GENERAL
Our operations are subject to the cyclical nature of the agricultural
industry. Sales of our equipment are affected by, among other things, changes in
net cash farm income, farm land values, weather conditions, the demand for
agricultural commodities, commodity prices and general economic conditions. We
record sales when we sell equipment and replacement parts to our independent
dealers, distributors and other customers. To the extent possible, we attempt to
sell products to our dealers and distributors on a level basis throughout the
year to reduce the effect of seasonal demands on manufacturing operations and to
minimize our investment in inventories. However, retail sales by dealers to
farmers are highly seasonal and largely are a function of the timing of the
planting and harvesting seasons. As a result, our net sales historically have
been the lowest in the first quarter and have increased in subsequent quarters.
The COVID-19 pandemic and other economic and geopolitical factors, including
inflation and the conflict in Ukraine, continue to create volatility in the
global economy, including employment disruptions, supply chain constraints and
delays in deliveries, as well as logistics interruptions. These factors, along
with increasing industrial demand, are negatively affecting production levels,
particularly as a result of delays in the receipts of parts and components.
Supply chain issues of particular concern include a wide range of parts and
components, including semiconductors. We may continue to face supplier
bottlenecks and delays in all regions as well as challenges with logistics, and
we continue to work to mitigate the impact of these issues in order to meet
end-market demand.
On May 5, 2022, we discovered that we had been subject to a ransomware
cyberattack. The attack resulted in the temporary closure of most of our
production sites and parts operations. A majority of the affected locations
resumed operations within approximately two weeks after the attack was
discovered. As a result of the temporary closures, our production, sales and
income from operations were negatively impacted during the second quarter of
2022. Please see further discussion below.
RESULTS OF OPERATIONS
For the three months ended June 30, 2022, we generated net income of
approximately $177.7 million, or $2.37 per share, compared to approximately
$282.8 million, or $3.73 per share, for the same period in 2021. For the six
months ended June 30, 2022, we generated net income of approximately $329.5
million, or $4.40 per share, compared to approximately $433.6 million, or $5.71
per share, for the same period in 2021.
Net sales during the three and six months ended June 30, 2022 were
approximately $2,945.2 million and $5,630.9 million, respectively, which were
approximately 2.3% and 7.1% higher than the same periods in 2021. These
increases were primarily the result of robust end-market demand and favorable
pricing during the three and six months ended June 30, 2022 compared to the same
periods in 2021, which helped to offset the negative impacts of currency
translation, supply chain constraints and the second quarter cyberattack.
Regionally, net sales were higher in all regions for the three and six months
ended June 30, 2022 compared to 2021 excluding currency translation, as
presented below.
Income from operations for the three months ended June 30, 2022 was
approximately $263.5 million compared to approximately $290.3 million for the
same period in 2021. Income from operations for the six months ended June 30,
2022 was approximately $467.5 million compared to approximately $485.5 million
for the same period in 2021. These decreases were primarily the result of
negative currency impacts, lower production volumes as a result of the second
quarter cyberattack, as well as higher production costs associated with supply
chain disruptions and the cyberattack. Income from operations for the six months
ended June 30, 2022 were also impacted by impairment charges recorded during the
first quarter related to our joint ventures in Russia of approximately
$36.0 million, as discussed below.
During the three and six months ended June 30, 2022, income from operations in
all regions was negatively impacted by supply chain disruptions and the second
quarter cyberattack which affected sales and production levels as well as
production costs. In addition, income from operations in our Europe/Middle East
region decreased for the three and six months ended June 30, 2022 compared to
the same periods in 2021 due to negative currency impacts. In our North American
region, income from operations decreased for the three and six months ended
June 30, 2022 compared to the same periods in 2021. These decreases were also
the result of a weaker sales mix. In our South American region, income from
operations increased in the three and six months ended June 30, 2022 compared to
the same periods in 2021. These increases reflect significant increases in
end-market demand, positive pricing and a favorable sales mix. In our
Asia/Pacific/Africa ("APA") region, income from
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Table of Contents
Management's Discussion and Analysis of Financial Condition and Results of
Operations
(continued)
operations increased for the three and six months ended June 30, 2022 compared
to the same periods in 2021, primarily due to a favorable sales mix and higher
net sales during the six months ended June 30, 2022.
Industry Market Conditions
Agricultural commodity prices continue to support favorable farm fundamentals
resulting in strong demand for machinery. Despite favorable demand, supply chain
constraints and limited global industry production have negatively impacted the
level of retail sales in the first six months of 2022. Future demand for
agricultural equipment will be influenced by farm income, which is a function of
commodity and protein prices, crop yields and government support.
In North America, industry unit retail sales of utility and high horsepower
tractors for the first six months of 2022 decreased approximately 7% compared to
the same period in 2021. Industry unit retail sales of combines for the first
six months of 2022 decreased approximately 8% compared to the same period in
2021. Lower sales of smaller tractors, which declined from record levels in
2021, were partially offset by increased sales of higher horsepower units.
In Western Europe, industry unit retail sales of tractors decreased
approximately 10% for the first six months of 2022 compared to the same period
in 2021. Industry unit retail sales of combines for the first six months of 2022
decreased approximately 16% compared to the first six months of 2021. Industry
retail tractor sales were restricted by supply chain challenges during the first
six months of 2022 compared to the same period in 2021.
In South America, industry unit retail sales of tractors increased
approximately 7% for the first six months of 2022 compared to the same period in
2021. Industry unit retail sales of combines for the first six months of 2022
decreased approximately 5% compared to the first six months of 2021. The
improved demand in tractors was primarily in Brazil and Argentina. Healthy crop
production levels as well as elevated commodity prices are supporting positive
economic conditions for farmers who continue to replace aged fleets.
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