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Article by DailyStocks_admin    (12-15-08 08:15 AM)

The Daily Magic Formula Stock for MM/DD/YYYY is AGCO Corp. According to the Magic Formula Investing Web Site, the ebit yield is 24% and the EBIT ROIC is 25-50%.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


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BUSINESS OVERVIEW

AGCO Corporation (“AGCO,” “we,” “us,” or the “Company”) was incorporated in Delaware in April 1991. Our executive offices are located at 4205 River Green Parkway, Duluth, Georgia 30096, and our telephone number is 770-813-9200. Unless otherwise indicated, all references in this Form 10-K to the Company include our subsidiaries.

General

We are the third largest manufacturer and distributor of agricultural equipment and related replacement parts in the world based on annual net sales. We sell a full range of agricultural equipment, including tractors, combines, self-propelled sprayers, hay tools, forage equipment and implements and a line of diesel engines. Our products are widely recognized in the agricultural equipment industry and are marketed under a number of well-known brand names, including: AGCO ® , Challenger ® , Fendt ® , Gleaner ® , Hesston ® , Massey Ferguson ® , RoGator ® , Spra-Coupe ® , Sunflower ® , Terra-Gator ® , Valtra ® and White tm Planters. We distribute most of our products through a combination of approximately 3,000 independent dealers and distributors in more than 140 countries. In addition, we provide retail financing in the United States, Canada, Brazil, Germany, France, the United Kingdom, Australia, Ireland and Austria through our finance joint ventures with Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A., which we refer to as “Rabobank.”

Since our formation, we have grown substantially through a series of over 20 acquisitions. We have been able to expand and strengthen our independent dealer network, introduce new and updated products and expand into new markets to meet the needs of our customers. We also have identified areas of our business in which we can decrease excess manufacturing capacity and eliminate duplication in administrative, sales, marketing and production functions. In addition, we have continued to focus on strategies and actions to improve our current distribution network, improve our product offerings, reduce the cost of our products and improve asset utilization.

Products

Tractors

Our compact tractors (under 40 horsepower) are sold under the AGCO, Challenger and Massey Ferguson brand names and typically are used on small farms and in specialty agricultural industries, such as dairies, landscaping and residential areas. We also offer a full range of tractors in the utility tractor category (40 to 100 horsepower), including two-wheel and all-wheel drive versions. We sell utility tractors primarily under the AGCO, Challenger, Fendt, Massey Ferguson and Valtra brand names. Utility tractors typically are used on small and medium-sized farms and in specialty agricultural industries, including dairies, livestock, orchards and vineyards. In addition, we offer a full range of tractors in the high horsepower segment (primarily 100 to 570 horsepower). High horsepower tractors typically are used on larger farms and on cattle ranches for hay production. We sell high horsepower tractors under the AGCO, Challenger, Fendt, Massey Ferguson and Valtra brand names. Tractors accounted for approximately 68% of our net sales in 2007, 67% in 2006 and 66% in 2005.

Combines

We sell combines primarily under the Gleaner, Massey Ferguson, Fendt, Valtra and Challenger brand names. Depending on the market, our combines are sold with conventional or rotary technology. All combines are complemented by a variety of crop-harvesting heads, available in different sizes, that are designed to maximize harvesting speed and efficiency while minimizing crop loss. Combines accounted for approximately 5% of our net sales in 2007, 4% in 2006 and 5% in 2005.

In September 2007, we acquired 50% of Laverda S.p.A. (“Laverda”), thereby creating an operating joint venture between AGCO and the Italian ARGO group. Laverda is located in Breganze, Italy and manufactures harvesting equipment. In addition to producing Laverda branded combines, the Breganze factory has been manufacturing mid-range combine harvesters for our Massey Ferguson, Fendt and Challenger brands for distribution in Europe, Africa and the Middle East since 2004. The joint venture also includes Laverda’s ownership in Fella-Werke GMBH (“Fella”), a German manufacturer of grass and hay machinery, and its 50% ownership in Gallignani S.p.A. (“Gallignani”), an Italian manufacturer of balers. The addition of the Fella and Gallignani product lines enables us to provide a comprehensive harvesting offering to our customers.

Application Equipment

We offer self-propelled, three- and four-wheeled vehicles and related equipment for use in the application of liquid and dry fertilizers and crop protection chemicals. We manufacture chemical sprayer equipment for use both prior to planting crops, known as pre-emergence, and after crops emerge from the ground, known as post-emergence, primarily under the RoGator, Terra-Gator, Spra-Coupe and Challenger brand names. We also manufacture related equipment, including vehicles used for waste application that are specifically designed for subsurface liquid injection and surface spreading of biosolids, such as sewage sludge and other farm or industrial waste that can be safely used for soil enrichment. Application equipment accounted for approximately 4% of our net sales in 2007, 5% in 2006 and 6% in 2005.

Hay Tools and Forage Equipment, Implements and Other Products

We sell hay tools and forage equipment primarily under the Hesston, Massey Ferguson, Challenger, Fendt and AGCO brand names. Hay and forage equipment includes both round and rectangular balers, self-propelled windrowers, disc mowers, spreaders and mower conditioners and are used for the harvesting and packaging of vegetative feeds used in the beef cattle, dairy and horse industries.

We also distribute a wide range of implements, planters and other equipment for our product lines. Tractor-pulled implements are used in field preparation and crop management. Implements include: disc harrows, which improve field performance by cutting through crop residue, leveling seed beds and mixing chemicals with the soil; heavy tillage, which breaks up soil and mixes crop residue into topsoil, with or without prior discing; and field cultivators, which prepare a smooth seed bed and destroy weeds. Tractor-pulled planters apply fertilizer and place seeds in the field. Other equipment primarily includes loaders, which are used for a variety of tasks including lifting and transporting hay crops. We sell implements, planters and other products primarily under the Hesston, Massey Ferguson, White Planters, Sunflower and Fendt brand names. In September 2007, we acquired Industria Agricola Fortaleza Limitada (“SFIL”), a Brazilian company located in Ibirubá, Rio Grande do Sul, Brazil that manufactures and distributes a line of farm implements including drills, planters, corn headers and front loaders. The addition of this line of implements will allow us to leverage the strength of our brands and our dealer networks in the South American region.

We provide a variety of precision farming technologies that are developed, manufactured, distributed and supported on a worldwide basis. These technologies provide farmers with the capability to enhance productivity on the farm by utilizing satellite global positioning systems, or GPS. Farmers use the Fieldstar ® precision farming system to gather information such as yield data to produce yield maps for the purpose of developing application maps. Many of our tractors, combines, planters, sprayers, tillage equipment and other application equipment are equipped to employ the Fieldstar system at the customer’s option. Our SGIS tm software converts a variety of agricultural data to provide application plans to enhance crop yield and productivity. Our Auto-Guide ® satellite navigation system assists parallel steering to avoid the under and overlap of planting rows to optimize land use and allows for more precise farming procedures from cultivation to product application. While these products do not generate significant revenues, we believe that these products and related services are complementary and important to promote our machinery sales.

Our SisuDiesel tm engines division produces diesel engines, gears and generating sets for use in Valtra tractors and certain of our other equipment and for sale to third parties. The engine division specializes in the manufacturing of off-road engines in the 50 to 450 horsepower range.

Hay tools and forage equipment, implements, engines and other products accounted for approximately 10% of our net sales in 2007, 2006 and 2005.

Replacement Parts

In addition to sales of new equipment, our replacement parts business is an important source of revenue and profitability for both us and our dealers. We sell replacement parts, many of which are proprietary, for products sold under all of our brand names. These parts help keep farm equipment in use, including products no longer in production. Since most of our products can be economically maintained with parts and service for a period of ten to 20 years, each product that enters the marketplace provides us with a potential long-term revenue stream. In addition, sales of replacement parts typically generate higher gross profits and historically have been less cyclical than new product sales. Replacement parts accounted for approximately 13% of our net sales in 2007, 14% in 2006 and 13% in 2005.

Marketing and Distribution

We distribute products primarily through a network of independent dealers and distributors. Our dealers are responsible for retail sales to the equipment’s end user in addition to after-sales service and support of the equipment. Our distributors may sell our products through a network of dealers supported by the distributor. Through our acquisitions and dealer development activities, we have broadened our product lines, expanded our dealer network and strengthened our geographic presence in Europe, North America, South America and the other markets around the world. Our sales are not dependent on any specific dealer, distributor or group of dealers. We intend to maintain the separate strengths and identities of our core brand names and product lines.

Europe

We market and distribute farm machinery, equipment and replacement parts to farmers in European markets through a network of approximately 1,200 independent Massey Ferguson, Fendt, Valtra and Challenger dealers and distributors. In certain markets, we also sell Valtra tractors and parts directly to the end user. In some cases, dealers carry competing or complementary products from other manufacturers. Sales in Europe accounted for approximately 57% of our net sales in 2007 and 2006 and 50% in 2005.

North America

We market and distribute farm machinery, equipment and replacement parts to farmers in North America through a network of approximately 1,200 independent dealers, each representing one or more of our brand names. Dealers may also sell competitive and dissimilar lines of products. A portion of our RoGator and Terra-Gator sprayer brands sales are made directly to end customers, often to fertilizer and chemical suppliers. Sales in North America accounted for approximately 22% of our net sales in 2007, 24% in 2006 and 29% in 2005.

South America

We market and distribute farm machinery, equipment and replacement parts to farmers in South America through several different networks. In Brazil and Argentina, we distribute products directly to approximately 400 independent dealers, primarily supporting the Massey Ferguson, Valtra and Challenger brand names. In Brazil, dealers are generally exclusive to one manufacturer. Outside of Brazil and Argentina, we sell our products in South America through independent distributors. Sales in South America accounted for approximately 16% of our net sales in 2007 and 12% in 2006 and 2005.

Rest of the World

Outside Europe, North America and South America, we operate primarily through a network of approximately 200 independent Massey Ferguson, Fendt, Valtra and Challenger dealers and distributors, as well as associates and licensees, marketing our products and providing customer service support in approximately 85 countries in Africa, the Middle East, Australia and Asia. With the exception of Australia and New Zealand, where we directly support our dealer network, we generally utilize independent distributors, associates and licensees to sell our products. These arrangements allow us to benefit from local market expertise to establish strong market positions with limited investment. Sales outside Europe, North America and South America accounted for approximately 5% of our net sales in 2007, 7% in 2006 and 9% in 2005.

Associates and licensees provide a significant distribution channel for our products and a source of low-cost production for certain Massey Ferguson and Valtra products. Associates are entities in which we have an ownership interest, most notably in India. Licensees are entities in which we have no direct ownership interest, most notably in Pakistan and Turkey. The associate or licensee generally has the exclusive right to produce and sell Massey Ferguson and Valtra equipment in its home country but may not sell these products in other countries. We generally license to these associates certain technology, as well as the right to use the Massey Ferguson and Valtra trade names. We also sell products to associates and licensees in the form of components used in local manufacturing operations, tractor kits supplied in completely knocked down form for local assembly and distribution, and fully assembled tractors for local distribution only. In certain countries, our arrangements with associates and licensees have evolved to where we principally provide technology, technical assistance and quality control. In these situations, licensee manufacturers sell certain tractor models under the Massey Ferguson and Valtra brand names in the licensed territory and also may become a source of low-cost production for us.

During 2006, we established a joint venture located in Russia for the purpose of distributing Fendt and Valtra branded equipment throughout Russia and Kazakhstan. During 2007, we became the sole owners of the joint venture by acquiring the remaining ownership interest from our Russian joint venture partners.


CEO BACKGROUND

Herman Cain , age 62, has been a director of the Company since December 2004. Mr. Cain also has served as the Chairman of T.H.E. New Voice, a leadership and consulting firm that he founded, since 2004. Prior to that, he was the Chairman of The Federal Reserve Bank of Kansas City from 1995 to 1996, and a Member from 1992 to 1994. Mr. Cain served as the Chief Executive Officer and President of the National Restaurant Association from 1997 to 1999 and as Chairman and Chief Executive Officer of Godfather’s Pizza, Inc. from 1988 to 1996. From 1977 to 1988, Mr. Cain served in various positions with The Pillsbury Company and Burger King Corporation.

Wolfgang Deml, age 62, has been a director of the Company since February 1999. Since 1991, Mr. Deml has been President and Chief Executive Officer of BayWa Corporation, a trading and services company located in Munich, Germany. Mr. Deml is also currently a member of the Supervisory Board of MAN Nutzfahrzeuge AG and the Chairman of the Supervisory Board of VK Mühlen AG.

David E. Momot, age 70, has been a director of the Company since August 2000. Over his 30-year career with General Electric, Mr. Momot served in various manufacturing and general management positions. Most recently, from 1991 to 1997, Mr. Momot held various executive positions at General Electric, including Vice President — European Operations G.E. Lighting, President and Chief Executive Officer — BG Automotive Motors, Inc. and, most recently, Vice President and General Manager — Industrial Drive Motors and Generators. Mr. Momot has served on the executive board of the Boy Scouts of America, on various Chambers of Commerce at local and state levels and on several YMCA and church boards.

Martin Richenhagen , age 55, has been Chairman of the Board of Directors since August 2006 and has served as President and Chief Executive Officer of the Company since July 2004. Mr. Richenhagen is currently a Board member for Nsoro, LLC, a global supplier and designer of technology solutions to commercial and government verticals, as well as a member of the Board, Audit and Technology & Environment Committees for PPG Industries, Inc., a leading coatings and specialty products and services company. From 2003 to 2004, Mr. Richenhagen was Executive Vice President of Forbo International SA, a flooring material business based in Switzerland. From 1998 to 2002, Mr. Richenhagen was Group President of Claas KgaA mbH, a global farm equipment manufacturer and distributor. From 1995 to 1998, Mr. Richenhagen was Senior Executive Vice President for Schindler Deutschland Holdings GmbH, a worldwide manufacturer and distributor of elevators and escalators.

The four nominees who receive the greatest number of votes cast for the election of directors at the Annual Meeting shall become directors at the conclusion of the tabulation of votes.

The Board of Directors recommends a vote FOR the nominees set forth above.


DIRECTORS CONTINUING IN OFFICE

The seven individuals named below are now serving as directors of the Company with terms expiring at the Annual Meetings in 2009 and 2010, as indicated.

Directors who are continuing in office as Class II directors whose terms expire at the Annual Meeting in 2009 are listed below:

P. George Benson, Ph.D , age 61, has been a director of the Company since December 2004. Mr. Benson is currently President of the College of Charleston in Charleston, South Carolina, serving in that position since 2007, and he has been a member of the Board of Directors and Audit Committee Chair for Nutrition 21, Inc., since 1998 and 2002, respectively. He also has been a member of the Board of Directors of Crawford & Company (Atlanta, Georgia) since 2005 and of the National Bank of South Carolina since 2007. Mr. Benson was a judge for the Malcom Baldrige National Quality Award from 1997 to 2000 and was Chairman of the Board of Overseers for the Baldrige Award from 2004 to 2007. From 1998 to 2007, he was Dean of the Terry College of Business at the University of Georgia. From 1993 to 1998, Mr. Benson served as Dean of the Rutgers Business School at Rutgers University. Prior to that, Mr. Benson was on the faculty of the Carlson School of Management at the University of Minnesota from 1977 to 1993, where he served as Director of the Operations Management Center from 1992 to 1993 and head of the Decision Sciences Area from 1983 to 1988.

Gerald L. Shaheen , age 63, has been a director of the Company since October 2005. Over his 40-year career with Caterpillar Inc., Mr. Shaheen served various marketing and general management positions, both in the United States and Europe. Most recently, from 1998 to February 2008, Mr. Shaheen served as a Group President. Mr. Shaheen is the Chairman of the Board of Trustees of Bradley University and a Board member and past Chairman of the U.S. Chamber of Commerce. He is also a Board member of the National Chamber Foundation, the Mineral Information Institute, Inc., the National City Corporation, Ford Motor Company and the National Multiple Sclerosis Society, Greater Illinois Chapter.

Hendrikus Visser, age 63, has been a director of the Company since April 2000. Mr. Visser is Chairman of the Board of Royal Huisman Shipyards N.V. and serves on the Boards of Sovion N.V., Friesland Bank N.V. Foundation OPG N.V. and Sterling Strategic Value, Ltd. He was the Chief Financial Officer of NUON N.V. and has served on the Boards of major international corporations and institutions including Rabobank Nederland, the Amsterdam Stock Exchange, Amsterdam Institute of Finance and De Lage Landen.

Directors who are continuing in office as Class III directors whose terms expire at the Annual Meeting in 2010 are listed below:

Francisco R. Gros , age 65, has been a director of the Company since October 2006. Mr. Gros is President and Chief Executive Officer of OGX Petroleo e Gas Participacoes S.A., a company involved in the exploration of oil and gas reserves in Brazil, serving in that position since 2007. Previously Mr. Gros was President and Chief Executive Officer of Fosfertil from 2003 to 2007. In addition, Mr. Gros was President and Chief Executive Officer of Petróleo Brasileiro S.A. from January 2002 to December 2002, and President and Chief Executive Officer of the Brazilian Development Bank from 2000 to 2001. Previously, Mr. Gros was also a Managing Director of Morgan Stanley from 1993 to 2000, and was Governor of the Central Bank on two occasions, in 1987 and from 1991 to 1992. Mr. Gros is also the Chairman of the Board for Lojas Renner S.A. and serves on the Boards of Globex Utilidades S.A., Ocean Wilson Holdings Limited, Energias do Brasil S.A. and Wellstream Holdings PLC.

Gerald B. Johanneson, age 67, has been a director of the Company since April 1995. Until his retirement in 2003, Mr. Johanneson had been President and Chief Executive Officer of Haworth, Inc. since 1997. He served as President and Chief Operating Officer of Haworth, Inc. from 1994 to 1997 and as Executive Vice President and Chief Operating Officer from 1988 to 1994. Mr. Johanneson currently serves on the Board of Haworth, Inc.

George E. Minnich , age 58, has been a director of the Company since January 2008. Mr. Minnich served as Senior Vice President and Chief Financial Officer of ITT Corporation from 2005 to 2007. Prior to that, he served in several senior finance positions at United Technologies Corporation, including Vice President and Chief Financial Officer of Otis Elevator from 2001 to 2005 and Vice President and Chief Financial Officer of Carrier Corporation from 1996 to 2001. He also held various positions within Price Waterhouse from 1971 to 1993, serving as an Audit Partner from 1984 to 1993.

Curtis E. Moll, age 68, has been a director of the Company since April 2000. Mr. Moll has been Chairman of the Board and Chief Executive Officer of MTD Products, Inc., a global manufacturing corporation, since 1980. He joined MTD Products as a project engineer in 1963. Mr. Moll is also Chairman of the Board of Shiloh Industries and serves on the Board of the Sherwin-Williams Company.

MANAGEMENT DISCUSSION FROM LATEST 10K

We are a leading manufacturer and distributor of agricultural equipment and related replacement parts throughout the world. We sell a full range of agricultural equipment, including tractors, combines, hay tools, sprayers, forage equipment and implements and a line of diesel engines. Our products are widely recognized in the agricultural equipment industry and are marketed under a number of well-known brand names, including AGCO ® , Challenger ® , Fendt ® , Gleaner ® , Hesston ® , Massey Ferguson ® , RoGator ® , Spra-Coupe ® , Sunflower ® , Terra-Gator ® , Valtra ® , and White tm Planters. We distribute most of our products through a combination of approximately 3,000 independent dealers, distributors, associates and licensees. In addition, we provide retail financing in the United States, Canada, Brazil, Germany, France, the United Kingdom, Australia, Ireland and Austria through our finance joint ventures with Rabobank.

Results of Operations

We sell our equipment and replacement parts to our independent dealers, distributors and other customers. A large majority of our sales are to independent dealers and distributors that sell our products to the end user. To the extent practicable, 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 our manufacturing operations and to minimize our investment in inventory. However, retail sales by dealers to farmers are highly seasonal and are linked to the planting and harvesting seasons. In certain markets, particularly in North America, there is often a time lag, which varies based on the timing and level of retail demand, between our sale of the equipment to the dealer and the dealer’s sale to a retail customer.

2007 Compared to 2006

Net income for 2007 was $246.3 million, or $2.55 per diluted share, compared to a net loss for 2006 of $64.9 million, or $0.71 per diluted share.

Our results for 2007 included the following items:


• restructuring and other infrequent income of $2.3 million, or $0.03 per share, primarily related to a $3.2 million gain on the sale of a portion of the land, buildings and improvements of our Randers, Denmark facility for proceeds of approximately $4.4 million, partially offset by $0.9 million of charges primarily related to severance and employee relocation costs associated with the rationalization of our Valtra sales office located in France, as well as the rationalization of certain parts, sales and marketing and administrative functions in Germany.

Our results for 2006 included the following items:


• a non-cash goodwill impairment charge of $171.4 million, or $1.81 per share, related to our Sprayer business in accordance with the provisions of Statement of Financial Standards (“SFAS”) SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”); and

• restructuring and other infrequent expenses of $1.0 million, or $0.01 per share, primarily related to the rationalization of certain parts, sales, marketing and administrative functions in the United Kingdom and Germany, as well as the rationalization of certain Valtra European sales offices.

Net sales for 2007 were approximately $1.4 billion, or 25.6%, higher than 2006 primarily due to improved industry conditions in most major global agricultural equipment markets and the positive impact of foreign currency translation. Sales growth was achieved in all of our geographic operating segments. Income from operations was $394.8 million in 2007 compared to $68.9 million in 2006. Income from operations during 2006 was negatively impacted by a $171.4 million goodwill impairment charge. The increase in income from operations and operating margins during 2007 was due primarily to sales volume growth, improved product mix and cost control initiatives.

In our Europe/Africa/Middle East operations, income from operations improved approximately $118.6 million in 2007 compared to 2006, primarily due to increased sales volumes, currency translation, a better mix of high horsepower tractors, and margin improvements achieved through higher production volumes and cost reduction initiatives. Income from operations in our South American operations increased approximately $56.1 million in 2007 compared to 2006, primarily due to sales growth resulting from stronger market conditions, primarily in the major market of Brazil, as well as margin improvement related to higher sales and production as well as cost management. In North America, income from operations increased approximately $2.1 million in 2007 compared to 2006, primarily due to higher sales as a result of improved market conditions. Our results in North America continue to be affected by the negative impacts of currency movements on products sourced from Brazil and Europe. Income from operations in our Asia/Pacific region decreased approximately $0.4 million in 2007 compared to 2006 primarily due to lower operating margins resulting from foreign currency impacts and sales mix.

Retail Sales

Worldwide industry equipment demand for farm equipment increased in 2007 in most major markets. Improved farm income driven by higher farm commodity prices have contributed to the improved demand for equipment. Farm commodity prices have been supported as a result of strong global demand and historically low inventories of commodities. Population growth, increased protein consumption in Asia, and an accelerating trend towards renewable energies have contributed to solid demand for farm commodities. In North America, industry demand increased particularly in the higher horsepower equipment segments due to higher farm income. In Europe, industry demand increased compared to the prior year due to growth in the French, U.K., Scandinavian and Central and Eastern European markets. In South America, industry demand improved due to a recovery in the Brazil and Argentina markets resulting from improved farm income in the region.

In the United States and Canada, industry unit retail sales of tractors increased approximately 1% in 2007 compared to 2006, due to increases in the high horsepower and utility tractor segments, offset by a decrease in the compact tractor segment. Industry unit retail sales of combines increased approximately 13% when compared to the prior year. Our unit retail sales of high horsepower tractors and combines in North America increased while our unit retail sales of utility and compact tractors decreased in 2007 compared to 2006 levels.

In Europe, industry unit retail sales of tractors increased approximately 4% in 2007 compared to 2006. Demand was strongest in the high horsepower segment and in the markets of Central and Eastern Europe, the United Kingdom, Scandinavia and France, which offset weaker markets in Spain, Italy and Germany. Our unit retail sales of tractors for 2007 in Europe were also higher when compared to 2006. In South America, industry unit retail sales of tractors in 2007 increased approximately 50% compared to 2006. Retail sales of tractors in the major market of Brazil increased approximately 53% during 2007. Industry unit retail sales of combines during 2007 were approximately 79% higher than the prior year, with an increase in Brazil of approximately 131% compared to the prior year. Our unit retail sales of tractors and combines in South America were also higher in 2007 compared to 2006. In other international markets, our net sales for 2007 were approximately 9.6% lower than the prior year, due to lower sales in the Middle East.

Results of Operations

Net sales for 2007 were $6,828.1 million compared to $5,435.0 million for 2006. The increase was primarily attributable to significant net sales increases in the South America and Europe/Africa/Middle East regions as well as positive currency translation impacts. Currency translation positively impacted net sales by approximately $473.3 million, primarily due to the continued strengthening of the Brazilian Real and the Euro.

Regionally, net sales in North America increased during 2007 primarily due to higher sales of higher horsepower tractors, combines and hay equipment due to market growth in those segments. In the Europe/Africa/Middle East region, net sales increased in 2007 primarily due to sales growth in tractors and parts particularly in the markets of France, Germany, the United Kingdom, Scandinavia and Eastern and Central Europe. In South America, net sales increased during 2007 compared to 2006 primarily as a result of a recovery in the major market of Brazil, and sales growth in Argentina. In the Asia/Pacific region, net sales increased in 2007 compared to 2006 due to improved industry demand in the region. We estimate that worldwide average price increases during 2007 contributed approximately 1.5% to the increase in net sales. Consolidated net sales of tractors and combines, which consisted of approximately 73% of our net sales in 2007, increased approximately 29% in 2007 compared to 2006. Unit sales of tractors and combines increased approximately 13% during 2007 compared to 2006. The difference between the unit sales increase and the increase in net sales was the result of foreign currency translation, pricing and sales mix changes.

Gross profit as a percentage of net sales increased during 2007 as compared to 2006 primarily due to increased net sales, higher production and an improved sales mix, partially offset by negative currency impacts. Margins in North America were affected by the weak United States dollar on products imported from our European and Brazilian manufacturing facilities. Unit production of tractors and combines during 2007 was approximately 20% higher than 2006. Gross margins also benefited from productivity improvements that were achieved through purchasing initiatives, resourcing of components and labor efficiencies. We recorded approximately $1.0 million of stock compensation expense, within cost of goods sold, during 2007 in accordance with SFAS No. 123R (Revised 2004), “Share-Based Payment” (“SFAS No. 123R”), as is more fully explained in Note 1 to our Consolidated Financial Statements.

Selling, general and administrative (“SG&A”) expenses as a percentage of net sales decreased during 2007 compared to 2006 primarily as a result of higher sales volumes in 2007 and cost control initiatives. We recorded approximately $25.0 million and $3.5 million of stock compensation expense, within SG&A, during 2007 and 2006, respectively, in accordance with SFAS No. 123R, as is more fully explained in Note 1 to our Consolidated Financial Statements. Engineering expenses increased during 2007 as a result of continued spending to fund product improvements and cost reduction projects.

The restructuring and other infrequent income recorded in 2007 primarily related to a $3.2 million gain on the sale of a portion of the buildings, land and improvements associated with our Randers, Denmark facility. This gain was partially offset by $0.9 million of charges primarily related to severance and employee relocation costs associated with the rationalization of our Valtra sales office located in France as well our rationalization of certain parts, sales and marketing and administrative functions in Germany. The restructuring and other infrequent expenses in 2006 primarily related to severance costs associated with the rationalization of certain parts, sales, marketing and administrative functions in the United Kingdom and Germany, as well as the rationalization of certain Valtra European sales offices located in Denmark, Norway, Germany and the United Kingdom. See “Restructuring and Other Infrequent (Income) Expenses.”

In 2006, sales and operating income of our Sprayer business declined significantly as compared to prior years. This was primarily due to increased competition resulting from updated product offerings from our major competitors and a shift in industry demand away from our strength in the commercial application segment to the farmer-owned segment. In addition, our projections for our Sprayer business did not result in a valuation sufficient to support the carrying amount of the goodwill balance on our Consolidated Balance Sheet attributable to the Sprayer business. As a result, during the fourth quarter of 2006, we recorded a non-cash goodwill impairment charge of $171.4 million related to our Sprayer business in accordance with the provisions of SFAS No. 142. The results of our annual impairment analyses conducted as of October 1, 2007 indicated that no reduction in the carrying amount of goodwill for our other reporting units was required in 2007. Refer to “Critical Accounting Estimates” and Note 1 to our Consolidated Financial Statements for further discussion.

Interest expense, net was $24.1 million for 2007 compared to $55.2 million for 2006. The decrease was primarily due to debt refinancing as well as a reduction in debt levels from 2006. In December 2006, we issued $201.3 million aggregate principal amount of 1 1 / 4 % convertible senior subordinated notes. The net proceeds received from the issuance of the notes, as well as available cash on hand, were used to repay a portion of our outstanding United States dollar and Euro denominated term loans, which carried a higher variable interest rate. In June 2007, we repaid the remaining balances of our outstanding United States dollar and Euro denominated term loans with available cash on hand. See “Liquidity and Capital Resources.”

Other expense, net was $43.4 million in 2007 compared to $32.9 million in 2006. Losses on sales of receivables primarily under our securitization facilities were $36.1 million in 2007 compared to $29.9 million in 2006. The increase during 2007 is primarily due to higher interest rates in 2007 compared to 2006.

We recorded an income tax provision of $111.4 million in 2007 compared to $73.5 million in 2006. SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”), requires the establishment of a valuation allowance when it is more likely than not that some portion or all of a company’s deferred tax assets will not be realized. In accordance with SFAS No. 109, we assessed the likelihood that our deferred tax assets would be recovered from estimated future taxable income and available income tax planning strategies. In 2007 and 2006, our effective tax rate was negatively impacted by incurring losses in tax jurisdictions where we recorded no tax benefit. The most significant impact related to losses incurred in the United States where losses were primarily due to lower operating margins, as discussed above. At December 31, 2007 and 2006, we had gross deferred tax assets of $479.1 million and $472.5 million, respectively, including $247.8 million and $246.6 million, respectively, related to net operating loss carryforwards. At December 31, 2007 and 2006, we had recorded total valuation allowances as an offset to the gross deferred tax assets of $315.3 million and $291.4 million, respectively, primarily related to net operating loss carryforwards in Brazil, Denmark and the United States. Realization of the remaining deferred tax assets as of December 31, 2007 depends on generating sufficient taxable income in future periods, net of reversing deferred tax liabilities. We believe it is more likely than not that the remaining net deferred tax assets will be realized.

In 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109. FIN 48 also prescribes a recognition threshold and measurement of a tax position taken or expected to be taken in an enterprise’s tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006. Accordingly, we adopted the provisions of FIN 48 on January 1, 2007. As a result of our implementation of FIN 48, we did not recognize a material adjustment with respect to liabilities for unrecognized tax benefits. At December 31, 2007, we had approximately $22.7 million of unrecognized tax benefits, all of which would impact our effective tax rate if recognized. As of December 31, 2007, we had approximately $14.0 million of current accrued taxes related to uncertain income tax positions connected with ongoing tax audits in various jurisdictions that we expect to settle or pay in the next 12 months. We recognize interest and penalties related to uncertain income tax positions in income tax expense. As of December 31, 2007, we had accrued interest and penalties related to unrecognized tax benefits of $1.1 million. See Note 6 to our Consolidated Financial Statements for further discussion of our adoption of FIN 48.

Equity in net earnings of affiliates was $30.4 million in 2007 compared to $27.8 million in 2006. The increase in 2007 was related to our 50% interest in the Laverda operating joint venture acquired in September 2007, as well as increased earnings in our retail finance joint ventures. As of December 31, 2007, the retail finance portfolio in our AGCO Finance joint venture in Brazil was approximately $1.1 billion. As a result of weak market conditions in 2005 and 2006, a substantial portion of this portfolio has been included in a payment deferral program directed by the Brazilian government. While the joint venture currently considers its reserves for loan losses adequate, the joint venture will continue to monitor its reserves considering borrower payment history, the value of the underlying equipment financed, and further payment deferral programs implemented by the Brazilian government.


MANAGEMENT DISCUSSION FOR LATEST QUARTER

GENERAL
Our operations are subject to the cyclical nature of the agricultural industry. Sales of our equipment have been and are expected to continue to be affected by changes in net cash farm income, farm land values, weather conditions, 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 or 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 inventory. Retail sales by dealers to farmers are highly seasonal and are a function of the timing of the planting and harvesting seasons. As a result, our net sales have historically been the lowest in the first quarter and have increased in subsequent quarters.
RESULTS OF OPERATIONS
For the three months ended September 30, 2008, we generated net income of $102.6 million, or $1.04 per share, compared to net income of $76.9 million, or $0.80 per share, for the same period in 2007. For the first nine months of 2008, we generated net income of $298.0 million, or $3.01 per share, compared to net income of $165.2 million, or $1.73 per share, for the same period in 2007.
Net sales during the third quarter and first nine months of 2008 were $2,085.4 million and $6,267.4 million, respectively, which were approximately 29.3% and 34.6% higher than the third quarter and first nine months of 2007, respectively, primarily due to sales growth in all four of our geographical segments as well as the positive impact of currency translation.
Income from operations during the third quarter of 2008 was $141.7 million compared to $110.4 million in the third quarter of 2007. Income from operations was $425.0 million for the first nine months of 2008 compared to $266.6 million for the same period in 2007. The increases in income from operations were primarily due to the increase in net sales, price increases and cost control initiatives partially offset by higher material costs.
Income from operations increased in our Europe/Africa/Middle East region in the third quarter and first nine months of 2008 primarily due to an increase in net sales resulting from stronger market demand in Europe, improved margins and the favorable impact of currency translation. In the South America region, income from operations increased in the third quarter and first nine months of 2008 due to increased sales volumes resulting from stronger market conditions, primarily in the major markets of Brazil and Argentina, and the impact of favorable currency translation, partially offset by lower margins due to higher material costs and increased levels of product development expenses. Income from operations in North America was higher in the third quarter and first nine months of 2008 compared to the same periods in 2007, primarily due to sales increases resulting from stronger market demand in the professional farming sector, partially offset by negative currency impacts on products sourced from Brazil and Europe. Income from operations in our Asia/Pacific region was higher in the third quarter and first nine months of 2008 compared to the same periods in 2007, primarily due to improved market conditions in Australia and New Zealand.

Retail Sales
In North America, industry unit retail sales of tractors for the first nine months of 2008 decreased approximately 5% compared to the first nine months of 2007 resulting primarily from decreases in the utility and compact tractor segments, partially offset by increases in industry unit retail sales of high horsepower tractors. Industry unit retail sales of combines for the first nine months of 2008 were approximately 25% higher than the prior year period. Weaker general economic conditions have reduced demand for compact and utility tractors that are also used in non-farming applications. Higher commodity prices and improved projected farm income in North America contributed to significant increases in sales of high horsepower tractors and combines in the first nine months of 2008. Our unit retail sales of tractors decreased in the first nine months of 2008 compared to the first nine months of 2007. Our unit retail sales of combines increased in the first nine months of 2008 compared to the same period in 2007.
In Europe, industry unit retail sales of tractors for the first nine months of 2008 increased approximately 9% compared to the first nine months of 2007. Retail demand improved in Central and Eastern Europe, Russia, the United Kingdom, Germany and France. Good harvests in 2008 and strong farm income in 2007 supported the increase in demand. Our unit retail sales were also higher in the first nine months of 2008 compared to the same period in 2007.
South American industry unit retail sales of tractors in the first nine months of 2008 increased approximately 36% over the prior year period. Industry unit retail sales of combines for the first nine months of 2008 were approximately 87% higher than the prior year period. Retail sales of tractors and combines in the major market of Brazil increased approximately 43% and 134%, respectively, during the first nine months of 2008 compared to the same period in 2007. The row crop and sugar cane sectors remain strong in Brazil and improved commodity prices have resulted in increased industry demand. Our South American unit retail sales of tractors and combines were also higher in the first nine months of 2008 compared to the same period in 2007.
Outside of North America, Europe and South America, net sales for the first nine months of 2008 increased approximately 18% compared to the prior year period due to higher sales in Australia and New Zealand due to improved harvests.

STATEMENTS OF OPERATIONS
Net sales for the third quarter of 2008 were $2,085.4 million compared to $1,613.0 million for the same period in 2007. Net sales for the first nine months of 2008 were $6,267.4 million compared to $4,657.0 million for the same prior year period. Net sales increased in all four of AGCO’s geographical segments for the third quarter and first nine months of 2008. Foreign currency translation positively impacted net sales by approximately $120.0 million, or 7.4%, in the third quarter of 2008 and by $522.9 million, or 11.2%, in the first nine months of 2008.

Regionally, net sales in North America increased during the third quarter and first nine months of 2008, primarily due to strong industry conditions supporting increased sales of high horsepower tractors and combines. In the Europe/Africa/Middle East region, net sales increased in the third quarter and first nine months of 2008 primarily due to sales growth in the United Kingdom, Germany, France and Central and Eastern Europe. Net sales in South America increased during the third quarter and first nine months of 2008 primarily as a result of stronger market conditions in the region, predominantly in Brazil. In the Asia/Pacific region, net sales increased in the third quarter and first nine months of 2008 compared to the same periods in 2007 primarily due to sales growth in Australia. We estimate that consolidated price increases during the third quarter and the first nine months of 2008 contributed approximately 4.6% and 3.0% to the increase in sales in the third quarter and the first nine months of 2008, respectively. Consolidated net sales of tractors and combines, which comprised approximately 71% and 72% of our net sales in the third quarter and first nine months of 2008, respectively, increased approximately 26% and 36% during the third quarter and first nine months of 2008, respectively, compared to the same periods in 2007. Unit sales of tractors and combines increased approximately 12% and 17% during the third quarter and first nine months of 2008, respectively, compared to the same periods in 2007. The difference between the unit sales increase and the increase in net sales was primarily the result of foreign currency translation, pricing and sales mix changes.

Gross profit as a percentage of net sales decreased during the third quarter but increased during the first nine months of 2008 compared to the prior year. Third quarter gross margins in 2008 were lower due to a weaker sales mix in Europe, currency impacts on European and Brazilian export sales and rising raw material costs particularly related to increases in steel costs. Gross margins for the first nine months of 2008 were higher due to the benefits of increased production and cost reduction initiatives offsetting currency impacts and raw material cost inflation. In 2007, supplier constraints at our German manufacturing facility and the production roll-out of a new high-horsepower tractor series pushed sales of certain higher margin products from the first half of 2007 into the third quarter of 2007. As a result, 2007 sales and gross margins in the third quarter benefited from a larger percentage of higher margin Fendt high horsepower tractors in Europe as compared to the third quarter of 2008. In response to increases in manufacturing input costs driven primarily by increases in steel and energy costs, we instituted a series of price increases during the first nine months of 2008. These pricing actions helped to partially offset the impact of rising manufacturing input costs. Additional pricing is planned for the remainder of 2008 in order to further offset the rising costs of materials. However, depending on the timing and acceptance of our pricing in relation to the amount and timing of the cost increases, our gross margins may be negatively impacted. Gross margins in North America continued to be adversely affected by the impact of the weaker United States dollar on products imported from our European and Brazilian manufacturing facilities. Unit production of tractors and combines for the third quarter and first nine months of 2008 was approximately 11% and 18% higher, respectively, than the comparable periods in 2007. The strong global market conditions have put us near or at capacity in some of our production operations. Therefore, we are making investments in some of our facilities to expand capacity. We are also working with our existing suppliers to prepare them for expected demand levels as well as working to qualify new suppliers to mitigate supply constraints. If supplier constraints occur, they could negatively impact future results. We recorded approximately $0.3 million and $0.7 million of stock compensation expense, within cost of goods sold, during the third quarter and first nine months of 2008, respectively, compared to $0.3 million and $0.4 million, respectively, of stock compensation expense for comparable periods in 2007, as is more fully explained in Note 1 to our Condensed Consolidated Financial Statements.
Selling, general and administrative (“SG&A”) expenses as a percentage of net sales decreased during the third quarter and first nine months of 2008 compared to the same prior year periods primarily due to higher sales volumes and cost control initiatives. We recorded approximately $6.5 million and $21.3 million of stock compensation expense, within SG&A, during the third quarter and first nine months of 2008, respectively, compared to $6.7 million and $10.2 million, respectively, of stock compensation expense for comparable periods in 2007, as is more fully explained in Note 1 to our Condensed Consolidated Financial Statements. Engineering expenses increased during the third quarter and first nine months of 2008 compared to the same prior year periods as a result of continued spending to fund new products, product improvements and cost reduction projects.
We recorded restructuring and other infrequent expenses of approximately $0.1 million and $0.3 million, respectively, during the third quarter and the first nine months of 2008 primarily related to severance and employee relocation costs associated with our rationalization of our Valtra sales office located in France, as well as our rationalization of certain parts, sales and marketing and administration functions in Germany. We recorded restructuring and other infrequent income of $2.5 million and $2.2 million during the third quarter and the first nine months of 2007, respectively. We sold a portion of the buildings, land and improvements associated with our Randers, Denmark facility and received cash proceeds of approximately $4.4 million in September 2007. A gain of approximately $3.0 million was recorded related to the sale in the third quarter of 2007. This gain was partially offset by charges primarily related to severance and employee relocation costs associated with the rationalization of our Valtra sales office located in France as well as the rationalization of certain parts, sales and marketing and administration functions in Germany. See Note 2 to our Condensed Consolidated Financial Statements for further discussion of restructuring activities.
Interest expense, net was $2.1 million and $12.7 million for the third quarter and first nine months of 2008, respectively, compared to $3.4 million and $17.6 million, respectively, for the comparable periods in 2007, primarily due to a reduction in debt levels and increased interest income earned during the third quarter and the first nine months of 2008 compared to the same periods in 2007.
Other expense, net was $2.9 million and $18.5 million during the third quarter and first nine months of 2008, respectively, compared to $10.5 million and $28.6 million, respectively, for the same periods in 2007. Losses on sales of receivables, primarily under our securitization facilities, were $7.2 million and $21.6 million in the third quarter and first nine months of 2008, respectively, compared to $8.7 million and $25.5 million for the same periods in 2007. The decrease was due to lower interest rates in 2008 compared to 2007, partially offset by higher outstanding funding under the securitizations in the third quarter and the first nine months of 2008 as compared to the same periods in 2007. There was also an increase in foreign exchange gains in the third quarter and first nine months of 2008 compared to the same periods in 2007.
We recorded income tax provisions of $42.7 million and $128.0 million for the third quarter and first nine months of 2008, respectively, compared to $26.7 million and $75.6 million for the comparable periods in 2007. The effective tax rate was 31.2% and 32.5% for the third quarter and first nine months of 2008, respectively, compared to 27.7% and 34.3% in the comparable periods in 2007. Our effective tax rate was positively impacted during 2008 primarily due to reductions in statutory tax rates in the United Kingdom and Germany and a decrease in losses incurred in the United States. The lower rate for the third quarter 2007 was primarily due to the adjustment of the Company’s deferred tax balances for impact of the United Kingdom and Germany tax rate changes that became effective in the third quarter 2007.

Equity in net earnings from affiliates for the third quarter of 2008 was approximately $8.6 million compared to $7.1 million during the third quarter of 2007. For the first nine months of 2008, equity in net earnings from affiliates was approximately $32.2 million compared to $20.4 million in the same period of 2007. The increase in earnings in the first nine months of 2008 was primarily due to income associated with our investment in the Laverda S.p.A. operating joint venture that occurred in September 2007, as is more fully described in our annual report on Form 10-K for the year ended December 31, 2007.

RETAIL FINANCE JOINT VENTURES
Our AGCO Finance retail finance joint ventures provide retail financing and wholesale financing to our dealers in the United States, Canada, Brazil, Germany, France, the United Kingdom, Australia, Ireland, Austria and Argentina. The joint ventures are owned 49% by AGCO and 51% by a wholly owned subsidiary of Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. (“Rabobank”), a AAA rated financial institution based in the Netherlands. The majority of the assets of the retail finance joint ventures represent finance receivables. The majority of the liabilities represent notes payable and accrued interest. Under the various joint venture agreements, Rabobank or its affiliates are obligated to provide financing to the joint venture companies, primarily through lines of credit. We do not guarantee the debt obligations of the retail finance joint ventures other than a portion of the retail portfolio in Brazil that is held outside the joint venture by Rabobank Brazil, which was approximately $7.5 million as of December 31, 2007, and will gradually be eliminated over time. As of September 30, 2008, our capital investment in the retail finance joint ventures, which is included in “investment in affiliates” on our Condensed Consolidated Balance Sheets, was approximately $205.2 million compared to $194.0 million as of September 30, 2007. The total finance portfolio in our retail finance joint ventures was approximately $5.1 billion as of September 30, 2008 compared to $4.6 billion as of September 30, 2007. The increase in the portfolio between periods was primarily the result of increased sales volumes in both Europe and Brazil, as well as the favorable impact of currency translation. For the first nine months of 2008, our share in the earnings of the retail finance joint ventures, included in “Equity in net earnings of affiliates” on our Condensed Consolidated Statements of Operations, was $24.4 million compared to $19.6 million in the same period of 2007. The increase during the first nine months of 2008 was due primarily to higher finance revenues generated as a result of our increased equipment sales volumes, particularly in Europe and Brazil, and the favorable impact of currency translation. To date, our retail joint ventures have not experienced any significant erosion in the credit quality of the receivables that they own as a result of the recent global economic challenges. However, there can be no assurance that the receivables will not at some point be impaired, and, given the size of the portfolio relative to the joint ventures’ level of equity, a significant adverse change would have a material impact on the joint ventures and on our operating results.
The retail finance portfolio in our AGCO Finance joint venture in Brazil was $1.3 billion as of September 30, 2008 compared to $1.1 billion as of December 31, 2007 and $1.2 billion as of September 30, 2007. As a result of weak market conditions in Brazil in 2005 and 2006, a substantial portion of this portfolio has been included in a payment deferral program directed by the Brazilian government. While the joint venture currently considers its reserves for loan losses adequate, the joint venture continually monitors its reserves considering borrower payment history, the value of the underlying equipment financed and further payment deferral programs implemented by the Brazilian government.

LIQUIDITY AND CAPITAL RESOURCES
Our financing requirements are subject to variations due to seasonal changes in inventory and receivable levels. Internally generated funds are supplemented when necessary from external sources, primarily our revolving credit facility and accounts receivable securitization facilities.
Our primary financing and funding sources, with balances outstanding as of September 30, 2008, are our € 200.0 million (or approximately $282.4 million) principal amount 6 7 / 8 % senior subordinated notes due 2014, $201.3 million principal amount 1 3 / 4 % convertible senior subordinated notes due 2033, $201.3 million principal amount 1 1 / 4 % convertible senior subordinated notes due 2036, approximately $491.2 million of accounts receivable securitization facilities (with approximately $453.6 million in outstanding funding as of September 30, 2008), and a $300.0 million multi-currency revolving credit facility (with no amounts outstanding as of September 30, 2008).
Our $201.3 million of 1 1 / 4 % convertible senior subordinated notes due December 15, 2036 are unsecured obligations and are convertible into cash and shares of our common stock upon satisfaction of certain conditions, as discussed below. The notes provide for (i) the settlement upon conversion in cash up to the principal amount of the notes with any excess conversion value settled in shares of our common stock, and (ii) the conversion rate to be increased under certain circumstances if the notes are converted in connection with certain change of control transactions occurring prior to December 15, 2013. Interest is payable on the notes at 1 1 / 4 % per annum, payable semi-annually in arrears in cash on June 15 and December 15 of each year. The notes are convertible into shares of our common stock at an effective price of $40.73 per share, subject to adjustment. This reflects an initial conversion rate for the notes of 24.5525 shares of common stock per $1,000 principal amount of notes. In the event of a stock dividend, split of our common stock or certain other dilutive events, the conversion rate will be adjusted so that upon conversion of the notes, holders of the notes would be entitled to receive the same number of shares of common stock that they would have been entitled to receive if they had converted the notes into our common stock immediately prior to such events. If a change of control transaction that qualifies as a “fundamental change” occurs on or prior to December 15, 2013, under certain circumstances we will increase the conversion rate for the notes converted in connection with the transaction by a number of additional shares (as used in this paragraph, the “make whole shares”). A fundamental change is any transaction or event in connection with which 50% or more of our common stock is exchanged for, converted into, acquired for or constitutes solely the right to receive consideration that is not at least 90% common stock listed on a U.S. national securities exchange or approved for quotation on an automated quotation system. The amount of the increase in the conversion rate, if any, will depend on the effective date of the transaction and an average price per share of our common stock as of the effective date. No adjustment to the conversion rate will be made if the price per share of common stock is less than $31.33 per share or more than $180.00 per share. The number of additional make whole shares ranges from 7.3658 shares per $1,000 principal amount at $31.33 per share to 0.1063 shares per $1,000 principal amount at $180.00 per share for the year ended December 15, 2008, with the number of make whole shares generally declining over time. If the acquirer or certain of its affiliates in the fundamental change transaction has publicly traded common stock, we may, instead of increasing the conversion rate as described above, cause the notes to become convertible into publicly traded common stock of the acquirer, with principal of the notes to be repaid in cash, and the balance, if any, payable in shares of such acquirer common stock. At no time will we issue an aggregate number of shares of our common stock upon conversion of the notes in excess of 31.9183 shares per $1,000 principal amount thereof. If the holders of our common stock receive only cash in a fundamental change transaction, then holders of notes will receive cash as well. Holders may convert the notes only under the following circumstances: (1) during any fiscal quarter, if the closing sales price of our common stock exceeds 120% of the conversion price for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter; (2) during the five business day period after a five consecutive trading day period in which the trading price per note for each day of that period was less than 98% of the product of the closing sale price of our common stock and the conversion rate; (3) if the notes have been called for redemption; or (4) upon the occurrence of certain corporate transactions. Beginning December 15, 2013, we may redeem any of the notes at a redemption price of 100% of their principal amount, plus accrued interest. Holders of the notes may require us to repurchase the notes at a repurchase price of 100% of their principal amount, plus accrued interest, on December 15, 2013, 2016, 2021, 2026 and 2031. Holders may also require us to repurchase all or a portion of the notes upon a fundamental change, as defined in the indenture, at a repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus any accrued and unpaid interest. The notes are senior subordinated obligations and are subordinated to all of our existing and future senior indebtedness and effectively subordinated to all debt and other liabilities of our subsidiaries. The notes are equal in right of payment with our 6 7 / 8 % senior subordinated notes due 2014 and our 1 3 / 4 % convertible senior subordinated notes due 2033.
Our $201.3 million of 1 3 / 4 % convertible senior subordinated notes due 2033 provide for (i) the settlement upon conversion in cash up to the principal amount of the converted new notes with any excess conversion value settled in shares of our common stock, and (ii) the conversion rate to be increased under certain circumstances if the notes are converted in connection with certain change of control transactions occurring prior to December 10, 2010, but otherwise are substantially the same as the old notes. The notes are unsecured obligations and are convertible into cash and shares of our common stock upon satisfaction of certain conditions, as discussed below. Interest is payable on the notes at 1 3 / 4 % per annum, payable semi-annually in arrears in cash on June 30 and December 31 of each year. The notes are convertible into shares of our common stock at an effective price of $22.36 per share, subject to adjustment. This reflects an initial conversion rate for the notes of 44.7193 shares of common stock per $1,000 principal amount of notes. In the event of a stock dividend, split of our common stock or certain other dilutive events, the conversion rate will be adjusted so that upon conversion of the notes, holders of the notes would be entitled to receive the same number of shares of common stock that they would have been entitled to receive if they had converted the notes into our common stock immediately prior to such events. If a change of control transaction that qualifies as a “fundamental change” occurs on or prior to December 31, 2010, under certain circumstances we will increase the conversion rate for the notes converted in connection with the transaction by a number of additional shares (also as used in this paragraph, the “make whole shares”). A fundamental change is any transaction or event in connection with which 50% or more of our common stock is exchanged for, converted into, acquired for or constitutes solely the right to receive consideration that is not at least 90% common stock listed on a U.S. national securities exchange or approved for quotation on an automated quotation system. The amount of the increase in the conversion rate, if any, will depend on the effective date of the transaction and an average price per share of our common stock as of the effective date. No adjustment to the conversion rate will be made if the price per share of common stock is less than $17.07 per share or more than $110.00 per share. The number of additional make whole shares ranges from 13.2 shares per $1,000 principal amount at $17.07 per share to 0.1 shares per $1,000 principal amount at $110.00 per share for the year ended December 31, 2008, with the number of make whole shares generally declining over time. If the acquirer or certain of its affiliates in the fundamental change transaction has publicly traded common stock, we may, instead of increasing the conversion rate as described above, cause the notes to become convertible into publicly traded common stock of the acquirer, with principal of the notes to be repaid in cash, and the balance, if any, payable in shares of such acquirer common stock. At no time will we issue an aggregate number of shares of our common stock upon conversion of the notes in excess of 58.5823 shares per $1,000 principal amount thereof. If the holders of our common stock receive only cash in a fundamental change transaction, then holders of notes will receive cash as well. Holders may convert the notes only under the following circumstances: (1) during any fiscal quarter, if the closing sales price of our common stock exceeds 120% of the conversion price for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter; (2) during the five business day period after a five consecutive trading day period in which the trading price per note for each day of that period was less than 98% of the product of the closing sale price of our common stock and the conversion rate; (3) if the notes have been called for redemption; or (4) upon the occurrence of certain corporate transactions. Beginning January 1, 2011, we may redeem any of the notes at a redemption price of 100% of their principal amount, plus accrued interest. Holders of the notes may require us to repurchase the notes at a repurchase price of 100% of their principal amount, plus accrued interest, on December 31, 2010, 2013, 2018, 2023 and 2028.
As of September 30, 2008 and December 31, 2007, the closing sales price of our common stock had exceeded 120% of the conversion price of $22.36 and $40.73 per share for our 1 3 / 4 % convertible senior subordinated notes and our 1 1 / 4 % convertible senior subordinated notes, respectively, for at least 20 trading days in the 30 consecutive trading days ending September 30, 2008 and December 31, 2007, and, therefore, we classified both notes as current liabilities. Future classification of the notes between current and long-term debt is dependent on the closing sales price of our common stock during future quarters. We believe it is unlikely the holders of the notes would convert the notes under the provisions of the indenture agreement, as typically convertible securities are not converted prior to expiration unless called for redemption, thereby requiring us to repay the principal portion in cash. In the event the notes were converted, we believe we could repay the notes with available cash on hand, funds from our $300.0 million multi-currency revolving credit facility or a combination of these sources.
The 1 3 / 4 % convertible senior subordinated notes and the 1 1 / 4 % convertible senior subordinated notes will impact the diluted weighted average shares outstanding in future periods depending on our stock price for the excess conversion value using the treasury stock method. In May 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) APB 14-1, “Accounting for Convertible Debt Instruments That May be Settled in Cash Upon Conversion (including Partial Cash Settlement).” The FSP requires that the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement), commonly referred to as an Instrument C under EITF Issue No. 90-19, “Convertible Bonds with Issuer Options to Settle for Cash Upon Conversion,” be separated to account for the fair value of the debt and equity components as of the date of issuance to reflect the issuer’s nonconvertible debt borrowing rate. The FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and is to be applied retrospectively to all periods presented (retroactive restatement) pursuant to the guidance in Statement of Financial Accounting Standards (“SFAS”) No. 154, “Accounting Changes and Error Corrections.” The FSP will impact the accounting treatment of our 1 3 / 4 % convertible senior subordinated notes due 2033 and our 1 1 / 4 % convertible senior subordinated notes due 2036 by reclassifying a portion of the convertible notes balances to additional paid-in capital representing the estimated fair value of the conversion feature as of the date of issuance and creating a discount on the convertible notes that will be amortized through interest expense over the life of the convertible notes. The FSP will result in a significant increase in interest expense and, therefore, reduce net income and basic and diluted earnings per share within our consolidated statements of operations. We will adopt the requirements of the FSP on January 1, 2009, and estimate that, upon adoption, our “retained earnings” balance will be reduced by approximately $37 million, our “convertible senior subordinated notes” balance will be reduced by approximately $57 million and our “additional paid-in capital” balance will increase by approximately $57 million, including a deferred tax impact of approximately $37 million. “Interest expense, net” attributable to the convertible senior subordinated notes during the fiscal year ended December 31, 2009 is expected to increase by approximately $15 million, compared to 2008, as a result of the adoption.
On May 16, 2008, we entered into a new $300.0 million unsecured multi-currency revolving credit facility. The new credit facility replaced our former existing $300.0 million secured multi-currency revolving credit facility. The maturity date of our new facility is May 16, 2013. Interest accrues on amounts outstanding under the new facility, at our option, at either (1) LIBOR plus a margin ranging between 1.00% and 1.75% based upon our total debt ratio or (2) the higher of the administrative agent’s base lending rate or one-half of one percent over the federal funds rate plus a margin ranging between 0.0% and 0.50% based upon our total debt ratio. The new facility contains covenants restricting, among other things, the incurrence of indebtedness and the making of certain payments, including dividends, and is subject to acceleration in the event of a default, as defined in the facility. We also must fulfill financial covenants in respect of a total debt to EBITDA ratio and an interest coverage ratio, as defined in the facility. As of September 30, 2008, we had no outstanding borrowings under the new facility. As of September 30, 2008, we had availability to borrow $291.3 million under the new facility.
Our former credit facility provided for a $300.0 million multi-currency revolving credit facility, a $300.0 million United States dollar denominated term loan and a € 120.0 million Euro denominated term loan. The maturity date of the former revolving credit facility was December 2008 and the maturity date for the former term loan facility was June 2009. We were required to make quarterly payments towards the United States dollar denominated term loan and Euro denominated term loan of $0.75 million and € 0.3 million, respectively (or an amortization of one percent per annum until the maturity date of each term loan). On June 29, 2007, we repaid the remaining balances of our outstanding United States dollar and Euro denominated term loans, totaling $72.5 million and € 28.6 million, respectively, with available cash on hand. The former revolving credit facility was secured by a majority of our U.S., Canadian, Finnish and U.K. — based assets and a pledge of a portion of the stock of our domestic and material foreign subsidiaries. Interest accrued on amounts outstanding under the former revolving credit facility, at our option, at either (1) LIBOR plus a margin ranging between 1.25% and 2.0% based upon our senior debt ratio or (2) the higher of the administrative agent’s base lending rate or one-half of one percent over the federal funds rate plus a margin ranging between 0.0% and 0.75% based on our senior debt ratio. Interest accrued on amounts outstanding under the term loans at LIBOR plus 1.75%. The former credit facility contained covenants restricting, among other things, the incurrence of indebtedness and the making of certain payments, including dividends. We also had to fulfill financial covenants including, among others, a total debt to EBITDA ratio, a senior debt to EBITDA ratio and a fixed charge coverage ratio, as defined in the facility. As of December 31, 2007 and September 30, 2007, we had no outstanding borrowings under the former credit facility. As of December 31, 2007 and September 30, 2007, we had availability to borrow $291.1 million under the former revolving credit facility.
Our € 200.0 million 6 7 / 8 % senior subordinated notes due 2014 are unsecured obligations and are subordinated in right of payment to any existing or future senior indebtedness. Interest is payable on the notes semi-annually on April 15 and October 15 of each year. Beginning April 15, 2009, we may redeem the notes, in whole or in part, initially at 103.438% of their principal amount, plus accrued interest, declining to 100% of their principal amount, plus accrued interest, at any time on or after April 15, 2012. In addition, before April 15, 2009, we may redeem the notes, in whole or in part, at a redemption price equal to 100% of the principal amount, plus accrued interest and a make-whole premium. The notes include covenants restricting the incurrence of indebtedness and the making of certain restricted payments, including dividends.
Under our securitization facilities, we sell accounts receivable in the United States, Canada and Europe on a revolving basis to commercial paper conduits through a wholly-owned special purpose U.S. subsidiary and a qualifying special purpose entity (“QSPE”) in the United Kingdom. The United States and Canadian securitization facilities expire in April 2009 and the European facility expires in October 2011, but each is subject to annual renewal. As of September 30, 2008, the aggregate amount of these facilities was $491.2 million. The outstanding funded balance of $453.6 million as of September 30, 2008 has the effect of reducing accounts receivable and short-term liabilities by the same amount. Our risk of loss under the securitization facilities is limited to a portion of the unfunded balance of receivables sold, which is approximately 15% of the funded amount. We maintain reserves for doubtful accounts associated with this risk. If the facilities were terminated, we would not be required to repurchase previously sold receivables but would be prevented from selling additional receivables to the commercial paper conduit.


CONF CALL

Greg Peterson - Director of Investor Relations

Thank you Samarian, good morning. We appreciate you joining us for AGCO's third quarter 2008 earnings conference call. Joining me this morning are Martin Richenhagen, our Chairman, President and Chief Executive Officer and Andy Beck, our Senior Vice President and Chief Financial Officer.

During this call we will refer to a slide presentation. The slides, earnings press release, and our financial statements are posted on our website at www.agcocorp.com. The non-GAAP measures used in the slide presentation are reconciled to GAAP measures in the appendix to the slides.

During the course of this conference call, we will make forward-looking statements, including some related to future sales, earnings, production levels, supplier and production constraints, inflation, foreign income, working capital improvement, cash flow, margins, effective tax rate, capital expenditures, and strategic initiatives. We wish to caution you that these statements are predictions and that actual events or results may differ materially. We refer you to the periodic reports that we file from time-to-time with the Securities and Exchange Commission including the company's Form 10-K for the year ended December 31, 2007 and Form 10-Q for the quarter ended June 30, 2008. These documents discuss important factors that could cause the actual results to differ materially from those contained in our forward-looking statements. A replay of this call will be available on our corporate website. I will now turn the call over to Martin.

Martin H. Richenhagen - Chairman, President, and Chief Executive Officer

Thank you, Greg and good morning everybody. We appreciate your attention this sunny October morning. We've experienced volatility over the last few weeks and you'll likely see more in the weeks and months ahead.

We believe AGCO, Your Agriculture Company, is well positioned financially, strategically, and operationally to serve our customers and execute on the positive long-term fundamentals of the agriculture sector. These maintained a high level of financial discipline and it's reflected on our balance sheet with our low level of net debt.

Given our overall financial health we're comfortable that we've the right policies in place to protect and grow our business even through this current financial climate. In general, our dealers and our farm customers are in the healthiest financial condition in recent memory. Their balance sheets are strong and in general their access to credit remains very good. Today AGCO Finance, our joint venture with Rabobank provides financing for about 50% of AGCO's retail sales, AGCO Finance is well capitalized. It does not rely on the commercial paper or securitization markets for its funding and its stands ready to increase its participation in financing our retail sales should other credit sources tighten. I also am pleased to tell you that despite the challenges in the financial markets AGCO's backlog remains strong and we have not seen a significant change in the flow of orders. 2008 harvest are at or above last years robust levels. And we expect healthy farm income in all the world's major agricultural markets.


Let's turn our attention now to AGCO's third quarter results. I'll begin my remarks on slide 3. You can see from this slide that we have continued our momentum for the third quarter of 2008 which resulted in record quarterly sales and earnings. Strong demand for our high horse power tractors and combines produced an increase in our sales of approximately 29% compared to the third quarter of 2007. And our drafted earnings per share rose to $1.04. We managed through significant material cost increases during the quarter and experienced no debt deterioration of our operating margins. This is quite impressive given the rich mix of sales in the third quarter of 2007 within an unseasonable high percentage of our sales coming from our premium price and products.

Slide 4 now illustrates our production schedules for 2007 and 2008. Tractor and combine production levels were up 11% in the third quarter of 2008 compared to the third quarter of 2007. Production was up to support the increased demand across the globe. Our current 2008 forecast calls for unit production of tractors and combines to increase 18% to 19% compared to 2007 levels in order to satisfy the forecasted increase in the market demand. The elevated demand for industrial and farm equipment continued to put stress on AGCO's supply chain. We are working with our suppliers and focusing on key internal processes to meet our production schedules by the end of the year.

Slide 5, details in that preview the farm equipments volume by region for the first nine month of 2008. Industry tractor sales in North America were down 5% compared to 2007 levels. The weakest segment continued to be tractors under 40 horsepower that are more closely tied to the general economy. We also experienced declines in the 400 to 100 horsepower category. The professional farming segment continues to benefit from positive cash crop economics and sales are up approximately 33% in the overrun in the horsepower tractor segment and the combine market grew approximately 25% in the first nine months of 2008 compared to the same period in 2007.

While AGCO's total unit tractor sales were lower in the first nine month of 2008, AGCO's unit sales of tractor over 100 horsepower and combines both showed strong growth doing the first nine months of 2008. For the full year of 2008, we expect weakness in tractors and that horsepower had continued growth in high horsepower tractor in the North American industry retail market.

Industry tractor volumes were up approximately 9% and move up in the first nine months of 2008 versus the same period last year. And strong harvest in France, Germany, Russia, and Central and Eastern Europe are driving increases in European industry volumes.

Our forecast for 2008 calls for market conditions in Europe to remain healthy with continued strong growth in Central and Eastern Europe and Russia and more modest growth in Western Europe. South America, the South American industry tractor volumes increased approximately 36% during the first nine months of 2008. Strong conditions in Brazil and Argentina are driving most of the South American growth.

Combine sales more than doubled in Brazil and also showed improvement in Argentina. For the full year of 2008 we expect the markets in both Brazil and Argentina to remain strong and contribute to an increase in South America and the industry demand compared to 2007 robust levels. Globally, the markets are healthy and as I mentioned earlier our order boards remain strong.

I will now turn the call overt to Andy Beck who will provide you with more details.

Andrew H. Beck - Senior Vice President and Chief Financial Officer

Thank you, Martin and good morning. Slide six details AGCO's regional net sales for the third quarter and first nine months of 2008. The bar graph shows our regional sales performance excluding the impact of currency translation. For the third quarter and first nine months of 2008 currency translation had a positive impact of approximately 7% and 11% respectively. If the current exchange rate holds, currency translation will put pressure on our fourth quarter sales.

During the third quarter, the Europe, Africa, Middle East segment had sales growth of approximately 15% excluding the impact of currency translation compared to the third quarter of 2007. The growth in our Europe, Africa, Middle East segment in the third quarter was led by Germany, France, Scandinavia and Eastern Europe and Russia. North America sales increased approximately 26% compared to the third quarter of 2007 excluding currency. Strong sales results in tractors, hay tools, sprayers, combines, and parts contributed to the improvement.

First nine months of 2008 sales in North America increased approximately 23%, excluding currency. Third quarter sales in South America improved approximately 38% from last year excluding currency translation. Good harvest and farm land expansions are driving double digit sales growth across nearly all the markets in South America even after excluding currency translation impacts.

Sales in our Asia-Pacific segment increased approximately 34% in the third quarter compared to 2007 excluding the impact of currency. Improved harvest in Australia and New Zealand, have sales well ahead of the draught impact of 2007 levels. On a year-to-date, sales were up 38% compared to 2007 excluding currency impacts. Globally, our net pricing for the quarter was a little below 5%.

Part sales for the third quarter 2008 were $301.1 million, up 19% compared to the same period in 2007, after removing the impact of currency. Growth was strong in all four of our reporting segments. For the first nine months of 2008, part sales were $838.1 million compared to $657 million in 2007.

Slide 7 highlights our sales and margin performance. Despite absorbing material cost increases, operating margins of 6.8% for the third quarter of 2008 match those seen in the third quarter of 2007. As Martin mentioned earlier, this was a significant accomplishment given the rich mix of sales we had in the third quarter of 2007. If you recall, in the first half of 2007, sales of our premium price set tractors were unseasonably low due to supplier constraints and the shifting of production of our new high horse power tractor. Production and sales were much heavier in the second half of 2007 and as a result our sales mix was richer and our margins higher especially in the third quarter of 2007.

Our South America business reported operating margins of 8.8% for the third quarter of 2008, the absorption benefits from higher volumes were offset by three factors first, raw material cost inflation which hit us hardest in this region; second, the negative currency translation impacts associated with sales of equipment manufactured in Brazil and exported to other countries in South America, and finally increased product development expenses in the region.

Third quarter operating income in our North America's segment was positive for the first time in over two years. Volume growth to market strength and new product introduction and distribution improvements, positive pricing environment and expense savings all contributed to the improvement. The positive results in North America all came just by currency pressure continuing in the third quarter. Our effective tax rate was approximately 31% in the third quarter of 2008, we expect the rate to be similar in the fourth quarter.

Slide 8 highlights the progress we are making with working capital reductions as we've focused on improving our return on assets. At the end of the third quarter AGCO's working capital sales ratio stood at 6.1% down from 9.5% one year ago. Our goal this year is to hold the line on working capital despite the strong sales growth we are experiencing. Much of our working capital focus is now aimed at lowering dealer inventories in North America which have now remained at 2007 levels. At the end of September 2008 our dealer month supply on a trailing 12 month basis in North America were as follows; five months for tractors, four months for combines, and five months for hay equipments. Other working capital details are as follows; outstanding funding under accounts receivable securitization programs was approximately $453.6 million at the end of September 2008 compared to $433.5 million at the end of September 2007.

We led uninterrupted access to funding through our securitization facilities to date and have liquidity back ups in place for this funding source, if needed. Wholesale interest bearing receivables transferred to ACGO Finance, our retail finance joint venture in North America as of September 30, 2008, were approximately $67.1 million. Losses on sales receivables primarily under these securitization facilities which is included in other expense net was $7.2 million in the third quarter of 2008 compared to $8.7 million for the same period in 2007. For the first nine months of 2008, losses on sales of receivables were $21.6 million compared to $25.5 million in the first 9 months of 2007.

Slide 9 addresses AGCO's free cash flow which represents cash flow from operations less capital expenditures. The graph on the left side of the slide shows the free cash flow during the first nine months of 2008 compared to 2007. Our seasonal demands for working capital are greatest early in the year as we prepare for the selling season and as you can see we've generated negative free cash flow in the first nine month of 2008 and 2007. The fourth quarter is the seasonally strongest when dealer and company inventories are sold down at the end of the year.

The graph on the right displays our annual free cash flow for 2007 and our projection for 2008. Our focus in 2008 has been to minimize our investment and working capital while still supporting strong sales growth this year. Even after recovering increased spending on strategic initiatives and capital expenditures for new products we expect to generate strong free cash flow this year.

Slide 10 quantifies the impact of our 2008 initiatives. We'll be making significant investments in our future in the form of increased engineering expenses to support a growing list of new product programs, cost associated with our European system initiative, and spending associated with developing new markets and improving our distribution. Through the end of September our sales and margin growth is paying for these investments and generating improvement in earnings in 2008, compared to 2007. Our initiative spending is focused on long-term growth and profitability improvements for the company.

Slide 11 lists our latest view of selected 2008 financial goals. We are projecting 2008 sales to increase 22% to 24% driven by healthy market conditions, pricing, and positive impact of currency. The new sales forecast reflects the negative currency translation impact of the recent appreciation of the dollar, including the recent movement and exchange rates our revised sales forecast would have been higher than our previous guidance.

We are targeting 2008 EPS to range from $3.90 to $4 while making significantly investment in our long-term initiatives. We expect to increase capital expenditures including additional investments and production capacity to be in the $230 million and $250 million range and our free cash flow to remain strong in the $175 million to $200 million range. That concludes our comments, operator we are now ready to open the call for questions.

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