Description
AGCO Corporation. Director MALLIKA SRINIVASAN bought 113,688 shares on 9-26-2012 at $ 45.57
BUSINESS OVERVIEW
General
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, self-propelled sprayers, hay tools, forage equipment and implements. We also manufacture and distribute grain storage and handling equipment systems as well as protein production systems. Our products are widely recognized in the agricultural equipment industry and are marketed under a number of well-known brands, including: Challenger ® , Fendt ® , Massey Ferguson ® and Valtra ® . We distribute most of our products through a combination of approximately 3,100 independent dealers and distributors in more than 140 countries. In addition, we provide retail financing through our retail finance joint ventures with Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A., which we refer to as “Rabobank.”
Products
Tractors
We offer a full range of tractors in the high horsepower segment (primarily 100 to 585 horsepower). Our high horsepower tractors typically are used on larger farms and on cattle ranches for hay production. Our compact tractors (under 40 horsepower) are typically 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. Our utility tractors are typically used on small- and medium-sized farms and in specialty agricultural industries, including dairy, livestock, orchards and vineyards. Tractors accounted for approximately 66% of our net sales in 2011, 68% in 2010 and 67% in 2009.
Combines
Our combines are sold with a variety of threshing technologies. 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 7% of our net sales in 2011 and 6% in both 2010 and 2009.
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.” Application equipment accounted for approximately 4% of our net sales in each of 2011, 2010 and 2009.
Hay Tools and Forage Equipment, Implements and Other Products
Our hay tools and forage equipment include 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, horse and alternative fuel 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 break up soil and mix 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.
Hay tools and forage equipment, implements, engines, grain storage and protein production systems, and other products accounted for approximately 8% of our net sales in 2011, 7% in 2010 and 9% in 2009.
Grain Storage and Protein Production Systems
On November 30, 2011, we acquired GSI Holdings Corp. (“GSI”), a leading manufacturer of grain storage and protein production systems. GSI manufactures and distributes grain storage bins and related drying and handling equipment systems, and swine and poultry feed storage and delivery, ventilation and watering systems. We sell our grain storage and protein production systems primarily under our GSI ® , DMC ® , FFI ™ , Zimmerman ™ , AP ™ , Cumberland ® , Hired Hand ™ and Agromarau ™ brand names.
Engines
Our AGCO Sisu Power engines division produces diesel engines, gears and generating sets. The diesel engines are manufactured for use in a portion of our tractors, combines and sprayers, and are also sold to third parties. The engine division specializes in the manufacturing of off-road engines in the 50 to 500 horsepower range.
Precision Farming Technologies
We provide a variety of precision farming technologies that are developed, manufactured, distributed and supported on a worldwide basis. A majority of these technologies are developed by third parties and are installed in our products. These technologies provide farmers with the capability to enhance productivity and profitability on the farm. AGCO also offers other advanced technology precision farming products that gather information such as yield data, allowing our customers to produce yield maps for the purpose of maximizing planting and fertilizer applications. While these products do not generate significant revenues, we believe that these products and related services are highly valued by professional farmers around the world and are integral to the growth of our machinery sales.
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 all of the products we sell. 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 profit margins and historically have been less cyclical than new product sales. Replacement parts accounted for approximately 15% of our net sales in 2011 and 2010 and 14% in 2009.
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. 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 equipment and replacement parts to farmers in European markets through a network of approximately 1,070 independent dealers and distributors. In certain markets, we also sell Valtra tractors and parts directly to end users. In some cases, dealers carry competing or complementary products from other manufacturers. As a result of our acquisition of GSI, we market and distribute grain storage and protein production system to farmers in Europe through a network of an additional 40 independent distributors. Sales in Europe accounted for approximately 52% of our net sales in 2011, 47% in 2010 and 54% in 2009.
North America
We market and distribute farm equipment and replacement parts to farmers in North America through a network of approximately 890 independent dealers, each representing one or more of our brand names. Dealers may also sell competitive and dissimilar lines of products. Sales in North America accounted for approximately 20% of our net sales in 2011 and 22% in both 2010 and 2009. As a result of our acquisition of GSI, we market and distribute grain storage and protein production system to farmers in North America through a network of an additional 400 independent dealers.
South America
We market and distribute farm equipment and replacement parts to farmers in South America through several different networks. In Brazil and Argentina, we distribute products directly to approximately 310 independent dealers. In Brazil, dealers are generally exclusive to one manufacturer. Outside of Brazil and Argentina, we sell our products in South America through independent distributors. As a result of our acquisition of GSI, we market and distribute grain storage and protein production systems to farmers in South America through a network of an additional 50 independent distributors. Sales in South America accounted for approximately 21% of our net sales in 2011, 25% in 2010 and 18% in 2009.
Rest of the World
Outside Europe, North America and South America, we operate primarily through a network of approximately 280 independent 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. As a result of our acquisition of GSI, we market and distribute grain storage and protein production system to farmers outside Europe, North America and South America, through a network of an additional 60 independent distributors. Sales outside Europe, North America and South America accounted for approximately 7% of our net sales in 2011 and 6% in both 2010 and 2009.
Associates and licensees provide a distribution channel in some markets for our products and/or 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 and Turkey. Licensees are entities in which we have no direct ownership interest, most notably in Pakistan. The associate or licensee generally has the exclusive right to produce and sell Massey Ferguson or Valtra equipment in its home country but may not sell these products in other countries. We generally license to these associates and licensees certain technology, as well as the right to use the Massey Ferguson or Valtra trade names. We also sell products to associates and licensees in the form of components used in local manufacturing operations. Licensee manufacturers sell certain tractor models under the Massey Ferguson or Valtra brand names in the licensed territory and also may become a source of low-cost production for us.
Parts Distribution
Parts inventories are maintained and distributed in a network of master and regional warehouses throughout North America, South America, Europe and Australia in order to provide timely response to customer demand for replacement parts. Our primary Western European master distribution warehouses are located in Desford, United Kingdom; Exeter, United Kingdom; Ennery, France; and Suolahti, Finland; and our North American master distribution warehouses are located in Batavia, Illinois and Kansas City, Missouri. Our South American master distribution warehouses are located in Jundiai, SĂŁo Paulo, Brazil and in Haedo, Argentina.
Dealer Support and Supervision
We believe that one of the most important criteria affecting a farmer’s decision to purchase a particular brand of equipment is the quality of the dealer who sells and services the equipment. We provide significant support to our dealers in order to improve the quality of our dealer network. We monitor each dealer’s performance and profitability and establish programs that focus on continual dealer improvement. Our dealers generally have sales territories for which they are responsible.
We believe that our ability to offer our dealers a full product line of agricultural equipment and related replacement parts, as well as our ongoing dealer training and support programs focusing on business and inventory management, sales, marketing, warranty and servicing matters and products, helps ensure the vitality and increase the competitiveness of our dealer network. We also maintain dealer advisory groups to obtain dealer feedback on our operations.
We provide our dealers with volume sales incentives, demonstration programs and other advertising support to assist sales. We design our sales programs, including retail financing incentives, and our policies for maintaining parts and service availability with extensive product warranties to enhance our dealers’ competitive position. In general, either party may cancel dealer contracts within certain notice periods.
Wholesale Financing
Primarily in the United States and Canada, we engage in the standard industry practice of providing dealers with floor plan payment terms for their inventories of farm equipment for extended periods. The terms of our wholesale finance agreements with our dealers vary by region and product line, with fixed payment schedules on all sales, generally ranging from one to 12 months. In the United States and Canada, dealers typically are not required to make an initial down payment, and our terms allow for an interest-free period generally ranging from six to 12 months, depending on the product. All equipment sales to dealers in the United States and Canada are immediately due upon a retail sale of the equipment by the dealer, with the exception of sales of grain storage and protein production systems. If not previously paid by the dealer, installment payments are required generally beginning after the interest-free period with the remaining outstanding equipment balance generally due within 12 months after shipment. We also provide financing to dealers on used equipment accepted in trade. We retain a security interest in a majority of the new and used equipment we finance. Sales of grain and protein production systems generally are payable within 30 days of shipment.
Typically, sales terms outside the United States and Canada are of a shorter duration, generally ranging from 30 to 180 days. In many cases, we retain a security interest in the equipment sold on extended terms. In certain international markets, our sales are backed by letters of credit or credit insurance.
For sales in most markets outside of the United States and Canada, we normally do not charge interest on outstanding receivables from our dealers and distributors. For sales to certain dealers or distributors in the United States and Canada, interest is generally charged at or above prime lending rates on outstanding receivable balances after interest-free periods. These interest-free periods vary by product and generally range from one to 12 months, with the exception of certain seasonal products, which bear interest after periods of up to 23 months that vary depending on the time of year of the sale and the dealer or distributor’s sales volume during the preceding year. For the year ended December 31, 2011, 16.9% and 3.2% of our net sales had maximum interest-free periods ranging from one to six months and seven to 12 months, respectively. Net sales with maximum interest-free periods ranging from 13 to 23 months were approximately 0.2% of our net sales during 2011. Actual interest-free periods are shorter than suggested by these percentages because receivables from our dealers and distributors in the United States and Canada are generally due immediately upon sale of the equipment to retail customers. Under normal circumstances, interest is not forgiven and interest-free periods are not extended.
We have an agreement to permit transferring, on an ongoing basis, substantially all of our wholesale interest-bearing and non-interest bearing receivables in North America to our U.S. and Canadian retail finance joint ventures. Upon transfer, the receivables maintain standard payment terms, including required regular principal payments on amounts outstanding, and interest charges at market rates. We also have accounts receivable sales agreements in Europe that permit the sale, on an ongoing basis, of a large portion of our wholesale receivables in Germany, France, Austria, Norway and Sweden to the relevant AGCO Finance entities in those countries. Upon transfer, the receivables maintain standard payment terms. Qualified dealers may obtain additional financing through our U.S., Canadian and European retail finance joint ventures at the joint ventures’ discretion. In addition, AGCO Finance entities provide wholesale financing to dealers in Brazil.
Retail Financing
Through our AGCO Finance retail financing joint ventures located in the United States, Canada, Germany, France, the United Kingdom, Austria, Ireland, the Netherlands, Denmark, Italy, Sweden, Brazil, Argentina and Australia, end users of our products are provided with a competitive and dedicated financing source. These retail finance companies are owned 49% by AGCO and 51% by a wholly-owned subsidiary of Rabobank. Besides contributing to our overall profitability, the AGCO Finance joint ventures can enhance our sales efforts by tailoring retail finance programs to prevailing market conditions. Refer to “Retail Finance Joint Ventures” within Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further information.
In addition, Rabobank is the primary lender with respect to our new credit facility and our 4 1 / 2 % senior term loan, as are more fully described in “Liquidity and Capital Resources” within Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our historical relationship with Rabobank has been strong and we anticipate their continued long-term support of our business.
Manufacturing and Suppliers
Manufacturing and Assembly
We manufacture our products in locations intended to optimize capacity, technology or local costs. Furthermore, we continue to balance our manufacturing resources with externally-sourced machinery, components and replacement parts to enable us to better control inventory and our supply of components. We believe that our manufacturing facilities are sufficient to meet our needs for the foreseeable future.
Europe
Our tractor manufacturing operations in Europe are located in Suolahti, Finland; Beauvais, France; and Marktoberdorf, Germany. The Suolahti facility produces 75 to 220 horsepower tractors marketed under the Valtra and Massey Ferguson brand names. The Beauvais facility produces 70 to 370 horsepower tractors marketed under the Massey Ferguson, Challenger, Valtra and AGCO brand names. The Marktoberdorf facility produces 50 to 390 horsepower tractors marketed under the Fendt brand name. We also assemble forklifts in our Kempten, Germany facility for sale to third parties and assemble cabs for our Fendt tractors in Baumenheim, Germany. We have a diesel engine manufacturing facility in Linnavuori, Finland. We have a joint venture with Claas Tractors SAS for the manufacture of driveline assemblies for tractors produced in our facility in Beauvais.
Our harvesting machinery manufacturing operations in Europe are located in Breganze, Italy; Feucht, Germany; and Hohenmoelsen, Germany. The Breganze facility produces straw walker and hybrid combine harvesters from 176 to 500 hp under the Massey Ferguson, Fendt, Laverda and Challenger brand names. The Breganze facility also manufactures free flow and power flow headers. The Hohenmoelsen facility produces self-propelled forage harvesters up to 650 horsepower for the Fendt brand name. The Feucht facility produces hay tools such as mowers, tedders and rakes under the Fella, Massey Ferguson and Challenger brand names.
CEO BACKGROUND
P. George Benson, Ph.D , age 65, has been a director of the Company since December 2004.
• President of the College of Charleston in Charleston, South Carolina since 2007
• Member of the Boards of Directors of Crawford & Company (Atlanta, Georgia) and Primerica, Inc.
• Former Member of the Board of Directors and Audit Committee Chair for Nutrition 21, Inc., from 1998 to 2010 and from 2002 to 2010, respectively
• Judge for the Malcom Baldrige National Quality Award from 1997 to 2000, was Chairman of the Board of Overseers for the Baldrige Award from 2004 to 2007 and is currently Chairman-elect of the Board of Directors for the Foundation for the Baldrige Award
• Former Dean of the Terry College of Business at the University of Georgia from 1998 to 2007
• Former Dean of the Rutgers Business School at Rutgers University from 1993 to 1998
• Former Faculty member 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
Director Qualifications and Skills : Mr. Benson has significant academic expertise in business, in particular with strategic planning and organizational management systems that adds a valuable perspective to the Board, especially in the area of improving the delivery of products and services. His ties to the community provide the Board with regional representation and a critical link to the academic and research sectors.
Wolfgang Deml , age 66, has been a director of the Company since February 1999.
• Former President and Chief Executive Officer of BayWa Corporation, a trading and services company located in Munich, Germany, from 1991 until his retirement in 2008
• Member of the Supervisory Board of Mannheimer Versicherung AG
Director Qualifications and Skills : Mr. Deml adds extensive experience to the Board given his service as the Chief Executive Officer of an international corporation within our industry. His tenure on the Board provides consistent leadership, and he serves as an ongoing source for industry-specific knowledge, especially in Europe, which is our largest market.
Luiz F. Furlan , age 65, has been a director of the Company since July 2010.
• Member of the Boards of Directors of BRF Brasil Foods S.A. (Brazil), Telefónica S.A. (Spain), Telefónica Brasil S.A. (Brazil), Telefónica Digital (UK) and AMIL Particpacoes S.A. (Brazil)
• Former member of the Board of Directors of Redecard S.A. from 2007 to 2010
• Numerous former executive positions 1976 to 2002 at Sadia, S.A., a leading producer of frozen foods in Brazil, including Chairman of its Board of Directors in 2009
• Two terms as Minister of Development, Industry and Foreign Trade of Brazil from 2003 to 2007
Director Qualifications and Skills : Mr. Furlan’s extensive executive experience in the South American food and agriculture business, along with his background in the Brazilian government, provide an important perspective and contribution to the Board, especially given that we have a substantial presence in Brazil.
Gerald B. Johanneson , age 71, has been a director of the Company since April 1995.
• Former President and Chief Executive Officer of Haworth, Inc. from 1997 until his retirement in 2003
• Former President and Chief Operating Officer of Haworth, Inc. from 1994 to 1997
• Former Executive Vice President and Chief Operating Officer of Haworth, Inc. from 1988 to 1994
• Former member of the Board of Directors of Haworth, Inc. from 2003 to 2011
Director Qualifications and Skills : Mr. Johanneson brings to the Board a wealth of knowledge of sales and marketing strategy in the manufacturing industry. His background as both a Chief Executive Officer and Chief Operating Officer of a global company lends a unique perspective to the Board. Further, Mr. Johanneson’s tenure provides consistent leadership to the Board and a familiarity with the Company’s operations.
George E. Minnich , age 62, has been a director of the Company since January 2008.
• Former Senior Vice President and Chief Financial Officer of ITT Corporation from 2005 to 2007
• 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
• Various positions within Price Waterhouse (now PricewaterhouseCoopers LLP) from 1971 to 1993, serving as an audit partner from 1984 to 1993
• Member of the Boards of Directors and Audit Committees of Belden Inc. and Kaman Corporation and the Chairman of their Audit Committees
• Member of the Board of Trustees of Albright College
Director Qualifications and Skills : Mr. Minnich, through his background as a former audit partner of Price Waterhouse and Chief Financial Officer of a publicly-traded company, provides the Board with substantial financial expertise. He also brings to the Board a familiarity with the challenges facing large, international manufacturing companies.
Martin H. Richenhagen , age 59, has been Chairman of the Board since August 2006 and has served as President and Chief Executive Officer of the Company since July 2004.
• Member of the Board of Directors, Audit and Technology & Environment Committees for PPG Industries, Inc.
• Former Executive Vice President of Forbo International SA, a flooring material business based in Switzerland from 2003 to 2004
• Former Group President of Claas KGaA mbH, a global farm equipment manufacturer and distributor from 1998 to 2002
• Former Senior Executive Vice President for Schindler Deutschland Holdings GmbH, a worldwide manufacturer and distributor of elevators and escalators from 1995 to 1998
Director Qualifications and Skills : In addition to his eight years of experience as the Company’s Chief Executive Officer, Mr. Richenhagen brings to the Board substantial experience in the agricultural equipment industry. His business and leadership acumen as both a former Executive Vice President and current Chief Executive Officer provides the Board with an informed resource for a wide range of disciplines, from sales and marketing to broad business strategies.
Gerald L. Shaheen , age 67, has been a director of the Company since October 2005.
• Numerous marketing and general management positions for Caterpillar Inc., both in the United States and Europe, including Group President from 1998 until his retirement in 2008
• Chairman of the Board of Trustees of Bradley University and Board member and past Chairman of the U.S. Chamber of Commerce
• Member of Board of Directors of the National Chamber Foundation, the Ford Motor Company, Peoria Next and the National Multiple Sclerosis Society, Greater Illinois Chapter
• Former member of the Board of Directors of National City Corp. from 2001 to 2008
Director Qualifications and Skills : Mr. Shaheen’s background in management of a global heavy equipment manufacturer brings to the Board particular knowledge of the Company’s industry, as well as a necessary perspective of the challenges facing large, publicly-traded companies. His work with the U.S. Chamber of Commerce also provides the Board with a wealth of knowledge related to international commerce and trade issues.
Mallika Srinivasan, age 54, has been a director of the Company since July 2011.
• Chairman and Chief Executive Officer of Tractors and Farm Equipment Limited, the second largest agricultural tractor manufacturer in India, since 2011
• Various positions at Tractors and Farm Equipment Limited since 1981, including Director (1994 to 2011), Vice President (1991 to 1994) and General Manager- Planning & Coordination (1986 to 1991)
• Member of the Boards of Directors of Tata Global Beverages Limited (India), The United Nilgiri Tea Estates Company Limited (India), the Indian School of Business and the Governing Board of Rural Technology and Business Incubator of the Indian School of Technology
• Recipient of the Economic Times Businesswoman of the Year in 2006 and Ernst & Young’s 2010 Manufacturing Entrepreneur of the Year
Director Qualifications and Skills : Ms. Srinivasan’s expertise in strategy, extensive leadership experience in the farm equipment industry and her knowledge of operations in India and other developing markets provide an important perspective and contribution to the Board.
Daniel C. Ustian , age 61, has been a director of the Company since March 2011.
• President and Chief Executive Officer of Navistar International Corporation since 2003
• Member of the Board of Directors of Navistar International Corporation since 2002 and Chairman of the Board since 2004
• Former President and Chief Operating Officer of Navistar, Inc., from 2002 to 2003, President of the Engine Group from 1999 to 2002, and Group Vice President and General Manager of Engine & Foundry from 1993 to 1999
• Member of the Business Roundtable and the Society of Automotive Engineers
Director Qualifications and Skills : As a result of his professional and other experiences as a Chief Executive Officer and otherwise, Mr. Ustian possesses particular knowledge and experience in a variety of areas, including manufacturing and global distribution of large capital equipment, which strengthens the Board’s collective knowledge, capabilities and experience.
Hendrikus Visser , age 67, has been a director of the Company since April 2000.
• Chairman of Royal Huisman Shipyards N.V.
• Member of the Boards of Directors of Vion N.V., Mediq N.V., and Sterling Strategic Value, Ltd.
• Former Chief Financial Officer of NUON N.V. and former member of the Boards of Directors of major international corporations and institutions including Rabobank Nederland, the Amsterdam Stock Exchange, Amsterdam Institute of Finance and De Lage Landen
Director Qualifications and Skills : Mr. Visser’s substantial experience with and knowledge of financial capital markets, particularly in our Europe/Africa/Middle East (“EAME”) region, provides the Board with significant international financial expertise. His tenure with the Board also provides stability in leadership, and he serves as a continued source of regional diversity.
MANAGEMENT DISCUSSION FROM LATEST 10K
Retail Sales
Worldwide industry equipment demand for farm equipment were at relatively high levels during 2011 in most major markets. Industry conditions in Western Europe were very strong compared to weaker industry conditions in 2010, primarily due to improved dairy, meat and grain prices and overall market recovery, which resulted in improved farm income across most of Western Europe. In South America, despite a modest decline in industry conditions, industry demand remained at a higher level due to positive farm economics and continued availability of favorable government financing programs. North American industry demand was robust in 2011, with stable market demand for larger equipment.
In the United States and Canada, industry unit retail sales of tractors increased approximately 2% in 2011 compared to 2010, resulting from growth in industry unit retail sales of high horsepower and mid-range utility tractors. Industry unit retail sales of combines decreased approximately 4% in 2011 compared to 2010 but remained at higher levels. Record farm income in 2011 supported strong industry retail sales of tractors, combines, sprayers and hay equipment. In Western Europe, industry unit retail sales of tractors and combines increased approximately 12% and 35% in 2011, respectively, compared to 2010 due to higher retail volumes in most major Western European markets. Demand was strongest in Germany, France, Scandinavia and Finland. Higher commodity prices and improvement in demand in the dairy and livestock sectors contributed to the increase in 2011. In South America, industry unit retail sales of tractors in 2011 decreased approximately 3% compared to 2010. Industry unit retail sales of tractors in the major markets of Brazil and Argentina decreased approximately 7% and 37%, respectively, during 2011 compared to 2010. Declines in the two largest South American markets were mostly offset by strong growth in other South American markets compared to 2010. Despite the modest decline, industry unit retail sales in Brazil remained at high levels due to attractive farm economics and supportive government financing rates that have been extended through the end of 2012. Industry retail sales of combines in South America during 2011 were approximately 20% higher than 2010. Industry unit retail sales of combines in Brazil and Argentina increased approximately 18% and 11%, respectively, during 2011 compared to 2010. Our net sales in our Rest of Word segment for 2011 were approximately 44.8% higher than 2010, primarily due to improved market conditions in Russia and Eastern Europe and in Australia and New Zealand.
Interest expense, net was $30.2 million for 2011 compared to $33.3 million for 2010. During 2011, we redeemed our €200.0 million of 6 7 / 8 % senior subordinated notes due April 15, 2014, as is more fully discussed in “Liquidity and Capital Resources.” In connection with the redemption, we recorded a loss of approximately $3.1 million associated with the premium paid to the holders of the notes and a write-off of approximately $1.2 million of unamortized deferred debt issuance costs. In addition, during 2011, holders of our former 1¾% convertible senior subordinated notes converted approximately $161.0 million of the principal amount of the notes, as is more fully discussed in “Liquidity and Capital Resources.”
Other expense, net was $19.1 million in 2011 compared to $16.0 million in 2010. Losses on sales of receivables primarily under our accounts receivable sales agreements were approximately $19.7 million and $13.7 million in 2011 and 2010, respectively. The increase in 2011 was due to a higher amount of receivables sold in Europe under our accounts receivable sales agreement with AGCO Finance entities in Europe, as is more fully discussed in “Retail Finance Joint Ventures.”
We recorded an income tax provision of $24.6 million in 2011 compared to $104.4 million in 2010. Our tax provision is impacted by the differing tax rates of the various tax jurisdictions in which we operate, permanent differences for items treated differently for financial accounting and income tax purposes, and losses in jurisdictions where no income tax benefit is recorded. Our 2011 income tax rate provision (as reconciled in Note 6 to our Consolidated Financial Statements) includes a reversal of approximately $149.3 million of valuation allowance previously established against our deferred tax assets in the United States. The reversal was required to offset deferred tax liabilities established as part of the acquisition accounting for GSI primarily related to acquired intangible assets.
A valuation allowance is established when it is more likely than not that some portion or all of a company’s deferred tax assets will not be realized. We assessed the likelihood that our deferred tax assets would be recovered from estimated future taxable income and available income tax planning strategies. At December 31, 2011 and 2010, we had gross deferred tax assets of $498.2 million and $466.4 million, respectively, including $181.6 million and $210.7 million, respectively, related to net operating loss carryforwards. At December 31, 2011 and 2010, we had recorded total valuation allowances as an offset to the gross deferred tax assets of $145.8 million and $262.5 million, respectively, primarily related to net operating loss carryforwards in Brazil, Denmark, Switzerland, the Netherlands, China, Russia and the United States. Realization of the remaining deferred tax assets as of December 31, 2011 will depend 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.
As of December 31, 2011 and 2010, we had approximately $71.1 million and $48.2 million, respectively, of unrecognized tax benefits, all of which would impact our effective tax rate if recognized. As of December 31, 2011 and 2010, we had approximately $23.0 million and $14.2 million, respectively, 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, 2011 and 2010, we had accrued interest and penalties related to unrecognized tax benefits of approximately $7.6 million and $5.2 million, respectively. See Note 6 to our Consolidated Financial Statements for further discussion of our uncertain income tax positions.
Equity in net earnings of affiliates, which is primarily comprised of income from our retail finance joint ventures, was $48.9 million in 2011 compared to $49.7 million in 2010. Refer to “Retail Finance Joint Ventures” for further information regarding our retail finance joint ventures and their results of operations.
2010 Compared to 2009
Net income for 2010 was $220.5 million, or $2.29 per diluted share, compared to net income for 2009 of $135.7 million, or $1.44 per diluted share.
Net sales for 2010 were approximately $380.2 million, or 5.8%, higher than 2009 primarily due to sales increases in our South American and North American geographical segments, partially offset by a slight decrease in our Europe/Africa/Middle East geographical segment as well as the unfavorable impact of currency translation. Strong market conditions in South America during 2010 helped to contribute to our overall sales growth in 2010. Income from operations was $324.2 million in 2010 compared to $218.7 million in 2009. The increase in income from operations and operating margins during 2010 primarily was due to higher net sales, material cost control initiatives, increased production volumes and an improved product mix, partially offset by higher engineering expenses.
In our Europe/Africa/Middle East region, income from operations decreased approximately $17.3 million in 2010 compared to 2009, primarily due to the reduction in net sales, lower production levels and increased engineering expenses. Income from operations in our South American region increased approximately $97.1 million in 2010 compared to 2009, primarily due to significant sales growth, improved factory productivity as a result of higher production levels, and a shift in product sales mix to higher margin, higher horsepower products. In our North America region, income from operations increased approximately $27.6 million in 2010 compared to 2009, primarily due to improved margins from new products, a favorable product mix, and factory efficiencies, partially offset by increased engineering expenditures. Income from operations in the Rest of World segment decreased approximately $4.2 million in 2010 compared to 2009, primarily due to weaker net sales, an unfavorable product mix and increased expenses related to growth initiatives.
Retail Sales
Worldwide industry equipment demand for farm equipment was mixed in 2010. In South America, strong industry conditions were the result of positive farm economics and continued availability of favorable government financing programs. North American industry demand was stable throughout 2010, with robust market demand for large equipment. Industry conditions in Western Europe were weak during the first half of 2010, especially in the dairy and livestock sectors, but improved in most major European markets towards the end of 2010.
In the United States and Canada, industry unit retail sales of tractors increased approximately 5% in 2010 compared to 2009, resulting from strong growth in industry unit retail sales of high horsepower tractors and modest growth in industry retail sales of compact tractors, partially offset by a small decline in unit retail sales of utility tractors. Industry unit retail sales of combines increased approximately 9% in 2010 compared to the prior year. Strong and improving economics for the professional producer sector contributed to the strength in retail sales of high horsepower tractors and combines. Continued weakness in the dairy and livestock sectors contributed to lower industry unit retail sales of mid-range utility tractors and hay equipment. In North America, our unit retail sales of tractors decreased in 2010 and our unit retail sales of combines increased in 2010 compared to 2009 levels. In Western Europe, industry unit retail sales of tractors decreased approximately 10% in 2010 compared to 2009 due to lower retail volumes in most major Western European markets. Demand was weakest in France, Spain, Italy and the United Kingdom. The slow pace of macro-economic recovery, weak farmer sentiment and soft demand in the dairy and livestock sectors contributed to the decline in 2010. Our unit retail sales of tractors for 2010 in Western Europe were also lower when compared to 2009. In South America, industry unit retail sales of tractors in 2010 increased approximately 31% compared to 2009. Industry unit retail sales of combines during 2010 were approximately 29% higher than 2009. Industry unit retail sales of tractors in the major market of Brazil increased approximately 24% during 2010 compared to 2009. Strong farm fundamentals and favorable government-sponsored financing programs in Brazil contributed to the strong industry demand, which began to accelerate in the second half of 2009. Improved weather and increased crop production in Argentina contributed to significant increases in industry unit retail sales of tractors and combines during 2010 compared to 2009. Our South American unit retail sales of tractors and combines were also higher in 2010 as compared to 2009. Our net sales in our Rest of Word segment for 2010 were approximately 4.7% lower than 2009, primarily due to lower sales in Australia and New Zealand, partially offset by higher sales in Asia. Weak market conditions in Australia and New Zealand and the tightened credit environment in the markets of Eastern Europe and Russia contributed to the decline.
SG&A expenses as a percentage of net sales increased slightly during 2010 compared to 2009. We recorded approximately $12.9 million and $8.2 million of stock compensation expense, within SG&A, during 2010 and 2009, respectively, as is more fully explained in Note 1 to our Consolidated Financial Statements. Engineering expenses increased during 2010 as compared to 2009 primarily due to higher spending for the development of new products and costs to meet new engine emission standards in the United States and Europe.
We recorded restructuring and other infrequent expenses of approximately $4.4 million and $13.2 million during 2010 and 2009, respectively. The restructuring and other infrequent expenses recorded in 2010 primarily related to severance and other related costs associated with the rationalization of our operations in Denmark, Spain, Finland and France. The restructuring and other infrequent expenses recorded in 2009 primarily related to severance and other related costs associated with the rationalization of our operations in France, the United Kingdom, Finland, Germany, the United States and Denmark.
Interest expense, net was $33.3 million for 2010 compared to $42.1 million for 2009. The decrease primarily was due to higher interest income due to higher amounts of invested cash.
Other expense, net was $16.0 million in 2010 compared to $22.2 million in 2009. Losses on sales of receivables primarily under our accounts receivable sales agreements were approximately $13.7 million in 2010. Losses on sales of receivables, primarily under our former U.S. and Canadian securitization facilities and our European securitization facilities, were approximately $15.6 million in 2009. The decrease primarily was due to a reduction in interest rates in 2010 compared to 2009. Other expense, net also decreased in 2010 due to favorable foreign exchange impacts in 2010 compared to 2009.
We recorded an income tax provision of $104.4 million in 2010 compared to $57.7 million in 2009. Our tax provision is impacted by the differing tax rates of the various tax jurisdictions in which we operate, permanent differences for items treated differently for financial accounting and income tax purposes, and losses in jurisdictions where no income tax benefit is recorded. Our 2009 income tax rate reconciliation provided in Note 6 to our Consolidated Financial Statements includes a $39.5 million favorable “change in valuation allowance” which was fully offset by a write-off of certain foreign tax assets reflected in “tax effects of permanent differences.” Due to the fact that these tax assets had not been expected to be utilized in future years, we previously had maintained a valuation allowance against the tax assets. Accordingly, this write-off resulted in no impact to our income tax provision for the year ended December 31, 2009.
A valuation allowance is established when it is more likely than not that some portion or all of a company’s deferred tax assets will not be realized. We assessed the likelihood that our deferred tax assets would be recovered from estimated future taxable income and available income tax planning strategies. At December 31, 2010 and 2009, we had gross deferred tax assets of $466.4 million and $484.7 million, respectively, including $210.7 million and $215.0 million, respectively, related to net operating loss carryforwards. At December 31, 2010 and 2009, we had recorded total valuation allowances as an offset to the gross deferred tax assets of $262.5 million and $261.7 million, respectively, primarily related to net operating loss carryforwards in Brazil, Denmark, Switzerland, the Netherlands and the United States.
As of December 31, 2010 and 2009, we had approximately $48.2 million and $21.8 million, respectively, of unrecognized tax benefits, all of which would impact our effective tax rate if recognized. As of December 31, 2010 and 2009, we had approximately $14.2 million and $3.5 million, respectively, 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, 2010 and 2009, we had accrued interest and penalties related to unrecognized tax benefits of approximately $5.2 million and $1.9 million, respectively. See Note 6 to our Consolidated Financial Statements for further discussion of our uncertain income tax positions.
Equity in net earnings of affiliates was $49.7 million in 2010 compared to $38.7 million in 2009. The increase primarily was due to increased earnings in our retail finance joint ventures. Refer to “Retail Finance Joint Ventures” for further information regarding our retail finance joint ventures and their results of operations.
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 June 30, 2012 , we generated net income of $204.9 million , or $2.08 per share, compared to net income of $133.7 million , or $1.36 per share, for the same period in 2011 . For the first six months of 2012, we generated net income of $325.1 million , or $3.29 per share, compared to net income of $213.7 million , or $2.17 per share, for the same period in 2011 .
Net sales during the three and six months ended June 30, 2012 were $2,690.1 million and $4,963.8 million , respectively, which were approximately 14.1% and 19.4% higher than both the three and six months ended June 30, 2011, respectively, due to sales growth in all of our geographical segments as well as the favorable impact of acquisitions, partially offset by the unfavorable impact of currency translation.
Income from operations for the three months ended June 30, 2012 was $264.9 million , compared to $201.6 million in the three months ended June 30, 2011. Income from operations was $434.7 million for the first six months of 2012 compared to $310.3 million for the same period in 2011. The increase in income from operations during the three and six months ended June 30, 2012 was a result of the benefits of acquisitions, an increase in net sales and improved gross margins resulting from price increases, higher production levels, a better sales mix and material cost control initiatives.
Income from operations in our Europe/Africa/Middle East (“EAME”) region was relatively flat in the three months ended June 30, 2012 and increased in the first six months of 2012 compared to the same periods in 2011. The increase in the first six months of 2012 was primarily due to higher sales and production volumes and a better product mix, partially offset by the negative impact of currency translation. In the South America region, income from operations increased in the three months ended June 30, 2012 and decreased in the first six months of 2012 compared to the same periods in 2011. The decrease in income from operations in the first six months of 2012 was primarily due to the negative impact of currency translation partially offset by improved margins. Income from operations in North America was higher in the three and six months ended June 30, 2012 compared to the same periods in 2011 primarily due to the positive impact of acquisitions, increased net sales, a favorable sales mix and cost control initiatives. Income from operations in our Asia/Pacific region increased in the three months ended June 30, 2012 and decreased in the first six months of 2012 compared to the same periods in 2011. Income from operations in the Asia/Pacific region decreased in the first six months of 2012 compared to the same period in 2011 due to additional market development costs in China which were partially offset by acquisition benefits.
Industry Unit Retail Sales
In North America, industry unit retail sales of tractors for the first six months of 2012 increased by approximately 6% compared to the first six months of 2011, with increases in compact, utility and high horsepower tractors. Record farm income in 2011 and the expectation of continued favorable farm economics resulted in the strength in retail sales of high horsepower tractors. Improvement in the dairy and livestock sectors has contributed to higher industry unit retail sales of utility tractors. North American farm economics remain healthy, but the current drought conditions across portions of the United States have added some uncertainty for farm equipment demand for the remainder of 2012 in the region. Industry unit retail sales of combines for the first six months of 2012 decreased by approximately 23% compared to the first six months of 2011, primarily due to the timing of industry production and high levels of demand in 2011.
In Western Europe, industry unit retail sales of tractors decreased approximately 2% and industry unit retail sales of combines increased approximately 15% for the first six months of 2012 compared to the first six months of 2011. Better crop fundamentals are sustaining demand in the key Western European markets of Germany, France and the United Kingdom while demand has weakened in Southern Europe.
South American industry unit retail sales of tractors in the first six months of 2012 decreased approximately 7% compared to the elevated levels in the same period in 2011. Industry unit retail sales of combines for the first six months of 2012 were approximately 12% lower than the first six months of 2011. Drought impacted the early harvests in southern Brazil and Argentina in the first half of 2012, resulting in weaker demand in these markets. Despite the adverse weather conditions earlier in the year, overall industry demand in South America remains at a high level primarily due to attractive government financing programs, favorable crop prices and exchange rates, and improved weather.
STATEMENTS OF OPERATIONS
Net sales for the three months ended June 30, 2012 were $2,690.1 million compared to $2,358.6 million for the same period in 2011. Net sales for the first six months of 2012 were $4,963.8 million compared to $4,156.3 million for the same period in 2011. Acquisitions positively impacted net sales by approximately $250.7 million, or 10.6%, in the three months ended June 30, 2012 and by $455.2 million, or 11.0%, in the first six months of 2012. Foreign currency translation negatively impacted net sales by approximately $264.5 million, or 11.2%, in the three months ended June 30, 2012 and by $341.6 million, or 8.2%, in the first six months of 2012.
RETAIL FINANCE JOINT VENTURES
Our AGCO Finance retail finance joint ventures provide retail financing to end customers and wholesale financing to our dealers in the United States, Canada, Germany, France, the United Kingdom, Austria, Ireland, the Netherlands, Denmark, Italy, Sweden, Brazil, Argentina and Australia. The joint ventures are owned 49% by AGCO and 51% by a wholly-owned subsidiary of Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A., “Rabobank”, a 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 joint ventures. As of June 30, 2012 , our capital investment in the retail finance joint ventures, which is included in “Investment in affiliates” on our Condensed Consolidated Balance Sheets, was approximately $332.6 million compared to $322.2 million as of December 31, 2011. The total finance portfolio in our retail finance joint ventures was approximately $7.7 billion and $7.5 billion as of June 30, 2012 and December 31, 2011, respectively. The total finance portfolio as of June 30, 2012 included approximately $6.5 billion of retail receivables and $1.2 billion of wholesale receivables from AGCO dealers. The total finance portfolio as of December 31, 2011 included approximately $6.4 billion of retail receivables and $1.1 billion of wholesale receivables from AGCO dealers. The wholesale receivables were either sold directly to AGCO Finance without recourse from our operating companies or AGCO Finance provided the financing directly to the dealers. For the six months ended June 30, 2012 , 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 $22.6 million for the same period in 2011.
The retail finance portfolio in our retail finance joint venture in Brazil was approximately $1.9 billion and $2.0 billion as of June 30, 2012 and December 31, 2011, respectively. As a result of weak market conditions in Brazil in 2005 and 2006, a substantial portion of this portfolio had been included in a payment deferral program directed by the Brazilian government relating to retail contracts entered into during 2004, where scheduled payments were rescheduled several times between 2005 and 2008. The impact of the deferral program resulted in higher delinquencies and lower collateral coverage for the portfolio. While the joint venture currently considers its reserves for loan losses adequate, it 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. To date, our retail finance joint ventures in markets outside of Brazil have not experienced any significant changes in the credit quality of their finance portfolios. However, there can be no assurance that the portfolio credit quality will not deteriorate, and, given the size of the portfolio relative to the joint ventures’ levels of equity, a significant adverse change in the joint ventures’ performance would have a material impact on the joint ventures and on our operating results.
LIQUIDITY AND CAPITAL RESOURCES
Our financing requirements are subject to variations due to seasonal changes in inventory and receivable levels. Internally generated funds are supplemented when necessary from external sources, primarily our credit facility and accounts receivable sales agreement facilities.
Current Facilities
Our $201.3 million of 1 1 / 4 % convertible senior subordinated notes due December 15, 2036, issued in December 2006, 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. Beginning December 15, 2013, we may redeem any of the notes at a redemption price of 100% of their principal amount, plus accrued interest, as well as settle any excess conversion value with shares of our common stock. 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, as well as settle any excess conversion value with shares of our common stock. Refer to our Form 10-K for the year ended December 31, 2011 for a full description of these notes.
As of June 30, 2012 and December 31, 2011, the closing sales price of our common stock had not exceeded 120% of the conversion price of $40.73 per share for our 1 1 / 4 % convertible senior subordinated notes for at least 20 trading days in the 30 consecutive trading days ending June 30, 2012 and December 31, 2011, and, therefore, we classified the notes as long-term debt. Future classification of the 1 1 / 4 % convertible senior subordinated notes between current and long-term debt is dependent on the closing sales price of our common stock during future quarters.
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. Refer to Notes 5 and 8 of our Condensed Consolidated Financial Statements for further discussion.
Our €200.0 million 4 1 / 2 % senior term loan with Rabobank is due May 2, 2016. We have the ability to prepay the term loan before its maturity date. Interest is payable on the notes at 4 1 / 2 % per annum, payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year. The term loan 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 default. We also must fulfill financial covenants with respect to a total debt to EBITDA ratio and an interest coverage ratio.
Our $300.0 million of 5 7 / 8 % senior notes due December 1, 2021 constitute senior unsecured and unsubordinated indebtedness. Interest is payable on the notes semi-annually in arrears on June 1 and December 1 of each year. At any time prior to September 1, 2021, we may redeem the notes, in whole or in part from time to time, at our option, at a redemption price equal to the greater of: (i) 100% of the principal amount plus accrued and unpaid interest, including additional interest, if any, to, but excluding, the redemption date; or (ii) the sum of the present values of the remaining scheduled payments of principal and interest (exclusive of interest accrued to the date of redemption) discounted to the redemption date at the treasury rate plus 0.5% , plus accrued and unpaid interest, including additional interest, if any. Beginning September 1, 2021, we may redeem the notes, in whole or in part from time to time, at our option, at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest, including additional interest, if any.
Our revolving credit and term loan facility consists of a $600.0 million multi-currency revolving credit facility and a $390.0 million term loan facility. The maturity date of our credit facility is December 1, 2016. We are required to make quarterly payments towards the term loan of $5.0 million commencing March 2012 increasing to $10.0 million commencing March 2015. Interest accrues on amounts outstanding under the credit facility, at our option, at either (1) LIBOR plus a margin ranging from 1.0% to 2.0% based on our leverage ratio, or (2) the base rate, which is equal to the higher of (i) the administrative agent’s base lending rate for the applicable currency, (ii) the federal funds rate plus 0.5% , and (iii) one-month LIBOR for loans denominated in US dollars plus 1.0% plus a margin ranging from 0.0% to 0.5% based on our leverage ratio. The credit 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. We also must fulfill financial covenants with respect to a total debt to EBITDA ratio and an interest coverage ratio. As of June 30, 2012 , we had $725.0 million of outstanding borrowings under the credit facility and availability to borrow approximately $265.0 million . As of
December 31, 2011, we had $665.0 million of outstanding borrowings under the credit facility and availability to borrow approximately $335.0 million .
Our accounts receivable sales agreements in North America and Europe permit the sale, on an ongoing basis, of a majority of our receivables to our 49% owned U.S., Canadian and European retail finance joint ventures. The sale of all receivables are without recourse to us. We do not service the receivables after the sale occurs, and we do not maintain any direct retained interest in the receivables. These agreements are accounted for as off-balance sheet transactions and have the effect of reducing accounts receivable and short-term liabilities by the same amount. As of June 30, 2012 and
December 31, 2011, the cash received from receivables sold under the U.S., Canadian and European accounts receivable sales agreements was approximately $931.9 million and $827.5 million , respectively.
Our AGCO Finance retail finance joint ventures in Brazil and Australia also provide wholesale financing to our dealers. The receivables associated with these arrangements are also without recourse to us. As of June 30, 2012 and December 31, 2011, these retail finance joint ventures had approximately $64.3 million and $62.0 million, respectively, of outstanding accounts receivable associated with these arrangements. These arrangements are accounted for as off-balance sheet transactions. In addition, we sell certain trade receivables under factoring arrangements to other financial institutions around the world. These arrangements are also accounted for as off-balance sheet transactions.
Cash Flows
Cash flows used in operating activities were approximately $188.2 million for the first six months of 2012 compared to cash flows provided by operating activities of approximately $101.5 million for the first six months of 2011. Cash flows used in operating activities in the first six months of 2012 were primarily the result of seasonal increases in working capital.
Our working capital requirements are seasonal, with investments in working capital typically building in the first half of the year and then reducing in the second half of the year. We had $1,759.6 million in working capital at June 30, 2012 , as compared with $1,457.3 million at December 31, 2011 and $1,428.8 million at June 30, 2011. Accounts receivable and inventories, combined, at June 30, 2012 were $665.7 million higher than at December 31, 2011 and $498.4 million higher than at June 30, 2011 . The increase in accounts receivable and inventories during the first six months of 2012 was a result of our recent acquisitions, net sales growth, an increase in production levels, supplier delivery constraints and seasonality.
Capital expenditures for the first six months of 2012 were $151.1 million compared to $112.4 million for the first six months of 2011. We anticipate that capital expenditures for the full year of 2012 will be approximately $375.0 million and will primarily be used to support expansion of our manufacturing operations, improving productivity, as well as to support the development and enhancement of new and existing products.
Our debt to capitalization ratio, which is total indebtedness divided by the sum of total indebtedness and stockholders’ equity, was 31.9% at June 30, 2012 compared to 32.7% at December 31, 2011.
CONF CALL
Greg Peterson - Director of Investor Relations
Thank you, Tiffany. Good morning, and welcome to those of you joining us for our call and Internet playback of that call for AGCO second quarter earnings. We will refer to a slide presentation, which is posted on our website at www.agcocorp.com, and we'll also use some non-GAAP measures during our presentation this morning. And we've got those non-GAAP measures reconciled to GAAP measures in the last section of the presentation.
We'll be making forward-looking statements this morning, including projections of earnings per share, sales, demand, government financing programs, market conditions, farm incomes and production, commodity prices, margins, currency translation, pricing increases, productivity, investments in product development, facilities and expanding markets, inventory and production models, acquisition impacts, completion of facility construction and upgrades, industry demand, general economic conditions, engineering efforts, depreciation, free cash flow, supplier issues and capital expenditures.
We wish to caution you that these statements are predictions and that actual 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, 2011. These documents discuss important factors that could cause the actual results to differ materially from those contained in our forward-looking statements.
And finally, a replay of this call will be available on our corporate website. On the call with me this morning are Martin Richenhagen, our Chairman, President and Chief Executive Officer; and Andy Beck, our Senior Vice President and Chief Financial Officer.
Now I'd like to turn the call over to Martin. Please go ahead.
Martin H. Richenhagen - Chairman, Chief Executive Officer, President, Chairman of Executive Committee and Member of Succession Planning Committee
Thank you, Greg, and good morning to everyone. AGCO posted another quarter of outstanding results with strong sales growth and record quarter earnings. We took advantage of healthy market conditions while executing against our important margin improvement initiatives and delivered second quarter sales growth of over 14% and gross margin expansion of 200 basis points compared to the second quarter of 2011.
Both our Europe, Africa, Middle East and North American business delivered operating margins in excess of 12%, and our South American margins rebounded to 9%. North America posted operating margins of 10% in its core business for the second quarter, the best in over 10 years.
Slide 3 summarizes our results for the second quarter and first half of 2012. In the second quarter, we reported sales close [ph] across all of our regions compared to the second quarter of 2011 on a constant currency basis. Adjusted earnings per share for the second quarter was $2.08 and reflected both strong execution and the benefit of higher production volumes. In the second half of 2012, we plan to increase our investments in new product development and facility and market expansion.
AGCO forecast for tractor and combine production volumes for 2011 are illustrated on Slide 4. Second quarter 2012 production was up 5% compared to the second quarter of 2011. High-horsepower tractor and combine production was about flat with the second quarter of last year in North America and Europe, but production of lower-horsepower tractors were up. Production levels in our South American factories were modestly lower than the levels in the second quarter of 2011.
In September, we expect to start our production in the new assembly facility at Schengen [ph] Marktoberdorf, Germany. The production schedule in Germany was more heavily weighted towards the first half of the year to compensate for lower production during the third quarter when the new assembly facility will be brought online. The production schedule at our Valtra plant in Finland was lower in the first half of 2012 compared to 2011 in conjunction with our SAP conversion and offset some of the increase in Germany.
AGCO's order board at the end of June remained in very good shape. In Europe, the order board is down about 10% from very high levels at the end of June 2011. North America high-horsepower tractor and combine orders are down about 5% compared to June 2011 levels. While order books are still healthy, we are closely monitoring the impact on orders in the second half demand from the severe drought being further caused much of the U.S. corn belt. The order board in South America is up about 20% compared to June 2011 levels. We expect production volumes to be up modestly for the remainder of the year. And for the full year of 2012, we expect production to be up approximately 10% from 2011 levels.
Slide 5 details industry unit volumes by region for the first half of 2012. Industry tractor sales in North America were up modestly compared to 2011 levels. In North America, industry sales of high-horsepower and utility tractors both increased due to higher levels of farm income in 2011. The combine market was down significantly compared to the second half of 2011 due to the timing of industry production and due to very high levels of demand experienced in 2011. Industry unit retail sales of tractors in Western Europe were down modestly in the first 6 months of 2012. And growth in the key markets of France, the United Kingdom and Germany was partially offset by declines in Southern Europe markets like Italy and Spain.
South American industry retail tractor volumes declined during the first half of 2012 compared to the first half of 2011. Dry weather impacted the first harvest in Southern Brazil and Argentina. Industry demand was negatively impacted earlier this year. Favorable exchange rates, improved weather and healthy farm economics have stabilized the market in South America.
I will now turn the call over to Andy, who will provide you more information on our second quarter results.
Andrew H. Beck - Chief Financial Officer, Chief Accounting Officer and Senior Vice President
Thank you, Martin, and good morning to everyone. AGCO's regional net sales performance for the second quarter and first half of 2012 is outlined on Slide 6. Currency translation had a negative impact of about 11% on AGCO's consolidated net sales in the second quarter of 2012. Acquisitions added approximately 11% of sales in the second quarter of 2012 compared to the same period in 2011.
The Europe, Africa, Middle East segment reported a net sales increase of approximately 12%, excluding the impact of currency translation during the second quarter of 2012 compared to the second quarter of 2011. Growth was highest in Germany, France, U.K. and Russia and was partially offset by sales declines in some of the Southern European markets.
North American sales increased approximately 88%, excluding currency translation impacts during the second quarter of 2012 compared to the same period in 2011. Excluding acquisition impacts, the growth was approximately 45%. Increases in hay equipment sprayers and high-horsepower tractors produced most of the growth.
AGCO's second quarter net sales in South America grew 9% from comparable 2011 levels, excluding currency. Acquisitions generated about half of the growth and higher sales in Brazil due to improved crop fundamentals were partially offset by declines in Argentina.
Net sales in our Asia Pacific segment increased approximately 17% in the second quarter of 2012 compared to 2011, excluding the impact of currency translation and the benefit of acquisition. Sales growth in Australia and New Zealand produced most of the organic increase. Parts sales were $357 million for the second quarter of 2012, an increase of approximately 7% compared to the same period in 2011 excluding currency.
Slide 7 details AGCO's sales and margin performance. AGCO's operating margins were up over 130 basis points in the second quarter of 2012 compared to the second quarter of 2011. The benefit of increased production volumes, a favorable pricing environment and only modest inflationary pressure around materials accounted for most of the margin improvement. Operating margins in the second quarter of 2012 in AGCO's Europe, Africa, Middle East region surpassed 12%. The EAME margins were approximately flat compared to the same period in 2011.
North America's second quarter operating margins exceeded 13%, including the benefit from GSI. Core margins were up significantly due to higher sales and production and favorable sales mix and cost control initiatives. In South America, operating margins improved to 9.3% in the second quarter, up approximately 170 basis points compared to the second quarter of 2011. Favorable exchange impacts, improving pricing and higher sales volumes produced the increase.
GSI, our new grain storage and protein production business, performed well in its seasonally strong second quarter. Slide 8 details GSI's sales by region and by product for the first half of 2012. GSI sales grew 7% in the 6 months of 2012 compared to the same period of last year. Sales grew across all regions with the strongest growth in Asia. GSI contributed approximately $0.30 of EPS during the second quarter of 2012. We are closely monitoring the impact of the ongoing drought in the U.S. on GSI's North American grain storage and protein production businesses. However, with higher international sales and better margin experience, we are still expecting approximately $0.45 of accretion for the full year of 2012.
Slide 9 highlights our inventory and receivables position at the end of the second quarter. Every year, our operating plan includes an increase of dealer and company inventory required for the selling seasons. The inventory build in the first half of 2012 was attributable to normal seasonality, as well as the accelerated production schedules in Europe and some supplier delivery constraints. We expect to reduce inventory by the end of 2012 as we complete our plant improvements and work through some supplier issues.
At the end of June 2012, our North America dealer month's supply on a trailing 12-month basis was lower for hay equipment and higher for combines and tractors versus the same period a year ago. Our dealer month's supply in North America was as follows: tractors were 6.5 months, 5 months for combine and 6 months for hay equipment. Other working capital details were as follows. Losses on sales of receivables associated with our receivable financing facilities, which is included in other expense net, were approximately $5.4 million during the second quarter of 2012 compared to $5.2 million in the same period of 2011.
Slide 10 details our depreciation and capital expenditure trends. In 2012, we expect to increase our capital expenditures to approximately $375 million as we continue to work to meet the Tier 4 emissions requirements, refresh and expand our product line, upgrade our system capabilities, improve our factory productivity and complete the expansion at Fendt and establish assembly capabilities in China.
Slide 11 addresses AGCO's free cash flow, which represents cash provided by or used in operating activities less capital expenditures. AGCO's use of cash in the first half of 2012 was elevated compared to the first half of 2011 due to our higher inventory build in our increased schedule of capital projects. We expect to generate strong cash flow again this year and plan to continue investing for future growth in the form of engineering expense and additional investments in our plants and new products. Even after covering these increased strategic investments, we are targeting free cash flow to exceed $200 million during 2012.
Our regional market outlook for 2012 is captured on Slide 12. Our forecast anticipates continued stable demand on a global basis. In North America, the solid financial position of row crop farmers and the outlook for farm income above historical averages is expected to mitigate some of the impact of the drought that will reduce crop production this year. The expectation of lower crop yields plus uncertainty around industry demand in the second half of 2012.
In South America, we expect an elevated demand in the second half of 2012, strong crop prices, favorable exchange rates and the clarity around government financing programs to keep demand at relatively high level. The improvement in the second half of 2012 is expected to mitigate most of the softness experienced in the first half of the year, resulting from a first weak harvest in Southern Brazil and Argentina.
Higher soft commodity prices are expected to produce healthy income for European grain farmers in 2012 and are expected to keep demand stable. We are forecasting modest growth in key Western European markets, offset by declines in Southern Europe. Better harvests in Russia and Eastern Europe in 2012 are also expected to produce strong growth in these markets.
Slide 13 highlights the assumptions underlying our 2012 outlook. We are forecasting price increases between 3% and 3.5% on a consolidated basis, offset by about 8% of negative currency impacts. In 2012, expenditures on new product development and Tier 4 emissions requirements are expected to cause an increase in engineering expense by approximately 10% to 15% or $40 million. We anticipate the benefit of new products in our productivity and purchasing initiatives to drive improved gross margins.
Our forecast includes expenses associated with site and manufacturing start-up and market support costs amounting to about $20 million for Fendt and $20 million to $25 million for expansion into China. We project the GSI acquisition will be accretive to 2012 earnings per share by about $0.45, and the strengthening U.S. dollar is expected to negatively impact our 2012 EPS by about $0.40 per share based on the current euro and real exchange rates.
Slide 14 lists our view of selected 2012 financial goals. Our order boards remain healthy, and we are projecting 2012 sales in the $10.1 billion to $10.3 billion range. Forecasted pricing benefits, market share improvements and acquisition impacts are expected to be partially offset by the negative impact of currency translation. Including significant planned investments in our -- and product development, market development and start-up costs associated with our manufacturing projects, we expect to continue to improve growth and operating margins from 2011 levels. We are now targeting 2012 earnings per share to be in the range from $5.50 to $5.75 per share. We expect the increased capital expenditures to be in the $375 million range and our free cash flow to exceed $200 million after funding the expected increase in CapEx.
That concludes our prepared remarks. Operator, we're now ready to take questions.
|
|
Fund Letters
