7) (13.5) % North America 739.9 734.7 5.2 0.7 % (5.3) (0.7) % South America 519.2 278.3 240.9 86.6 % 26.0 9.3 % Asia/Pacific/Africa 218.5 231.1 (12.6) (5.5) % (16.5) (7.1) % $ 2,945.2 $ 2,879.3 $ 65.9 2.3 % $ (216.5) (7.5) % 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 39 Table of Contents Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) 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 June 30, 2022 2021 $ % of Net Sales $ % of Net Sales (1) Gross profit $ 690.5 23.4 % $ 692.4 24.0 % Selling, general and administrative expenses 302.5 10.3 % 276.3 9.6 % Engineering expenses 107.1 3.6 % 107.2 3.7 % Amortization of intangibles 15.4 0.5 % 14.2 0.5 % Restructuring expenses 0.4 — % 4.7 0.2 % Bad debt expense 1.6 0.1 % (0.3) — % Income from operations $ 263.5 8.9 % $ 290.3 10.1 % Six Months Ended June 30, 2022 2021 $ % of 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 40 Table of Contents Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) 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 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”) 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. 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. 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 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. 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 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. 41 Table of Contents Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) Cyberattack 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 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 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. 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 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 42 Table of Contents Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) 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 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 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 1.002% Senior term loan due 2025 260.4 Senior term loans due between 2023 and 2028 332.7 0.800% Senior notes due 2028 624.8 Other long-term debt 6.1 ____________________________________ (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”. 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 $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%. 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 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. 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. 43 Table of Contents Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) 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. 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 $260.4 million as of June 30, 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 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 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. Should we ever encounter difficulties, our historical relationship with our lenders has been strong, and we anticipate their continued long-term support of our business. Our accounts receivable sales agreements in North America, Europe and Brazil permit the sale, on an ongoing basis, of a majority of our receivables to our U.S., Canadian, European and Brazilian finance joint ventures. The sales of all receivables are without recourse to us. We do not service the receivables after the sales occur, and we do not maintain any direct retained interest in the receivables. These agreements are accounted for as off-balance sheet transactions and have the effect of reducing accounts receivable and short-term liabilities by the same amount. As of June 30, 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 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 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. 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. 44 Table of Contents Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) In order to efficiently manage our liquidity, we generally pay vendors in accordance with negotiated terms. To enable vendors to obtain payment in advance of our payment due dates to them, we have established programs in certain markets with financial institutions under which the vendors have the option to be paid by the financial institutions earlier than the payment due dates. When vendors receive early payments they receive discounted amounts and we then pay the financial institutions the face amounts of the invoices on the payment due dates. We do not reimburse vendors for any costs they incur for participation in the programs. Amounts owed to the financial institutions are presented as “Accounts payable” in our Condensed Consolidated Balance Sheets. Should we not be able to negotiate extended payment terms with our vendors, or should financial institutions no longer be willing to participate in early payment programs with us, we would expect to have sufficient liquidity to timely pay our vendors without any material impact on us or our financial position. Our debt to capitalization ratio, which is total indebtedness divided by the sum of total indebtedness and stockholders’ equity, was 40.7% and 29.7% at June 30, 2022 and December 31, 2021, respectively. Cash Flows 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 $2,073.8 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 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. 45 Table of Contents Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) COMMITMENTS, OFF-BALANCE SHEET ARRANGEMENTS AND CONTINGENCIES We are party to a number of commitments and other financial arrangements, which may include off-balance sheet arrangements. At June 30, 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. The maximum potential amount of future payments under the guarantee is approximately $183.8 million. We also sell a majority of our wholesale receivables in North America, Europe and Brazil to our U.S., Canadian, European and Brazilian finance joint ventures. At June 30, 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. 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 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. 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. 46 Table of Contents Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) FORWARD-LOOKING STATEMENTS Certain statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report on Form 10-Q are forward-looking, including certain statements set forth under the headings “Liquidity and Capital Resources” and “Outlook.” Forward-looking statements reflect assumptions, expectations, projections, intentions or beliefs about future events. These statements, which may relate to such matters as earnings, net sales, margins, industry demand, market conditions, commodity prices, farm incomes, foreign currency translation, general economic outlook, dividends, share repurchases, availability of financing, product development and enhancement, factory productivity, production and sales volumes, benefits from cost reduction initiatives, material costs, pricing impacts, tax rates, compliance with loan covenants, capital expenditures, working capital and debt service requirements and the impacts of the COVID-19 pandemic are “forward-looking statements” within the meaning of the federal securities laws. These statements do not relate strictly to historical or current facts, and you can identify certain of these statements, but not necessarily all, by the use of the words “anticipate,” “assumed,” “indicate,” “estimate,” “believe,” “predict,” “forecast,” “rely,” “expect,” “continue,” “grow” and other words of similar meaning. Although we believe that the expectations and assumptions reflected in these statements are reasonable in view of the information currently available to us, there can be no assurance that these expectations will prove to be correct. These forward-looking statements involve a number of risks and uncertainties, and actual results may differ materially from the results discussed in or implied by the forward-looking statements. Adverse changes in any of the following factors could cause actual results to differ materially from the forward-looking statements: • general economic and capital market conditions; • availability of credit to our retail customers; • the worldwide demand for agricultural products; • grain stock levels and the levels of new and used field inventories; • cost of steel and other raw materials; • energy costs; • performance and collectability of the accounts receivable originated or owned by AGCO or our finance joint ventures; • government policies and subsidies; • uncertainty regarding changes in the international tariff regimes and product embargoes and their impact on the cost of the products that we sell; • weather conditions; • interest and foreign currency exchange rates; • pricing and product actions taken by competitors; • commodity prices, acreage planted and crop yields; • farm income, land values, debt levels and access to credit; • pervasive livestock diseases; • production disruptions, including due to component and raw material availability; • production levels and capacity constraints at our facilities, including those resulting from plant expansions and systems upgrades; • integration of recent and future acquisitions; • our expansion plans in emerging markets; • supply constraints, including energy shortages; • 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 future cyberattacks, including ransomware attacks; and • the war in Ukraine. 47 Table of Contents 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. 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. 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.