2014 AGCO 10Q - Q2

 
 
 
 
 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
For the quarter ended June 30, 2014
of
AGCO CORPORATION
A Delaware Corporation
IRS Employer Identification No. 58-1960019
SEC File Number 1-12930
4205 River Green Parkway
Duluth, GA 30096
(770) 813-9200

AGCO Corporation (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.
AGCO Corporation has submitted electronically and posted on its corporate website every Interactive Data File for the periods required to be submitted and posted pursuant to Rule 405 of regulation S-T.
As of July 31, 2014, AGCO Corporation had 93,795,360 shares of common stock outstanding. AGCO Corporation is a large accelerated filer.
AGCO Corporation is a well-known seasoned issuer and is not a shell company.
 
 
 
 
 


AGCO CORPORATION AND SUBSIDIARIES
INDEX
 
 
 
Page
Numbers
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
Item 3.
 
 
 
 
Item 4.
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
Item 6.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Table of Contents

PART I.        FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

AGCO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited and in millions, except share amounts)
 
June 30,
2014
 
December 31,
2013
ASSETS
Current Assets:
 

 
 

Cash and cash equivalents
$
323.3

 
$
1,047.2

Accounts and notes receivable, net
1,233.4

 
940.6

Inventories, net
2,437.9

 
2,016.1

Deferred tax assets
219.3

 
241.2

Other current assets
319.7

 
272.0

Total current assets
4,533.6

 
4,517.1

Property, plant and equipment, net
1,603.5

 
1,602.3

Investment in affiliates
448.2

 
416.1

Deferred tax assets
23.6

 
24.4

Other assets
128.2

 
134.6

Intangible assets, net
541.6

 
565.6

Goodwill
1,190.6

 
1,178.7

Total assets
$
8,469.3

 
$
8,438.8

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
 

 
 

Current portion of long-term debt
$
94.4

 
$
110.5

Convertible senior subordinated notes
151.5

 
201.2

Accounts payable
948.7

 
960.3

Accrued expenses
1,375.1

 
1,389.2

Other current liabilities
221.0

 
150.8

Total current liabilities
2,790.7

 
2,812.0

Long-term debt, less current portion
979.2

 
938.5

Pensions and postretirement health care benefits
234.3

 
246.4

Deferred tax liabilities
241.8

 
251.2

Other noncurrent liabilities
160.9

 
145.9

Total liabilities
4,406.9

 
4,394.0

Commitments and contingencies (Note 14)


 


Stockholders’ Equity:
 

 
 

AGCO Corporation stockholders’ equity:
 

 
 

Preferred stock; $0.01 par value, 1,000,000 shares authorized, no shares issued or outstanding in 2014 and 2013
—

 
—

Common stock; $0.01 par value, 150,000,000 shares authorized, 93,946,186 and 97,362,466 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively
0.9

 
1.0

Additional paid-in capital
823.0

 
1,117.9

Retained earnings
3,649.2

 
3,402.0

Accumulated other comprehensive loss
(445.3
)
 
(510.7
)
Total AGCO Corporation stockholders’ equity
4,027.8

 
4,010.2

Noncontrolling interests
34.6

 
34.6

Total stockholders’ equity
4,062.4

 
4,044.8

Total liabilities and stockholders’ equity
$
8,469.3

 
$
8,438.8


See accompanying notes to condensed consolidated financial statements.

3
Table of Contents

AGCO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in millions, except per share data)


 
 
 
 
 
Three Months Ended June 30,
 
2014
 
2013
Net sales
$
2,750.3

 
$
3,048.2

Cost of goods sold
2,118.8

 
2,337.9

Gross profit
631.5

 
710.3

Selling, general and administrative expenses
262.3

 
279.7

Engineering expenses
92.5

 
91.4

Amortization of intangibles
10.0

 
12.1

Income from operations
266.7

 
327.1

Interest expense, net
15.7

 
13.5

Other expense, net
12.9

 
10.2

Income before income taxes and equity in net earnings of affiliates
238.1

 
303.4

Income tax provision
83.2

 
104.4

Income before equity in net earnings of affiliates
154.9

 
199.0

Equity in net earnings of affiliates
11.1

 
14.1

Net income
166.0

 
213.1

Net loss attributable to noncontrolling interests
2.2

 
0.6

Net income attributable to AGCO Corporation and subsidiaries
$
168.2

 
$
213.7

Net income per common share attributable to AGCO Corporation and subsidiaries:
 

 
 

Basic
$
1.79

 
$
2.20

Diluted
$
1.77

 
$
2.15

Cash dividends declared and paid per common share
$
0.11

 
$
0.10

Weighted average number of common and common equivalent shares outstanding:
 

 
 

Basic
93.9

 
97.3

Diluted
95.1

 
99.3




See accompanying notes to condensed consolidated financial statements.


4
Table of Contents

AGCO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in millions, except per share data)


 
Six Months Ended June 30,
 
2014
 
2013
Net sales
$
5,083.7

 
$
5,451.3

Cost of goods sold
3,937.3

 
4,207.9

Gross profit
1,146.4

 
1,243.4

Selling, general and administrative expenses
529.3

 
535.4

Engineering expenses
174.7

 
179.4

Amortization of intangibles
20.0

 
24.1

Income from operations
422.4

 
504.5

Interest expense, net
29.6

 
26.1

Other expense, net
24.1

 
13.9

Income before income taxes and equity in net earnings of affiliates
368.7

 
464.5

Income tax provision
129.6

 
157.3

Income before equity in net earnings of affiliates
239.1

 
307.2

Equity in net earnings of affiliates
26.1

 
23.0

Net income
265.2

 
330.2

Net loss attributable to noncontrolling interests
2.6

 
1.5

Net income attributable to AGCO Corporation and subsidiaries
$
267.8

 
$
331.7

Net income per common share attributable to AGCO Corporation and subsidiaries:
 

 
 

Basic
$
2.83

 
$
3.41

Diluted
$
2.79

 
$
3.34

Cash dividends declared and paid per common share
$
0.22

 
$
0.20

Weighted average number of common and common equivalent shares outstanding:
 

 
 

Basic
94.6

 
97.2

Diluted
95.9

 
99.2




See accompanying notes to condensed consolidated financial statements.

5
Table of Contents

AGCO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited and in millions)

 
Three Months Ended June 30,
 
2014
 
2013
Net income
$
166.0

 
$
213.1

Other comprehensive income (loss), net of reclassification adjustments:
 
 
 
Foreign currency translation adjustments
23.1

 
(98.5
)
Defined benefit pension plans, net of tax
1.9

 
2.4

Unrealized loss on derivatives, net of tax
(1.2
)
 
(2.0
)
Other comprehensive income (loss), net of reclassification adjustments
23.8

 
(98.1
)
Comprehensive income
189.8

 
115.0

Comprehensive loss attributable to noncontrolling interests
2.2

 
0.9

Comprehensive income attributable to AGCO Corporation and subsidiaries
$
192.0

 
$
115.9



 
Six Months Ended June 30,
 
2014
 
2013
Net income
$
265.2

 
$
330.2

Other comprehensive income (loss), net of reclassification adjustments:
 
 
 
Foreign currency translation adjustments
61.5

 
(142.9
)
Defined benefit pension plans, net of tax
3.7

 
4.8

Unrealized loss on derivatives, net of tax
(0.1
)
 
(1.8
)
Other comprehensive income (loss), net of reclassification adjustments
65.1

 
(139.9
)
Comprehensive income
330.3

 
190.3

Comprehensive loss attributable to noncontrolling interests
2.9

 
1.7

Comprehensive income attributable to AGCO Corporation and subsidiaries
$
333.2

 
$
192.0




See accompanying notes to condensed consolidated financial statements.

6
Table of Contents

AGCO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in millions)
 
 
Six Months Ended June 30,
 
2014
 
2013
Cash flows from operating activities:
 

 
 

Net income
$
265.2

 
$
330.2

Adjustments to reconcile net income to net cash (used in) provided by operating activities:
 

 
 

Depreciation
119.3

 
101.4

Deferred debt issuance cost amortization
1.8

 
1.8

Amortization of intangibles
20.0

 
24.1

Amortization of debt discount
—

 
4.6

Stock compensation
11.8

 
28.1

Equity in net earnings of affiliates, net of cash received
(19.6
)
 
(12.2
)
Deferred income tax provision
8.6

 
27.7

Other
2.1

 
0.1

Changes in operating assets and liabilities:
 

 
 

Accounts and notes receivable, net
(271.4
)
 
(389.8
)
Inventories, net
(418.1
)
 
(404.7
)
Other current and noncurrent assets
(37.2
)
 
2.9

Accounts payable
12.6

 
214.9

Accrued expenses
8.6

 
107.4

Other current and noncurrent liabilities
42.1

 
28.5

Total adjustments
(519.4
)
 
(265.2
)
Net cash (used in) provided by operating activities
(254.2
)
 
65.0

Cash flows from investing activities:
 

 
 

Purchases of property, plant and equipment
(155.5
)
 
(174.2
)
Proceeds from sale of property, plant and equipment
1.5

 
2.2

Purchase of business
(0.1
)
 
(0.1
)
Net cash used in investing activities
(154.1
)
 
(172.1
)
Cash flows from financing activities:
 

 
 

Purchases and retirement of common stock
(290.0
)
 
(1.0
)
Proceeds from debt obligations, net
51.9

 
91.7

Repurchase or conversion of convertible senior subordinated notes
(49.7
)
 
—

Payment of dividends to stockholders
(20.6
)
 
(19.4
)
Payment of minimum tax withholdings on stock compensation
(11.9
)
 
(15.9
)
Distribution to noncontrolling interests, net
(2.0
)
 
(2.1
)
Payment of debt issuance costs
(1.3
)
 
—

Net cash (used in) provided by financing activities
(323.6
)
 
53.3

Effects of exchange rate changes on cash and cash equivalents
8.0

 
(46.9
)
Decrease in cash and cash equivalents
(723.9
)
 
(100.7
)
Cash and cash equivalents, beginning of period
1,047.2

 
781.3

Cash and cash equivalents, end of period
$
323.3

 
$
680.6




See accompanying notes to condensed consolidated financial statements.


7
Table of Contents

AGCO CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.    BASIS OF PRESENTATION

The condensed consolidated financial statements of AGCO Corporation and its subsidiaries (the “Company” or “AGCO”) included herein have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, which are of a normal recurring nature, necessary to present fairly the Company’s financial position, results of operations, comprehensive income and cash flows at the dates and for the periods presented. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. Results for interim periods are not necessarily indicative of the results for the year.
Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which supersedes existing revenue recognition guidance under current U.S. GAAP. ASU 2014-09 outlines a comprehensive single revenue recognition model that provides a five-step analysis in determining when and how revenue is recognized. The new model will require revenue recognition to depict the transfer of promised goods or services to customers at an amount that reflects the consideration expected to be received in exchange for those goods or services. Additional disclosures will also be required to enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The standard is effective for reporting periods beginning after December 15, 2016 using either a full retrospective or a modified retrospective approach. Early adoption is not permitted. The Company is currently evaluating the impact of adopting this standard on the Company’s results of operations and financial condition.
 
In July 2013, the FASB issued ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (“ASU 2013-11”). ASU 2013-11 requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. To the extent a net operating loss carryfoward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position, or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit is presented in the financial statements as a liability and is not combined with deferred tax assets. The standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption was permitted. The adoption of ASU 2013-11 did not have a material impact on the Company’s results of operations or financial condition.

2.    STOCK COMPENSATION PLANS

The Company recorded stock compensation expense as follows for the three and six months ended June 30, 2014 and 2013 (in millions):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
Cost of goods sold
 
$
0.3

 
$
1.3

 
$
0.8

 
$
1.9

Selling, general and administrative expenses
 
5.3

 
18.5

 
11.2

 
26.4

Total stock compensation expense
 
$
5.6

 
$
19.8

 
$
12.0

 
$
28.3



8
Table of Contents
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)

Stock Incentive Plan    

Under the Company’s 2006 Long Term Incentive Plan (the “2006 Plan”), up to 10.0 million shares of AGCO common stock may be issued. The 2006 Plan allows the Company, under the direction of the Board of Directors’ Compensation Committee, to make grants of performance shares, stock appreciation rights and restricted stock awards to employees, officers and non-employee directors of the Company.

Employee Plans

The weighted average grant-date fair value of performance awards granted under the 2006 Plan during the six months ended June 30, 2014 and 2013 was $53.93 and $50.65, respectively.

During the six months ended June 30, 2014, the Company granted 864,600 awards related to the three-year performance period commencing in 2014 and ending in 2016, assuming the maximum target level of performance is achieved. The compensation expense associated with all awards granted under the 2006 Plan is amortized ratably over the vesting or performance period based on the Company’s projected assessment of the level of performance that will be achieved and earned. Performance award transactions during the six months ended June 30, 2014 were as follows and are presented as if the Company were to achieve its maximum levels of performance under the plan:
Shares awarded but not earned at January 1
2,808,519

Shares awarded
864,600

Shares forfeited or unearned
(78,272
)
Shares earned
—

Shares awarded but not earned at June 30
3,594,847


As of June 30, 2014, the total compensation cost related to unearned performance awards not yet recognized, assuming the Company’s current projected assessment of the level of performance that will be achieved and earned, was approximately $40.5 million, and the weighted average period over which it is expected to be recognized is approximately two years.

During the three and six months ended June 30, 2014, the Company recorded stock compensation expense of approximately $1.3 million and $2.6 million, respectively, associated with stock-settled appreciation rights (“SSAR”) awards. During the three and six months ended June 30, 2013, the Company recorded stock compensation expense of approximately $1.2 million and $2.3 million, respectively, associated with SSAR awards. The Company estimated the fair value of the grants using the Black-Scholes option pricing model. The weighted average grant-date fair value of SSARs granted under the 2006 Plan and the weighted average assumptions under the Black-Scholes option model were as follows for the six months ended June 30, 2014 and 2013:
 
Six Months Ended June 30,
 
2014
 
2013
Weighted average grant-date fair value
$
13.13

 
$
22.22

Weighted average assumptions under Black-Scholes option model:
 

 
 

Expected life of awards (years)
3.0

 
5.5

Risk-free interest rate
0.9
%
 
0.8
%
Expected volatility
35.7
%
 
50.6
%
Expected dividend yield
0.8
%
 
0.8
%

    

9
Table of Contents
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)

SSAR transactions during the six months ended June 30, 2014 were as follows:
SSARs outstanding at January 1
1,094,836

SSARs granted
297,900

SSARs exercised
(12,550
)
SSARs canceled or forfeited
(20,181
)
SSARs outstanding at June 30
1,360,005

SSAR price ranges per share:
 

Granted
$
55.23

Exercised
21.45-52.94

Canceled or forfeited
21.45-56.98

Weighted average SSAR exercise prices per share:
 

Granted
$
55.23

Exercised
35.97

Canceled or forfeited
52.51

Outstanding at June
48.30


At June 30, 2014, the weighted average remaining contractual life of SSARs outstanding was approximately four years. As of June 30, 2014, the total compensation cost related to unvested SSARs not yet recognized was approximately $11.2 million and the weighted-average period over which it is expected to be recognized is approximately three years.

The following table sets forth the exercise price range, number of shares, weighted average exercise price, and remaining contractual life by groups of similar price as of June 30, 2014:
 
 
SSARs Outstanding
 
SSARs Exercisable
Range of Exercise Prices
 
Number of
Shares
 
Weighted Average
Remaining
Contractual Life
(Years)
 
Weighted Average
Exercise Price
 
Number of Shares
 
Weighted Average
Exercise Price
$ 21.45 – $32.01
 
156,125

 
1.6
 
$
21.88

 
154,000

 
$
21.74

$ 33.65 – $43.39
 
125,525

 
2.6
 
$
33.88

 
124,075

 
$
33.76

$ 47.89 – $63.64
 
1,078,355

 
5.0
 
$
53.80

 
378,950

 
$
53.42

 
 
1,360,005

 
 
 
 
 
657,025

 
$
42.28


The total fair value of SSARs vested during the six months ended June 30, 2014 was approximately $4.2 million. There were 702,980 SSARs that were not vested as of June 30, 2014. The total intrinsic value of outstanding and exercisable SSARs as of June 30, 2014 was $11.0 million and $9.2 million, respectively. The total intrinsic value of SSARs exercised during the six months ended June 30, 2014 was approximately $0.2 million. The Company realized an insignificant tax benefit from the exercise of these SSARs.

Director Restricted Stock Grants

The 2006 Plan provides for annual restricted stock grants of the Company’s common stock to all non-employee directors. The shares are restricted as to transferability for a period of one year. In the event a director departs from the Company’s Board of Directors, the non-transferability period expires immediately. The plan allows each director to have the option of forfeiting a portion of the shares awarded in lieu of a cash payment contributed to the participant’s tax withholding to satisfy the statutory minimum federal, state and employment taxes that would be payable at the time of grant. The 2014 grant was made on April 24, 2014 and equated to 18,846 shares of common stock, of which 14,907 shares of common stock were issued after shares were withheld for taxes. The Company recorded stock compensation expense of approximately $1.1 million during the six months ended June 30, 2014 associated with these grants.


10
Table of Contents
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)

As of June 30, 2014, of the 10.0 million shares reserved for issuance under the 2006 Plan, approximately 2.5 million shares were available for grant, assuming the maximum number of shares are earned related to the performance award grants discussed above.

3.    GOODWILL AND OTHER INTANGIBLE ASSETS
 
Changes in the carrying amount of acquired intangible assets during the six months ended June 30, 2014 are summarized as follows (in millions):
 
Trademarks and
Tradenames
 
Customer
Relationships
 
Patents and
Technology
 
Land Use Rights
 
Total
Gross carrying amounts:
 

 
 

 
 

 
 
 
 

Balance as of December 31, 2013
$
118.6

 
$
502.7

 
$
89.1

 
$
14.9

 
$
725.3

Adjustment
—

 
—

 
—

 
(4.8
)
 
(4.8
)
Foreign currency translation
0.3

 
3.7

 
(0.1
)
 
(0.4
)
 
3.5

Balance as of June 30, 2014
$
118.9

 
$
506.4

 
$
89.0

 
$
9.7

 
$
724.0


 
Trademarks and
Tradenames
 
Customer
Relationships
 
Patents and
Technology
 
Land Use Rights
 
Total
Accumulated amortization:
 

 
 

 
 

 
 
 
 

Balance as of December 31, 2013
$
31.0

 
$
160.7

 
$
59.0

 
$
2.7

 
$
253.4

Amortization expense
3.0

 
15.4

 
1.5

 
0.1

 
20.0

Foreign currency translation
—

 
2.9

 
(0.2
)
 
(0.1
)
 
2.6

Balance as of June 30, 2014
$
34.0

 
$
179.0

 
$
60.3

 
$
2.7

 
$
276.0


 
Trademarks and
Tradenames
Indefinite-lived intangible assets:
 

Balance as of December 31, 2013
$
93.7

Foreign currency translation
(0.1
)
Balance as of June 30, 2014
$
93.6


Changes in the carrying amount of goodwill during the six months ended June 30, 2014 are summarized as follows (in millions):
 
North
America
 
South
America
 
Europe/Africa/
Middle East
 
Asia/
Pacific
 
Consolidated
Balance as of December 31, 2013
$
424.0

 
$
190.7

 
$
506.6

 
$
57.4

 
$
1,178.7

Foreign currency translation
—

 
12.9

 
(0.9
)
 
(0.1
)
 
11.9

Balance as of June 30, 2014
$
424.0

 
$
203.6

 
$
505.7

 
$
57.3

 
$
1,190.6


Goodwill is tested for impairment on an annual basis and more often if indications of impairment exist. The Company conducts its annual impairment analyses as of October 1 each fiscal year.
The Company currently amortizes certain acquired intangible assets, primarily on a straight-line basis, over their estimated useful lives, which range from five to 50 years.
    

11
Table of Contents
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)

4.    INDEBTEDNESS

Indebtedness consisted of the following at June 30, 2014 and December 31, 2013 (in millions):
 
June 30, 2014
 
December 31, 2013
11/4% Convertible senior subordinated notes due 2036
$
151.5

 
$
201.2

41/2% Senior term loan due 2016
273.8

 
275.0

57/8% Senior notes due 2021
300.0

 
300.0

Credit facility, expiring 2019
355.0

 
360.0

Other long-term debt
144.8

 
114.0

 
1,225.1

 
1,250.2

Less: Current portion of long-term debt
(94.4
)
 
(110.5
)
        11/4% Convertible senior subordinated notes due 2036
(151.5
)
 
(201.2
)
Total indebtedness, less current portion
$
979.2

 
$
938.5


Convertible Senior Subordinated Notes

The carrying amount of the equity component of the Company’s 11/4% convertible senior subordinated notes due 2036 was $32.3 million and $54.3 million as of June 30, 2014 and December 31, 2013, respectively. The discount on the liability component of the notes was fully amortized as of December 31, 2013. The interest expense recognized relating to the contractual interest coupon and the amortization of the discount on the liability component for the 11/4% convertible senior subordinated notes was approximately $0.3 million and $0.9 million for the three and six months ended June 30, 2014, respectively, and $2.9 million and $5.8 million for the three and six months ended June 30, 2013, respectively. The effective interest rate on the liability component for the 11/4% convertible senior subordinated notes for the six months ended June 30, 2013 was 6.1%.

The Company’s 11/4% convertible senior subordinated notes, due December 15, 2036, were issued in December 2006, and provided 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 the Company’s common stock, and (ii) the conversion rate to be increased under certain circumstances if the notes were converted in connection with certain change of control transactions occurring prior to December 15, 2013. The notes were unsecured obligations and were convertible into cash and shares of the Company’s common stock upon satisfaction of certain conditions. Interest was payable on the notes at 11/4% per annum, payable semi-annually in arrears in cash on June 15 and December 15 of each year. The notes were convertible into shares of the Company’s common stock at an effective price of $40.27 per share as of June 30, 2014, subject to adjustment, including to reflect the impact to the conversion rate upon payment of any dividends to the Company’s stockholders. The effective price reflected a conversion rate for the notes of 24.8295 shares of common stock per $1,000 principal amount of notes.

During the six months ended June 30, 2014, holders of the Company’s 11/4% convertible senior subordinated notes converted or the Company repurchased approximately $49.7 million of principal amount of the notes. The Company issued 378,087 shares of its common stock associated with the $21.9 million excess conversion value of the notes. The Company reflected the repayment of the principal of the notes totaling $49.7 million within “Repurchase or conversion of convertible senior subordinated notes” within the Company’s Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2014.

Holders of the Company’s 11/4% convertible senior subordinated notes had the ability to convert the notes if, during any fiscal quarter, the closing sales price of the Company’s common stock exceeded 120% of the conversion price of $40.27 per share for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter. In May 2014, the Company announced its election to redeem all of its outstanding 11/4% convertible senior subordinated notes with a redemption date of June 20, 2014. Substantially all of the holders of the Company’s notes elected to convert their notes prior to the redemption date. At the end of the required conversion period, in July 2014, holders of the notes converted and the Company paid the remaining principal amount of approximately $151.5 million of the notes. The Company issued 1,059,378 shares of its common stock associated with the $59.1 million excess conversion value of the notes. As a result of the ability of the holders to convert and the subsequent conversions, the Company classified the notes as a current liability as

12
Table of Contents
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)

of June 30, 2014. Due to the ability of the holders of the notes to convert the notes during the three months ending March 31, 2014, the Company also classified the notes as a current liability as of December 31, 2013.

4 1/2% Senior Term Loan

The Company’s €200.0 million (or approximately $273.8 million as of June 30, 2014) 41/2% senior term loan with Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. (“Rabobank”) is due May 2, 2016. The Company has the ability to prepay the term loan before its maturity date. Interest is payable on the term loan at 41/2% 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. The Company also has to fulfill financial covenants with respect to a total debt to EBITDA ratio and an interest coverage ratio.

5 7/8%  Senior Notes

The Company’s $300.0 million of 57/8% 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, the Company may redeem the notes, in whole or in part from time to time, at its 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, the Company may redeem the notes, in whole or in part from time to time, at its option, at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest, including additional interest, if any.

Credit Facility

On June 30, 2014, the Company amended and restated its current credit facility agreement, increasing the multi-currency revolving credit facility from $600.0 million to $800.0 million and maintaining its $355.0 million term loan facility. The maturity date of the Company’s credit facility was also extended until June 28, 2019. The Company amended the term loan facility so that it is no longer required to make quarterly payments towards the term loan. Previously, the Company was required to make quarterly payments towards the term loan of $5.0 million that were to increase to $10.0 million commencing March 2015. Interest accrues on amounts outstanding under the credit facility, at the Company’s option, at either (1) LIBOR plus a margin ranging from 1.0% to 2.0% based on the Company’s 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 the Company’s 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. The Company also has to fulfill financial covenants with respect to a total debt to EBITDA ratio and an interest coverage ratio. As of June 30, 2014, the Company had $355.0 million of outstanding borrowings under the credit facility and availability to borrow approximately $800.0 million. As of December 31, 2013, the Company had $360.0 million of outstanding borrowings under its credit facility and availability to borrow approximately $600.0 million.

The carrying amounts of long-term debt under the Company’s 41/2% senior term loan and credit facility approximate their fair values based on the borrowing rates currently available to the Company for loans with similar terms and average maturities. At June 30, 2014, the estimated fair values of the Company’s 57/8% senior notes and 11/4% convertible senior subordinated notes, based on their listed market values, were $339.8 million and $204.3 million, respectively, compared to their carrying values of $300.0 million and $151.5 million, respectively. At December 31, 2013, the estimated fair values of the Company’s 57/8% senior notes and 11/4% convertible senior subordinated notes, based on their listed market values, were $322.1 million and $290.5 million, respectively, compared to their carrying values of $300.0 million and $201.2 million, respectively.

Standby Letters of Credit and Similar Instruments

The Company has arrangements with various banks to issue standby letters of credit or similar instruments, which guarantee the Company’s obligations for the purchase or sale of certain inventories and for potential claims exposure for

13
Table of Contents
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)

insurance coverage. At June 30, 2014 and December 31, 2013, outstanding letters of credit totaled $19.1 million and $16.7 million, respectively.

5.    INVENTORIES

Inventories at June 30, 2014 and December 31, 2013 were as follows (in millions):
 
June 30, 2014
 
December 31, 2013
Finished goods
$
958.0

 
$
775.7

Repair and replacement parts
658.9

 
550.2

Work in process
195.6

 
109.0

Raw materials
625.4

 
581.2

Inventories, net
$
2,437.9

 
$
2,016.1


6.    PRODUCT WARRANTY

The warranty reserve activity for the three and six months ended June 30, 2014 and 2013 consisted of the following (in millions):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Balance at beginning of period
$
305.0

 
$
266.4

 
$
294.9

 
$
256.9

Accruals for warranties issued during the period
43.3

 
66.2

 
98.9

 
109.5

Settlements made (in cash or in kind) during the period
(44.7
)
 
(38.6
)
 
(90.8
)
 
(67.1
)
Foreign currency translation
0.3

 
(0.2
)
 
0.9

 
(5.5
)
Balance at June 30
$
303.9

 
$
293.8

 
$
303.9

 
$
293.8


The Company’s agricultural equipment products are generally warranted against defects in material and workmanship for a period of one to four years. The Company accrues for future warranty costs at the time of sale based on historical warranty experience. Approximately $262.6 million and $255.9 million of warranty reserves are included in “Accrued expenses” in the Company’s Condensed Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013, respectively. Approximately $41.3 million and $39.0 million of warranty reserves are included in “Other noncurrent liabilities” in the Company’s Condensed Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013, respectively.


14
Table of Contents
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)

7.    NET INCOME PER COMMON SHARE

Basic net income per common share is computed by dividing net income attributable to AGCO Corporation and its subsidiaries by the weighted average number of common shares outstanding during each period. Diluted net income per common share assumes the exercise of outstanding SSARs, vesting of performance share awards, and the appreciation of the excess conversion value of the Company’s contingently convertible senior subordinated notes using the treasury stock method when the effects of such assumptions are dilutive. Dilution of weighted shares outstanding depended on the Company’s stock price for the excess conversion value of the contingently convertible senior subordinated notes using the treasury stock method. A reconciliation of net income attributable to AGCO Corporation and its subsidiaries and weighted average common shares outstanding for purposes of calculating basic and diluted net income per share for the three and six months ended June 30, 2014 and 2013 is as follows (in millions, except per share data):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Basic net income per share:
 
 
 
 
 

 
 

Net income attributable to AGCO Corporation and subsidiaries
$
168.2

 
$
213.7

 
$
267.8

 
$
331.7

Weighted average number of common shares outstanding
93.9

 
97.3

 
94.6

 
97.2

Basic net income per share attributable to AGCO Corporation and subsidiaries
$
1.79

 
$
2.20

 
$
2.83

 
$
3.41

Diluted net income per share:
 
 
 
 
 

 
 

Net income attributable to AGCO Corporation and subsidiaries
$
168.2

 
$
213.7

 
$
267.8

 
$
331.7

Weighted average number of common shares outstanding
93.9

 
97.3

 
94.6

 
97.2

Dilutive SSARs and performance share awards
0.2

 
0.9

 
0.3

 
0.9

Weighted average assumed conversion of contingently convertible senior subordinated notes
1.0

 
1.1

 
1.0

 
1.1

Weighted average number of common shares and common share equivalents outstanding for purposes of computing diluted net income per share
95.1

 
99.3

 
95.9

 
99.2

Diluted net income per share attributable to AGCO Corporation and subsidiaries
$
1.77

 
$
2.15

 
$
2.79

 
$
3.34


SSARs to purchase approximately 1.1 million shares of the Company’s common stock for the three and six months ended June 30, 2014 and approximately 0.8 million shares of the Company’s common stock for the three and six months ended June 30, 2013 were outstanding but not included in the calculation of weighted average common and common equivalent shares outstanding because they had an antidilutive impact.

8.    INCOME TAXES

At June 30, 2014 and December 31, 2013, the Company had approximately $136.1 million and $122.2 million, respectively, of unrecognized tax benefits, all of which would affect the Company’s effective tax rate if recognized. At June 30, 2014 and December 31, 2013, the Company had approximately $64.6 million and $61.9 million, respectively, of accrued or deferred taxes related to uncertain income tax positions connected with ongoing tax audits in various jurisdictions that it expects to settle or pay in the next 12 months. The Company accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes. At June 30, 2014 and December 31, 2013, the Company had accrued interest and penalties related to unrecognized tax benefits of $17.0 million and $14.4 million, respectively.
Generally, tax years 2008 through 2013 remain open to examination by taxing authorities in the United States and certain other foreign taxing jurisdictions.

9.    DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

All derivatives are recognized on the Company’s Condensed Consolidated Balance Sheets at fair value. On the date the derivative contract is entered into, the Company designates the derivative as either (1) a fair value hedge of a recognized liability, (2) a cash flow hedge of a forecasted transaction, (3) a hedge of a net investment in a foreign operation, or (4) a non-designated derivative instrument.


15
Table of Contents
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)

The Company formally documents all relationships between hedging instruments and hedged items, as well as the risk management objectives and strategy for undertaking various hedge transactions. The Company formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flow of hedged items. When it is determined that a derivative is no longer highly effective as a hedge, hedge accounting is discontinued on a prospective basis.

Foreign Currency Risk

The Company has significant manufacturing operations in the United States, France, Germany, Finland and Brazil, and it purchases a portion of its tractors, combines and components from third-party foreign suppliers. The Company also sells products in over 140 countries throughout the world. The Company’s most significant transactional foreign currency exposures are the Euro, Brazilian real and the Canadian dollar in relation to the United States dollar, and the Euro in relation to the British pound.

The Company attempts to manage its transactional foreign exchange exposure by hedging foreign currency cash flow forecasts and commitments arising from the anticipated settlement of receivables and payables and from future purchases and sales. Where naturally offsetting currency positions do not occur, the Company hedges certain, but not all, of its exposures through the use of foreign currency contracts. The Company’s translation exposure resulting from translating the financial statements of foreign subsidiaries into United States dollars is not hedged. The Company’s most significant translation exposures are the Euro, the British pound and the Brazilian real in relation to the United States dollar, and the Swiss franc in relation to the Euro. When practical, the translation impact is reduced by financing local operations with local borrowings.

The foreign currency contracts are primarily forward and options contracts. These contracts’ fair value measurements fall within the Level 2 fair value hierarchy. Level 2 fair value measurements are generally based upon quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs or significant value-drivers are observable in active markets. The fair value of foreign currency forward contracts is based on a valuation model that discounts cash flows resulting from the differential between the contract price and the market-based forward rate. The fair value of foreign currency option contracts is based on a valuation model that utilizes spot and forward exchange rates, interest rates and currency pair volatility.

The Company’s senior management establishes the Company’s foreign currency and interest rate risk management policies. These policies are reviewed periodically by the Audit Committee of the Company’s Board of Directors. The policies allow for the use of derivative instruments to hedge exposures to movements in foreign currency and interest rates. The Company’s policies prohibit the use of derivative instruments for speculative purposes.

Cash Flow Hedges

During 2014 and 2013, the Company designated certain foreign currency contracts as cash flow hedges of expected future sales and purchases. The effective portion of the fair value gains or losses on these cash flow hedges were recorded in other comprehensive income and are subsequently reclassified into cost of goods sold during the period the sales and purchases are recognized. These amounts offset the effect of the changes in foreign currency rates on the related sale and purchase transactions. The amount of the net gain recorded in other comprehensive income that was reclassified into cost of goods sold during the six months ended June 30, 2014 and 2013 was approximately $0.0 million and $1.6 million, respectively, on an after-tax basis. The outstanding contracts as of June 30, 2014 range in maturity through December 2014.

The following table summarizes the activity in accumulated other comprehensive loss related to the derivatives held by the Company during the six months ended June 30, 2014 (in millions):
 
 
Before-Tax
Amount
 
Income
Tax
 
After-Tax
Amount
Accumulated derivative net losses as of December 31, 2013
 
$
(0.3
)
 
$
(0.1
)
 
$
(0.2
)
Net changes in fair value of derivatives
 
0.6

 
0.7

 
(0.1
)
Net gains reclassified from accumulated other comprehensive loss into income
 
(0.1
)
 
(0.1
)
 
—

Accumulated derivative net losses as of June 30, 2014
 
$
0.2

 
$
0.5

 
$
(0.3
)
    

16
Table of Contents
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)

The Company had outstanding foreign currency contracts with a notional amount of approximately $81.6 million and $50.3 million as of June 30, 2014 and December 31, 2013, respectively, that were entered into to hedge forecasted sale and purchase transactions.

Derivative Transactions Not Designated as Hedging Instruments

During 2014 and 2013, the Company entered into foreign currency contracts to hedge receivables and payables on the Company and its subsidiaries’ balance sheets that are denominated in foreign currencies other than the functional currency. These contracts were classified as non-designated derivative instruments.

As of June 30, 2014 and December 31, 2013, the Company had outstanding foreign currency contracts with a notional amount of approximately $3,094.9 million and $1,288.4 million, respectively, that were entered into to hedge receivables and payables that were denominated in foreign currencies other than the functional currency. Changes in the fair value of these contracts are reported in “Other expense, net.” For the three and six months ended June 30, 2014, the Company recorded a net gain of approximately $7.7 million and $5.9 million, respectively, within “Other expense, net” related to these contracts. For the three and six months ended June 30, 2013, the Company recorded a net gain (loss) of approximately $0.4 million and $(12.4) million, respectively, within “Other expense, net” related to these contracts. Gains and losses on such contracts are substantially offset by losses and gains on the remeasurement of the underlying asset or liability being hedged.

The table below sets forth the fair value of derivative instruments as of June 30, 2014 (in millions):
 
Asset Derivatives as of
June 30, 2014
 
 
Liability Derivatives as of
June 30, 2014
 
Balance Sheet
Location
 
Fair
Value
 
 
Balance Sheet
Location
 
Fair
Value
Derivative instruments designated as hedging instruments:
 
 
 

 
 
 
 
 

Foreign currency contracts
Other current assets
 
$
1.3

 
 
Other current liabilities
 
$
1.4

Derivative instruments not designated as hedging instruments:
 
 
 
 
 
 
 
 
Foreign currency contracts
Other current assets
 
16.7

 
 
Other current liabilities
 
8.2

Total derivative instruments
 
 
$
18.0

 
 
 
 
$
9.6


The table below sets forth the fair value of derivative instruments as of December 31, 2013 (in millions):
 
Asset Derivatives as of
December 31, 2013
 
 
Liability Derivatives as of
December 31, 2013
 
Balance Sheet
Location
 
Fair
Value
 
 
Balance Sheet
Location
 
Fair
Value
Derivative instruments designated as hedging instruments:
 
 
 

 
 
 
 
 

Foreign currency contracts
Other current assets
 
$
—

 
 
Other current liabilities
 
$
0.1

Derivative instruments not designated as hedging instruments:
 
 
 
 
 
 
 
 
Foreign currency contracts
Other current assets
 
13.9

 
 
Other current liabilities
 
5.3

Total derivative instruments
 
 
$
13.9

 
 
 
 
$
5.4


Counterparty Risk

The Company regularly monitors the counterparty risk and credit ratings of all the counterparties to the derivative instruments. The Company believes that its exposures are appropriately diversified across counterparties and that these counterparties are creditworthy financial institutions. If the Company perceives any risk with a counterparty, then the Company would cease to do business with that counterparty. There have been no negative impacts to the Company from any non-performance of any counterparties.


17
Table of Contents
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)

10.    CHANGES IN STOCKHOLDERS’ EQUITY AND TEMPORARY EQUITY

The following table sets forth changes in stockholders’ equity and temporary equity attributed to AGCO Corporation and its subsidiaries and to noncontrolling interests for the six months ended June 30, 2014 (in millions):
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Noncontrolling
Interests
 
Total Stockholders’
Equity
 
Temporary Equity
Balance, December 31, 2013
$
1.0

 
$
1,117.9

 
$
3,402.0

 
$
(510.7
)
 
$
34.6

 
$
4,044.8

 
$
—

Stock compensation
—

 
11.8

 
—

 
—

 
—

 
11.8

 
—

Issuance of performance award stock
—

 
(11.8
)
 
—

 
—

 
—

 
(11.8
)
 
—

SSARs exercised
—

 
(0.1
)
 
—

 
—

 
—

 
(0.1
)
 
—

Distribution to noncontrolling interest
—

 
—

 
—

 
—

 
(2.0
)
 
(2.0
)
 
—

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
—

 
—

 
267.8

 
—

 
2.0

 
269.8

 
(4.6
)
Other comprehensive income, net of reclassification adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
—

 
—

 
—

 
61.8

 
—

 
61.8

 
(0.3
)
Defined benefit pension plans, net of tax
—

 
—

 
—

 
3.7

 
—

 
3.7

 
—

Unrealized loss on derivatives, net of tax
—

 
—

 
—

 
(0.1
)
 
—

 
(0.1
)
 
—

Payment of dividends to stockholders
—

 
—

 
(20.6
)
 
—

 
—

 
(20.6
)
 
—

Purchases and retirement of common stock
(0.1
)
 
(289.9
)
 
—

 
—

 
—

 
(290.0
)
 
—

Changes in noncontrolling interest
—

 
(4.9
)
 
—

 
—

 
—

 
(4.9
)
 
4.9

Balance, June 30, 2014
$
0.9

 
$
823.0

 
$
3,649.2

 
$
(445.3
)
 
$
34.6

 
$
4,062.4

 
$
—


Total comprehensive loss attributable to noncontrolling interests and redeemable noncontrolling interest for the three and six months ended June 30, 2014 and 2013 was as follows (in millions):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Net loss
$
(2.2
)
 
$
(0.6
)
 
$
(2.6
)
 
$
(1.5
)
Other comprehensive loss:
 
 
 
 
 
 
 
Foreign currency translation adjustments
—

 
(0.3
)
 
(0.3
)
 
(0.2
)
Total comprehensive loss
$
(2.2
)
 
$
(0.9
)
 
$
(2.9
)
 
$
(1.7
)

18
Table of Contents
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)

The following table sets forth changes in accumulated other comprehensive loss by component, net of tax, attributed to AGCO Corporation and its subsidiaries for the six months ended June 30, 2014 (in millions):
 
Defined Benefit Pension Plans
 
Deferred Net (Losses) Gains on Derivatives
 
Cumulative Translation Adjustment
 
Total
Accumulated other comprehensive loss, December 31, 2013
$
(206.4
)
 
$
(0.2
)
 
$
(304.1
)
 
$
(510.7
)
Other comprehensive (loss) gain before reclassifications
—

 
(0.1
)
 
61.8

 
61.7

Net losses reclassified from accumulated other comprehensive loss
3.7

 
—

 
—

 
3.7

Other comprehensive income (loss), net of reclassification adjustments
3.7

 
(0.1
)
 
61.8

 
65.4

Accumulated other comprehensive loss, June 30, 2014
$
(202.7
)
 
$
(0.3
)
 
$
(242.3
)
 
$
(445.3
)

The following table sets forth reclassification adjustments out of accumulated other comprehensive loss by component attributed to AGCO Corporation and its subsidiaries for the three and six months ended June 30, 2014 (in millions):
 
 
Amount Reclassified from Accumulated Other Comprehensive Loss(1)
 
 
Details about Accumulated Other Comprehensive Loss Components
 
Three months ended June 30, 2014
 
Six months ended June 30, 2014
 
Affected Line Item within the Condensed Consolidated Statements of Operations
Net gains on cash flow hedges
 
$
(0.2
)
 
$
(0.1
)
 
Cost of goods sold
 
 
0.1

 
0.1

 
Income tax provision
Reclassification net of tax
 
$
(0.1
)
 
$
—

 
 
 
 
 
 
 
 
 
Defined benefit pension plans:
 
 
 
 
 
 
Amortization of net actuarial loss
 
$
2.2

 
$
4.4

 
(2) 
Amortization of prior service cost
 
0.3

 
0.5

 
(2) 
Reclassification before tax
 
2.5

 
4.9

 
 
 
 
(0.6
)
 
(1.2
)
 
Income tax provision
Reclassification net of tax
 
$
1.9

 
$
3.7

 
 
 
 
 
 
 
 
 
Net losses reclassified from accumulated other comprehensive loss
 
$
1.8

 
$
3.7

 
 
____________________________________

(1) (Gains) losses included within the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2014.
(2) These accumulated other comprehensive loss components are included in the computation of net periodic pension and postretirement benefit cost. See Note 12 to the Company’s Condensed Consolidated Financial Statements.

Share Repurchase Program

In July 2012, the Company’s Board of Directors approved a share repurchase program under which the Company can repurchase up to $50.0 million of its common stock. This share repurchase program does not have an expiration date.  In December 2013, the Company’s Board of Directors approved an additional share repurchase program under which the Company can repurchase up to $500.0 million of its common stock through an expiration date of June 2015.


19
Table of Contents
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)

During the six months ended June 30, 2014, the Company entered into accelerated repurchase agreements (“ASRs”) with a financial institution to repurchase an aggregate of $290.0 million of shares of the Company’s common stock. The Company received approximately 4,178,915 shares during the six months ended June 30, 2014 related to these ASRs. The specific number of shares the Company ultimately repurchased was determined at the completion of the terms of the ASRs based on the daily volume-weighted average share price of the Company’s common stock less an agreed upon discount. Upon settlement of the ASRs, the Company was entitled to receive additional shares of common stock or, under certain circumstances, was required to remit a settlement amount. In July 2014, the Company received an additional 1,210,204 shares of common stock upon final settlement of the ASRs. All shares received under the ASRs were retired upon receipt, and the excess of the purchase price over par value per share was recorded to “Additional paid-in capital” within the Company’s Condensed Consolidated Balance Sheets. Of the $550.0 million in approved share repurchase programs, the remaining amount authorized to be repurchased is approximately $241.4 million.

11.    ACCOUNTS RECEIVABLE SALES AGREEMENTS

As of June 30, 2014 and December 31, 2013, the Company had accounts receivable sales agreements that permit the sale, on an ongoing basis, of a majority of its wholesale receivables in North America and Europe to its 49% owned U.S., Canadian and European retail finance joint ventures. As of June 30, 2014 and December 31, 2013, the cash received from receivables sold under the U.S., Canadian and European accounts receivable sales agreements was approximately $1.4 billion and $1.3 billion, respectively.

Under the terms of the accounts receivable agreements in North America and Europe, the Company pays an annual servicing fee related to the servicing of the receivables sold. The Company also pays the respective AGCO Finance entities a subsidized interest payment with respect to the sales agreements, calculated based upon LIBOR plus a margin on any non-interest bearing accounts receivable outstanding and sold under the sales agreements. These fees were reflected within losses on the sales of receivables included within “Other expense, net” in the Company’s Condensed Consolidated Statements of Operations. The Company does not service the receivables after the sale occurs and does not maintain any direct retained interest in the receivables. The Company reviewed its accounting for the accounts receivable sales agreements and determined that these facilities should be accounted for as off-balance sheet transactions.
    Losses on sales of receivables associated with the accounts receivable financing facilities discussed above, reflected within “Other expense, net” in the Company’s Condensed Consolidated Statements of Operations, were approximately $6.7 million and $14.2 million during the three and six months ended June 30, 2014, respectively. Losses on sales of receivables associated with the accounts receivable financing facilities discussed above, reflected within “Other expense, net” in the Company’s Condensed Consolidated Statements of Operations, were approximately $6.5 million and $12.1 million during the three and six months ended June 30, 2013, respectively.

The Company’s retail finance joint ventures in Brazil and Australia also provide wholesale financing to the Company’s dealers. The receivables associated with these arrangements are without recourse to the Company. The Company does not service the receivables after the sale occurs and does not maintain any direct retained interest in the receivables. As of June 30, 2014 and December 31, 2013, these retail finance joint ventures had approximately $66.9 million and $68.2 million, respectively, of outstanding accounts receivable associated with these arrangements. The Company reviewed its accounting for these arrangements and determined that these arrangements should be accounted for as off-balance sheet transactions.

In addition, the Company sells certain trade receivables under factoring arrangements to other financial institutions around the world. The Company reviewed the sale of such receivables and determined that these arrangements should be accounted for as off-balance sheet transactions.


20
Table of Contents
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)

12.    EMPLOYEE BENEFIT PLANS

Net periodic pension and postretirement benefit cost for the Company’s defined pension and postretirement benefit plans for the three months ended June 30, 2014 and 2013 are set forth below (in millions):
 
 
Three Months Ended June 30,
Pension benefits
 
2014
 
2013
Service cost
 
$
4.3

 
$
4.6

Interest cost
 
9.4

 
9.1

Expected return on plan assets
 
(11.2
)
 
(9.7
)
Amortization of net actuarial loss
 
2.2

 
2.8

Amortization of prior service cost
 
0.2

 
0.2

Net periodic pension cost
 
$
4.9

 
$
7.0

 
 
Three Months Ended June 30,
Postretirement benefits
 
2014
 
2013
Interest cost
 
$
0.4

 
$
0.5

Amortization of net actuarial loss
 
—

 
0.2

Amortization of prior service cost
 
0.1

 
0.1

Net periodic postretirement benefit cost
 
$
0.5

 
$
0.8


Net periodic pension and postretirement benefit cost for the Company’s defined pension and postretirement benefit plans for the six months ended June 30, 2014 and 2013 are set forth below (in millions):
 
 
Six Months Ended June 30,
Pension benefits
 
2014
 
2013
Service cost
 
$
8.6

 
$
9.2

Interest cost
 
18.8

 
18.3

Expected return on plan assets
 
(22.4
)
 
(19.5
)
Amortization of net actuarial loss
 
4.4

 
5.8

Amortization of prior service cost
 
0.4

 
0.4

Net periodic pension cost
 
$
9.8

 
$
14.2

 
 
Six Months Ended June 30,
Postretirement benefits
 
2014
 
2013
Service cost
 
$
0.1

 
$
0.1

Interest cost
 
0.8

 
0.9

Amortization of net actuarial loss
 
—

 
0.3

Amortization of prior service cost
 
0.1

 
0.1

Net periodic postretirement benefit cost
 
$
1.0

 
$
1.4


21
Table of Contents
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)

The following table summarizes the activity in accumulated other comprehensive loss related to the Company’s defined pension and postretirement benefit plans during the six months ended June 30, 2014 (in millions):
 
 
Before-Tax
Amount
 
Income
Tax
 
After-Tax
Amount
Accumulated other comprehensive loss as of December 31, 2013
 
$
(279.4
)
 
$
(73.0
)
 
$
(206.4
)
Amortization of net actuarial loss
 
4.4

 
1.0

 
3.4

Amortization of prior service cost
 
0.5

 
0.2

 
0.3

Accumulated other comprehensive loss as of June 30, 2014
 
$
(274.5
)
 
$
(71.8
)
 
$
(202.7
)

During the six months ended June 30, 2014, approximately $23.1 million of contributions had been made to the Company’s defined pension benefit plans. The Company currently estimates its minimum contributions for 2014 to its defined pension benefit plans will aggregate approximately $44.3 million.
During the six months ended June 30, 2014, the Company made approximately $0.8 million of contributions to its postretirement health care and life insurance benefit plans. The Company currently estimates that it will make approximately $1.9 million of contributions to its postretirement health care and life insurance benefit plans during 2014.

13.    SEGMENT REPORTING

The Company’s four reportable segments distribute a full range of agricultural equipment and related replacement parts. The Company evaluates segment performance primarily based on income from operations. Sales for each segment are based on the location of the third-party customer. The Company’s selling, general and administrative expenses and engineering expenses are charged to each segment based on the region and division where the expenses are incurred. As a result, the components of income from operations for one segment may not be comparable to another segment. Segment results for the three and six months ended June 30, 2014 and 2013 and assets as of June 30, 2014 and December 31, 2013 based on the Company’s reportable segments are as follows (in millions):
Three Months Ended June 30,
 
North
America
 
South
America
 
Europe/Africa/
Middle East
 
Asia/
Pacific
 
Consolidated
2014
 
 

 
 

 
 

 
 

 
 

Net sales
 
$
686.2

 
$
440.2

 
$
1,521.9

 
$
102.0

 
$
2,750.3

Income (loss) from operations
 
95.5

 
29.9

 
188.1

 
(3.3
)
 
310.2

Depreciation
 
14.4

 
6.6

 
35.3

 
3.6

 
59.9

Capital expenditures
 
11.5

 
10.2

 
21.4

 
11.2

 
54.3

2013
 
 

 
 

 
 

 
 

 
 

Net sales
 
$
788.9

 
$
540.0

 
$
1,599.0

 
$
120.3

 
$
3,048.2

Income (loss) from operations
 
121.6

 
59.7

 
204.9

 
(0.8
)
 
385.4

Depreciation
 
12.2

 
6.3

 
30.5

 
2.0

 
51.0

Capital expenditures
 
12.6

 
12.6

 
48.5

 
6.5

 
80.2



22
Table of Contents
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)

Six Months Ended June 30,
 
North
America
 
South
America
 
Europe/Africa/
Middle East
 
Asia/
Pacific
 
Consolidated
2014
 
 

 
 

 
 

 
 

 
 

Net sales
 
$
1,333.7

 
$
793.8

 
$
2,757.8

 
$
198.4

 
$
5,083.7

Income (loss) from operations
 
151.0

 
57.8

 
309.0

 
(4.6
)
 
513.2

Depreciation
 
29.4

 
12.8

 
70.2

 
6.9

 
119.3

Capital expenditures
 
36.7

 
16.5

 
82.1

 
20.2

 
155.5

2013
 
 

 
 

 
 

 
 

 
 

Net sales
 
$
1,413.1

 
$
1,005.7

 
$
2,792.2

 
$
240.3

 
$
5,451.3

Income from operations
 
193.7

 
108.0

 
304.6

 
4.7

 
611.0

Depreciation
 
24.2

 
12.7

 
60.0

 
4.5

 
101.4

Capital expenditures
 
27.5

 
30.6

 
101.7

 
14.4

 
174.2

Assets
 
 
 
 
 
 
 
 
 
 
As of June 30, 2014
 
$
1,136.3

 
$
909.4

 
$
2,679.5

 
$
405.9

 
$
5,131.1

As of December 31, 2013
 
1,002.8

 
773.5

 
2,368.9

 
289.5

 
4,434.7


A reconciliation from the segment information to the consolidated balances for income from operations and total assets is set forth below (in millions):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Segment income from operations
$
310.2

 
$
385.4

 
$
513.2

 
$
611.0

Corporate expenses
(28.2
)
 
(27.7
)
 
(59.6
)
 
(56.0
)
Stock compensation expense
(5.3
)
 
(18.5
)
 
(11.2
)
 
(26.4
)
Amortization of intangibles
(10.0
)
 
(12.1
)
 
(20.0
)
 
(24.1
)
Consolidated income from operations
$
266.7

 
$
327.1

 
$
422.4

 
$
504.5


 
June 30, 2014
 
December 31, 2013
Segment assets
$
5,131.1

 
$
4,434.7

Cash and cash equivalents
323.3

 
1,047.2

Receivables from affiliates
143.7

 
124.3

Investments in affiliates
448.2

 
416.1

Deferred tax assets, other current and noncurrent assets
690.8

 
672.2

Intangible assets, net
541.6

 
565.6

Goodwill
1,190.6

 
1,178.7

Consolidated total assets
$
8,469.3

 
$
8,438.8



23
Table of Contents
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)

14.    COMMITMENTS AND CONTINGENCIES

Off-Balance Sheet Arrangements

Guarantees

The Company maintains a remarketing agreement with its U.S. retail finance joint venture, whereby the Company is obligated to repurchase repossessed inventory at market values. The Company has an agreement with its U.S. retail finance joint venture which limits the Company’s purchase obligations under this arrangement to $6.0 million in the aggregate per calendar year. The Company believes that any losses that might be incurred on the resale of this equipment will not materially impact the Company’s financial position or results of operations, due to the fair value of the underlying equipment.

At June 30, 2014, the Company guaranteed indebtedness owed to third parties of approximately $164.5 million, primarily related to dealer and end-user financing of equipment. Such guarantees generally obligate the Company to repay outstanding finance obligations owed to financial institutions if dealers or end users default on such loans through 2019. The Company believes the credit risk associated with these guarantees is not material to its financial position or results of operations. Losses under such guarantees have historically been insignificant. In addition, the Company generally would expect to be able to recover a significant portion of the amounts paid under such guarantees from the sale of the underlying financed farm equipment, as the fair value of such equipment is expected to be sufficient to offset a substantial portion of the amounts paid.

Other

The Company sells a majority of its wholesale receivables in North America and Europe to its 49% owned U.S., Canadian and European retail finance joint ventures. The Company also sells certain accounts receivable under factoring arrangements to financial institutions around the world. The Company reviewed the sale of such receivables and determined that these facilities should be accounted for as off-balance sheet transactions.

Legal Claims and Other Matters

As a result of Brazilian tax legislative changes impacting value added taxes (“VAT”), the Company recorded a reserve of approximately $69.0 million and $62.8 million against its outstanding balance of Brazilian VAT receivable as of June 30, 2014 and December 31, 2013, respectively, due to the uncertainty as to the Company’s ability to collect the amounts outstanding.

On June 27, 2008, the Republic of Iraq filed a civil action in federal court in the Southern District of New York, Case No. 08 CIV 59617, naming as defendants one of the Company’s French subsidiaries and two of its other foreign subsidiaries that participated in the United Nations Oil for Food Program (the “Program”). Ninety-one other entities or companies also were named as defendants in the civil action due to their participation in the Program. The complaint purports to assert claims against each of the defendants seeking damages in an unspecified amount. On February 6, 2013, the federal court dismissed the complaint with prejudice. The plaintiff has appealed the decision and the appellate process is ongoing. Although the Company’s subsidiaries intend to vigorously defend against this action, it is not possible at this time to predict the outcome of this action or its impact, if any, on the Company, although if the outcome was adverse, the Company could be required to pay damages.

On October 30, 2012, a third-party complaint was filed in federal court in the Southern District of Texas, Case No. 09 CIV 03884, naming as defendants one of the Company’s French subsidiaries and two of its other foreign subsidiaries. Sixty other entities or companies also were named as third-party defendants. The complaint asserts claims against the defendants, certain of which are also third-party plaintiffs, seeking unspecified damages arising from their participation in the Program. The third-party plaintiffs seek contribution from the third-party defendants. On February 12, 2014, the federal court dismissed the third-party complaint with prejudice. The appeals period has not expired. Although the Company’s subsidiaries intend to vigorously defend against this action, it is not possible at this time to predict the outcome of the action or its impact, if any, on the Company, although if the outcome was adverse, the Company could be required to pay damages.

In August 2008, as part of routine audits, the Brazilian taxing authorities disallowed deductions relating to the amortization of certain goodwill recognized in connection with a reorganization of the Company’s Brazilian operations and the related transfer of certain assets to the Company’s Brazilian subsidiaries. The amount of the tax disallowance through June 30, 2014, not including interest and penalties, was approximately 131.5 million Brazilian reais (or approximately $59.5 million).

24
Table of Contents
Notes to Condensed Consolidated Financial Statements - Continued
(unaudited)

The amount ultimately in dispute will be greater because of interest and penalties. The Company has been advised by its legal and tax advisors that its position with respect to the deductions is allowable under the tax laws of Brazil. The Company is contesting the disallowance and believes that it is not likely that the assessment, interest or penalties will be required to be paid. However, the ultimate outcome will not be determined until the Brazilian tax appeal process is complete, which could take several years.

The Company is a party to various other legal claims and actions incidental to its business. The Company believes that none of these claims or actions, either individually or in the aggregate, is material to its business or financial statements as a whole, including its results of operations and financial condition.

15.    SUBSEQUENT EVENT

On August 1, 2014, the Company acquired Intersystems Holdings, Inc. (“Intersystems”) for approximately $130.0 million, net of cash acquired of approximately $3.7 million. Intersystems is located in Omaha, Nebraska and designs and manufactures bulk material handling equipment, industrial sampling equipment, micro batch weighing devices and conveying systems, primarily for the agricultural, biofuels, and food and feed processing industries. The Company will allocate the purchase price to the assets acquired and liabilities assumed based on preliminary estimates of their fair values as of the acquisition date. The acquired assets of Intersystems consist primarily of accounts receivable, property, plant and equipment, inventories, goodwill and other identifiable intangible assets. The liabilities assumed consist of accounts payable and accrued expenses. The goodwill recorded will be reported within the Company’s North American geographical reportable segment.


25
Table of Contents

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL
Our operations are subject to the cyclical nature of the agricultural industry. Sales of our equipment have been and are expected to continue to be affected by changes in net cash farm income, farm land values, weather conditions, the demand for agricultural commodities, commodity prices and general economic conditions. We record sales when we sell equipment and replacement parts to our independent dealers, distributors and other customers. To the extent possible, we attempt to sell products to our dealers and distributors on a level basis throughout the year to reduce the effect of seasonal demands on manufacturing operations and to minimize our investment in inventories. However, retail sales by dealers to farmers are highly seasonal and 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, 2014, we generated net income of $168.2 million, or $1.77 per share, compared to net income of $213.7 million, or $2.15 per share, for the same period in 2013. For the first six months of 2014, we generated net income of $267.8 million, or $2.79 per share, compared to net income of $331.7 million, or $3.34 per share, for the same period in 2013.

Net sales during the three and six months ended June 30, 2014 were $2,750.3 million and $5,083.7 million, respectively, which were approximately 9.8% and 6.7% lower than the three and six months ended June 30, 2013, respectively, due to softer market conditions.

Income from operations for the three months ended June 30, 2014 was $266.7 million compared to $327.1 million for the same period in 2013. Income from operations was $422.4 million for the six months ended June 30, 2014 compared to $504.5 million for the same period in 2013. The decrease in income from operations for the three and six months was primarily a result of lower sales and production levels and a weaker product mix, partially offset by pricing, material cost containment actions and improved factory productivity.

Income from operations in our Europe/Africa/Middle East (“EAME”) region decreased in the three months ended June 30, 2014 and improved slightly during the first six months of 2014 compared to the same periods in 2013. Improved labor productivity and the benefit of cost reduction initiatives were largely offset by lower sales and production levels. In the South American region, income from operations decreased for the three and six months ended June 30, 2014 compared to the same periods in 2013 primarily due to lower net sales and production volumes as well as material cost inflation. Lower sales and production volumes contributed to the decline in income from operations in the North American region during the the three and six months ended June 30, 2014 as compared to the same periods in 2013. Income from operations in our Asia/Pacific region decreased in the three and six months ended June 30, 2014 compared to the same periods in 2013 due to lower net sales and increased expenses associated with our new factory in China.

Industry Unit Retail Sales
Favorable growing conditions and forecasts for strong yields and crop production in 2014 has resulted in lower prices of all major commodities. With prospects for lower farm income impacting farmer sentiment, industry demand has softened in all the major agricultural equipment markets during the first six months of 2014 compared to the first six months of 2013.     
    
In North America, industry unit retail sales of utility and high horsepower tractors for the first six months of 2014 decreased by approximately 2% compared to the first six months of 2013. Industry unit retail sales of combines for the first six months of 2014 decreased by approximately 15% compared to the first six months of 2013. The most significant declines were experienced in the row crop sector impacting demand for high horsepower tractors and combines and were partially offset by higher industry sales in lower horsepower tractors due to improved economics for dairy and livestock producers.

In Western Europe, industry unit retail sales of tractors for the first six months of 2014 decreased by approximately 6% compared to the first six months of 2013. Industry unit retail sales of combines for the first six months of 2014 decreased by approximately 4% compared to the first six months of 2013. Market results by country remained mixed during the first six months of 2014, with declines in the key markets of France and Germany partially offset by improved demand in the United Kingdom and Spain.


26
Table of Contents
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(continued)

South American industry unit retail sales of tractors in the first six months of 2014 decreased approximately 18% compared to the same period in 2013. Industry unit retail sales of combines for the first six months of 2014 decreased by approximately 25% compared to the first six months of 2013. The decline was most pronounced in Brazil due to delayed funding for the government subsidized financing program and weak conditions in the sugarcane sector that negatively impacted demand.

STATEMENTS OF OPERATIONS
Net sales for the three months ended June 30, 2014 were $2,750.3 million compared to $3,048.2 million for the same period in 2013. Net sales for the first six months of 2014 were $5,083.7 million compared to $5,451.3 million for the same period in 2013. Foreign currency translation positively impacted net sales by approximately $9.3 million, or 0.3%, in the three months ended June 30, 2014 and negatively impacted sales by $40.0 million, or 0.7%, during the six months ended June 30, 2014.

The following table sets forth, for the three and six months ended June 30, 2014, the impact to net sales of currency translation by geographical segment (in millions, except percentages):
 
Three Months Ended June 30,
 
Change
 
Change Due to Currency
Translation
 
2014
 
2013
 
$
 
%
 
$
 
%
North America
$
686.2

 
$
788.9

 
$
(102.7
)
 
(13.0
)%
 
$
(6.3
)
 
(0.8
)%
South America
440.2

 
540.0

 
(99.8
)
 
(18.5
)%
 
(42.0
)
 
(7.8
)%
Europe/Africa/Middle East
1,521.9

 
1,599.0

 
(77.1
)
 
(4.8
)%
 
59.9

 
3.8
 %
Asia/Pacific
102.0

 
120.3

 
(18.3
)
 
(15.2
)%
 
(2.3
)
 
(1.9