FORM 10-K
Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 
WASHINGTON, D.C. 20549
 
FORM 10-K
 
 
For the fiscal year ended December 31, 2008
 
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’s Common Stock and Junior Preferred Stock purchase rights are registered pursuant to Section 12(b) of the Act and are listed on the New York Stock Exchange.
 
AGCO Corporation is a well-known seasoned issuer.
 
AGCO Corporation is required to file reports pursuant to Section 13 or Section 15(d) of the Act. AGCO Corporation (1) has filed all reports required to be filed by Section 13 or 15(d) of the Act during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.
 
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K will be contained in a definitive proxy statement, portions of which are incorporated by reference into Part III of this Form 10-K.
 
The aggregate market value of AGCO Corporation’s Common Stock (based upon the closing sales price quoted on the New York Stock Exchange) held by non-affiliates as of June 30, 2008 was approximately $3.2 billion. For this purpose, directors and officers have been assumed to be affiliates. As of February 13, 2009, 91,844,193 shares of AGCO Corporation’s Common Stock were outstanding.
 
AGCO Corporation is a large accelerated filer.
 
AGCO Corporation is not a shell company.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of AGCO Corporation’s Proxy Statement for the 2009 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.
 


TABLE OF CONTENTS

PART I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
PART II
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
1. Operations and Summary of Significant Accounting Policies
2. Acquisitions and Joint Venture
3. Restructuring and Other Infrequent Expenses (Income)
4. Accounts Receivable Securitization
5. Investments in Affiliates
6. Income Taxes
7. Indebtedness
8. Employee Benefit Plans
9. Common Stock
10. Stock Incentive Plans
11. Derivative Instruments and Hedging Activities
12. Commitments and Contingencies
13. Related Party Transactions
14. Segment Reporting
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
SIGNATURES
EX-3.2
EX-10.15
EX-10.17
EX-10.19
EX-10.20
EX-10.22
EX-10.24
EX-21.0
EX-23.1
EX-24.0
EX-31.1
EX-31.2
EX-32.1


Table of Contents

 
PART I
 
Item 1.   Business
 
AGCO Corporation (“AGCO,” “we,” “us,” or the “Company”) was incorporated in Delaware in April 1991. Our executive offices are located at 4205 River Green Parkway, Duluth, Georgia 30096, and our telephone number is (770) 813-9200. Unless otherwise indicated, all references in this Form 10-K to the Company include our subsidiaries.
 
General
 
We are the third largest manufacturer and distributor of agricultural equipment and related replacement parts in the world based on annual net sales. We sell a full range of agricultural equipment, including tractors, combines, self-propelled sprayers, hay tools, forage equipment and implements and a line of diesel engines. Our products are widely recognized in the agricultural equipment industry and are marketed under a number of well-known brands, including: Challenger®, Fendt®, Massey Ferguson® and Valtra®. We distribute most of our products through a combination of approximately 2,800 independent dealers and distributors in more than 140 countries. In addition, we provide retail financing in the United States, Canada, Brazil, Germany, France, the United Kingdom, Australia, Ireland and Austria through our finance joint ventures with Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A., which we refer to as “Rabobank.”
 
Products
 
Tractors
 
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. In addition, we offer a full range of tractors in the high horsepower segment (primarily 100 to 570 horsepower). High horsepower tractors typically are used on larger farms and on cattle ranches for hay production. Tractors accounted for approximately 67% of our net sales in 2008, 68% in 2007 and 67% in 2006.
 
Combines
 
Depending on the market, our combines are sold with conventional or rotary technology. All combines are complemented by a variety of crop-harvesting heads, available in different sizes, that are designed to maximize harvesting speed and efficiency while minimizing crop loss. Combines accounted for approximately 6% of our net sales in 2008, 5% in 2007 and 4% in 2006.
 
Our 50% investment in Laverda S.p.A. (“Laverda”), an operating joint venture between AGCO and the Italian ARGO group, is located in Breganze, Italy and manufactures harvesting equipment. In addition to producing Laverda branded combines, the Breganze factory has been manufacturing mid-range combine harvesters for our Massey Ferguson, Fendt and Challenger brands for distribution in Europe, Africa and the Middle East since 2004. The joint venture also includes Laverda’s ownership in Fella-Werke GMBH (“Fella”), a German manufacturer of grass and hay machinery, and its 30% ownership in Gallignani S.p.A. (“Gallignani”), an Italian manufacturer of balers.
 
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. We also manufacture related equipment, including vehicles used for waste application that are specifically designed for subsurface liquid injection and surface spreading of biosolids, such as sewage sludge


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and other farm or industrial waste that can be safely used for soil enrichment. Application equipment accounted for approximately 4% of our net sales in 2008 and 2007 and 5% in 2006.
 
Hay Tools and Forage Equipment, Implement, Engines 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 breaks up soil and mixes crop residue into topsoil, with or without prior discing; and field cultivators, which prepare a smooth seed bed and destroy weeds. Tractor-pulled planters apply fertilizer and place seeds in the field. Other equipment primarily includes loaders, which are used for a variety of tasks including lifting and transporting hay crops.
 
We provide a variety of precision farming technologies that are developed, manufactured, distributed and supported on a worldwide basis. These technologies provide farmers with the capability to enhance productivity and profitability on the farm. Through the use of global positioning systems, or GPS, our automated steering and guidance products use satellites to help our customers eliminate skips and overlaps to optimize land use. This technology allows for more precise farming practices from cultivation to planting to nutrient and pesticide applications. 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. Many of our tractors, combines, planters and sprayers are equipped with these precision farming technologies at the customer’s option. Our suite of farm management software converts a variety of data generated by our machinery into valuable information that can be used to enhance efficiency, productivity and profitability and promote greater environmental stewardship. While these products do not generate significant revenues, we believe that these products and related services are desired and highly valued by professional farmers around the world and are integral to the growth of our machinery sales.
 
Our AGCO Sisu Power engines division produces diesel engines, gears and generating sets. The diesel engines are manufactured for use in Valtra tractors and certain other branded tractors, combines and sprayers, as well as for sale to third parties. The engine division specializes in the manufacturing of off-road engines in the 50 to 500 horsepower range.
 
Hay tools and forage equipment, implements, engines and other products accounted for approximately 11% of our net sales in 2008 and 10% in 2007 and 2006.
 
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 profits and historically have been less cyclical than new product sales. Replacement parts accounted for approximately 12% of our net sales in 2008, 13% in 2007 and 14% in 2006.
 
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.


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Our sales are not dependent on any specific dealer, distributor or group of dealers. We intend to maintain the separate strengths and identities of our core brand names and product lines.
 
Europe
 
We market and distribute farm machinery, equipment and replacement parts to farmers in European markets through a network of approximately 1,100 independent dealers and distributors. In certain markets, we also sell Valtra tractors and parts directly to the end user. In some cases, dealers carry competing or complementary products from other manufacturers. Sales in Europe accounted for approximately 56% of our net sales in 2008, and 57% in 2007 and 2006.
 
North America
 
We market and distribute farm machinery, equipment and replacement parts to farmers in North America through a network of approximately 1,100 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 21% of our net sales in 2008, 22% in 2007 and 24% in 2006.
 
South America
 
We market and distribute farm machinery, equipment and replacement parts to farmers in South America through several different networks. In Brazil and Argentina, we distribute products directly to approximately 400 independent dealers. In Brazil, dealers are generally exclusive to one manufacturer. Outside of Brazil and Argentina, we sell our products in South America through independent distributors. Sales in South America accounted for approximately 18% of our net sales in 2008, 16% in 2007 and 12% in 2006.
 
Rest of the World
 
Outside Europe, North America and South America, we operate primarily through a network of approximately 200 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. Sales outside Europe, North America and South America accounted for approximately 5% of our net sales in 2008 and 2007 and 7% in 2006.
 
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. Licensees are entities in which we have no direct ownership interest, most notably in Turkey and Pakistan. The associate or licensee generally has the exclusive right to produce and sell Massey Ferguson and Valtra equipment in its home country but may not sell these products in other countries. We generally license to these associates certain technology, as well as the right to use the Massey Ferguson and Valtra trade names. We also sell products to associates and licensees in the form of components used in local manufacturing operations, tractor kits supplied in completely knocked down form for local assembly and distribution, and fully assembled tractors for local distribution only. In certain countries, our arrangements with associates and licensees have evolved to where we principally provide technology, technical assistance and quality control. In these situations, licensee manufacturers sell certain tractor models under the Massey Ferguson and Valtra brand names in the licensed territory and also may become a source of low-cost production for us.
 
Parts Distribution
 
Parts inventories are maintained and distributed in a network of master and regional warehouses throughout North America, South America, Western Europe and Australia in order to provide timely response to customer demand for replacement parts. Our primary Western European master distribution warehouses are


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located in Desford, 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 Mogi das Cruzes, Brazil; Canoas, Rio Grande do Sul, Brazil; Sumaré, São Paulo, Brazil; and 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. If not previously paid by the dealer, installment payments are required generally beginning seven to 13 months after shipment with the remaining outstanding equipment balance generally due within 12 to 18 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.
 
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 do not normally charge interest on outstanding receivables from our dealers and distributors. For sales to certain dealers or distributors in the United States and Canada, where we generated approximately 20% of our net sales in 2008, 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’s or distributor’s sales volume during the preceding year. For the year ended December 31, 2008, 16.2% and 4.7% 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 0.4% of our net sales during 2008. 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, the majority of interest-bearing receivables in North


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America to our United States 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. Under this arrangement, qualified dealers may obtain additional financing through our United States and Canadian retail finance joint ventures.
 
Retail Financing
 
Through our retail financing joint ventures located in the United States, Canada, Brazil, Germany, France, the United Kingdom, Australia, Ireland and Austria, end users of our products are provided with a competitive and dedicated financing source. These retail finance companies are owned 49% by us and 51% by a wholly-owned subsidiary of Rabobank. The retail finance joint ventures can tailor retail finance programs to prevailing market conditions and such programs can enhance our sales efforts.
 
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. In addition, we maintain a combine assembly facility in Randers, Denmark. The Suolahti facility produces 75 to 280 horsepower tractors marketed under the Valtra and Massey Ferguson brand names. The Beauvais facility produces 80 to 360 horsepower tractors primarily marketed under the Massey Ferguson and Challenger brand names. The Marktoberdorf facility produces 50 to 360 horsepower tractors marketed under the Fendt brand name and transmissions which we use in tractors produced both in our Marktoberdorf and Beauvais facilities. The Randers facility assembles conventional combines under the Massey Ferguson, Challenger and Fendt brand names. We also assemble cabs for our Fendt tractors in Baumenheim, Germany. We have a diesel engine manufacturing facility in Linnavuori, Finland. Our 50% investment in Laverda, an operating joint venture between AGCO and the Italian ARGO group, is located in Breganze, Italy and manufactures harvesting equipment. In addition to producing Laverda branded combines, the Breganze factory has been manufacturing mid-range combine harvesters for our Massey Ferguson, Fendt and Challenger brands for distribution in Europe, Africa and the Middle East since 2004. We also have a joint venture with Claas Tractor SAS for the manufacture of driveline assemblies for tractors produced in our facility in Beauvais.
 
North America
 
Our manufacturing operations in North America are located in Beloit, Kansas; Hesston, Kansas; Jackson, Minnesota; and Queretaro, Mexico, and produce products for a majority of our brand names in North America as well as for export outside of North America. The Beloit facility produces tillage and seeding equipment. The Hesston facility produces hay and forage equipment, rotary combines and planters. The Jackson facility produces 270 to 570 horsepower track tractors and four-wheeled drive articulated tractors, as well as self-propelled sprayers. In Queretaro, we assemble tractors for distribution in the Mexican market. In addition, we also have three tractor light assembly operations throughout the United States for the final assembly of imported tractors sold in the North American market.
 
South America
 
Our manufacturing operations in South America are located in Brazil. In Canoas, Rio Grande do Sul, Brazil, we manufacture and assemble tractors, ranging from 50 to 220 horsepower, and industrial loader-backhoes. The tractors are sold primarily under the Massey Ferguson brand name. In Mogi das Cruzes, Brazil,


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we manufacture and assemble tractors, ranging from 50 to 210 horsepower, marketed primarily under the Valtra and Challenger brand names. We also manufacture diesel engines in the Mogi das Cruzes facility. We manufacture combines marketed under the Massey Ferguson, Valtra and Challenger brand names in Santa Rosa, Rio Grande do Sul, Brazil. In Ibirubá, Rio Grande do Sul, Brazil, we manufacture and distribute a line of farm implements, including drills, planters, corn headers and front loaders.
 
Third-Party Suppliers
 
We externally source many of our products, components and replacement parts. Our production strategy is intended to optimize our research and development and capital investment requirements and to allow us greater flexibility to respond to changes in market conditions.
 
We purchase some of the products we distribute from third-party suppliers. We purchase standard and specialty tractors from Carraro S.p.A. and distribute these tractors worldwide. In addition, we purchase some tractor models from our licensee in India and compact tractors from Iseki & Company, Limited, a Japanese manufacturer. We also purchase other tractors, implements and hay and forage equipment from various third-party suppliers.
 
In addition to the purchase of machinery, third-party suppliers supply us with significant components used in our manufacturing operations, such as engines and transmissions. We select third-party suppliers that we believe are low cost, high quality and possess the most appropriate technology. We also assist in the development of these products or component parts based upon our own design requirements. Our past experience with outside suppliers has generally been favorable.
 
Seasonality
 
Generally, retail sales by dealers to farmers are highly seasonal and are a function of the timing of the planting and harvesting seasons. To the extent practicable, we attempt to ship products to our dealers and distributors on a level basis throughout the year to reduce the effect of seasonal retail demands on our manufacturing operations and to minimize our investment in inventory. Our financing requirements are subject to variations due to seasonal changes in working capital levels, which typically increase in the first half of the year and then decrease in the second half of the year. The fourth quarter is also typically a large period for retail sales because of our customers’ year end tax planning considerations, the increase in availability of funds from completed harvests and the timing of dealer incentives.
 
Competition
 
The agricultural industry is highly competitive. We compete with several large national and international full-line suppliers, as well as numerous short-line and specialty manufacturers with differing manufacturing and marketing methods. Our two principal competitors on a worldwide basis are Deere & Company and CNH Global N.V. In certain Western European and South American countries, we have regional competitors that have significant market share in a single country or a group of countries.
 
We believe several key factors influence a buyer’s choice of farm equipment, including the strength and quality of a company’s dealers, the quality and pricing of products, dealer or brand loyalty, product availability, the terms of financing and customer service. See “Marketing and Distribution” for additional information.
 
Engineering and Research
 
We make significant expenditures for engineering and applied research to improve the quality and performance of our products, to develop new products and to comply with government safety and engine emissions regulations. Our expenditures on engineering and research were approximately $194.5 million, or 2.3% of net sales, in 2008, $154.9 million, or 2.3% of net sales, in 2007 and $127.9 million, or 2.4% of net sales, in 2006.


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Intellectual Property
 
We own and have licenses to the rights under a number of domestic and foreign patents, trademarks, trade names and brand names relating to our products and businesses. We defend our patent, trademark and trade and brand name rights primarily by monitoring competitors’ machines and industry publications and conducting other investigative work. We consider our intellectual property rights, including our rights to use our trade and brand names, important in the operation of our businesses. However, we do not believe we are dependent on any single patent, trademark or trade name or group of patents or trademarks, trade names or brand names.
 
Environmental Matters and Regulation
 
We are subject to environmental laws and regulations concerning emissions to the air, discharges of processed or other types of wastewater, and the generation, handling, storage, transportation, treatment and disposal of waste materials. These laws and regulations are constantly changing, and the effects that they may have on us in the future are impossible to predict with accuracy. It is our policy to comply with all applicable environmental, health and safety laws and regulations, and we believe that any expense or liability we may incur in connection with any noncompliance with any law or regulation or the cleanup of any of our properties will not have a materially adverse effect on us. We believe that we are in compliance in all material respects with all applicable laws and regulations.
 
The United States Environmental Protection Agency has issued regulations concerning permissible emissions from off-road engines. We do not anticipate that the cost of compliance with the regulations will have a material impact on us. Our AGCO Sisu Power engines division, which specializes in the manufacturing of off-road engines in the 40 to 500 horsepower range, currently complies with Com II, Com IIIa, Tier II and Tier III emissions requirements set by European and United States regulatory authorities. We expect to meet future emissions requirements, such as Tier 4a or Com IIIb requirements effective starting in 2011, through the introduction of new technology to the engines and exhaust after-treatment systems, as necessary.
 
Our international operations also are subject to environmental laws, as well as various other national and local laws, in the countries in which we manufacture and sell our products. We believe that we are in compliance with these laws in all material respects and that the cost of compliance with these laws in the future will not have a materially adverse effect on us.
 
Regulation and Government Policy
 
Domestic and foreign political developments and government regulations and policies directly affect the agricultural industry in the United States and abroad and indirectly affect the agricultural equipment business. The application, modification or adoption of laws, regulations or policies could have an adverse effect on our business.
 
We are subject to various federal, state and local laws affecting our business, as well as a variety of regulations relating to such matters as working conditions and product safety. A variety of laws regulate our contractual relationships with our dealers. These laws impose substantive standards on the relationships between us and our dealers, including events of default, grounds for termination, non-renewal of dealer contracts and equipment repurchase requirements. Such laws could adversely affect our ability to terminate our dealers.
 
Employees
 
As of December 31, 2008, we employed approximately 15,600 employees, including approximately 4,250 employees in the United States and Canada. A majority of our employees at our manufacturing facilities, both domestic and international, are represented by collective bargaining agreements and union contracts with terms that expire on varying dates. We currently do not expect any significant difficulties in renewing these agreements.


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Available Information
 
Our Internet address is www.agcocorp.com. We make the following reports filed by us available, free of charge, on our website under the heading “SEC Filings” in the “Investors & Media” section:
 
  •  annual reports on Form 10-K;
 
  •  quarterly reports on Form 10-Q;
 
  •  current reports on Form 8-K;
 
  •  proxy statements for the annual meetings of stockholders; and
 
  •  Forms 3, 4 and 5
 
The foregoing reports are made available on our website as soon as practicable after they are filed with the Securities and Exchange Commission (“SEC”).
 
We also provide corporate governance and other information on our website. This information includes:
 
  •  charters for the committees of our board of directors, which are available under the heading “Committee Charters” in the “Corporate Governance” section of our website’s “Investors & Media” section; and
 
  •  our Code of Conduct, which is available under the heading “Code of Conduct” in the “Corporate Governance” section of our website’s “Investors & Media” section.
 
In addition, in the event of any waivers of our Code of Conduct, those waivers will be available under the heading “Office of Ethics and Compliance” in the “Corporate Governance” section of our website’s “Investors & Media” section.


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Executive Officers of the Registrant
 
The following table sets forth information as of January 31, 2009 with respect to each person who is an executive officer of the Company.
 
             
Name
 
Age
 
Positions
 
Martin H. Richenhagen
    56     Chairman of the Board, President and Chief Executive Officer
Garry L. Ball
    61     Senior Vice President — Engineering
Andrew H. Beck
    45     Senior Vice President — Chief Financial Officer
Norman L. Boyd
    65     Senior Vice President — Executive Development
David L. Caplan
    61     Senior Vice President — Materials Management, Worldwide
André M. Carioba
    57     Senior Vice President and General Manager, South America
Gary L. Collar
    52     Senior Vice President and General Manager, EAME and Australia/New Zealand
Robert B. Crain
    49     Senior Vice President and General Manager, North America
Randall G. Hoffman
    57     Senior Vice President — Global Sales & Marketing and Product Management
Hubertus M. Muehlhaeuser
    39     Senior Vice President — Strategy & Integration and General Manager, Eastern Europe & Asia
Lucinda B. Smith
    42     Senior Vice President — Human Resources
Hans-Bernd Veltmaat
    54     Senior Vice President — Manufacturing & Quality
 
Martin H. Richenhagen has been President and Chief Executive Officer since July 2004. From January 2003 to February 2004, Mr. Richenhagen was Executive Vice President of Forbo International SA, a flooring material business based in Switzerland. From 1998 to December 2002, Mr. Richenhagen was Group President of Claas KGaA mbH, a global farm equipment manufacturer and distributor. From 1995 to 1998, Mr. Richenhagen was Senior Executive Vice President for Schindler Deutschland Holdings GmbH, a worldwide manufacturer and distributor of elevators and escalators.
 
Garry L. Ball has been Senior Vice President — Engineering since June 2002. Mr. Ball was Senior Vice President — Engineering and Product Development from June 2001 to June 2002. From 2000 to 2001, Mr. Ball was Vice President of Engineering at CapacityWeb.com. From 1999 to 2000, Mr. Ball was Vice President of Construction Equipment New Product Development at Case New Holland (CNH) Global N.V. Prior to that, he held several key positions including Vice President of Engineering Agricultural Tractor for New Holland N.V., Europe, and Chief Engineer for Tractors at Ford New Holland.
 
Andrew H. Beck has been Senior Vice President — Chief Financial Officer since June 2002. Mr. Beck was Vice President, Chief Accounting Officer from January 2002 to June 2002, Vice President and Controller from April 2000 to January 2002, Corporate Controller from January 1996 to April 2000, Assistant Treasurer from March 1995 to January 1996 and Controller, International Operations from June 1994 to March 1995.
 
Norman L. Boyd has been Senior Vice President — Executive Development since January 2009. Mr. Boyd was Senior Vice President — Human Resources for the Company from June 2002 to December 2008, Senior Vice President — Corporate Development from October 1998 to June 2002, Vice President of Europe/Africa/Middle East Distribution from February 1997 to September 1998, Vice President of Marketing, Americas from February 1995 to February 1997 and Manager of Dealer Operations from January 1993 to February 1995.
 
David L. Caplan has been Senior Vice President — Materials Management, Worldwide since October 2003. Mr. Caplan was Senior Director of Purchasing of PACCAR Inc. from January 2002 to October 2003 and was Director of Operation Support with Kenworth Truck Company from November 1997 to January 2002.
 
André M. Carioba has been Senior Vice President and General Manager, South America since July 2006. Mr. Carioba held several positions with BMW Group and its subsidiaries worldwide, including President and Chief Executive Officer of BMW Brazil Ltda., from August 2000 to December 2005, Director of Purchasing and Logistics of BMW Brazil Ltda., from September 1998 to July 2000, and Senior Manager for International Purchasing Projects of BMW AG in Germany, from January 1995 to August 1998.


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Gary L. Collar has been Senior Vice President and General Manager, EAME and Australia/New Zealand since January 2009. From January 2004 to December 2008, Mr. Collar was Senior Vice President and General Manager, EAME and EAPAC. Mr. Collar was Vice President, Worldwide Market Development for the Challenger Division from May 2002 until January 2004. Between 1994 and 2002, Mr. Collar held various senior executive positions with ZF Friedrichshaven A.G., including Vice President Business Development, North America, from 2001 until 2002, and President and Chief Executive Officer of ZF-Unisia Autoparts, Inc., from 1994 until 2001.
 
Robert B. Crain has been Senior Vice President and General Manager, North America since January 2006. Mr. Crain held several positions with CNH Global N.V. and its predecessors, including Vice President of New Holland’s North America Agricultural Business, from February 2004 to December 2005, Vice President of CNH Marketing North America Agricultural business, from January 2003 to January 2004, and Vice President and General Manager of Worldwide Operations for the Crop Harvesting Division of CNH Global N.V., from January 1999 to December 2002.
 
Randall G. Hoffman has been Senior Vice President — Global Sales & Marketing and Product Management since November 2005. Mr. Hoffman was the Senior Vice President and General Manager, Challenger Division Worldwide, from January 2004 to November 2005, Vice President and General Manager, Worldwide Challenger Division, from June 2002 to January 2004, Vice President of Sales and Marketing, North America, from December 2001 to June 2002, Vice President, Marketing North America, from April 2001 to November 2001, Vice President of Dealer Operations, from June 2000 to April 2001, Director, Distribution Development, North America, from April 2000 to June 2000, Manager, Distribution Development, North America, from May 1998 to April 2000, and General Marketing Manager, from January 1995 to May 1998.
 
Hubertus M. Muehlhaeuser has been Senior Vice President — Strategy & Integration and General Manager, Eastern Europe & Asia since January 2009. From September 2005 to December 2008, Mr. Muehlhaeuser was Senior Vice President — Strategy & Integration. Mr. Muehlhaeuser has responsibility for our engines division. Previously, Mr. Muehlhaeuser spent over ten years with Arthur D. Little, Ltd., an international management-consulting firm, where he was made a partner in 1999. From October 2000 to May 2005, he led that firm’s Global Strategy and Organization Practice as a member of the firm’s global management team, and was the firm’s managing director of Switzerland from April 2001 to May 2005.
 
Lucinda B. Smith has been Senior Vice President — Human Resources since January 2009. Ms. Smith was Vice President, Global Talent Management & Rewards, from May 2008 to December 2008, and was Director of Organizational Development and Compensation, from October 2006 to May 2008. From August 2005 to September 2006, Ms. Smith was Global Director of Human Resources for AJC International, Inc. Ms. Smith also held various domestic and international human resource management positions at Lend Lease Corporation, Cendian Corporation and Georgia-Pacific Corporation.
 
Hans-Bernd Veltmaat has been Senior Vice President — Manufacturing & Quality since July 2008. Mr. Veltmaat was Group Executive Vice President of Recycling Plants at Alba AG from July 2007 to June 2008. From August 1996 to June 2007, Mr. Veltmaat held various positions with Claas KGaA mbH in Germany, including Group Executive Vice President, a member of the Claas Group Executive Board and Chief Executive Officer of Claas Fertigungstechnik GmbH.
 
Financial Information on Geographical Areas
 
For financial information on geographic areas, see pages 105 through 107 of this Form 10-K under the caption “Segment Reporting,” which information is incorporated herein by reference.
 
Item 1A.   Risk Factors
 
We make forward-looking statements in this report, in other materials we file with the SEC or otherwise release to the public, and on our website. In addition, our senior management might make forward-looking statements orally to analysts, investors, the media and others. Statements concerning our future operations, prospects, strategies, products, manufacturing facilities, legal proceedings, financial condition, future economic


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performance (including growth and earnings) and demand for our products and services, and other statements of our plans, beliefs, or expectations, including the statements contained in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” regarding industry conditions, market demand, availability of financing, funding of our postretirement plans, payment of current accrued taxes, tax contingencies, net sales and income, restructuring and other infrequent expenses, impacts of unrecognized actuarial losses related to our pension and postretirement benefit plans, pension investments and funding, elimination of guarantees of retail finance joint venture debt, conversion features of our notes, realization of net deferred tax assets, the impact of certain recent accounting pronouncements, or the fulfillment of working capital needs, are forward-looking statements. In some cases these statements are identifiable through the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” and similar expressions. You are cautioned not to place undue reliance on these forward-looking statements. The forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks, and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. These factors include, among others, those set forth below and in the other documents that we file with the SEC. There also are other factors that we may not describe, generally because we currently do not perceive them to be material that could cause actual results to differ materially from our expectations.
 
We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
 
Our financial results depend entirely upon the agricultural industry, and factors that adversely affect the agricultural industry generally, including declines in the general economy, increases in farm input costs, lower commodity prices and changes in the availability of credit for our retail customers, will adversely affect us.
 
Our success depends heavily on the vitality of the agricultural industry. Historically, the agricultural industry, including the agricultural equipment business, has been cyclical and subject to a variety of economic factors, governmental regulations and legislation, and weather conditions. Sales of agricultural equipment generally are related to the health of the agricultural industry, which is affected by farm income, farm input costs, debt levels and land values, all of which reflect levels of commodity prices, acreage planted, crop yields, agricultural product demand including crops used for renewable energies, government policies and government subsidies. Sales also are influenced by economic conditions, interest rate and exchange rate levels, and the availability of retail financing, as well as the ongoing economic downturn that recently adversely impacted our sales in certain regions and is likely to have a greater adverse impact on our sales in the future; the extent of which we cannot predict. Trends in the industry, such as farm consolidations, may affect the agricultural equipment market. In addition, weather conditions, such as heat waves or droughts, and pervasive livestock diseases can affect farmers’ buying decisions. Downturns in the agricultural industry due to these or other factors are likely to result in decreases in demand for agricultural equipment, which would adversely affect our sales, growth, results of operations and financial condition. During previous downturns in the farm sector, we experienced significant and prolonged declines in sales and profitability, and we expect our business to remain subject to similar market fluctuations in the future.
 
The agricultural equipment industry is highly seasonal, and seasonal fluctuations significantly impact results of operations and cash flows.
 
The agricultural equipment business is highly seasonal, which causes our quarterly results and our available cash flow to fluctuate during the year. The fourth quarter is also typically a large period for retail sales because of our customers’ year end tax planning considerations, the increase in availability of funds from completed harvests and the timing of dealer incentives. In addition, farmers purchase agricultural equipment in the Spring and Fall in conjunction with the major planting and harvesting seasons. Our net sales and income from operations have historically been the lowest in the first quarter and have increased in subsequent quarters as dealers increase inventory in anticipation of increased retail sales in the third and fourth quarters.


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Most of our sales depend on the retail customers’ obtaining financing, and any disruption in their ability to obtain financing, whether due to the current economic downturn or otherwise, will result in the sale of fewer products by us. In addition, the collectability of receivables that are created from our sales, as well as from such retail financing, is critical to our business.
 
Most retail sales of the products that we manufacture are financed, either by our joint ventures with Rabobank or by a bank or other private lender. As a result of the ongoing economic downturn, financing for capital equipment purchases has become more difficult and expensive to obtain. During 2008, our joint ventures with Rabobank, which are controlled by Rabobank and are dependent upon Rabobank for financing as well, financed approximately 50% of the retail sales of our tractors and combines, in the markets where the joint ventures operate. Any difficulty by Rabobank to continue to provide that financing, or any business decision by Rabobank as the controlling member not to fund the business or particular aspects of it (for example, a particular country or region), would require the joint ventures to find other sources of financing (which may be difficult to obtain), or us to find another source of retail financing for our customers, or our customers would be required to utilize other retail financing providers. To the extent that financing is not available or available only at unattractive prices, our sales would be negatively impacted.
 
In some cases, the financing provided by our joint venture with Rabobank or by others is supported by a government subsidy or guarantee. The programs under which those subsidies and guarantees are provided generally are of limited duration and subject to renewal and contain various caps and other limitations. In some markets, i.e., Brazil, this support is quite significant. In the event the governments that provide this support elect not to renew these programs, and were financing not available, whether through our joint ventures or otherwise, it is likely that our sales would decline.
 
In addition, both AGCO and our retail finance joint ventures have substantial accounts receivable from dealers and end customers, and we would be adversely impacted if the collectability of these receivables was not consistent with historical experience; this collectability is dependent on the financial strength of the farm industry, which in turn is dependent upon the general economy and commodity prices, as well as several of the other factors discussed in this “Risk Factors” section.
 
Our success depends on the introduction of new products, which requires substantial expenditures.
 
Our long-term results depend upon our ability to introduce and market new products successfully. The success of our new products will depend on a number of factors, including:
 
  •  customer acceptance;
 
  •  the efficiency of our suppliers in providing component parts;
 
  •  the economy;
 
  •  competition; and
 
  •  the strength of our dealer networks.
 
As both we and our competitors continuously introduce new products or refine versions of existing products, we cannot predict the level of market acceptance or the amount of market share our new products will achieve. Any manufacturing delays or problems with our new product launches could adversely affect our operating results. We have experienced delays in the introduction of new products in the past, and we cannot assure you that we will not experience delays in the future. In addition, introducing new products could result in a decrease in revenues from our existing products. Consistent with our strategy of offering new products and product refinements, we expect to continue to use a substantial amount of capital for further product development and refinement. We may need more capital for product development and refinement than is available to us, which could adversely affect our business, financial condition or results of operations.
 
We face significant competition and, if we are unable to compete successfully against other agricultural equipment manufacturers, we would lose customers and our net sales and profitability would decline.
 
The agricultural equipment business is highly competitive, particularly in North America, Europe and Latin America. We compete with several large national and international companies that, like us, offer a full


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line of agricultural equipment. We also compete with numerous short-line and specialty manufacturers and suppliers of farm equipment products. Our two key competitors, Deere & Company and CNH Global N.V., are substantially larger than we are and have greater financial and other resources. In addition, in some markets, we compete with smaller regional competitors with significant market share in a single country or group of countries. Our competitors may substantially increase the resources devoted to the development and marketing, including discounting, of products that compete with our products. If we are unable to compete successfully against other agricultural equipment manufacturers, we could lose customers and our net sales and profitability may decline. There also can be no assurances that consumers will continue to regard our agricultural equipment favorably due to the features and quality of our products, and we may be unable to develop new products that appeal to consumers or unable to continue to compete successfully in the agricultural equipment business. In addition, competitive pressures in the agricultural equipment business may affect the market prices of new and used equipment, which, in turn, may adversely affect our sales margins and results of operations.
 
Rationalization or restructuring of manufacturing facilities may cause production capacity constraints and inventory fluctuations.
 
The rationalization of our manufacturing facilities has at times resulted in, and similar rationalizations or restructurings in the future may result in, temporary constraints upon our ability to produce the quantity of products necessary to fill orders and thereby complete sales in a timely manner. A prolonged delay in our ability to fill orders on a timely basis could affect customer demand for our products and increase the size of our product inventories, causing future reductions in our manufacturing schedules and adversely affecting our results of operations. Moreover, our continuous development and production of new products will often involve the retooling of existing manufacturing facilities. This retooling may limit our production capacity at certain times in the future, which could adversely affect our results of operations and financial condition.
 
We depend on suppliers for raw materials, components and parts for our products, and any failure by our suppliers to provide products as needed, or by us to promptly address supplier issues, will adversely impact our ability to timely and efficiently manufacture and sell products. We also are subject to raw material price fluctuations, which can adversely affect our manufacturing costs.
 
Our products include components and parts manufactured by others. As a result, our ability to timely and efficiently manufacture existing products, to introduce new products and to shift manufacturing of products from one facility to another depends on the quality of these components and parts and the timeliness of their delivery to our facilities. At any particular time, we depend on many different suppliers, and the failure by one or more of our suppliers to perform as needed will result in fewer products being manufactured, shipped and sold. If the quality of the components or parts provided by our suppliers is less than required and we do not recognize that failure prior to the shipment of our products, we will incur higher warranty costs. The timely supply of component parts for our products also depends on our ability to manage our relationships with suppliers, to identify and replace suppliers that fail to meet our schedules or quality standards, and to monitor the flow of components and accurately project our needs. A significant increase in the price of any component or raw material could adversely affect our profitability. We cannot avoid exposure to global price fluctuations, such as occurred in the past with the costs of steel and related products, and our profitability depends on, among other things, our ability to raise equipment and parts prices sufficiently enough to recover any such material or component cost increases.
 
Our business routinely is subject to claims and legal actions, some of which could be material.
 
We routinely are a party to claims and legal actions incidental to our business. These include claims for personal injuries by users of farm equipment, disputes with distributors, vendors and others with respect to commercial matters, and disputes with taxing and other governmental authorities regarding the conduct of our business. In February 2006, we received a subpoena from the SEC in connection with a non-public, fact-finding inquiry entitled “In the Matter of Certain Participants in the Oil for Food Program.” This subpoena requested documents concerning transactions in Iraq by AGCO and certain of our subsidiaries under the United Nations Oil for Food Program. Subsequently, we were contacted by the Department of Justice (the


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“DOJ”) regarding the same transactions, although no subpoena or other formal process has been initiated by the DOJ. Similar inquiries have been initiated by the Brazilian, Danish, French and U.K. governments regarding subsidiaries of the Company. The inquiries arose from sales of approximately $58.0 million in farm equipment to the Iraq ministry of agriculture between 2000 and 2002. The SEC’s staff has asserted that certain aspects of those transactions were not properly recorded in our books and records. We are cooperating fully in these inquiries, including discussions regarding settlement. It is not possible to predict the outcome of these inquiries or their impact, if any, on us; although if the outcomes were adverse we could be required to pay fines and make other payments as well as take appropriate remedial actions.
 
A majority of our sales and manufacturing take place outside the United States, and, as a result, we are exposed to risks related to foreign laws, taxes, economic conditions, labor supply and relations, political conditions and governmental policies. These risks may delay or reduce our realization of value from our international operations.
 
For the year ended December 31, 2008, we derived approximately $7,075.0 million, or 84%, of our net sales from sales outside the United States. The primary foreign countries in which we do business are Germany, France, Brazil, the United Kingdom, Finland and Canada. In addition, we have significant manufacturing operations in France, Germany, Brazil and Finland. Our results of operations and financial condition may be adversely affected by the laws, taxes, economic conditions, labor supply and relations, political conditions, and governmental policies of the foreign countries in which we conduct business. Some of our international operations also are subject to various risks that are not present in domestic operations, including restrictions on dividends and the repatriation of funds. Foreign developing markets may present special risks, such as unavailability of financing, inflation, slow economic growth and price controls.
 
Domestic and foreign political developments and government regulations and policies directly affect the international agricultural industry, which affects the demand for agricultural equipment. If demand for agricultural equipment declines, our sales, growth, results of operations and financial condition may be adversely affected. The application, modification or adoption of laws, regulations, trade agreements or policies adversely affecting the agricultural industry, including the imposition of import and export duties and quotas, expropriation and potentially burdensome taxation, could have an adverse effect on our business. The ability of our international customers to operate their businesses and the health of the agricultural industry, in general, are affected by domestic and foreign government programs that provide economic support to farmers. As a result, farm income levels and the ability of farmers to obtain advantageous financing and other protections would be reduced to the extent that any such programs are curtailed or eliminated. Any such reductions would likely result in a decrease in demand for agricultural equipment. For example, a decrease or elimination of current price protections for commodities or of subsidy payments for farmers in the European Union, the United States, Brazil or elsewhere in South America could negatively impact the operations of farmers in those regions, and, as a result, our sales may decline if these farmers delay, reduce or cancel purchases of our products.
 
We recently have experienced substantial and sustained volatility with respect to currency exchange rate and interest rate changes which can adversely affect our reported results of operations and the competitiveness of our products.
 
We conduct operations in many areas of the world involving transactions denominated in a variety of currencies. Our production costs, profit margins and competitive position are affected by the strength of the currencies in countries where we manufacture or purchase goods relative to the strength of the currencies in countries where our products are sold. In addition, we are subject to currency exchange rate risk to the extent that our costs are denominated in currencies other than those in which we earn revenues and to risks associated with translating the financial statements of our foreign subsidiaries from local currencies into United States dollars. Similarly, changes in interest rates affect our results of operations by increasing or decreasing borrowing costs and finance income. Our most significant transactional foreign currency exposures are the Euro, Brazilian real, the Canadian dollar and the Russian rouble in relation to the United States dollar. Where naturally offsetting currency positions do not occur, we attempt to manage these risks by economically


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hedging some, but not all, of our exposures through the use of foreign currency forward exchange or option contracts. As with all hedging instruments, there are risks associated with the use of foreign currency forward exchange contracts, interest rate swap agreements and other risk management contracts. While the use of such hedging instruments provides us with protection from certain fluctuations in currency exchange and interest rates, we potentially forego the benefits that might result from favorable fluctuations in currency exchange and interest rates. In addition, any default by the counterparties to these transactions could adversely affect us. Despite our use of economic hedging transactions, currency exchange rate or interest rate fluctuations may adversely affect our results of operations, cash flow or financial condition.
 
We are subject to extensive environmental laws and regulations, and our compliance with, or our failure to comply with, existing or future laws and regulations could delay production of our products or otherwise adversely affect our business.
 
We are subject to increasingly stringent environmental laws and regulations in the countries in which we operate. These regulations govern, among other things, emissions into the air, discharges into water, the use, handling and disposal of hazardous substances, waste disposal and the remediation of soil and groundwater contamination. Our costs of complying with these or any other current or future environmental regulations may be significant. For example, the European Union and the United States have adopted more stringent environmental regulations regarding emissions into the air. As a result, we will likely incur increased capital expenses to modify our products to comply with these regulations. Further, we may experience production delays if we or our suppliers are unable to design and manufacture components for our products that comply with environmental standards established by regulators. In addition, in some markets (such as the United States) we must obtain governmental environmental approvals in order to import our products, and these approvals can be difficult or time consuming to obtain or may not be obtainable at all. For example, our AGCO Sisu Power engine division and our engine suppliers are subject to air quality standards, and production at our facilities could be impaired if AGCO Sisu Power and these suppliers are unable to timely respond to any changes in environmental laws and regulations affecting engine emissions. Compliance with environmental and safety regulations has added, and will continue to add, to the cost of our products and increase the capital-intensive nature of our business. We may be adversely impacted by costs, liabilities or claims with respect to our operations under existing laws or those that may be adopted in the future. If we fail to comply with existing or future laws and regulations, we may be subject to governmental or judicial fines or sanctions and our business and results of operations could be adversely affected.
 
Our labor force is heavily unionized, and our contractual and legal obligations under collective bargaining agreements and labor laws subject us to the risks of work interruption or stoppage and could cause our costs to be higher.
 
Most of our employees, most notably at our manufacturing facilities, are represented by collective bargaining agreements and union contracts with terms that expire on varying dates. Several of our collective bargaining agreements and union contracts are of limited duration and, therefore, must be re-negotiated frequently. As a result, we could incur significant administrative expenses associated with union representation of our employees. Furthermore, we are at greater risk of work interruptions or stoppages than non-unionized companies, and any work interruption or stoppage could significantly impact the volume of goods we have available for sale. In addition, collective bargaining agreements, union contracts and labor laws may impair our ability to reduce our labor costs by streamlining existing manufacturing facilities and in restructuring our business because of limitations on personnel and salary changes and similar restrictions.
 
We have significant pension obligations with respect to our employees and our available cash flow may be adversely affected in the event that payments became due under any pension plans that are unfunded or underfunded. Declines in the market value of the securities used to fund these obligations result in increased pension expense in future periods.
 
A portion of our active and retired employees participate in defined benefit pension plans under which we are obligated to provide prescribed levels of benefits regardless of the value of the underlying assets, if any, of


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the applicable pension plan. To the extent that our obligations under a plan are unfunded or underfunded, we will have to use cash flow from operations and other sources to pay our obligations either as they become due or over some shorter funding period. In addition, since the assets that we already have provided to fund these obligations are invested in debt instruments and other securities, the value of these assets varies due to market factors. Recently, these fluctuations have been significant and adverse, and there can be no assurances that they will not be significant in the future. As of December 31, 2008, we had approximately $180.2 million in unfunded or underfunded obligations related to our pension and other postretirement health care benefits.
 
We have a substantial amount of indebtedness, and, as a result, we are subject to certain restrictive covenants and payment obligations that may adversely affect our ability to operate and expand our business.
 
We have a substantial amount of indebtedness. As of December 31, 2008, we had total long-term indebtedness, including current portions of long-term indebtedness, of approximately $682.1 million, stockholders’ equity of approximately $1,957.0 million and a ratio of total indebtedness to equity of approximately 0.35 to 1.0. We also had short-term obligations of $222.5 million, capital lease obligations of $5.0 million, unconditional purchase or other long-term obligations of $380.6 million, and amounts funded under an accounts receivable securitization facility of $483.2 million. In addition, we had guaranteed indebtedness owed to third parties and our retail finance joint ventures of approximately $126.9 million, primarily related to dealer and end-user financing of equipment.
 
Holders of our 13/4% convertible senior subordinated notes due 2033 and our 11/4% convertible senior subordinated notes due 2036 may convert the notes if, during any fiscal quarter, the closing sales price of our common stock exceeds 120% of the conversion price of $22.36 per share for our 13/4% convertible senior subordinated notes and $40.73 per share for our 11/4% convertible senior subordinated notes for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter. As of December 31, 2008, the closing sales price of our common stock did not exceed 120% of the conversion price for both notes for at least 20 trading days in the 30 consecutive trading days ending December 31, 2008, and, therefore, we classified both notes as long-term debt. Future classification of the notes between current and long-term debt is dependent on the closing sales price of our common stock during future quarters. In the event the notes are converted in the future, we believe we could repay the notes with available cash on hand, funds from our existing $300.0 million multi-currency revolving credit facility or a combination of these sources.
 
Our substantial indebtedness could have important adverse consequences. For example, it could:
 
  •  require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, which would reduce the availability of our cash flow to fund future working capital, capital expenditures, acquisitions and other general corporate purposes;
 
  •  increase our vulnerability to general adverse economic and industry conditions;
 
  •  limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
 
  •  restrict us from introducing new products or pursuing business opportunities;
 
  •  place us at a competitive disadvantage compared to our competitors that have relatively less indebtedness;
 
  •  limit, along with the financial and other restrictive covenants in our indebtedness, among other things, our ability to borrow additional funds, pay cash dividends or engage in or enter into certain transactions; and
 
  •  prevent us from selling additional receivables to our commercial paper conduits.
 
Item 1B.   Unresolved Staff Comments
 
Not applicable.


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Item 2.   Properties
 
Our principal properties as of January 31, 2009, were as follows:
 
                     
        Leased
    Owned
 
Location
 
Description of Property
  (Sq. Ft.)     (Sq. Ft.)  
 
United States:
                   
Batavia, Illinois
  Parts Distribution     310,200          
Beloit, Kansas
  Manufacturing             164,500  
Duluth, Georgia
  Corporate Headquarters     125,000          
Hesston, Kansas
  Manufacturing             1,288,300  
Jackson, Minnesota
  Manufacturing             596,000  
Kansas City, Missouri
  Parts Distribution/Warehouse     593,600          
International:
                   
Neuhausen, Switzerland
  Regional Headquarters     17,500          
Stoneleigh, United Kingdom
  Sales and Administrative office     85,000          
Desford, United Kingdom
  Parts Distribution     298,000          
Beauvais, France(1)
  Manufacturing             1,144,900  
Ennery, France
  Parts Distribution             417,500  
Marktoberdorf, Germany
  Manufacturing     80,600       735,500  
Baumenheim, Germany
  Manufacturing             463,600  
Randers, Denmark
  Manufacturing     145,100       143,400  
Linnavuori, Finland
  Manufacturing             257,700  
Suolahti, Finland
  Manufacturing/Parts Distribution             550,900  
Sunshine, Victoria, Australia
  Regional Headquarters/Parts Distribution             94,600  
Haedo, Argentina
  Parts Distribution/Sales Office     32,000          
Canoas, Rio Grande do Sul, Brazil
  Regional Headquarters/             615,300  
    Manufacturing/Parts distribution                
Santa Rosa, Rio Grande do Sul, Brazil
  Manufacturing             386,500  
Mogi das Cruzes, Brazil
  Manufacturing/Parts distribution             722,200  
Ibirubá, Rio Grande do Sul, Brazil
  Manufacturing             75,400  
 
 
(1) Includes our joint venture with GIMA, in which we own a 50% interest.
 
We consider each of our facilities to be in good condition and adequate for its present use. We believe that we have sufficient capacity to meet our current and anticipated manufacturing requirements.


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Item 3.   Legal Proceedings
 
In February 2006, we received a subpoena from the SEC in connection with a non-public, fact-finding inquiry entitled “In the Matter of Certain Participants in the Oil for Food Program.” This subpoena requested documents concerning transactions in Iraq by AGCO and certain of our subsidiaries under the United Nations Oil for Food Program. Subsequently, we were contacted by the DOJ regarding the same transactions, although no subpoena or other formal process has been initiated by the DOJ. Other inquiries have been initiated by the Brazilian, Danish, French and U.K. governments regarding subsidiaries of AGCO. The inquiries arose from sales of approximately $58.0 million in farm equipment to the Iraq ministry of agriculture between 2000 and 2002. The SEC’s staff has asserted that certain aspects of those transactions were not properly recorded in our books and records. We are cooperating fully in these inquiries, including discussions regarding settlement. It is not possible at this time to predict the outcome of these inquiries or their impact, if any, on us; although if the outcomes were adverse, we could be required to pay fines and make other payments as well as take appropriate remedial actions.
 
On June 27, 2008, the Republic of Iraq filed a civil action in a federal court in New York, Case No. 08 CIV 59617, naming as defendants three of our foreign subsidiaries that participated in the United Nations Oil for Food Program. Ninety-one other entities or companies were also named as defendants in the civil action due to their participation in the United Nations Oil for Food Program. The complaint purports to assert claims against each of the defendants seeking damages in an unspecified amount. Although our 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 us; although if the outcome was adverse, we could be required to pay damages.
 
In August 2008, as part of a routine audit, the Brazilian taxing authorities disallowed deductions relating to the amortization of certain goodwill recognized in connection with a reorganization of our Brazilian operations and the related transfer of certain assets to our Brazilian subsidiaries. The amount of the tax disallowance through December 31, 2008, not including interest and penalties, was approximately 77.5 million Brazilian reais (or approximately $33.7 million). The amount ultimately in dispute will be greater because of interest, penalties and future deductions. We have been advised by our legal and tax advisors that our position with respect to the deductions is allowable under the tax laws of Brazil. We are contesting the disallowance and believe 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.
 
We are a party to various other legal claims and actions incidental to our business. We believe that none of these claims or actions, either individually or in the aggregate, is material to our business or financial condition.
 
Item 4.   Submission Of Matters to a Vote of Security Holders
 
Not Applicable.


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PART II
 
Item 5.   Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Our common stock is listed on the New York Stock Exchange (“NYSE”) and trades under the symbol AG. As of the close of business on February 13, 2009, the closing stock price was $20.47, and there were 492 stockholders of record. (This number does not include stockholders who hold their stock through brokers, banks and other nominees.) The following table sets forth, for the periods indicated, the high and low sales prices for our common stock for each quarter within the last two years, as reported on the NYSE.
 
                 
    High     Low  
 
2008
               
First Quarter
  $ 70.50     $ 54.35  
Second Quarter
    70.51       50.70  
Third Quarter
    63.06       40.99  
Fourth Quarter
    41.30       19.35  
 
                 
    High     Low  
 
2007
               
First Quarter
  $ 39.19     $ 29.18  
Second Quarter
    45.12       35.96  
Third Quarter
    50.77       38.15  
Fourth Quarter
    70.78       49.22  
 
DIVIDEND POLICY
 
We currently do not pay dividends. We cannot provide any assurance that we will pay dividends in the foreseeable future. Although we are in compliance with all provisions of our debt agreements, our credit facility and the indenture governing our senior subordinated notes contain restrictions on our ability to pay dividends in certain circumstances.


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Item 6.   Selected Financial Data
 
The following tables present our selected consolidated financial data. The data set forth below should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical Consolidated Financial Statements and the related notes. Our operating data and selected balance sheet data as of and for the years ended December 31, 2008, 2007, 2006, 2005 and 2004 were derived from the 2008, 2007, 2006, 2005 and 2004 Consolidated Financial Statements, which have been audited by KPMG LLP, our independent registered public accounting firm. The Consolidated Financial Statements as of December 31, 2008 and 2007 and for the years ended December 31, 2008, 2007 and 2006 and the reports thereon, are included in Item 8 in this Form 10-K. The historical financial data may not be indicative of our future performance.
 
                                         
    Years Ended December 31,  
    2008     2007     2006(2)     2005(2)     2004  
          (In millions, except per share data)        
 
Operating Data:
                                       
Net sales
  $ 8,424.6     $ 6,828.1     $ 5,435.0     $ 5,449.7     $ 5,273.3  
Gross profit
    1,499.7       1,191.0       927.8       933.6       952.9  
Income from operations
    565.0       394.8       68.9       274.7       323.5  
Net income (loss)
  $ 400.0     $ 246.3     $ (64.9 )   $ 31.6     $ 158.8  
Net income (loss) per common share — diluted(3)
  $ 4.09     $ 2.55     $ (0.71 )   $ 0.35     $ 1.71  
Weighted average shares outstanding — diluted(3)
    97.7       96.6       90.8       90.7       95.6  
 
                                         
    As of December 31,  
    2008     2007     2006(2)     2005(2)     2004  
          (In millions, except number of employees)        
 
Balance Sheet Data:
                                       
Cash and cash equivalents
  $ 512.2     $ 582.4     $ 401.1     $ 220.6     $ 325.6  
Working capital
    1,026.7       638.4       685.4       825.8       1,045.5  
Total assets
    4,954.8       4,787.6       4,114.5       3,861.2       4,297.3  
Total long-term debt, excluding current portion(1)
    682.0       294.1       577.4       841.8       1,151.7  
Stockholders’ equity
    1,957.0       2,043.0       1,493.6       1,416.0       1,422.4  
Other Data:
                                       
Number of employees
    15,606       13,720       12,804       13,023       14,313  
 
 
(1) Holders of our $201.3 million 13/4% convertible senior subordinated notes due 2033 and our $201.3 million 11/4% convertible senior subordinated notes due 2036 may convert the notes if, during any fiscal quarter, the closing sales price of our common stock exceeds 120% of the conversion price of $22.36 per share for our 13/4% convertible senior subordinated notes and $40.73 per share for our 11/4% convertible senior subordinated notes for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter. As of December 31, 2008, this criteria was not met with respect to both notes, and, therefore, we classified both notes as long-term debt. As of December 31, 2007, the criteria was met for both notes, and, therefore, we classified both notes as current liabilities. As of December 31, 2006, the criteria was met for our 13/4% convertible senior subordinated notes, and, therefore, we classified the notes as a current liability.
 
(2) During the fourth quarter of 2006, we completed our annual impairment analysis of goodwill and other intangible assets under the guidance of Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets,” and concluded that the goodwill associated with our Sprayer business was impaired. We therefore recorded a write-down of the total amount of such goodwill of approximately $171.4 million. During the fourth quarter of 2005, we recognized a non-cash income tax charge of approximately $90.8 million related to increasing the valuation allowance for our U.S. deferred income tax assets.
 
(3) During the fourth quarter of 2004, we adopted the provisions of Emerging Issues Task Force No. 04-08, which required that shares subject to issuance from contingently convertible debt should be included in the calculation of diluted earnings per share using the if-converted method regardless of whether a market price trigger has been met. We therefore included approximately 9.0 million additional shares of common stock that may have been issued upon conversion of our former 13/4% convertible senior subordinated notes in our diluted earnings per share calculation for the year ended December 31, 2004. On June 29, 2005, we completed an exchange of our 13/4% convertible senior subordinates notes for new notes that provide for settlement upon conversion in cash up to the principal amount of the converted new notes with any excess conversion value settled in shares of our common stock. The impact of the


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exchange resulted in a reduction in the diluted weighted average shares outstanding of approximately 9.0 million shares on a prospective basis. Dilution of weighted shares is dependent on our stock price once the market price trigger or other specified conversion circumstances are met for the excess conversion value using the treasury stock method. Our 11/4% convertible senior subordinated notes issued in December 2006 will also potentially impact the dilution of weighted shares outstanding for the excess conversion value using the treasury stock method. For the years ended December 31, 2006 and 2005, approximately 1.2 million and 4.4 million shares, respectively, were excluded from the diluted weighted average shares outstanding calculation related to the assumed conversion of our 13/4% convertible senior subordinates notes, as the impact would have been antidilutive.


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Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
We are a leading manufacturer and distributor of agricultural equipment and related replacement parts throughout the world. We sell a full range of agricultural equipment, including tractors, combines, hay tools, sprayers, forage equipment and implements and a line of diesel engines. Our products are widely recognized in the agricultural equipment industry and are marketed under a number of well-known brand names, including: Challenger®, Fendt®, Massey Ferguson® and Valtra®. We distribute most of our products through a combination of approximately 2,800 distributors, associates and licensees. In addition, we provide retail financing in the United States, Canada, Brazil, Germany, France, the United Kingdom, Australia, Ireland and Austria through our finance joint ventures with Rabobank.
 
Results of Operations
 
We sell our equipment and replacement parts to our independent dealers, distributors and other customers. A large majority of our sales are to independent dealers and distributors that sell our products to the end user. To the extent practicable, we attempt to sell products to our dealers and distributors on a level basis throughout the year to reduce the effect of seasonal demands on our manufacturing operations and to minimize our investment in inventory. However, retail sales by dealers to farmers are highly seasonal and are linked to the planting and harvesting seasons. In certain markets, particularly in North America, there is often a time lag, which varies based on the timing and level of retail demand, between our sale of the equipment to the dealer and the dealer’s sale to a retail customer.
 
The following table sets forth, for the periods indicated, the percentage relationship to net sales of certain items included in our Consolidated Statements of Operations:
 
                         
    Years Ended December 31,  
    2008     2007     2006  
 
Net sales
    100.0 %     100.0 %     100.0 %
Cost of goods sold
    82.2       82.6       82.9  
                         
Gross profit
    17.8       17.4       17.1  
Selling, general and administrative expenses
    8.6       9.1       10.0  
Engineering expenses
    2.3       2.3       2.4  
Restructuring and other infrequent expenses
                 
Goodwill impairment charge
                3.1  
Amortization of intangibles
    0.2       0.2       0.3  
                         
Income from operations
    6.7       5.8       1.3  
Interest expense, net
    0.2       0.4       1.0  
Other expense, net
    0.2       0.6       0.6  
                         
Income (loss) before income taxes and equity in net earnings of affiliates
    6.3       4.8       (0.3 )
Income tax provision
    2.0       1.6       1.4  
                         
Income (loss) before equity in net earnings of affiliates
    4.3       3.2       (1.7 )
Equity in net earnings of affiliates
    0.5       0.4       0.5  
                         
Net income (loss)
    4.8 %     3.6 %     (1.2 )%
                         
 
2008 Compared to 2007
 
Net income for 2008 was $400.0 million, or $4.09 per diluted share, compared to net income for 2007 of $246.3 million, or $2.55 per diluted share.
 
Net sales for 2008 were approximately $1,596.5 million, or 23.4%, higher than 2007 primarily due to improved industry conditions in most major global agricultural equipment markets and the positive impact of


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foreign currency translation. Sales growth was achieved in all of our geographic operating segments. Income from operations was $565.0 million in 2008 compared to $394.8 million in 2007. The increase in income from operations and operating margins during 2008 was due primarily to sales volume growth, price increases, improved product mix and cost control initiatives, partially offset by higher material costs.
 
In our Europe/Africa/Middle East operations, income from operations improved approximately $119.1 million in 2008 compared to 2007, primarily due to increased sales volumes, favorable currency translation impacts, improved product mix and margin improvements achieved through cost reduction initiatives. Income from operations in our South American operations increased approximately $32.9 million in 2008 compared to 2007, primarily due to higher sales volume resulting from stronger market conditions, particularly in the major market of Brazil, as well as favorable currency translation impacts. In North America, income from operations increased approximately $44.3 million in 2008 compared to 2007, primarily due to higher sales as a result of strong industry demand for large farm equipment and operating efficiencies. Income from operations in our Asia/Pacific region increased approximately $8.4 million in 2008 compared to 2007, primarily due to sales growth in the Australian and New Zealand markets.
 
Retail Sales
 
Worldwide industry equipment demand for farm equipment increased in 2008 in most major markets. Healthy farm income driven by higher farm commodity prices have contributed to the improved demand for equipment, particularly in the large farm equipment sector. In 2008, farm commodity prices continued to be supported as a result of strong global demand and historically low inventories of commodities. Population growth, increased protein consumption in Asia and an accelerating trend towards renewable energies have contributed to strengthened demand for farm commodities.
 
In the United States and Canada, industry unit retail sales of tractors decreased approximately 7% in 2008 compared to 2007, due to decreases in the compact and utility tractor segments, offset by increases in the high horsepower tractor segment. Industry unit retail sales of combines increased approximately 22% in 2008 when compared to the prior year. In North America, our unit retail sales of compact and high horsepower tractors as well as combines increased while our unit retail sales of utility tractors decreased in 2008 compared to 2007 levels. In Europe, industry unit retail sales of tractors increased approximately 7% in 2008 compared to 2007. Demand was strongest in the high horsepower segment and in the markets of France, Germany, Central and Eastern Europe, and Russia, which offset weaker markets in Spain, Finland and Scandinavia. Our unit retail sales of tractors for 2008 in Europe were also higher when compared to 2007. In South America, industry unit retail sales of tractors in 2008 increased approximately 30% compared to 2007. Retail sales of tractors in the major market of Brazil increased approximately 39% during 2008. Industry unit retail sales of combines during 2008 were approximately 50% higher than the prior year, with an increase in Brazil of approximately 88% compared to the prior year. Improved commodity prices contributed to the strength of the row crop and sugar cane sectors in Brazil, resulting in increased industry demand. Our unit retail sales of tractors and combines in South America were also higher in 2008 compared to 2007. In other international markets, our net sales for 2008 were approximately 10.3% higher than the prior year, due primarily to higher sales in Australia and New Zealand resulting from improved harvests.
 
The rate of retail sales increases declined in most major markets in the fourth quarter of 2008 as lower commodity prices and tightened credit availability began to impact sales demand, particularly in South America, Eastern Europe and Russia.
 
Results of Operations
 
Net sales for 2008 were $8,424.6 million compared to $6,828.1 million for 2007. The increase was primarily attributable to net sales growth in all four of our geographical regions as well as positive currency translation impacts. Currency translation positively impacted net sales by approximately $247.9 million, primarily due to the strength of the Brazilian real and the Euro in the first nine months of the year. The


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following table sets forth, for the periods indicated, the impact to net sales of currency translation by geographical segment (in millions, except percentages):
 
                                                 
                Change     Change due to Currency Translation  
    2008     2007     $     %     $     %  
 
North America
  $ 1,794.3     $ 1,488.1     $ 306.2       20.6 %   $ (11.6 )     (0.8 )%
South America
    1,496.5       1,090.6       405.9       37.2 %     76.8       7.0 %
Europe/Africa/ Middle East
    4,905.4       4,067.1       838.3       20.6 %     181.3       4.5 %
Asia/Pacific
    228.4       182.3       46.1       25.3 %     1.4       0.8 %
                                                 
    $ 8,424.6     $ 6,828.1     $ 1,596.5       23.4 %   $ 247.9       3.6 %
                                                 
 
Regionally, net sales in North America increased during 2008 compared to 2007 primarily due to strong industry conditions supporting increased sales of high horsepower tractors, combines, hay equipment and sprayers. In the Europe/Africa/Middle East region, net sales increased in 2008 primarily due to sales growth in France, Germany, the United Kingdom, Austria, Eastern and Central Europe, and Russia. In South America, net sales increased during 2008 compared to 2007 primarily as a result of stronger market conditions in the region, particularly in the major market of Brazil. In the Asia/Pacific region, net sales increased in 2008 compared to 2007 due to sales growth in Australia and New Zealand. We estimate that worldwide consolidated average price increases during 2008 contributed approximately 4% to the increase in net sales. Consolidated net sales of tractors and combines, which consisted of approximately 72% of our net sales in 2008, increased approximately 23% in 2008 compared to 2007. Unit sales of tractors and combines increased approximately 11% during 2008 compared to 2007. The difference between the unit sales increase and the increase in net sales was the result of foreign currency translation, pricing and sales mix changes.
 
The following table sets forth, for the periods indicated, the percentage relationship to net sales of certain items included in our Consolidated Statements of Operations (in millions, except percentages):
 
                                 
    2008     2007  
          % of
          % of
 
    $     Net Sales     $     Net Sales  
 
Gross profit
  $ 1,499.7       17.8 %   $ 1,191.0       17.4 %
Selling, general and administrative expenses
    720.9       8.6 %     625.7       9.1 %
Engineering expenses
    194.5       2.3 %     154.9       2.3 %
Restructuring and other infrequent expenses (income)
    0.2             (2.3 )      
Amortization of intangibles
    19.1       0.2 %     17.9       0.2 %
                                 
Income from operations
  $ 565.0       6.7 %   $ 394.8       5.8 %
                                 
 
Gross profit as a percentage of net sales increased during 2008 as compared to 2007 primarily due to increased net sales, the benefits of higher production, and cost reduction initiatives, partially offset by negative currency impacts and raw material cost inflation. Unit production of tractors and combines during 2008 was approximately 18% higher than 2007. In response to increases in manufacturing input costs driven primarily by increases in steel and energy costs, we instituted a series of price increases during 2008. These pricing actions helped to partially offset the impact of rising manufacturing input costs. Gross margins in 2008 and 2007 in North America were also affected by the weak United States dollar on products imported from our European and Brazilian manufacturing facilities. We recorded approximately $1.5 million and $1.0 million of stock compensation expense, within cost of goods sold, during 2008 and 2007, respectively, in accordance with SFAS No. 123R (Revised 2004), “Share-Based Payment” (“SFAS No. 123R”), as is more fully explained in Note 1 to our Consolidated Financial Statements.
 
Selling, general and administrative (“SG&A”) expenses as a percentage of net sales decreased during 2008 compared to 2007, primarily as a result of higher sales volumes in 2008 and cost control initiatives. We


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recorded approximately $32.0 million and $25.0 million of stock compensation expense, within SG&A, during 2008 and 2007, respectively, in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 123R, as is more fully explained in Note 1 to our Consolidated Financial Statements. Engineering expenses increased during 2008 as a result of continued spending to fund new products, product improvements and cost reduction projects.
 
The restructuring and other infrequent expenses recorded in 2008 related primarily to severance and employee relocation costs associated with rationalization of our Valtra sales office located in France. The restructuring and other infrequent income recorded in 2007 primarily related to a $3.2 million gain on the sale of a portion of the buildings, land and improvements associated with our Randers, Denmark facility. This gain was partially offset by $0.9 million of charges primarily related to severance and employee relocation costs associated with the rationalization of our Valtra sales office located in France as well our rationalization of certain parts, sales and marketing and administrative functions in Germany.
 
Interest expense, net was $19.1 million for 2008 compared to $24.1 million for 2007. The decrease was primarily due to a reduction in debt levels and increased interest income earned during 2008 compared to 2007. See “Liquidity and Capital Resources” for further discussion.
 
Other expense, net was $20.1 million in 2008 compared to $43.4 million in 2007. Losses on sales of receivables primarily under our securitization facilities were $27.3 million in 2008 compared to $36.1 million in 2007. The decrease during 2008 was primarily due to lower interest rates in 2008 compared to 2007, partially offset by higher outstanding funding under the securitizations in 2008 compared to 2007. There was also an increase in foreign exchange gains in 2008 compared to 2007.
 
We recorded an income tax provision of $164.6 million in 2008 compared to $111.4 million in 2007. SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”), requires the establishment of a valuation allowance when it is more likely than not that some portion or all of a company’s deferred tax assets will not be realized. In accordance with SFAS No. 109, we assessed the likelihood that our deferred tax assets would be recovered from estimated future taxable income and available income tax planning strategies. Our effective tax rate was positively impacted during 2008 primarily due to reductions in statutory tax rates in the United Kingdom and Germany and a decrease in losses incurred in the United States. At December 31, 2008 and 2007, we had gross deferred tax assets of $471.4 million and $479.l million, respectively, including $210.8 million and $247.8 million, respectively, related to net operating loss carryforwards. At December 31, 2008 and 2007, we had recorded total valuation allowances as an offset to the gross deferred tax assets of $316.6 million and $315.3 million, respectively, primarily related to net operating loss carryforwards in Brazil, Denmark, The Netherlands and the United States. Realization of the remaining deferred tax assets as of December 31, 2008 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.
 
In 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109. FIN 48 also prescribes a recognition threshold and measurement of a tax position taken or expected to be taken in an enterprise’s tax return. FIN 48 was effective for fiscal years beginning after December 15, 2006. Accordingly, we adopted the provisions of FIN 48 on January 1, 2007. At December 31, 2008 and 2007, we had approximately $20.1 million and $22.7 million, respectively, of unrecognized tax benefits, all of which would impact our effective tax rate if recognized. As of December 31, 2008 and 2007, we had approximately $7.6 million and $14.0 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, 2008 and 2007, we had accrued interest and penalties related to unrecognized tax benefits of approximately $1.8 million and $1.1 million, respectively. See Note 6 to our Consolidated Financial Statements for further discussion of our uncertain income tax positions.


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Equity in net earnings of affiliates was $38.8 million in 2008 compared to $30.4 million in 2007. The increase in 2008 was primarily due to income associated with our investment in the Laverda S.p.A. operating joint venture acquired in September 2007, as well as increased earnings in our retail finance joint ventures. See “Retail Finance Joint Ventures” for further discussion.
 
2007 Compared to 2006
 
Net income for 2007 was $246.3 million, or $2.55 per diluted share, compared to a net loss for 2006 of $64.9 million, or $0.71 per diluted share.
 
Our results for 2007 included the following items:
 
  •  restructuring and other infrequent income of $2.3 million, or $0.03 per share, primarily related to a $3.2 million gain on the sale of a portion of the land, buildings and improvements of our Randers, Denmark facility for proceeds of approximately $4.4 million, partially offset by $0.9 million of charges primarily related to severance and employee relocation costs associated with the rationalization of our Valtra sales office located in France, as well as the rationalization of certain parts, sales and marketing and administrative functions in Germany.
 
Our results for 2006 included the following items:
 
  •  a non-cash goodwill impairment charge of $171.4 million, or $1.81 per share, related to our Sprayer business in accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”); and
 
  •  restructuring and other infrequent expenses of $1.0 million, or $0.01 per share, primarily related to the rationalization of certain parts, sales, marketing and administrative functions in the United Kingdom and Germany, as well as the rationalization of certain Valtra European sales offices.
 
Net sales for 2007 were approximately $1,393.1 million, or 25.6%, higher than 2006 primarily due to improved industry conditions in most major global agricultural equipment markets and the positive impact of foreign currency translation. Sales growth was achieved in all of our geographic operating segments. Income from operations was $394.8 million in 2007 compared to $68.9 million in 2006. Income from operations during 2006 was negatively impacted by a $171.4 million goodwill impairment charge. The increase in income from operations and operating margins during 2007 was due primarily to sales volume growth, improved product mix and cost control initiatives.
 
In our Europe/Africa/Middle East operations, income from operations improved approximately $118.6 million in 2007 compared to 2006, primarily due to increased sales volumes, currency translation, a better mix of high horsepower tractors and margin improvements achieved through higher production volumes and cost reduction initiatives. Income from operations in our South American operations increased approximately $56.1 million in 2007 compared to 2006, primarily due to sales growth resulting from stronger market conditions, primarily in the major market of Brazil, as well as margin improvement related to higher sales and production as well as cost management. In North America, income from operations increased approximately $2.1 million in 2007 compared to 2006, primarily due to higher sales as a result of improved market conditions. Our results in North America were affected by the negative impacts of currency movements on products sourced from Brazil and Europe. Income from operations in our Asia/Pacific region decreased approximately $0.4 million in 2007 compared to 2006, primarily due to lower operating margins resulting from foreign currency impacts and sales mix.
 
Retail Sales
 
Worldwide industry equipment demand for farm equipment increased in 2007 in most major markets. Improved farm income driven by higher farm commodity prices contributed to the improved demand for equipment. Farm commodity prices were supported as a result of strong global demand and historically low inventories of commodities.


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In the United States and Canada, industry unit retail sales of tractors increased approximately 1% in 2007 compared to 2006, due to increases in the high horsepower and utility tractor segments, offset by a decrease in the compact tractor segment. Industry unit retail sales of combines increased approximately 13% when compared to the prior year. Our unit retail sales of high horsepower tractors and combines in North America increased while our unit retail sales of utility and compact tractors decreased in 2007 compared to 2006 levels. In Europe, industry unit retail sales of tractors increased approximately 4% in 2007 compared to 2006. Demand was strongest in the high horsepower segment and in the markets of Central and Eastern Europe, the United Kingdom, Scandinavia and France, which offset weaker markets in Spain, Italy and Germany. Our unit retail sales of tractors for 2007 in Europe were also higher when compared to 2006. In South America, industry unit retail sales of tractors in 2007 increased approximately 50% compared to 2006. Retail sales of tractors in the major market of Brazil increased approximately 53% during 2007. Industry unit retail sales of combines during 2007 were approximately 79% higher than the prior year, with an increase in Brazil of approximately 131% compared to the prior year. Our unit retail sales of tractors and combines in South America were also higher in 2007 compared to 2006. In other international markets, our net sales for 2007 were approximately 9.6% lower than the prior year, due to lower sales in the Middle East.
 
Results of Operations
 
Net sales for 2007 were $6,828.1 million compared to $5,435.0 million for 2006. The increase was primarily attributable to significant net sales increases in the South America and Europe/Africa/Middle East regions as well as positive currency translation impacts. Currency translation positively impacted net sales by approximately $473.3 million, primarily due to the continued strengthening of the Brazilian real and the Euro. The following table sets forth, for the periods indicated, the impact to net sales of currency translation by geographical segment (in millions, except percentages):
 
                                                 
                Change     Change due to Currency Translation  
    2007     2006     $     %     $     %  
 
North America
  $ 1,488.1     $ 1,283.8     $ 204.3       15.9 %   $ 12.2       1.0 %
South America
    1,090.6       657.2       433.4       66.0 %     101.6       15.5 %
Europe/Africa/ Middle East
    4,067.1       3,334.4       732.7       22.0 %     342.1       10.3 %
Asia/Pacific
    182.3       159.6       22.7       14.2 %     17.4       10.9 %
                                                 
    $ 6,828.1     $ 5,435.0     $ 1,393.1       25.6 %   $ 473.3       8.7 %
                                                 
 
Regionally, net sales in North America increased during 2007 compared to 2006, primarily due to higher sales of high horsepower tractors, combines and hay equipment due to market growth in those segments. In the Europe/Africa/Middle East region, net sales increased in 2007 primarily due to sales growth in tractors and parts, particularly in the markets of France, Germany, the United Kingdom, Scandinavia and Eastern and Central Europe. In South America, net sales increased during 2007 compared to 2006 primarily as a result of a recovery in the major market of Brazil and sales growth in Argentina. In the Asia/Pacific region, net sales increased in 2007 compared to 2006 due to improved industry demand in the region. We estimate that worldwide average price increases during 2007 contributed approximately 1.5% to the increase in net sales. Consolidated net sales of tractors and combines, which consisted of approximately 73% of our net sales in 2007, increased approximately 29% in 2007 compared to 2006. Unit sales of tractors and combines increased approximately 13% during 2007 compared to 2006. The difference between the unit sales increase and the increase in net sales was the result of foreign currency translation, pricing and sales mix changes.


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The following table sets forth, for the periods indicated, the percentage relationship to net sales of certain items included in our Consolidated Statements of Operations (in millions, except percentages):
 
                                 
    2007     2006  
          % of
          % of
 
    $     Net Sales     $     Net Sales  
 
Gross profit
  $ 1,191.0       17.4 %   $ 927.8       17.1 %
Selling, general and administrative expenses
    625.7       9.1 %     541.7       10.0 %
Engineering expenses
    154.9       2.3 %     127.9       2.4 %
Restructuring and other infrequent (income) expenses
    (2.3 )           1.0        
Goodwill impairment charge
                171.4       3.1 %
Amortization of intangibles
    17.9       0.2 %     16.9       0.3 %
                                 
Income from operations
  $ 394.8       5.8 %   $ 68.9       1.3 %
                                 
 
Gross profit as a percentage of net sales increased during 2007 as compared to 2006 primarily due to increased net sales, higher production and an improved sales mix, partially offset by negative currency impacts. Margins in North America were affected by the weak United States dollar on products imported from our European and Brazilian manufacturing facilities. Unit production of tractors and combines during 2007 was approximately 20% higher than 2006. Gross margins also benefited from productivity improvements that were achieved through purchasing initiatives, resourcing of components and labor efficiencies. We recorded approximately $1.0 million of stock compensation expense, within cost of goods sold, during 2007 in accordance with SFAS No. 123R as is more fully explained in Note 1 to our Consolidated Financial Statements.
 
SG&A expenses as a percentage of net sales decreased during 2007 compared to 2006, primarily as a result of higher sales volumes in 2007 and cost control initiatives. We recorded approximately $25.0 million and $3.5 million of stock compensation expense, within SG&A, during 2007 and 2006, respectively, in accordance with SFAS No. 123R, as is more fully explained in Note 1 to our Consolidated Financial Statements. Engineering expenses increased during 2007 as a result of continued spending to fund product improvements and cost reduction projects.
 
The restructuring and other infrequent income recorded in 2007 primarily related to a $3.2 million gain on the sale of a portion of the buildings, land and improvements associated with our Randers, Denmark facility. This gain was partially offset by $0.9 million of charges primarily related to severance and employee relocation costs associated with the rationalization of our Valtra sales office located in France as well our rationalization of certain parts, sales and marketing and administrative functions in Germany. The restructuring and other infrequent expenses in 2006 primarily related to severance costs associated with the rationalization of certain parts, sales, marketing and administrative functions in the United Kingdom and Germany, as well as the rationalization of certain Valtra European sales offices located in Denmark, Norway, Germany and the United Kingdom.
 
In 2006, sales and operating income of our Sprayer business declined significantly as compared to prior years. This was primarily due to increased competition resulting from updated product offerings from our major competitors and a shift in industry demand away from our strength in the commercial application segment to the farmer-owned segment. In addition, our projections for our Sprayer business did not result in a valuation sufficient to support the carrying amount of the goodwill balance on our Consolidated Balance Sheet attributable to the Sprayer business. As a result, during the fourth quarter of 2006, we recorded a non-cash goodwill impairment charge of $171.4 million related to our Sprayer business in accordance with the provisions of SFAS No. 142. The results of our annual impairment analyses conducted as of October 1, 2007 indicated that no reduction in the carrying amount of goodwill for our other reporting units was required in 2007. Refer to “Critical Accounting Estimates” and Note 1 to our Consolidated Financial Statements for further discussion.
 
Interest expense, net was $24.1 million for 2007 compared to $55.2 million for 2006. The decrease was primarily due to debt refinancing as well as a reduction in debt levels from 2006. In December 2006, we


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issued $201.3 million aggregate principal amount of 11/4% convertible senior subordinated notes. The net proceeds received from the issuance of the notes, as well as available cash on hand, were used to repay a portion of our former outstanding United States dollar and Euro denominated term loans, which carried a higher variable interest rate. In June 2007, we repaid the remaining balances of those loans with available cash on hand. See “Liquidity and Capital Resources.”
 
Other expense, net was $43.4 million in 2007 compared to $32.9 million in 2006. Losses on sales of receivables primarily under our securitization facilities were $36.1 million in 2007 compared to $29.9 million in 2006. The increase during 2007 was primarily due to higher interest rates in 2007 compared to 2006.
 
We recorded an income tax provision of $111.4 million in 2007 compared to $73.5 million in 2006. In accordance with SFAS No. 109, we assessed the likelihood that our deferred tax assets would be recovered from estimated future taxable income and available income tax planning strategies. In 2007 and 2006, our effective tax rate was negatively impacted by incurring losses in tax jurisdictions where we recorded no tax benefit. The most significant impact related to losses incurred in the United States, where losses were primarily due to lower operating margins, as discussed above. At December 31, 2007 and 2006, we had gross deferred tax assets of $479.1 million and $472.5 million, respectively, including $247.8 million and $246.6 million, respectively, related to net operating loss carryforwards. At December 31, 2007 and 2006, we recorded total valuation allowances as an offset to the gross deferred tax assets of $315.3 million and $291.4 million, respectively, primarily related to net operating loss carryforwards in Brazil, Denmark and the United States.
 
We adopted the provisions of FIN 48 on January 1, 2007. As a result of our implementation of FIN 48, we did not recognize a material adjustment with respect to liabilities for unrecognized tax benefits during 2007. At December 31, 2007, we had approximately $22.7 million of unrecognized tax benefits, all of which would have impacted our effective tax rate if recognized. As of December 31, 2007, we had approximately $14.0 million of current accrued taxes related to uncertain income tax positions connected with ongoing tax audits in various jurisdictions that we expected to settle or pay in the succeeding 12 months. We recognize interest and penalties related to uncertain income tax positions in income tax expense. As of December 31, 2007, we had accrued interest and penalties related to unrecognized tax benefits of $1.1 million. See Note 6 to our Consolidated Financial Statements for further discussion of our adoption of FIN 48 and our uncertain income tax positions.
 
Equity in net earnings of affiliates was $30.4 million in 2007 compared to $27.8 million in 2006. The increase in 2007 was related to our 50% interest in the Laverda operating joint venture acquired in September 2007, as well as increased earnings in our retail finance joint ventures. See “Retail Finance Joint Ventures” for further discussion.


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Quarterly Results
 
The following table presents unaudited interim operating results. We believe that the following information includes all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our results of operations for the periods presented. The operating results for any period are not necessarily indicative of results for any future period.
 
                                 
    Three Months Ended  
    March 31     June 30     September 30     December 31  
    (In millions, except per share data)  
 
2008:
                               
Net sales
  $ 1,786.6     $ 2,395.4     $ 2,085.4     $ 2,157.2  
Gross profit
    315.2       428.2       380.1       376.2  
Income from operations(1)
    94.2       189.1       141.7       140.0  
Net income(1)
    62.3       133.1       102.6       102.0  
Net income per common share — diluted(1)
    0.63       1.34       1.04       1.08  
2007:
                               
Net sales
  $ 1,332.6     $ 1,711.4     $ 1,613.0     $ 2,171.1  
Gross profit
    219.4       297.0       307.6       367.0  
Income from operations(1)
    45.6       110.6       110.4       128.2  
Net income(1)
    24.5       63.8       76.9       81.1  
Net income per common share — diluted(1)
    0.26       0.67       0.80       0.82  
 
 
(1) For 2008, the quarters ended March 31, June 30, September 30 and December 31 included restructuring and other infrequent expenses (income) of $0.1 million, $0.1 million, $0.1 million and $(0.1) million, respectively, with no impact to net income per common share on a diluted basis.
 
For 2007, the quarters ended March 31, June 30, September 30 and December 31 included restructuring and other infrequent (income) expenses of $0.0 million, $0.3 million, $(2.5) million and $(0.1) million, respectively, thereby impacting net income per common share on a diluted basis by $0.00, $0.00, $(0.03) and $0.00, respectively.
 
Retail Finance Joint Ventures
 
Our AGCO Finance retail finance joint ventures provide retail financing and wholesale financing to our dealers in the United States, Canada, Brazil, Germany, France, the United Kingdom, Australia, Ireland, Austria and Argentina. The joint ventures are owned 49% by AGCO and 51% by a wholly owned subsidiary of Rabobank, a AAA rated financial institution based in The Netherlands. The majority of the assets of the retail finance joint ventures represent finance receivables. The majority of the liabilities represent notes payable and accrued interest. Under the various joint venture agreements, Rabobank or its affiliates provide financing to the joint ventures, primarily through lines of credit. We do not guarantee the debt obligations of the joint ventures other than a portion of the retail portfolio in Brazil that is held outside the joint venture by Rabobank Brazil, which was approximately $3.9 million as of December 31, 2008, and will gradually be eliminated over time. As of December 31, 2008, our capital investment in the retail finance joint ventures, which is included in “Investment in affiliates” on our Consolidated Balance Sheets, was approximately $187.8 million compared to $197.2 million as of December 31, 2007. The total finance portfolio in our retail finance joint ventures was approximately $4.8 billion as of December 31, 2008 and 2007. During 2008, our share in the earnings of the retail finance joint ventures, included in “Equity in net earnings of affiliates” on our Consolidated Statements of Operations, was $29.7 million compared to $26.6 million in 2007. The increase during 2008 was due primarily to higher finance revenues generated as a result of higher average retail finance portfolios, particularly in Europe, and the favorable impact of currency translation. The retail finance portfolio in our retail finance joint venture in Brazil was $1.2 billion as of December 31, 2008 compared to $1.3 billion as of December 31, 2007. As a result of weak market conditions in Brazil in 2005 and 2006, a substantial portion of this portfolio has been included in a payment deferral program directed by the Brazilian government. The impact of the deferral program has 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


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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 as a result of the recent global economic challenges. 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’ level 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.
 
Critical Accounting Estimates
 
We prepare our Consolidated Financial Statements in conformity with U.S. generally accepted accounting principles. In the preparation of these financial statements, we make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The significant accounting policies followed in the preparation of the financial statements are detailed in Note 1 to our Consolidated Financial Statements. We believe that our application of the policies discussed below involves significant levels of judgment, estimates and complexity.
 
Due to the level of judgment, complexity and period of time over which many of these items are resolved, actual results could differ from those estimated at the time of preparation of the financial statements. Adjustments to these estimates would impact our financial position and future results of operations.
 
Allowance for Doubtful Accounts
 
We determine our allowance for doubtful accounts by actively monitoring the financial condition of our customers to determine the potential for any nonpayment of trade receivables. In determining our allowance for doubtful accounts, we also consider other economic factors, such as aging trends. We believe that our process of specific review of customers combined with overall analytical review provides an effective evaluation of ultimate collectability of trade receivables. Our loss or write-off experience was approximately 0.03% of net sales in 2008.
 
Discount and Sales Incentive Allowances
 
We provide various incentive programs with respect to our products. These incentive programs include reductions in invoice prices, reductions in retail financing rates, dealer commissions, dealer incentive allowances and volume discounts. In most cases, incentive programs are established and communicated to our dealers on a quarterly basis. The incentives are paid either at the time of invoice (through a reduction of invoice price), at the time of the settlement of the receivable, at the time of retail financing, at the time of warranty registration, or at a subsequent time based on dealer purchases. The incentive programs are product line specific and generally do not vary by dealer. The cost of sales incentives associated with dealer commissions and dealer incentive allowances is estimated based upon the terms of the programs and historical experience, is based on a percentage of the sales price, and is recorded at the later of (a) the date at which the related revenue is recognized, or (b) the date at which the sales incentive is offered. The related provisions and accruals are made on a product or product line basis and are monitored for adequacy and revised at least quarterly in the event of subsequent modifications to the programs. Volume discounts are estimated and recognized based on historical experience, and related reserves are monitored and adjusted based on actual dealer purchases and the dealers’ progress towards achieving specified cumulative target levels. The Company records the cost of interest subsidy payments, which is a reduction in the retail financing rates, at the later of (a) the date at which the related revenue is recognized, or (b) the date at which the sales incentive is offered. Estimates of these incentives are based on the terms of the programs and historical experience. All incentive programs are recorded and presented as a reduction of revenue due to the fact that we do not receive an identifiable benefit in exchange for the consideration provided. Reserves for incentive programs that will be paid either through the reduction of future invoices or through credit memos are recorded as “accounts receivable allowances” within our Consolidated Balance Sheets. Reserves for incentive programs that will be


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paid in cash, as is the case with most of our volume discount programs, are recorded within “Accrued expenses” within our Consolidated Balance Sheets.
 
At December 31, 2008, we had recorded an allowance for discounts and sales incentives of approximately $125.1 million. If we were to allow an additional 1% of sales incentives and discounts at the time of retail sale, for those sales subject to such discount programs, our reserve would increase by approximately $6.9 million as of December 31, 2008. Conversely, if we were to decrease our sales incentives and discounts by 1% at the time of retail sale, our reserve would decrease by approximately $6.9 million as of December 31, 2008.
 
Inventory Reserves
 
Inventories are valued at the lower of cost or market using the first-in, first-out method. Market is current replacement cost (by purchase or by reproduction dependent on the type of inventory). In cases where market exceeds net realizable value (i.e., estimated selling price less reasonably predictable costs of completion and disposal), inventories are stated at net realizable value. Market is not considered to be less than net realizable value reduced by an allowance for an approximately normal profit margin. Determination of cost includes estimates for surplus and obsolete inventory based on estimates of future sales and production. Changes in demand and product design can impact these estimates. We periodically evaluate and update our assumptions when assessing the adequacy of inventory adjustments.
 
Deferred Income Taxes and Uncertain Income Tax Positions
 
SFAS No. 109 requires the establishment of a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. In accordance with SFAS No. 109, we establish valuation allowances for deferred tax assets when we estimate it is more likely than not that the tax assets will not be realized, and we periodically assess the likelihood that our deferred tax assets will be recovered from estimated future projected taxable income and available tax planning strategies and determine if adjustments to the valuation allowance are appropriate. As a result of these assessments, there are certain tax jurisdictions where we do not benefit further losses. Changes in industry conditions and the competitive environment may impact the accuracy of our projections.
 
At December 31, 2008 and 2007, we had gross deferred tax assets of $471.4 million and $479.1 million, respectively, including $210.8 million and $247.8 million, respectively, related to net operating loss carryforwards. At December 31, 2008 and 2007, we recorded total valuation allowances as an offset to the gross deferred tax assets of $316.6 million and $315.3 million, respectively, primarily related to net operating loss carryforwards in Brazil, Denmark, The Netherlands and the United States. Realization of the remaining deferred tax assets as of December 31, 2008 depends on generating sufficient taxable income in future periods, net of reversing deferred tax liabilities. We believe it is more likely than not that the remaining net deferred tax assets will be realized.
 
In 2006, the FASB issued FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109. FIN 48 also prescribes a recognition threshold and measurement of a tax position taken or expected to be taken in an enterprise’s tax return. FIN 48 was effective for fiscal years beginning after December 15, 2006. Accordingly, we adopted the provisions of FIN 48 on January 1, 2007. At December 31, 2008 and 2007, we had approximately $20.1 million and $22.7 million, respectively, of unrecognized tax benefits, all of which would impact our effective tax rate if recognized. As of December 31, 2008 and 2007, we had approximately $7.6 million and $14.0 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, 2008 and 2007, we had accrued interest and penalties related to unrecognized tax benefits of approximately $1.8 million and $1.1 million, respectively. We maintain procedures designed to appropriately reflect uncertain income tax positions in our Consolidated Financial Statements in accordance with the provisions of FIN 48. These procedures include the evaluation of uncertainties both internally and, as necessary, externally with third


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party advisors. See Note 6 to our Consolidated Financial Statements for further discussion of our uncertain income tax positions.
 
Warranty and Additional Service Actions
 
We make provisions for estimated expenses related to product warranties at the time products are sold. We base these estimates on historical experience of the nature, frequency and average cost of warranty claims. In addition, the number and magnitude of additional service actions expected to be approved, and policies related to additional service actions, are taken into consideration. Due to the uncertainty and potential volatility of these estimated factors, changes in our assumptions could materially affect net income.
 
Our estimate of warranty obligations is reevaluated on a quarterly basis. Experience has shown that initial data for any product series line can be volatile; therefore, our process relies upon long-term historical averages until sufficient data is available. As actual experience becomes available, it is used to modify the historical averages to ensure that the forecast is within the range of likely outcomes. Resulting balances are then compared with present spending rates to ensure that the accruals are adequate to meet expected future obligations.
 
See Note 1 to our Consolidated Financial Statements for more information regarding costs and assumptions for warranties.
 
Insurance Reserves
 
We provide insurance reserves for our estimates of losses due to claims for worker’s compensation, product liability and other liabilities for which we are self-insured. We base these estimates on the ultimate settlement amount of claims, which often have long periods of resolution. We closely monitor the claims to maintain adequate reserves.
 
Pensions
 
We have defined benefit pension plans covering certain employees principally in the United States, the United Kingdom, Germany, Finland, Norway, France, Switzerland, Australia and Argentina. Our primary plans cover certain employees in the United States and the United Kingdom.
 
In the United States, we sponsor a funded, qualified pension plan for our salaried employees, as well as a separate funded qualified pension plan for our hourly employees. Both plans are frozen, and we fund at least the minimum contributions required under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code to both plans. In addition, we sponsor an unfunded, nonqualified pension plan for our executives.
 
In the United Kingdom, we sponsor a funded pension plan that provides an annuity benefit based on participants’ final average earnings and service. Participation in this plan is limited to certain older, longer service employees and existing retirees. No future employees will participate in this plan. See Note 8 to our Consolidated Financial Statements for more information regarding costs and assumptions for employee retirement benefits.
 
Nature of Estimates Required.  The measurement of our pension obligations, costs and liabilities is dependent on a variety of assumptions provided by management and used by our actuaries. These assumptions include estimates of the present value of projected future pension payments to all plan participants, taking into consideration the likelihood of potential future events such as salary increases and demographic experience. These assumptions may have an effect on the amount and timing of future contributions.
 
Assumptions and Approach Used.  The assumptions used in developing the required estimates include the following key factors:
 
     
•   Discount rates
  •   Inflation
•   Salary growth
  •   Expected return on plan assets
•   Retirement rates
  •   Mortality rates


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For the years ended December 31, 2008 and 2007, we based the discount rate used to determine the projected benefit obligation for our U.S. pension plans and our Executive Nonqualified Pension Plan by matching the projected cash flows of our plans to the Citigroup Pension Discount Curve. For our non-U.S. plans, we based the discount rate on comparable indices within each of those countries, such as the Merrill Lynch AA-rated corporate bond index in the United Kingdom and the 10+-year iBoxx AA corporate bond yield in Euro zone countries. The indices used in the United States, the United Kingdom and other countries were chosen to match our expected plan obligations and related expected cash flows. As of December 31, 2008, the measurement date with respect to our U.S. and U.K. pension plans and all other defined benefit plans is December 31 of each year. We adopted the provisions of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS No. 158”), as of the year ended December 31, 2006. SFAS No. 158 requires the measurement of all defined benefit plan assets and obligations as of the date of our fiscal year end for years ending after December 15, 2008, and, therefore, the measurement date with respect to our U.K. pension plan was changed from September 30 to December 31 upon adoption of that measurement provision during 2008. Our inflation assumption is based on an evaluation of external market indicators. The salary growth assumptions reflect our long-term actual experience, the near-term outlook and assumed inflation. The expected return on plan asset assumptions reflects asset allocations, investment strategy, historical experience and the views of investment managers. Retirement and termination rates are based primarily on actual plan experience and actuarial standards of practice. The mortality rates for the U.S. plans were updated during 2006 to reflect the most recent study released by the Society of Actuaries, which reflects pensioner experience and distinctions for blue and white collar employees. The mortality rates for the U.K. plan were updated in 2007 to reflect expected improvements in the life expectancy of the plan participants. The effects of actual results differing from our assumptions are accumulated and amortized over future periods and, therefore, generally affect our recognized expense in such periods.
 
Our U.S. and U.K. pension plans represent approximately 88% of our consolidated projected benefit obligation as of December 31, 2008. If the discount rate used to determine the 2008 projected benefit obligation for our U.S. pension plans was decreased by 25 basis points, our projected benefit obligation would have increased by approximately $1.4 million at December 31, 2008, and our 2009 pension expense would increase by approximately $0.1 million. If the discount rate used to determine the 2008 projected benefit obligation for our U.S. pension plans was increased by 25 basis points, our projected benefit obligation would have decreased by approximately $1.3 million, and our 2009 pension expense would decrease by approximately $0.1 million. If the discount rate used to determine the projected benefit obligation for our U.K. pension plan was decreased by 25 basis points, our projected benefit obligation would have increased by approximately $15.2 million at December 31, 2008, and our 2009 pension expense would increase by approximately $1.4 million. If the discount rate used to determine the projected benefit obligation for our U.K. pension plan was increased by 25 basis points, our projected benefit obligation would have decreased by approximately $14.6 million at December 31, 2008, and our 2009 pension expense would decrease by approximately $1.4 million.
 
Unrecognized actuarial losses related to our qualified pension plans were $186.1 million as of December 31, 2008 compared to $126.9 million as of December 31, 2007. The increase in unrecognized losses between years primarily reflects losses as a result of poorer than expected asset returns, partially offset by an increase in discount rates and the impact of foreign currency translation. The unrecognized actuarial losses will be impacted in future periods by actual asset returns, discount rate changes, currency exchange rate fluctuations, actual demographic experience and certain other factors. These losses will be amortized on a straight-line basis over the average remaining service period of active employees expected to receive benefits under most of our qualified defined benefit pension plans. For some plans, the population covered is predominantly inactive participants, and losses related to those plans will be amortized over the average remaining lives of those participants while covered by the respective plan. As of December 31, 2008, the average amortization period was 18 years for our U.S. pension plans and 11 years for our non-U.S. pension plans. The estimated net actuarial loss for qualified defined benefit pension plans that will be amortized from our accumulated other comprehensive loss during the year ended December 31, 2009 is approximately $9.1 million compared to approximately $8.3 million during the year ended December 31, 2008.


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The weighted average asset allocation of our U.S. pension benefit plans at December 31, 2008 and 2007 are as follows:
 
                 
Asset Category
  2008     2007  
 
Large and small cap domestic equity securities
    24 %     30 %
International equity securities
    11 %     15 %
Domestic fixed income securities
    23 %     19 %
Other investments
    42 %     36 %
                 
Total
    100 %     100 %
                 
 
The weighted average asset allocation of our non-U.S. pension benefit plans at December 31, 2008 and 2007 are as follows:
 
                 
Asset Category
  2008     2007  
 
Equity securities
    39 %     47 %
Fixed income securities
    33 %     31 %
Other investments
    28 %     22 %
                 
Total
    100 %     100 %
                 
 
All tax-qualified pension fund investments in the United States are held in the AGCO Corporation Master Pension Trust. Our global pension fund strategy is to diversify investments across broad categories of equity and fixed income securities with appropriate use of alternative investment categories to minimize risk and volatility. Our U.S. target allocation of retirement fund investments is 35% large and small cap domestic equity securities, 15% international equity securities, 20% domestic fixed income securities and 30% invested in other investments. We have noted that over very long periods, this mix of investments would achieve an average return in excess of 8.5%. In arriving at the choice of an expected return assumption of 8% for our U.S.-based plans, we have tempered this historical indicator with lower expectations for returns on equity investments in the future as well as considered administrative costs of the plans. To date, we have not invested pension funds in our own common stock, and we have no intention of doing so in the future. Our non-U.S. target allocation of retirement fund investments is 42% equity securities, 28% fixed income securities and 30% invested in other investments. The majority of our non-U.S. pension fund investments are related to our pension plan in the United Kingdom. We have noted that over very long periods, this target mix of investments would achieve an average return in excess of 7.5%. In arriving at the choice of an expected return assumption of 7% for our U.K. pension plan, we have tempered this historical indicator with a slightly lower expectation of future returns on equity investments as well as plan expenses.
 
As of December 31, 2008, we had approximately $139.2 million in unfunded or underfunded obligations related to our qualified pension plans, due primarily to our pension plan in the United Kingdom. In 2008, we contributed approximately $31.7 million towards those obligations, and we expect to fund approximately $26.5 million in 2009. Future funding is dependent upon compliance with local laws and regulations and changes to those laws and regulations in the future, as well as the generation of operating cash flows in the future. We currently have an agreement in place with the trustees of the U.K. defined benefit plan that obligates us to fund approximately £13.5 million per year (or approximately $19.6 million) towards that obligation for the next seven years. The funding arrangement is based upon the current underfunded status and could change in the future as discount rates, local laws and regulations, and other factors change.
 
Other Postretirement Benefits (Retiree Health Care and Life Insurance)
 
We provide certain postretirement health care and life insurance benefits for certain employees, principally in the United States and Brazil. Participation in these plans has been generally limited to older employees and existing retirees. See Note 8 to our Consolidated Financial Statements for more information regarding costs and assumptions for other postretirement benefits.


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Nature of Estimates Required.  The measurement of our obligations, costs and liabilities associated with other postretirement benefits, such as retiree health care and life insurance, requires that we make use of estimates of the present value of the projected future payments to all participants, taking into consideration the likelihood of potential future events such as health care cost increases and demographic experience, which may have an effect on the amount and timing of future payments.
 
Assumptions and Approach Used.  The assumptions used in developing the required estimates include the following key factors:
 
     
•   Health care cost trends
  •   Inflation
•   Discount rates
  •   Expected return on plan assets
•   Retirement rates
  •   Mortality rates
 
Our health care cost trend assumptions are developed based on historical cost data, the near-term outlook, efficiencies and other cost-mitigating actions, including further employee cost sharing, administrative improvements and other efficiencies, and an assessment of likely long-term trends. For the years ended December 31, 2008 and 2007, we based the discount rate used to determine the projected benefit obligation for our U.S. postretirement benefit plans by matching the projected cash flows of our plans to the Citigroup Pension Discount Curve. For our Brazilian plan, we based the discount rate on government bond indices within that country. The indices used were chosen to match our expected plan obligations and related expected cash flows. Our inflation assumptions are based on an evaluation of external market indicators. Retirement and termination rates are based primarily on actual plan experience and actuarial standards of practice. The mortality rates for the U.S. plans were updated during 2006 to reflect the most recent study released by the Society of Actuaries, which reflects pensioner experience and distinctions for blue and white collar employees. The effects of actual results differing from our assumptions are accumulated and amortized over future periods and, therefore, generally affect our recognized expense in such future periods.
 
Our U.S. postretirement health care and life insurance plans represent approximately 98% of our consolidated projected benefit obligation. If the discount rate used to determine the 2008 projected benefit obligation for our U.S. postretirement benefit plans was decreased by 25 basis points, our projected benefit obligation would have increased by approximately $0.7 million at December 31, 2008, and our 2009 postretirement benefit expense would increase by a nominal amount. If the discount rate used to determine the 2008 projected benefit obligation for our U.S. postretirement benefit plans was increased by 25 basis points, our projected benefit obligation would have decreased by approximately $0.7 million, and our 2009 pension expense would decrease by a nominal amount.
 
Unrecognized actuarial losses related to our U.S. postretirement benefit plans were $7.1 million as of December 31, 2008 compared to $4.3 million as of December 31, 2007. The increase in losses primarily reflects an increase in our assumptions regarding future medical costs. The unrecognized actuarial losses will be impacted in future periods by discount rate changes, actual demographic experience, actual health care inflation and certain other factors. These losses will be amortized on a straight-line basis over the average remaining service period of active employees expected to receive benefits, or the average remaining lives of inactive participants, covered under the postretirement benefit plans. As of December 31, 2008, the average amortization period was 14 years for our U.S. postretirement benefit plans. The estimated net actuarial loss for postretirement health care benefits that will be amortized from our accumulated other comprehensive loss during the year ended December 31, 2009 is approximately $0.3 million, compared to approximately $0.2 million during the year ended December 31, 2008.
 
As of December 31, 2008, we had approximately $28.6 million in unfunded obligations related to our U.S. and Brazilian postretirement health and life insurance benefit plans. In 2008, we made benefit payments of approximately $2.0 million towards these obligations, and we expect to make benefit payments of approximately $2.0 million towards these obligations in 2009.


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For measuring the expected U.S. postretirement benefit obligation at December 31, 2008, we assumed a 8.5% health care cost trend rate for 2009, decreasing to 4.9% by 2060. Changing the assumed health care cost trend rates by one percentage point each year and holding all other assumptions constant would have the following effect to service and interest cost for 2009 and the accumulated postretirement benefit obligation at December 31, 2008 (in millions):
 
                 
    One Percentage
    One Percentage
 
    Point Increase     Point Decrease  
 
Effect on service and interest cost
  $ 0.2     $ (0.2 )
Effect on accumulated postretirement benefit obligation
  $ 3.0     $ (2.6 )
 
Litigation
 
We are party to various claims and lawsuits arising in the normal course of business. We closely monitor these claims and lawsuits and frequently consult with our legal counsel to determine whether they may, when resolved, have a material adverse effect on our financial position or results of operations and accrue and/or disclose loss contingencies as appropriate.
 
Goodwill and Indefinite-Lived Assets
 
SFAS No. 142 establishes a method of testing goodwill and other indefinite-lived intangible assets for impairment on an annual basis or on an interim basis if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying value. Our initial assessment and our annual assessments involve determining an estimate of the fair value of our reporting units in order to evaluate whether an impairment of the current carrying amount of goodwill and other indefinite-lived intangible assets exists. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired, and thus the second step of the impairment is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. Fair values are derived based on an evaluation of past and expected future performance of our reporting units. A reporting unit is an operating segment or one level below an operating segment (e.g., a component). A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and our executive management team regularly reviews the operating results of that component. In addition, we combine and aggregate two or more components of an operating segment as a single reporting unit if the components have similar economic characteristics. Our reportable segments reported under the guidance of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” are not our reporting units, with the exception of our Asia/Pacific geographical segment.
 
The second step of the goodwill impairment test, used to measure the amount of impairment loss, compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The loss recognized cannot exceed the carrying amount of goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination is determined. That is, we allocate the fair value of a reporting unit to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. The excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill.
 
We utilized a combination of valuation techniques, including a discounted cash flow approach and a market multiple approach, when making our annual and interim assessments. As stated above, goodwill is tested for impairment on an annual basis and more often if indications of impairment exist. The results of our analyses conducted as of October 1, 2008 and 2007 indicated that no reduction in the carrying amount of goodwill was required. During 2006, sales and operating income of our Sprayer operations declined significantly as compared to prior years. This was primarily due to increased competition resulting from


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updated product offerings from our major competitors and a shift in industry demand away from our strength in the commercial application segment to the farmer-owned segment. In addition, our projections for the Sprayer operations did not result in a valuation sufficient to support the carrying amount of the goodwill balance on our Consolidated Balance Sheet, as there was no excess fair value of the reporting unit over the amounts assigned to its assets and liabilities that could be allocated to the implied fair value of goodwill. As a result, we concluded that the goodwill associated with our Sprayer operations was impaired and recognized a write-down of the total amount of recorded goodwill of approximately $171.4 million during the fourth quarter of 2006. The results of our analyses conducted as of October 1, 2006 associated with our other reporting units indicated that no reduction in their carrying amounts of goodwill was required.
 
The tests required by SFAS No. 142 require us to make various assumptions including assumptions regarding future cash flows, market multiples, growth rates and discount rates. The assumptions about future cash flows and growth rates are based on the current and long-term business plans of the reporting unit. Discount rate assumptions are based on an assessment of the risk inherent in the future cash flows of the reporting unit. These assumptions require significant judgments on our part and the conclusions that we reach could vary significantly based upon these judgments.
 
As of December 31, 2008, we had approximately $587.0 million of goodwill. While our annual impairment testing in 2008 supported the carrying amount of this goodwill, we may be required to reevaluate the carrying amount in future periods, thus utilizing different assumptions that reflect the then current market conditions and expectations, and therefore, we could conclude that an impairment has occurred.
 
Liquidity and Capital Resources
 
Our financing requirements are subject to variations due to seasonal changes in inventory and receivable levels. Internally generated funds are supplemented when necessary from external sources, primarily our revolving credit facility and accounts receivable securitization facilities.
 
We believe that these facilities, together with available cash and internally generated funds, will be sufficient to support our working capital, capital expenditures and debt service requirements for the foreseeable future. In addition, none of these facilities matures until, at the earliest, December 2010:
 
  •  Our $300 million revolving credit facility, as extended in 2008, does not expire until May 2013 (no amounts were outstanding as of December 31, 2008).
 
  •  Our €200.0 million (or approximately $279.4 million) 67/8% senior subordinated notes do not mature until 2014.
 
  •  Absent a significant increase in our stock price, the earliest that we could be required to redeem our $201.3 million 11/4% convertible senior subordinated notes is in December 2010 and in December 2013 with respect to our $201.3 million 13/4% convertible senior subordinated notes.
 
  •  Our $489.7 million securitization facilities in U.S. and Canada, and in Europe do not expire until December 2013 and October 2011, respectively (with outstanding funding of $483.2 million as of December 31, 2008).
 
In addition, although we are in complete compliance with the financial covenants contained in these facilities and do not foresee any difficulty in continuing to meet the financial covenants, should we ever encounter difficulties, our historical relationship with our lenders has been strong and we anticipate their continued long-term support of our business. However, it is impossible to predict the length or severity of the current tightened credit environment, which may impact our ability to obtain additional financing sources or our ability to renew or extend the maturity of our existing financing sources.
 
Current Facilities
 
Our $201.3 million of 11/4% convertible senior subordinated notes due December 15, 2036 were issued in December 2006, and we received proceeds of approximately $196.4 million, after related fees and expenses. The notes are unsecured obligations and are convertible into cash and shares of our common stock upon


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satisfaction of certain conditions, as discussed below. The notes provide for (i) the settlement upon conversion in cash up to the principal amount of the notes with any excess conversion value settled in shares of our common stock, and (ii) the conversion rate to be increased under certain circumstances if the notes are converted in connection with certain change of control transactions occurring prior to December 15, 2013. Interest is payable on the notes at 11/4% 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. The notes contain certain anti-dilution provisions designed to protect the holders’ interests. If a change of control transaction that qualifies as a “fundamental change” occurs on or prior to December 15, 2013, under certain circumstances we will increase the conversion rate for the notes converted in connection with the transaction by a number of additional shares (as used in this paragraph, the “make whole shares”). A fundamental change is any transaction or event in connection with which 50% or more of our common stock is exchanged for, converted into, acquired for or constitutes solely the right to receive consideration that is not at least 90% common stock listed on a U.S. national securities exchange, or approved for quotation on an automated quotation system. The amount of the increase in the conversion rate, if any, will depend on the effective date of the transaction and an average price per share of our common stock as of the effective date. No adjustment to the conversion rate will be made if the price per share of common stock is less than $31.33 per share or more than $180.00 per share. The number of additional make whole shares range from 7.3658 shares per $1,000 principal amount at $31.33 per share to 0.0483 shares per $1,000 principal amount at $180.00 per share for the year ended December 15, 2009, with the number of make whole shares generally declining over time. If the acquirer or certain of its affiliates in the fundamental change transaction has publicly traded common stock, we may, instead of increasing the conversion rate as described above, cause the notes to become convertible into publicly traded common stock of the acquirer, with principal of the notes to be repaid in cash, and the balance, if any, payable in shares of such acquirer common stock. At no time will we issue an aggregate number of shares of our common stock upon conversion of the notes in excess of 31.9183 shares per $1,000 principal amount thereof. If the holders of our common stock receive only cash in a fundamental change transaction, then holders of notes will receive cash as well. Holders may convert the notes only under the following circumstances: (1) during any fiscal quarter, if the closing sales price of our common stock exceeds 120% of the conversion price for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter; (2) during the five business day period after a five consecutive trading day period in which the trading price per note for each day of that period was less than 98% of the product of the closing sale price of our common stock and the conversion rate; (3) if the notes have been called for redemption; or (4) upon the occurrence of certain corporate transactions. Beginning December 15, 2013, we may redeem any of the notes at a redemption price of 100% of their principal amount, plus accrued interest. Holders of the notes may require us to repurchase the notes at a repurchase price of 100% of their principal amount, plus accrued interest, on December 15, 2013, 2016, 2021, 2026 and 2031. Holders may also require us to repurchase all or a portion of the notes upon a fundamental change, as defined in the indenture, at a repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus any accrued and unpaid interest. The notes are senior subordinated obligations and are subordinated to all of our existing and future senior indebtedness and effectively subordinated to all debt and other liabilities of our subsidiaries. The notes are equal in right of payment with our 67/8% senior subordinated notes due 2014 and our 13/4% convertible senior subordinated notes due 2033.
 
We used the net proceeds received from the issuance of the 11/4% convertible senior subordinated notes, as well as available cash, to repay $196.9 million of our former outstanding United States dollar denominated term loan and €79.1 million of our former outstanding Euro denominated term loan. In addition, we recorded interest expense of approximately $2.0 million for the proportionate write-off of deferred debt issuance costs associated with the former term loan balances that were repaid. Our former United States dollar denominated and Euro denominated term loans are discussed further below.
 
Our $201.3 million of 13/4% convertible senior subordinated notes due December 31, 2033 were exchanged and issued in June 2005 and provide for (i) the settlement upon conversion in cash up to the principal amount of the converted new notes with any excess conversion value settled in shares of our common


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stock, and (ii) the conversion rate to be increased under certain circumstances if the new notes are converted in connection with certain change of control transactions occurring prior to December 10, 2010, but otherwise are substantially the same as the old notes. The notes are unsecured obligations and are convertible into cash and shares of our common stock upon satisfaction of certain conditions, as discussed below. Interest is payable on the notes at 13/4% per annum, payable semi-annually in arrears in cash on June 30 and December 31 of each year. The notes are convertible into shares of our common stock at an effective price of $22.36 per share, subject to adjustment. This reflects an initial conversion rate for the notes of 44.7193 shares of common stock per $1,000 principal amount of notes. The notes contain certain anti-dilution provisions designed to protect the holders’ interests. If a change of control transaction that qualifies as a “fundamental change” occurs on or prior to December 31, 2010, under certain circumstances we will increase the conversion rate for the notes converted in connection with the transaction by a number of additional shares (as used in this paragraph, the “make whole shares”). A fundamental change is any transaction or event in connection with which 50% or more of our common stock is exchanged for, converted into, acquired for or constitutes solely the right to receive consideration that is not at least 90% common stock listed on a U.S. national securities exchange or approved for quotation on an automated quotation system. The amount of the increase in the conversion rate, if any, will depend on the effective date of the transaction and an average price per share of our common stock as of the effective date. No adjustment to the conversion rate will be made if the price per share of common stock is less than $17.07 per share or more than $110.00 per share. The number of additional make whole shares range from 13.0 shares per $1,000 principal amount at $17.07 per share to 0.0 shares per $1,000 principal amount at $110.00 per share for the year ended December 31, 2009, with the number of make whole shares generally declining over time. If the acquirer or certain of its affiliates in the fundamental change transaction has publicly traded common stock, we may, instead of increasing the conversion rate as described above, cause the notes to become convertible into publicly traded common stock of the acquirer, with principal of the notes to be repaid in cash, and the balance, if any, payable in shares of such acquirer common stock. At no time will we issue an aggregate number of shares of our common stock upon conversion of the notes in excess of 58.5823 shares per $1,000 principal amount thereof. If the holders of our common stock receive only cash in a fundamental change transaction, then holders of notes will receive cash as well. Holders may convert the notes only under the following circumstances: (1) during any fiscal quarter, if the closing sales price of our common stock exceeds 120% of the conversion price for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter; (2) during the five business day period after a five consecutive trading day period in which the trading price per note for each day of that period was less than 98% of the product of the closing sale price of our common stock and the conversion rate; (3) if the notes have been called for redemption; or (4) upon the occurrence of certain corporate transactions. Beginning January 1, 2011, we may redeem any of the notes at a redemption price of 100% of their principal amount, plus accrued interest. Holders of the notes may require us to repurchase the notes at a repurchase price of 100% of their principal amount, plus accrued interest, on December 31, 2010, 2013, 2018, 2023 and 2028.
 
As of December 31, 2008, the closing sales price of our common stock did not exceed 120% of the conversion price of $22.36 and $40.73 per share, respectively, for our 13/4% convertible senior subordinated notes and our 11/4% convertible senior subordinated notes for at least 20 trading days in the 30 consecutive trading days ending December 31, 2008, and, therefore, we classified both notes as long-term debt. As of December 31, 2007, the closing sales price of our common stock had exceeded 120% of the conversion price of $22.36 and $40.73 per share, respectively, for our 13/4% convertible senior subordinated notes and our 11/4% convertible senior subordinated notes for at least 20 trading days in the 30 consecutive trading days ending December 31, 2007, and, therefore, we classified both notes as current liabilities. Future classification of the notes between current and long-term debt is dependent on the closing sales price of our common stock during future quarters.
 
The 13/4% convertible senior subordinated notes and the 11/4% convertible senior subordinated notes will impact the diluted weighted average shares outstanding in future periods depending on our stock price for the excess conversion value using the treasury stock method. In May 2008, the FASB issued FASB Staff Position (“FSP”) APB 14-1, “Accounting for Convertible Debt Instruments That May be Settled in Cash Upon Conversion (including Partial Cash Settlement).” The FSP requires that the liability and equity components of


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convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement), commonly referred to as an Instrument C under Emerging Issues Task Force (“EITF”) Issue No. 90-19, “Convertible Bonds with Issuer Options to Settle for Cash Upon Conversion,” (“EITF No. 90-19”) be separated to account for the fair value of the debt and equity components as of the date of issuance to reflect the issuer’s nonconvertible debt borrowing rate. The FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and is to be applied retrospectively to all periods presented (retroactive restatement) pursuant to the guidance in SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154”). The FSP will impact the accounting treatment of our 13/4% convertible senior subordinated notes due 2033 and our 11/4% convertible senior subordinated notes due 2036 by reclassifying a portion of the convertible notes balances to additional paid-in capital representing the estimated fair value of the conversion feature as of the date of issuance and creating a discount on the convertible notes that will be amortized through interest expense over the life of the convertible notes. The FSP will result in a significant increase in interest expense and, therefore, reduce net income and basic and diluted earnings per share within our Consolidated Statements of Operations. We will adopt the requirements of the FSP on January 1, 2009, and estimate that, upon adoption, our “Retained earnings” balance will be reduced by approximately $37 million, our “Convertible senior subordinated notes” balance will be reduced by approximately $57 million and our “Additional paid-in capital” balance will increase by approximately $57 million, including a deferred tax impact of approximately $37 million. “Interest expense, net” attributable to the convertible senior subordinated notes during the fiscal year ended December 31, 2009 is expected to increase by approximately $15 million, compared to 2008, as a result of the adoption.
 
On May 16, 2008, we entered into a new $300.0 million unsecured multi-currency revolving credit facility. The new credit facility replaced our former $300.0 million secured multi-currency revolving credit facility. The maturity date of the new facility is May 16, 2013. Interest accrues on amounts outstanding under the new facility, at our option, at either (1) LIBOR plus a margin ranging between 1.00% and 1.75% based upon the Company’s total debt ratio or (2) the higher of the administrative agent’s base lending rate or one-half of one percent over the federal funds rate plus a margin ranging between 0.0% and 0.50% based upon the Company’s total debt ratio. The new facility contains covenants restricting, among other things, the incurrence of indebtedness and the making of certain payments, including dividends, and is subject to acceleration in the event of a default, as defined in the new facility. The Company also must fulfill financial covenants in respect of a total debt to EBITDA ratio and an interest coverage ratio, as defined in the facility. As of December 31, 2008, we had no outstanding borrowings under the multi-currency revolving credit facility. As of December 31, 2008, we had availability to borrow approximately $291.3 million under the revolving credit facility.
 
Our former credit facility provided for a $300.0 million multi-currency revolving credit facility, a $300.0 million United States dollar denominated term loan and a €120.0 million Euro denominated term loan. The maturity date of the revolving credit facility was December 2008 and the maturity date for the term loan facility was June 2009. We were required to make quarterly payments towards the United States dollar denominated term loan and Euro denominated term loan of $0.75 million and €0.3 million, respectively (or an amortization of one percent per annum until the maturity date of each term loan). As previously discussed, in December 2006, we used the net proceeds received from the issuance of the 11/4% convertible senior subordinated notes, as well as available cash, to repay $196.9 million of the United States dollar denominated term loan and €79.1 million of the Euro denominated term loan. In addition, on June 29, 2007, we repaid the remaining balances of the United States dollar and Euro denominated term loans, totaling $72.5 million and €28.6 million, respectively, with available cash on hand. The revolving credit facility was secured by a majority of our U.S., Canadian, Finnish and U.K.-based assets and a pledge of a portion of the stock of our domestic and material foreign subsidiaries. Interest accrued on amounts outstanding under the revolving credit facility, at our option, at either (1) LIBOR plus a margin ranging between 1.25% and 2.0% based upon our senior debt ratio or (2) the higher of the administrative agent’s base lending rate or one-half of one percent over the federal funds rate plus a margin ranging between 0.0% and 0.75% based on our senior debt ratio. Interest accrued on amounts outstanding under the term loans at LIBOR plus 1.75%. The credit facility contained covenants restricting, among other things, the incurrence of indebtedness and the making of certain payments, including dividends. We also had to fulfill financial covenants including, among others, a total debt to EBITDA ratio, a senior debt to EBITDA ratio and a fixed charge coverage ratio, as defined in the facility.


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As of December 31, 2007, we had no outstanding borrowings under the former credit facility. As of December 31, 2007, we had availability to borrow $291.1 million under the former revolving credit facility.
 
Our €200.0 million of 67/8% senior subordinated notes due April 15, 2014 were issued in April 2004. We received proceeds of approximately $234.0 million, after offering related fees and expenses. The 67/8% senior subordinated notes are unsecured obligations and are subordinated in right of payment to any existing or future senior indebtedness. Interest is payable on the notes semi-annually on April 15 and October 15 of each year. Beginning April 15, 2009, we may redeem the notes, in whole or in part, initially at 103.438% of their principal amount, plus accrued interest, declining to 100% of their principal amount, plus accrued interest, at any time on or after April 15, 2012. In addition, before April 15, 2009, we may redeem the notes, in whole or in part, at a redemption price equal to 100% of the principal amount, plus accrued interest and a make-whole premium. The notes include covenants restricting the incurrence of indebtedness and the making of certain restricted payments, including dividends.
 
Under our securitization facilities, we sell accounts receivable in the United States, Canada and Europe on a revolving basis to commercial paper conduits through a wholly-owned special purpose U.S. subsidiary and a qualifying special purpose entity (“QSPE”) in the United Kingdom. The United States and Canadian securitization facilities expire in December 2013 and the European facility expires in October 2011, but each is subject to annual renewal. In December 2008, we renewed and amended our United States and Canadian securitization facilities extending the expiration date from April 2009 to December 2013. As of December 31, 2008, the aggregate amount of these facilities was $489.7 million. The outstanding funded balance of $483.2 million as of December 31, 2008 has the effect of reducing accounts receivable and short-term liabilities by the same amount. Our risk of loss under the securitization facilities is limited to a portion of the unfunded balance of receivables sold, which is approximately 15% of the funded amount. We maintain reserves for doubtful accounts associated with this risk. If the facilities were terminated, we would not be required to repurchase previously sold receivables but would be prevented from selling additional receivables to the commercial paper conduits.
 
These facilities allow us to sell accounts receivables through financing conduits, which obtain funding from commercial paper markets. Future funding under securitization facilities depends upon the adequacy of receivables, a sufficient demand for the underlying commercial paper and the maintenance of certain covenants concerning the quality of the receivables and our financial condition. In the event commercial paper demand is not adequate, our securitization facilities provide for liquidity backing from various financial institutions, including Rabobank. These liquidity commitments would provide us with interim funding to allow us to find alternative sources of working capital financing, if necessary.
 
We have an agreement to permit transferring, on an ongoing basis, the majority of our wholesale interest-bearing receivables in North America to our United States and Canadian retail finance joint ventures, AGCO Finance LLC and AGCO Finance Canada, Ltd. We have a 49% ownership interest in these joint ventures. The transfer of the wholesale interest-bearing receivables is without recourse to AGCO and we continue to service the receivables. As of December 31, 2008 and 2007, the balance of interest-bearing receivables transferred to AGCO Finance LLC and AGCO Finance Canada, Ltd. under this agreement was approximately $59.0 million and $73.3 million, respectively.
 
Cash Flows
 
Cash flow provided by operating activities was $291.3 million during 2008, compared to $504.3 million during 2007. The decrease in cash flow provided by operating activities during 2008 was primarily due to the increase in our net working capital used to support our growth in sales during 2008, partially offset by an increase in net income. In addition, supplier delays, limited credit in Eastern European and Russian markets and softening demand in the fourth quarter of 2008 caused our inventory levels to increase at year end.
 
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 $1,026.7 million in working capital at December 31, 2008, as compared with $638.4 million at December 31, 2007. Accounts receivable and inventories, combined, at December 31, 2008 were $304.9 million higher than at December 31, 2007.


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Capital expenditures for 2008 were $251.3 million compared to $141.4 million during 2007. Capital expenditures during 2008 were used to support our manufacturing operations, systems initiatives, and the development and enhancement of new and existing products.
 
In September 2007, we made a $66.8 million investment in Laverda, an operating joint venture that manufactures harvesting equipment, and paid $20.5 million in connection with the acquisition of Industria Agricola Fortaleza Limitada (“SFIL”), in Brazil.
 
Our debt to capitalization ratio, which is total indebtedness divided by the sum of total indebtedness and stockholders’ equity, was 25.8% at December 31, 2008 compared to 25.4% at December 31, 2007.
 
Contractual Obligations
 
The future payments required under our significant contractual obligations, excluding foreign currency option and forward contracts, as of December 31, 2008 are as follows (in millions):
 
                                         
    Payments Due by Period  
                2010 to
    2012 to
    2014 and
 
    Total     2009     2011     2013     Beyond  
 
Indebtedness
  $ 682.1     $ 0.1     $     $     $ 682.0  
Interest payments related to long-term debt(1)
    119.6       25.3       47.0       40.9       6.4  
Capital lease obligations
    5.0       2.4       2.3       0.3        
Operating lease obligations
    158.1       37.0       50.1       26.4       44.6  
Unconditional purchase obligations(2)
    90.7       76.5       10.9       3.3        
Other short-term and long-term obligations(3)
    234.7       83.7       47.5       48.6       54.9  
                                         
Total contractual cash obligations
  $ 1,290.2     $ 225.0     $ 157.8     $ 119.5     $ 787.9  
                                         
 
                                         
    Amount of Commitment Expiration per Period  
                2010 to
    2012 to
    2014 and
 
    Total     2009     2011     2013     Beyond  
 
Standby letters of credit and similar instruments
  $ 8.7     $ 8.7     $     $     $  —  
Guarantees
    126.9       115.3       10.3       1.3        
                                         
Total commercial commitments and letters of credit
  $ 135.6     $ 124.0     $ 10.3     $ 1.3     $  
                                         
 
 
(1) Estimated interest payments are calculated assuming current interest rates over minimum maturity periods specified in debt agreements. Debt may be repaid sooner or later than such minimum maturity periods.
 
(2) Unconditional purchase obligations exclude routine purchase orders entered into in the normal course of business. As a result of the rationalization of our European combine manufacturing operations during 2004, we entered into an agreement with Laverda to produce certain combine model ranges over a five-year period. The agreement provides that we will purchase a minimum quantity of approximately 83 combines through May 2009, at a cost of approximately €6.7 million (or approximately $9.4 million).
 
(3) Other short-term and long-term obligations include estimates of future minimum contribution requirements under our U.S. and non-U.S. defined benefit pension and postretirement plans. These estimates are based on current legislation in the countries we operate within and are subject to change. Other short-term and long-term obligations also include income tax liabilities related to uncertain income tax positions connected with ongoing income tax audits in various jurisdictions in accordance with FIN 48. In addition, short-term obligations include amounts due to financial institutions related to sales of certain receivables that did not meet the off-balance sheet criteria under SFAS No. 140.
 
Off-Balance Sheet Arrangements
 
Guarantees
 
At December 31, 2008, we were obligated under certain circumstances to purchase, through the year 2010, up to approximately $3.0 million of equipment upon expiration of certain operating leases between AGCO Finance LLC and AGCO Finance Canada Ltd., our retail finance joint ventures in North America, and end users. We also maintain a remarketing agreement with these joint ventures whereby we are obligated to


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repurchase repossessed inventory at market values. We have an agreement with AGCO Finance LLC which limits our purchase obligations under this arrangement to $6.0 million in the aggregate per calendar year. We believe that any losses that might be incurred on the resale of this equipment will not materially impact our financial position or results of operations, due to the fair value of the underlying equipment.
 
From time to time, we sell certain trade receivables under factoring arrangements to financial institutions throughout the world. We evaluate the sale of such receivables pursuant to the guidelines of SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities — a Replacement of FASB Statement No. 125,” and have determined that these facilities should be accounted for as off-balance sheet transactions in accordance with SFAS No. 140.
 
At December 31, 2008, we guaranteed indebtedness owed to third parties of approximately $123.9 million, primarily related to dealer and end-user financing of equipment. Such guarantees generally obligate us to repay outstanding finance obligations owed to financial institutions if dealers or end users default on such loans through 2012. We believe the credit risk associated with these guarantees is not material to our financial position. Losses under such guarantees have historically been insignificant. In addition, we would be able to recover any amounts paid under such guarantees from the sale of the underlying financed farm equipment, as the fair value of such equipment would be sufficient to offset a substantial portion of the amounts paid.
 
Other
 
At December 31, 2008, we had foreign currency forward contracts to buy an aggregate of approximately $419.0 million United States dollar equivalents and foreign currency forward contracts to sell an aggregate of approximately $326.0 million United States dollar equivalents. The outstanding contracts as of December 31, 2008 range in maturity through December 2009. See “Foreign Currency Risk Management” for additional information.
 
Contingencies
 
As a result of Brazilian tax legislative changes impacting value added taxes (“VAT”), we have recorded a reserve of approximately $13.9 million and $21.9 million against our outstanding balance of Brazilian VAT taxes receivable as of December 31, 2008 and 2007, respectively, due to the uncertainty as to our ability to collect the amounts outstanding.
 
In February 2006, we received a subpoena from the SEC in connection with a non-public, fact-finding inquiry entitled “In the Matter of Certain Participants in the Oil for Food Program.” This subpoena requested documents concerning transactions in Iraq by AGCO and certain of our subsidiaries under the United Nations Oil for Food Program. Subsequently, we were contacted by the DOJ regarding the same transactions, although no subpoena or other formal process has been initiated by the DOJ. Other inquiries have been initiated by the Brazilian, Danish, French and U.K. governments regarding subsidiaries of AGCO. The inquiries arose from sales of approximately $58.0 million in farm equipment to the Iraq ministry of agriculture between 2000 and 2002. The SEC’s staff has asserted that certain aspects of those transactions were not properly recorded in our books and records. We are cooperating fully in these inquiries, including discussions regarding settlement. It is not possible at this time to predict the outcome of these inquiries or their impact, if any, on us; although if the outcomes were adverse, we could be required to pay fines and make other payments as well as take appropriate remedial actions.
 
On June 27, 2008, the Republic of Iraq filed a civil action in a federal court in New York, Case No. 08 CIV 59617, naming as defendants three of our foreign subsidiaries that participated in the United Nations Oil for Food Program. Ninety-one other entities or companies were also named as defendants in the civil action due to their participation in the United Nations Oil for Food Program. The complaint purports to assert claims against each of the defendants seeking damages in an unspecified amount. Although our 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 us; although if the outcome was adverse, we could be required to pay damages.


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In August 2008, as part of a routine audit, the Brazilian taxing authorities disallowed deductions relating to the amortization of certain goodwill recognized in connection with a reorganization of our Brazilian operations and the related transfer of certain assets to our Brazilian subsidiaries. The amount of the tax disallowance through December 31, 2008, not including interest and penalties, was approximately 77.5 million Brazilian reais, (or approximately $33.7 million). The amount ultimately in dispute will be greater because of interest, penalties and future deductions. We have been advised by our legal and tax advisors that our position with respect to the deductions is allowable under the tax laws of Brazil. We are contesting the disallowance and believe 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.
 
We are a party to various other legal claims and actions incidental to our business. We believe that none of these claims or actions, either individually or in the aggregate, is material to our business or financial condition.
 
Related Parties
 
Rabobank is a 51% owner in our retail finance joint ventures, which are located in the United States, Canada, Brazil, Germany, France, the United Kingdom, Australia, Ireland and Austria. Rabobank is also the principal agent and participant in our revolving credit facility and our securitization facilities. The majority of the assets of our 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 provide financing to the joint venture companies, primarily through lines of credit. We do not guarantee the debt obligations of the retail finance joint ventures other than a portion of the retail portfolio in Brazil that is held outside the joint venture by Rabobank Brazil. Prior to 2005, our joint venture in Brazil had an agency relationship with Rabobank whereby Rabobank provided the funding. In February 2005, we made a $21.3 million investment in our retail finance joint venture with Rabobank Brazil. With the additional investment, the joint venture’s organizational structure is now more comparable to our other retail finance joint ventures and will result in the gradual elimination of our solvency guarantee to Rabobank for the portfolio that was originally funded by Rabobank Brazil. As of December 31, 2008, the solvency requirement for the portfolio held by Rabobank was approximately $3.9 million.
 
Our retail finance joint ventures provide retail financing and wholesale financing to our dealers. The terms of the financing arrangements offered to our dealers are similar to arrangements they provide to unaffiliated third parties. As discussed previously, at December 31, 2008 we were obligated under certain circumstances to purchase through the year 2010 up to $3.0 million of equipment upon expiration of certain operating leases between AGCO Finance LLC and AGCO Finance Canada Ltd., our retail joint ventures in North America, and end users. We also maintain a remarketing agreement with these joint ventures, as discussed above under “Off-Balance Sheet Arrangements.” In addition, as part of sales incentives provided to end users, we may from time to time subsidize interest rates of retail financing provided by our retail joint ventures. The cost of those programs is recognized at the time of sale to our dealers. In addition, as discussed above, we have an agreement to permit transferring, on an ongoing basis, the majority of our wholesale interest-bearing receivables in North America to AGCO Finance LLC and AGCO Finance Canada, Ltd. We have a 49% ownership interest in these joint ventures. The transfer of the wholesale interest-bearing receivables is without recourse to AGCO and we continue to service the receivables. As of December 31, 2008 and 2007, the balance of interest-bearing receivables transferred to AGCO Finance LLC and AGCO Finance Canada, Ltd. under this agreement was approximately $59.0 million and $73.3 million, respectively.
 
Outlook
 
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, farm industry related legislation, availability of financing and general economic conditions.


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The outlook for the 2009 farm equipment industry reflects significant uncertainty and softening demand in all major farm equipment markets. After record 2008 market conditions, we expect 2009 South American industry retail sales to be down significantly due to dry weather conditions and the impact of the tightened credit environment on planted acreage and crop production. European industry retail sales are expected to decline moderately in 2009, with stronger declines in the credit challenged markets of Central and Eastern Europe and Russia. In North America, we expect 2009 industry retail sales to decline moderately, with lower demand for small tractors reflecting the weakness in the general economy and residential construction. Demand from the professional farming sector in North America is expected to moderate in the second half of the year.
 
As a result of the weaker industry outlook, our 2009 net sales are expected to decrease compared to 2008 as a result of softer end market demand as well as the impact of unfavorable foreign currency translation. In 2009, projected operating income is expected to be impacted by lower net sales and production volumes as well as by increased engineering expenses for new product development and Tier 4 emission requirements. As a result, net income is expected to decline in 2009 compared to 2008.
 
Foreign Currency Risk Management
 
We have significant manufacturing operations in France, Germany, Brazil and Finland, and we purchase a portion of our tractors, combines and components from third-party foreign suppliers, primarily in various European countries and in Japan. We also sell products in over 140 countries throughout the world. The majority of our net sales outside the United States are denominated in the currency of the customer location, with the exception of sales in the Middle East, Africa, Asia and parts of South America where net sales are primarily denominated in British pounds, Euros or United States dollars. See Note 14 to our Consolidated Financial Statements for net sales by customer location. Our most significant transactional foreign currency exposures are the Euro, Brazilian real, the Canadian dollar and the Russian rouble in relation to the United States dollar. Fluctuations in the value of foreign currencies create exposures, which can adversely affect our results of operations.
 
We attempt to manage our 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, we hedge certain, but not all, of our exposures through the use of foreign currency forward or option contracts. Our hedging policy prohibits entering into such contracts for speculative trading purposes. Our translation exposure resulting from translating the financial statements of foreign subsidiaries into United States dollars is not hedged. Our most significant translation exposures are the Euro, the British pound and the Brazilian real in relation to the United States dollar. When practical, this translation impact is reduced by financing local operations with local borrowings.
 
All derivatives are recognized on our Consolidated Balance Sheets at fair value. On the date a derivative contract is entered into, we designate 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. As discussed above, we use foreign currency forward contracts to hedge receivables and payables on our Consolidated Balance Sheet and our subsidiaries’ balance sheets that are denominated in foreign currencies other than the functional currency. These forward contracts are classified as non-designated derivative instruments. Gains and losses on such contracts are historically substantially offset by losses and gains on the remeasurement of the underlying asset or liability being hedged. Changes in fair value of non-designated derivative contracts are reported in current earnings. During 2008, 2007 and 2006, we designated certain foreign currency option and forward contracts as cash flow hedges of expected future sales. The effective portion of the fair value gains or losses on these cash flow hedges were recorded in other comprehensive income (loss) and subsequently reclassified into cost of goods sold during the period the sales were recognized. These amounts offset the effect of the changes in foreign exchange rates on the related sale transactions. The amount of the gain recorded in other comprehensive income (loss) that was reclassified to cost of goods sold during the years ended December 31, 2008, 2007 and 2006 was approximately $14.1 million, $4.1 million and $4.0 million, respectively, on an after-tax basis. The amount of the (loss) gain recorded


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to other comprehensive income (loss) related to the outstanding cash flow hedges as of December 31, 2008, 2007 and 2006 was approximately $(36.7) million, $7.7 million and $0.1 million, respectively, on an after-tax basis. The outstanding contracts as of December 31, 2008 range in maturity through December 2009.
 
During 2008, cash was deposited with a financial institution as security against outstanding foreign exchange contracts that mature throughout 2009. As of December 31, 2008, the amount deposited was approximately $33.8 million and was classified as “Restricted cash” in our Consolidated Balance Sheets. The amount posted as security will either increase or decrease in the future depending on the value of the outstanding amount of contracts secured under the arrangement and the relative impact on gains (losses) on the outstanding contracts.
 
The following is a summary of foreign currency derivative contracts used to hedge currency exposures. The outstanding contracts as of December 31, 2008 range in maturity through December 2009. The net notional amounts and fair value gains or losses as of December 31, 2008 stated in United States dollars are as follows (in millions, except average contract rate):
 
                         
    Net
             
    Notional
    Average
    Fair
 
    Amount
    Contract
    Value
 
    Buy/(Sell)     Rate*     Gain/(Loss)  
 
Australian dollar
  $ (24.3 )     1.57     $ (2.3 )
Brazilian real
    368.7       2.04       (49.5 )
British pound
    1.2       0.66       4.2  
Canadian dollar
    (39.0 )     1.24       (0.4 )
Euro
    (187.7 )     0.65       18.3  
Japanese yen
    24.9       92.74       0.6  
Mexican peso
    (19.6 )     13.56       0.3  
New Zealand dollar
    (3.1 )     1.69       0.1  
Norwegian krone
    11.3       6.85       (0.2 )
Polish zloty
    (7.5 )     3.08       (0.3 )
Russian rouble
    (44.8 )     30.43       0.1  
South African rand
    0.3       9.41        
Swedish krona
    10.6       8.44       0.8  
Swiss franc
    2.0       1.15       1.1  
                         
                    $ (27.2 )
                         
 
 
* Per United States dollar
 
Because these contracts were entered into for hedging purposes, the gains and losses on the contracts would largely be offset by gains and losses on the underlying firm commitment or forecasted transaction.
 
Interest Rates
 
We manage interest rate risk through the use of fixed rate debt and may in the future utilize interest rate swap contracts. We have fixed rate debt from our senior subordinated notes and our convertible senior subordinated notes. Our floating rate exposure is related to our revolving credit facility and our securitization facilities, which are tied to changes in United States and European LIBOR rates. Assuming a 10% increase in interest rates, interest expense, net and the cost of our securitization facilities for the year ended December 31, 2008 would have increased by approximately $1.6 million.
 
We had no interest rate swap contracts outstanding during the years ended December 31, 2008, 2007 and 2006.


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Recent Accounting Pronouncements
 
In December 2008, the FASB affirmed FSP No. FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (“FSP FAS 132(R)-1”). FSP FAS 132(R)-1 requires additional disclosures about assets held in an employer’s defined benefit pension or postretirement plan, primarily related to categories and fair value measurements of plan assets. FSP FAS 132(R)-1 is effective for fiscal years ending after December 15, 2009. We will therefore adopt the disclosure requirements for our fiscal year ended December 31, 2009.
 
In September 2008, the FASB issued FSP FIN 45-4, “An amendment of FIN 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” The FSP requires additional disclosure about the current status of the payment/performance risk of a guarantee. The FSP is effective for financial statements issued for fiscal years and interim periods ending after November 15, 2008, with early adoption encouraged. We adopted the provisions of the FSP as of the year ended December 31, 2008.
 
In May 2008, the FASB issued FSP APB 14-1. The FSP requires that the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement), commonly referred to as an Instrument C under EITF No. 90-19, be separated to account for the fair value of the debt and equity components as of the date of issuance to reflect the issuer’s nonconvertible debt borrowing rate. The FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and is to be applied retrospectively to all periods presented (retroactive restatement) pursuant to the guidance in SFAS No. 154. The FSP will impact the accounting treatment of our 13/4% convertible senior subordinated notes due 2033 and our 11/4% convertible senior subordinated notes due 2036 by reclassifying a portion of the convertible notes balances to additional paid-in capital representing the estimated fair value of the conversion feature as of the date of issuance and creating a discount on the convertible notes that will be amortized through interest expense over the life of the convertible notes. The FSP will result in a significant increase in interest expense and, therefore, reduce net income and basic and diluted earnings per share within our Consolidated Statements of Operations. We will adopt the requirements of the FSP on January 1, 2009, and estimate that upon adoption, our “Retained earnings” balance will be reduced by approximately $37 million, our “Convertible senior subordinated notes” balance will be reduced by approximately $57 million and our “Additional paid-in capital” balance will increase by approximately $57 million, including a deferred tax impact of approximately $37 million. “Interest expense, net” attributable to the convertible senior subordinated notes during the fiscal year ended December 31, 2009 is expected to increase by approximately $15 million, compared to 2008, as a result of the adoption.
 
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133” (“SFAS No. 161”). SFAS No. 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early adoption encouraged. We will adopt SFAS No. 161 on January 1, 2009.
 
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141R”), and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS No. 160”). SFAS No. 141R requires an acquirer to measure the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. SFAS No. 141R also requires the fair value measurement of certain other assets and liabilities related to the acquisition, such as contingencies and research and development. SFAS No. 160 clarifies that a noncontrolling interest in a subsidiary should be reported as equity in a company’s consolidated financial statements. Consolidated net income should include the net income for both the parent and the noncontrolling interest, with disclosure of both amounts on a company’s consolidated statement of operations. The calculation of earnings per share will


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continue to be based on income amounts attributable to the parent. We are required to adopt SFAS No. 141R and SFAS No. 160 on January 1, 2009.
 
In March 2007, the EITF reached a consensus on EITF Issue No. 06-10, “Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements” (“EITF 06-10”), which requires that an employer recognize a liability for the postretirement benefit related to a collateral assignment split-dollar life insurance arrangement in accordance with either SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions” (“SFAS No. 106”) (if, in substance, a postretirement benefit plan exists), or Accounting Principles Board Opinion No. 12 (if the arrangement is, in substance, an individual deferred compensation contract) if the employer has agreed to maintain a life insurance policy during the employee’s retirement or provide the employee with a death benefit based on the substantive agreement with the employee. In addition, the EITF reached a consensus that an employer should recognize and measure an asset based on the nature and substance of the collateral assignment split-dollar life insurance arrangement. The EITF observed that in determining the nature and substance of the arrangement, the employer should assess what future cash flows the employer is entitled to, if any, as well as the employee’s obligation and ability to repay the employer. EITF 06-10 is effective for fiscal years beginning after December 15, 2007. The adoption of EITF 06-10 on January 1, 2008 did not have a material effect on our consolidated results of operations or financial position.
 
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 provides companies with an option to report selected financial assets and liabilities at fair value and to provide additional information that will help investors and other users of financial statements to understand more easily the effect on earnings of a company’s choice to use fair value. It also requires companies to display the fair value of those assets and liabilities for which they have chosen to use fair value on the face of their balance sheets. The adoption of SFAS No. 159 on January 1, 2008 did not have a material effect on our consolidated results of operations or financial position.
 
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 establishes a common definition for fair value to be applied to guidance regarding U.S. generally accepted accounting principles requiring use of fair value, establishes a framework for measuring fair value and expands disclosure about such fair value measurements. SFAS No. 157 is effective for fair value measures already required or permitted by other standards for fiscal years beginning after November 15, 2007. In November 2007, the FASB proposed a one-year deferral of SFAS No. 157’s fair value measurement requirements for nonfinancial assets and liabilities that are not required or permitted to be measured at fair value on a recurring basis. The adoption of SFAS No. 157 on January 1, 2008 did not have a material effect on our consolidated results of operations or financial position.
 
In June 2006, the EITF reached a consensus on EITF Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements” (“EITF 06-4”), which requires the application of the provisions of SFAS No. 106 to endorsement split-dollar life insurance arrangements. SFAS No. 106 would require the Company to recognize a liability for the discounted future benefit obligation that the Company would have to pay upon the death of the underlying insured employee. An endorsement-type arrangement generally exists when the Company owns and controls all incidents of ownership of the underlying policies. EITF 06-4 is effective for fiscal years beginning after December 15, 2007. The adoption of EITF 06-4 on January 1, 2008 did not have a material effect on our consolidated results of operations or financial position.
 
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk
 
The Quantitative and Qualitative Disclosures about Market Risk information required by this Item set forth under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Foreign Currency Risk Management” and “—Interest Rates” on pages 46 and 47 under Item 7 of this Form 10-K are incorporated herein by reference.


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Item 8.   Financial Statements and Supplementary Data
 
The following Consolidated Financial Statements of AGCO and its subsidiaries for each of the years in the three-year period ended December 31, 2008 are included in this Item:
 
         
    Page
 
    51  
    52  
    53  
    54  
    55  
    56  
 
The information under the heading “Quarterly Results” of Item 7 on page 30 of this Form 10-K is incorporated herein by reference.


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Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Stockholders:
AGCO Corporation:
 
We have audited the accompanying consolidated balance sheets of AGCO Corporation and subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2008. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in Item 15(a)(2). These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AGCO Corporation and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), AGCO Corporation’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 27, 2009 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
 
/s/ KPMG LLP
 
Atlanta, Georgia
February 27, 2009


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AGCO CORPORATION
 
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
 
                         
    Years Ended December 31,  
    2008     2007     2006  
 
Net sales
  $ 8,424.6     $ 6,828.1     $ 5,435.0  
Cost of goods sold
    6,924.9       5,637.1       4,507.2  
                         
Gross profit
    1,499.7       1,191.0       927.8  
Selling, general and administrative expenses
    720.9       625.7       541.7  
Engineering expenses
    194.5       154.9       127.9  
Restructuring and other infrequent expenses (income)
    0.2       (2.3 )     1.0  
Goodwill impairment charge
                171.4  
Amortization of intangibles
    19.1       17.9       16.9  
                         
Income from operations
    565.0       394.8       68.9  
Interest expense, net
    19.1       24.1       55.2  
Other expense, net
    20.1       43.4       32.9  
                         
Income (loss) before income taxes and equity in net earnings of affiliates
    525.8       327.3       (19.2 )
Income tax provision
    164.6       111.4       73.5  
                         
Income (loss) before equity in net earnings of affiliates
    361.2       215.9       (92.7 )
Equity in net earnings of affiliates
    38.8       30.4       27.8  
                         
Net income (loss)
  $ 400.0     $ 246.3     $ (64.9 )
                         
Net income (loss) per common share:
                       
Basic
  $ 4.36     $ 2.69     $ (0.71 )
                         
Diluted
  $ 4.09     $ 2.55     $ (0.71 )
                         
Weighted average number of common and common equivalent shares outstanding:
                       
Basic
    91.7       91.5       90.8  
                         
Diluted
    97.7       96.6       90.8  
                         
 
See accompanying notes to Consolidated Financial Statements.


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AGCO CORPORATION
 
CONSOLIDATED BALANCE SHEETS
(In millions, except share amounts)
 
                 
    December 31,
    December 31,
 
    2008     2007  
 
ASSETS
Current Assets:
               
Cash and cash equivalents
  $ 512.2     $ 582.4  
Restricted cash
    33.8        
Accounts and notes receivable, net
    815.6       766.4  
Inventories, net
    1,389.9       1,134.2  
Deferred tax assets
    56.6       52.7  
Other current assets
    197.1       186.0  
                 
Total current assets
    3,005.2       2,721.7  
Property, plant and equipment, net
    811.1       753.0  
Investment in affiliates
    275.1       284.6  
Deferred tax assets
    29.9       89.1  
Other assets
    69.6       67.9  
Intangible assets, net
    176.9       205.7  
Goodwill
    587.0       665.6  
                 
Total assets
  $ 4,954.8     $ 4,787.6  
                 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
               
Current portion of long-term debt
  $ 0.1     $ 0.2  
Convertible senior subordinated notes
          402.5  
Accounts payable
    1,027.1       827.1  
Accrued expenses
    799.8       773.2  
Other current liabilities
    151.5       80.3  
                 
Total current liabilities
    1,978.5       2,083.3  
Long-term debt, less current portion
    682.0       294.1  
Pensions and postretirement health care benefits
    173.6       150.3  
Deferred tax liabilities
    108.1       163.6  
Other noncurrent liabilities
    55.6       53.3  
                 
Total liabilities
    2,997.8       2,744.6  
                 
Commitments and Contingencies (Note 12)
               
Stockholders’ Equity:
               
Preferred stock; $0.01 par value, 1,000,000 shares authorized, no shares issued or outstanding in 2008 and 2007
           
Common stock; $0.01 par value, 150,000,000 shares authorized, 91,844,193 and 91,609,895 shares issued and outstanding in 2008 and 2007, respectively
    0.9       0.9  
Additional paid-in capital
    973.2       942.7  
Retained earnings
    1,419.3       1,020.4  
Accumulated other comprehensive (loss) income
    (436.4 )     79.0  
                 
Total stockholders’ equity
    1,957.0       2,043.0  
                 
Total liabilities and stockholders’ equity
  $ 4,954.8     $ 4,787.6  
                 
 
See accompanying notes to Consolidated Financial Statements.


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AGCO CORPORATION
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions, except share amounts)
 
                                                                                         
                                  Accumulated Other Comprehensive Income (Loss)              
                                  Defined
          Deferred
    Accumulated
             
                Additional
                Benefit
    Cumulative
    Gains
    Other
    Total
       
    Common Stock     Paid-in
    Retained
    Unearned
    Pension
    Translation
    (Losses) on
    Comprehensive
    Stockholders’
    Comprehensive
 
    Shares     Amount     Capital     Earnings     Compensation     Plans     Adjustment     Derivatives     Income (Loss)     Equity     Income (Loss)  
 
Balance, December 31, 2005
    90,508,221     $ 0.9     $ 894.7     $ 825.4     $ (0.1 )   $ (150.1 )   $ (158.7 )   $ 3.9     $ (304.9 )   $ 1,416.0          
Cumulative effect of adjustments from the adoption of SAB No. 108, net of taxes
                      13.6                                     13.6          
                                                                                         
Adjusted balance, January 1, 2006
    90,508,221       0.9       894.7       839.0       (0.1 )     (150.1 )     (158.7 )     3.9       (304.9 )     1,429.6          
Net loss
                      (64.9 )                                   (64.9 )   $ (64.9 )
Issuance of restricted stock
    8,832             0.2                                           0.2          
Stock options exercised
    660,850             10.8                                           10.8          
Stock compensation
                3.3                                           3.3          
Reclassification due to the adoption of SFAS No. 123R
                (0.1 )           0.1                                        
Additional minimum pension liability, net of taxes
                                  6.6                   6.6       6.6       6.6  
Deferred gains and losses on derivatives, net
                                              0.1       0.1       0.1       0.1  
Deferred gains and losses on derivatives held by affiliates, net
                                              (2.0 )     (2.0 )     (2.0 )     (2.0 )
Adjustment related to the adoption of SFAS No. 158, net of taxes
                                  (26.8 )                 (26.8 )     (26.8 )        
Change in cumulative translation adjustment
                                        136.7             136.7       136.7       136.7  
                                                                                         
Balance, December 31, 2006
    91,177,903       0.9       908.9       774.1             (170.3 )     (22.0 )     2.0       (190.3 )     1,493.6       76.5  
                                                                                         
Net income
                      246.3                                     246.3       246.3  
Issuance of restricted stock
    6,346             0.2                                           0.2          
Stock options and SSARs exercised
    425,646             8.0                                           8.0          
Stock compensation
                25.6                                           25.6          
Defined benefit pension plans, net of taxes:
                                                                                       
Prior service cost arising during year
                                  1.4                   1.4       1.4       1.4  
Net actuarial gain arising during year
                                  71.1                   71.1       71.1       71.1  
Amortization of prior service cost included in net periodic pension cost
                                  0.1                   0.1       0.1       0.1  
Amortization of net actuarial losses
                                                                                       
included in net periodic pension cost
                                  10.6                   10.6       10.6       10.6  
Deferred gains and losses on derivatives, net
                                              7.7       7.7       7.7       7.7  
Deferred gains and losses on derivatives held by affiliates, net
                                              (4.4 )     (4.4 )     (4.4 )     (4.4 )
Change in cumulative translation adjustment
                                        182.8             182.8       182.8       182.8  
                                                                                         
Balance, December 31, 2007
    91,609,895       0.9       942.7       1,020.4             (87.1 )     160.8       5.3       79.0       2,043.0       515.6  
                                                                                         
Net income
                      400.0                                     400.0       400.0  
Issuance of restricted stock
    136,457             1.6                                           1.6          
Issuance of performance award stock
    62,387             (2.6 )                                         (2.6 )        
Stock options and SSARs exercised
    35,454             (0.3 )                                         (0.3 )        
Stock compensation
                31.8                                           31.8          
Defined benefit pension plans, net of taxes:
                                                                                       
Prior service cost arising during year
                                  (0.2 )                 (0.2 )     (0.2 )     (0.2 )
Net actuarial loss arising during year
                                  (57.6 )                 (57.6 )     (57.6 )     (57.6 )
Amortization of net actuarial losses included in net periodic pension cost
                                  5.6                   5.6       5.6       5.6  
Effects of changing pension plan measurement date pursuant to SFAS No. 158:
                                                                                       
Service cost, interest cost and expected return on plan assets for October 1 — December 31, 2007
                      (0.2 )                                   (0.2 )        
Amortization of net actuarial losses for October 1 — December 31, 2007
                      (0.9 )           0.9                   0.9             0.9  
Deferred gains and losses on derivatives, net
                                              (44.4 )     (44.4 )     (44.4 )     (44.4 )
Deferred gains and losses on derivatives held by affiliates, net
                                              (1.0 )     (1.0 )     (1.0 )     (1.0 )
Change in cumulative translation adjustment
                                        (418.7 )           (418.7 )     (418.7 )     (418.7 )
                                                                                         
Balance, December 31, 2008
    91,844,193     $ 0.9     $ 973.2     $ 1,419.3     $     $ (138.4 )   $ (257.9 )   $ (40.1 )   $ (436.4 )   $ 1,957.0     $ (115.4 )
                                                                                         
 
See accompanying notes to Consolidated Financial Statements.
 


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AGCO CORPORATION
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
 
                         
    Years Ended December 31,  
    2008     2007     2006  
 
Cash flows from operating activities:
                       
Net income (loss)
  $ 400.0     $ 246.3     $ (64.9 )
                         
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
                       
Depreciation
    127.4       115.6       98.6  
Deferred debt issuance cost amortization
    3.2       4.7       6.4  
Goodwill impairment charge
                171.4  
Amortization of intangibles
    19.1       17.9       16.9  
Stock compensation
    33.3       25.7       3.5  
Equity in net earnings of affiliates, net of cash received
    (11.0 )     (3.5 )     (8.8 )
Deferred income tax provision
    7.3       2.5       10.6  
Gain on sale of property, plant and equipment
    (0.2 )     (2.9 )     (0.8 )
Write-down of property, plant and equipment
                0.3  
Changes in operating assets and liabilities, net of effects from purchase of businesses:
                       
Accounts and notes receivable, net
    (208.4 )     (3.0 )     32.5  
Inventories, net
    (374.2 )     10.7       66.2  
Other current and noncurrent assets
    (75.6 )     (41.4 )     (26.5 )
Accounts payable
    284.4       54.1       55.1  
Accrued expenses
    127.4       86.4       44.3  
Other current and noncurrent liabilities
    (41.4 )     (8.8 )     37.4  
                         
Total adjustments
    (108.7 )     258.0       507.1  
                         
Net cash provided by operating activities
    291.3       504.3       442.2  
                         
Cash flows from investing activities:
                       
Purchases of property, plant and equipment
    (251.3 )     (141.4 )     (129.1 )
Proceeds from sale of property, plant and equipment
    4.9       6.0       3.9  
Purchase businesses, net of cash acquired
          (17.8 )      
Investments in unconsolidated affiliates, net
    (0.6 )     (68.0 )     (2.9 )
Restricted cash and other
    (32.5 )     (2.7 )      
                         
Net cash used in investing activities
    (279.5 )     (223.9 )     (128.1 )
                         
Cash flows from financing activities:
                       
Proceeds from debt obligations
    76.5       208.8       538.2  
Repayments of debt obligations
    (38.1 )     (329.5 )     (708.2 )
Proceeds from issuance of common stock
    0.3       8.2       10.8  
Payment of minimum tax withholdings on stock compensation
    (3.2 )            
Payment of debt issuance costs
    (1.4 )     (0.3 )     (4.9 )
                         
Net cash provided by (used in) financing activities
    34.1       (112.8 )     (164.1 )
                         
Effects of exchange rate changes on cash and cash equivalents
    (116.1 )     13.7       30.5  
                         
(Decrease) increase in cash and cash equivalents
    (70.2 )     181.3       180.5  
Cash and cash equivalents, beginning of year
    582.4       401.1       220.6  
                         
Cash and cash equivalents, end of year
  $ 512.2     $ 582.4     $ 401.1  
                         
 
See accompanying notes to Consolidated Financial Statements.


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AGCO CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1.   Operations and Summary of Significant Accounting Policies
 
Business
 
AGCO Corporation (“AGCO” or the “Company”) is a leading manufacturer and distributor of agricultural equipment and related replacement parts throughout the world. The Company sells a full range of agricultural equipment, including tractors, combines, hay tools, sprayers, forage equipment and implements. The Company’s products are widely recognized in the agricultural equipment industry and are marketed under a number of well-known brand names including: Challenger®, Fendt®, Massey Ferguson® and Valtra®. The Company distributes most of its products through a combination of approximately 2,800 independent dealers and distributors. In addition, the Company provides retail financing in the United States, Canada, Brazil, Germany, France, the United Kingdom, Australia, Ireland and Austria through its retail finance joint ventures with Coöperative Centrale Raiffeisen-Boerenleenbank B.A., or “Rabobank.”
 
Basis of Presentation
 
The Consolidated Financial Statements represent the consolidation of all wholly-owned companies, majority-owned companies and joint ventures where the Company has been determined to be the primary beneficiary under Financial Accounting Standards Board (“FASB”) Interpretation No. 46R, “Consolidation of Variable Interest Entities” (“FIN 46R”). The Company records investments in all other affiliate companies using the equity method of accounting. Other investments representing an ownership of less than 20% are recorded at cost. All significant intercompany balances and transactions have been eliminated in the Consolidated Financial Statements.
 
Joint Ventures
 
The Company analyzed the provisions of FIN 46R as they relate to the accounting for its investments in joint ventures and determined that it is the primary beneficiary of one of its joint ventures, GIMA. GIMA is a joint venture between AGCO and Claas Tractor SAS (“Claas”) to cooperate in the field of purchasing, design and manufacturing of components for agricultural tractors. Each party has a 50% ownership in the joint venture and has an investment of approximately €4.2 million in the joint venture. Both parties purchase all of the production output of the joint venture. Purchases made by the Company from GIMA during 2008 were approximately $340.2 million. In addition, the Company charges GIMA with respect to the lease of a portion of its facility in France and related utilities and for certain administrative and back office support services. The amount paid by GIMA to the Company for lease costs and support services during 2008 was approximately $10.5 million. GIMA has overdraft facilities with two third — party financial institutions of up to €3.0 million (and no amounts were outstanding with respect to the overdraft facilities as of December 31, 2008). Such facilities are not secured by any of GIMA’s assets, and neither joint venture partner provides a guarantee with respect to the facilities. The joint venture partners provide operating cash requirements to the joint venture on a 50/50 basis. Cash flow requirements are generally structurally financed by the purchases of product by both parties (on a cost plus basis) based upon the level of purchases from both partners. Capital expenditures and additional operating cash flow requirements by the joint venture are funded on a 50/50 basis by the joint venture partners. There have been no additional capital infusions into the joint venture since inception. Per the joint venture agreement, both partners would have to provide additional capital infusions if the joint venture’s retained losses exceed more than half of its share capital balance. This circumstance would be unlikely given the structural setup of the joint venture and the financing of the joint venture through purchases of all of its product by both partners on a cost plus basis. In analyzing the provisions of FIN 46R, the Company determined that it was the primary beneficiary of the joint venture due to the fact that the Company purchases a majority of the production output, and thus absorbs a majority of the gains or losses associated with the joint venture. The equity interest of Claas is reported as a minority interest, included in “Other noncurrent liabilities” in the accompanying Consolidated Balance Sheets as of December 31, 2008 and 2007.


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AGCO CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Rabobank is a 51% owner in the Company’s retail finance joint ventures which are located in the United States, Canada, Brazil, Germany, France, the United Kingdom, Australia, Ireland and Austria. The majority of the assets of the Company’s 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 provide financing to the joint venture companies, primarily through lines of credit. The Company does not guarantee the debt obligations of the retail finance joint ventures other than an insignificant portion of the retail portfolio in Brazil that is held outside the joint venture by Rabobank Brazil (Note 13). The Company’s retail finance joint ventures provide retail financing and wholesale financing to its dealers. The terms of the financing arrangements offered to the Company’s dealers are similar to arrangements the retail finance joint ventures provide to unaffiliated third parties. At December 31, 2008, the Company was obligated under certain circumstances to purchase through the year 2010 up to $3.0 million of equipment upon expiration of certain operating leases between AGCO Finance LLC and AGCO Finance Canada Ltd., its retail joint ventures in North America, and end users. The Company also maintains a remarketing agreement with these joint ventures (Note 12). In addition, as part of sales incentives provided to end users, the Company may from time to time subsidize interest rates of retail financing provided by its retail joint ventures. In addition, the Company has an agreement to permit transferring, on an ongoing basis, the majority of its wholesale interest-bearing receivables in North America to AGCO Finance LLC and AGCO Finance Canada, Ltd. The transfer of the receivables is without recourse to the Company, and the Company continues to service the receivables. The Company does not maintain any direct retained interest in the receivables. In analyzing the provisions of FIN 46R, the Company determined that the retail finance joint ventures did not meet the consolidation requirements and should be accounted for under the voting interest model. In making this determination, the Company evaluated the sufficiency of the equity at risk for each retail finance joint venture, the ability of the joint venture investors to make decisions about the joint ventures’ activities that have a significant effect on the success of the entities, the obligations to absorb expected losses of the joint ventures, and the rights to receive expected residual returns.
 
Revenue Recognition
 
Sales of equipment and replacement parts are recorded by the Company when title and risks of ownership have been transferred to an independent dealer, distributor or other customer. Payment terms vary by market and product with fixed payment schedules on all sales. The terms of sale generally require that a purchase order or order confirmation accompany all shipments. Title generally passes to the dealer or distributor upon shipment and the risk of loss upon damage, theft or destruction of the equipment is the responsibility of the dealer, distributor or third-party carrier. In certain foreign countries, the Company retains a form of title to goods delivered to dealers until the dealer makes payment so that the Company can recover the goods in the event of customer default on payment. This occurs as the laws of some foreign countries do not provide for a seller’s retention of a security interest in goods in the same manner as established in the United States Uniform Commercial Code. The only right the Company retains with respect to the title are those enabling recovery of the goods in the event of customer default on payment. The dealer or distributor may not return equipment or replacement parts while its contract with the Company is in force. Replacement parts may be returned only under promotional and annual return programs. Provisions for returns under these programs are made at the time of sale based on the terms of the program and historical returns experience. The Company may provide certain sales incentives to dealers and distributors. Provisions for sales incentives are made at the time of sale for existing incentive programs. These provisions are revised in the event of subsequent modification to the incentive program. See “Accounts and Notes Receivable” for further discussion.
 
In the United States and Canada, all equipment sales to dealers are immediately due upon a retail sale of the equipment by the dealer. If not previously paid by the dealer in the United States and Canada, installment payments are required generally beginning seven to 13 months after shipment with the remaining outstanding equipment balance generally due within 12 to 18 months after shipment. Interest generally is charged on the


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AGCO CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
outstanding balance six to 18 months after shipment. Sales terms of some highly seasonal products provide for payment and due dates based on a specified date during the year regardless of the shipment date. Equipment sold to dealers in the United States and Canada is paid in full on average within 12 months of shipment. Sales of replacement parts generally are payable within 30 days of shipment with terms for some larger seasonal stock orders generally requiring payment within six months of shipment.
 
In other international markets, equipment sales are generally payable in full within 30 to 180 days of shipment. Payment terms for some highly seasonal products have a specified due date during the year regardless of the shipment date. Sales of replacement parts generally are payable within 30 to 90 days of shipment with terms for some larger seasonal stock orders generally payable within six months of shipment.
 
In certain markets, particularly in North America, there is a time lag, which varies based on the timing and level of retail demand, between the date the Company records a sale and when the dealer sells the equipment to a retail customer.
 
Foreign Currency Translation
 
The financial statements of the Company’s foreign subsidiaries are translated into United States currency in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 52, “Foreign Currency Translation.” Assets and liabilities are translated to United States dollars at period-end exchange rates. Income and expense items are translated at average rates of exchange prevailing during the period. Translation adjustments are included in “Accumulated other comprehensive income (loss)” in stockholders’ equity. Gains and losses, which result from foreign currency transactions, are included in the accompanying Consolidated Statements of Operations.
 
Use of Estimates
 
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The estimates made by management primarily relate to accounts and notes receivable, inventories, deferred income tax valuation allowances, intangible assets and certain accrued liabilities, principally relating to reserves for volume discounts and sales incentives, warranty obligations, product liability and workers’ compensation obligations, and pensions and postretirement benefits.
 
Adoption of SEC Staff Accounting Bulletin No. 108
 
In September 2006, the Securities and Exchange Commission (“SEC”) staff issued Staff Accounting Bulletin 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 requires that public companies utilize a “dual-approach” to assessing the quantitative effects of financial misstatements. This dual approach includes both an income statement focused assessment, sometimes referred to as the “rollover” method, and a balance sheet focused assessment, sometimes referred to as the “iron curtain” method. The guidance in SAB 108 was adopted during the Company’s year ended December 31, 2006. The transition provisions of SAB 108 permitted a company to adjust opening retained earnings for the cumulative effect of immaterial errors related to prior years deemed to be material if corrected in the current year.
 
Prior to 2006, the Company evaluated uncorrected misstatements utilizing the “rollover” method. In connection with the implementation of SAB 108, in applying the “iron curtain” method, the Company identified two types of uncorrected misstatements that it previously determined were not material to prior years under the rollover method. Under the iron curtain method, these items were deemed to be material to the


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AGCO CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Company’s financial statements for the year ended December 31, 2006, and, therefore, the Company recorded an adjustment to increase its opening retained earnings balance as of January 1, 2006, by approximately $13.6 million, net of taxes, in accordance with the implementation of SAB 108. Those misstatements consisted of (in millions):
 
             
    Cumulative
     
    Adjustment,
     
Description
  Net of Taxes    
Nature and Timing of Differences
 
Excess reserves
  $ 10.9     This adjustment primarily related to provisions for reserves that were determined to be in excess of amounts required for previous periods. This misstatement had accumulated over several years and substantially all of the excess amounts had ceased accumulating as of December 31, 2001. The provisions primarily related to medical and general insurance reserves, warranty reserves and legal and non-income tax related contingencies.
             
Under capitalization of parts inventory volume
and purchase-related variances
    2.7     This adjustment resulted from the Company’s non-GAAP policy in North America prior to 2006 to expense certain volume and purchase related variances with respect to parts inventory.
             
    $ 13.6      
             
 
Cash and Cash Equivalents
 
The Company considers all investments with an original maturity of three months or less to be cash equivalents. Cash equivalents at December 31, 2008 and 2007 of $419.9 million and $466.2 million, respectively, consisted primarily of overnight repurchase agreements with financial institutions.
 
Restricted Cash
 
During 2008, the Company deposited cash with a financial institution as security against outstanding foreign exchange contracts that mature throughout 2009. As of December 31, 2008, the amount deposited was approximately $33.8 million and was classified as “Restricted cash” in the Company’s Consolidated Balance Sheets. The amount posted as security will either increase or decrease in the future depending on the value of the outstanding amount of contracts secured under the arrangement and the relative impact on gains (losses) on the outstanding contracts. Refer to Note 11 for further discussion related to the Company’s foreign exchange contracts.
 
Accounts and Notes Receivable
 
Accounts and notes receivable arise from the sale of equipment and replacement parts to independent dealers, distributors or other customers. Payments due under the Company’s terms of sale generally range from one to 12 months and are not contingent upon the sale of the equipment by the dealer or distributor to a retail customer. Under normal circumstances, payment terms are not extended and equipment may not be returned. In certain regions, including the United States and Canada, the Company is obligated to repurchase equipment and replacement parts upon cancellation of a dealer or distributor contract. These obligations are required by national, state or provincial laws and require the Company to repurchase a dealer or distributor’s unsold inventory, including inventory for which the receivable has already been paid.


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AGCO CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
For sales in most markets outside of the United States and Canada, the Company does not normally charge interest on outstanding receivables with its dealers and distributors. For sales to certain dealers or distributors in the United States and Canada, where approximately 20% of the Company’s net sales were generated in 2008, interest is 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 various periods up to 23 months depending on the time of year of the sale and the dealer’s or distributor’s sales volume during the preceding year. For the year ended December 31, 2008, 16.2% and 4.7% of the Company’s 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 0.4% of the Company’s net sales during 2008. Actual interest-free periods are shorter than above because the equipment receivable from dealers or distributors in the United States and Canada is due immediately upon sale of the equipment to a retail customer. Under normal circumstances, interest is not forgiven and interest-free periods are not extended. The Company has an agreement to permit transferring, on an ongoing basis, the majority of interest-bearing receivables in North America to its United States 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. Under this arrangement, qualified dealers may obtain additional financing through the United States and Canadian retail finance joint ventures.
 
The Company provides various incentive programs with respect to its products. These incentive programs include reductions in invoice prices, reductions in retail financing rates, dealer commissions, dealer incentive allowances and volume discounts. In most cases, incentive programs are established and communicated to the Company’s dealers on a quarterly basis. The incentives are paid either at the time of invoice (through a reduction of invoice price), at the time of the settlement of the receivable, at the time of retail financing, at the time of warranty registration, or at a subsequent time based on dealer purchases. The incentive programs are product line specific and generally do not vary by dealer. The cost of sales incentives associated with dealer commissions and dealer incentive allowances is estimated based upon the terms of the programs and historical experience, is based on a percentage of the sales price, and is recorded at the later of (a) the date at which the related revenue is recognized, or (b) the date at which the sales incentive is offered. The related provisions and accruals are made on a product or product line basis and are monitored for adequacy and revised at least quarterly in the event of subsequent modifications to the programs. Volume discounts are estimated and recognized based on historical experience, and related reserves are monitored and adjusted based on actual dealer purchases and the dealers’ progress towards achieving specified cumulative target levels. The Company records the cost of interest subsidy payments, which is a reduction in the retail financing rates, at the later of (a) the date at which the related revenue is recognized, or (b) the date at which the sales incentive is offered. Estimates of these incentives are based on the terms of the programs and historical experience. All incentive programs are recorded and presented as a reduction of revenue in accordance with Emerging Issues Task Force (“EITF”) No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer Including a Reseller of the Vendor’s Products,” due to the fact that the Company does not receive an identifiable benefit in exchange for the consideration provided. Reserves for incentive programs that will be paid either through the reduction of future invoices or through credit memos are recorded as “accounts receivable allowances” within the Company’s Consolidated Balance Sheet. Reserves for incentive programs that will be paid in cash, as is the case with most of the Company’s volume discount programs, are recorded within “Accrued expenses” within the Company’s Consolidated Balance Sheet.
 
Accounts and notes receivable are shown net of allowances for sales incentive discounts available to dealers and for doubtful accounts. Cash flows related to the collection of receivables are reported within “Cash


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AGCO CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
flows from operating activities” within the Company’s Consolidated Statements of Cash Flows. Accounts and notes receivable allowances at December 31, 2008 and 2007 were as follows (in millions):
 
                 
    2008     2007  
 
Sales incentive discounts
  $ 125.1     $ 107.9  
Doubtful accounts
    28.1       34.5  
                 
    $ 153.2     $ 142.4  
                 
 
The Company transfers certain accounts receivable to various financial institutions primarily under its accounts receivable securitization facilities (Note 4). The Company records such transfers as sales of accounts receivable when it is considered to have surrendered control of such receivables under the provisions of SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a Replacement of SFAS No. 125” (“SFAS No. 140”).
 
Inventories
 
Inventories are valued at the lower of cost or market using the first-in, first-out method. Market is current replacement cost (by purchase or by reproduction dependent on the type of inventory). In cases where market exceeds net realizable value (i.e., estimated selling price less reasonably predictable costs of completion and disposal), inventories are stated at net realizable value. Market is not considered to be less than net realizable value reduced by an allowance for an approximately normal profit margin. At December 31, 2008 and 2007, the Company had recorded $106.0 million and $96.7 million, respectively, as an adjustment for surplus and obsolete inventories. These adjustments are reflected within “Inventories, net.”
 
Inventories, net at December 31, 2008 and 2007 were as follows (in millions):
 
                 
    2008     2007  
 
Finished goods
  $ 484.9     $ 391.7  
Repair and replacement parts
    396.1       361.1  
Work in process
    130.5       88.3  
Raw materials
    378.4       293.1  
                 
Inventories, net
  $ 1,389.9     $ 1,134.2  
                 
 
Cash flows related to the sale of inventories are reported within “Cash flows from operating activities” within the Company’s Consolidated Statements of Cash Flows.
 
Property, Plant and Equipment
 
Property, plant and equipment are recorded at cost, less accumulated depreciation and amortization. Depreciation is provided on a straight-line basis over the estimated useful lives of ten to 40 years for buildings and improvements, three to 15 years for machinery and equipment and three to ten years for furniture and fixtures. Expenditures for maintenance and repairs are charged to expense as incurred.


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AGCO CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Property, plant and equipment, net at December 31, 2008 and 2007 consisted of the following (in millions):
 
                 
    2008     2007  
 
Land
  $ 54.5     $ 59.4  
Buildings and improvements
    297.3       301.4  
Machinery and equipment
    969.9       941.0  
Furniture and fixtures
    172.7       174.6  
                 
Gross property, plant and equipment
    1,494.4       1,476.4  
Accumulated depreciation and amortization
    (683.3 )     (723.4 )
                 
Property, plant and equipment, net
  $ 811.1     $ 753.0  
                 
 
Goodwill and Other Intangible Assets
 
SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), establishes a method of testing goodwill and other indefinite-lived intangible assets for impairment on an annual basis or on an interim basis if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying value. The Company’s annual assessments involve determining an estimate of the fair value of the Company’s reporting units in order to evaluate whether an impairment of the current carrying amount of goodwill and other indefinite-lived intangible assets exists. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired, and thus the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. Fair values are derived based on an evaluation of past and expected future performance of the Company’s reporting units. A reporting unit is an operating segment or one level below an operating segment, for example, a component. A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and the Company’s executive management team regularly reviews the operating results of that component. In addition, the Company combines and aggregates two or more components of an operating segment as a single reporting unit if the components have similar economic characteristics. The Company’s reportable segments reported under the guidance of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” are not its reporting units, with the exception of its Asia/Pacific geographical segment.
 
The second step of the goodwill impairment test, used to measure the amount of impairment loss, compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The loss recognized cannot exceed the carrying amount of goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination is determined. That is, the Company allocates the fair value of a reporting unit to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. The excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill.
 
The Company utilizes a combination of valuation techniques, including a discounted cash flow approach and a market multiple approach when making its annual and interim assessments. As stated above, goodwill is tested for impairment on an annual basis and more often if indications of impairment exist. The results of the Company’s analyses conducted as of October 1, 2008 and 2007 indicated that no reduction in the carrying


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AGCO CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
amount of goodwill was required. During 2006, sales and operating income of the Company’s Sprayer operations declined significantly as compared to prior years. This was primarily due to increased competition resulting from updated product offerings from the Company’s major competitors and a shift in industry demand away from our strength in the commercial application segment to the farmer-owned segment. In addition, the Company’s projections for the Sprayer operations did not result in a valuation sufficient to support the carrying amount of the goodwill balance on the Company’s Consolidated Balance Sheet, as there was no excess fair value of the reporting unit over the amounts assigned to its assets and liabilities that could be allocated to the implied fair value of goodwill. As a result, the Company concluded that the goodwill associated with its Sprayer operations was impaired and recognized a write-down of the total amount of recorded goodwill of approximately $171.4 million during the fourth quarter of 2006. The results of the Company’s analyses conducted as of October 1, 2006 associated with its other reporting units indicated that no reduction in their carrying amounts of goodwill was required.
 
Changes in the carrying amount of acquired intangible assets during 2008 and 2007 are summarized as follows (in millions):
 
                                 
    Trademarks and
    Customer
    Patents and
       
    Tradenames     Relationships     Technology     Total  
 
Gross carrying amounts:
                               
Balance as of December 31, 2006
  $ 32.9     $ 89.6     $ 50.1     $ 172.6  
Acquisition
    0.4                   0.4  
Foreign currency translation
    0.1       13.4       5.1       18.6  
                                 
Balance as of December 31, 2007
    33.4     $ 103.0     $ 55.2     $ 191.6  
Foreign currency translation
    (0.2 )     (14.6 )     (2.3 )     (17.1 )
                                 
Balance as of December 31, 2008
  $ 33.2     $ 88.4     $ 52.9     $ 174.5  
                                 
 
                                 
    Trademarks and
    Customer
    Patents and
       
    Tradenames     Relationships     Technology     Total  
 
Accumulated amortization:
                               
Balance as of December 31, 2006
  $ 6.0     $ 28.3     $ 22.5     $ 56.8  
Amortization expense
    1.2       9.6       7.1       17.9  
Foreign currency translation
          4.7       2.7       7.4  
                                 
Balance as of December 31, 2007
    7.2       42.6       32.3       82.1  
Amortization expense
    1.3       10.2       7.6       19.1  
Foreign currency translation
    (0.1 )     (7.4 )     (1.7 )     (9.2 )
                                 
Balance as of December 31, 2008
  $ 8.4     $ 45.4     $ 38.2     $ 92.0  
                                 
 
         
    Trademarks and
 
    Tradenames  
 
Indefinite-lived intangible assets:
       
Balance as of December 31, 2006
  $ 92.1  
Foreign currency translation
    4.1  
         
Balance as of December 31, 2007
    96.2  
Foreign currency translation
    (1.8 )
         
Balance as of December 31, 2008
  $ 94.4  
         


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AGCO CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The Company amortizes certain acquired intangible assets primarily on a straight-line basis over their estimated useful lives, which range from three to 30 years. The acquired intangible assets have a weighted average useful life as follows:
 
         
    Weighted-Average
 
Intangible Asset
  Useful Life  
 
Trademarks and tradenames
    30 years  
Technology and patents
    7 years  
Customer relationships
    10 years  
 
For the years ended December 31, 2008, 2007 and 2006, acquired intangible asset amortization was $19.1 million, $17.9 million and $16.9 million, respectively. The Company estimates amortization of existing intangible assets will be $17.0 million for 2009, $17.0 million for 2010, $9.8 million for 2011, $9.8 million for 2012 and $9.7 million for 2013.
 
In accordance with SFAS No. 142, the Company determined that two of its trademarks have an indefinite useful life. The Massey Ferguson trademark has been in existence since 1952 and was formed from the merger of Massey-Harris (established in the 1890’s) and Ferguson (established in the 1930’s). The Massey Ferguson brand is currently sold in over 140 countries worldwide, making it one of the most widely sold tractor brands in the world. The Company has also identified the Valtra trademark as an indefinite-lived asset. The Valtra trademark has been in existence since the late 1990’s, but is a derivative of the Valmet trademark which has been in existence since 1951. Valtra and Valmet are used interchangeably in the marketplace today and Valtra is recognized to be the tractor line of the Valmet name. The Valtra brand is currently sold in approximately 50 countries around the world. Both the Massey Ferguson brand and the Valtra brand are primary product lines of the Company’s business and the Company plans to use these trademarks for an indefinite period of time. The Company plans to continue to make investments in product development to enhance the value of these brands into the future. There are no legal, regulatory, contractual, competitive, economic or other factors that the Company is aware of that the Company believes would limit the useful lives of the trademarks. The Massey Ferguson and Valtra trademark registrations can be renewed at a nominal cost in the countries in which the Company operates.
 
Changes in the carrying amount of goodwill during the years ended December 31, 2008, 2007 and 2006 are summarized as follows (in millions). See Note 2 for further information regarding adjustments related to income taxes:
 
                                 
    North
    South
    Europe/Africa/
       
    America     America     Middle East     Consolidated  
 
Balance as of December 31, 2005
  $ 174.0     $ 137.0     $ 385.7     $ 696.7  
Adjustments related to income taxes
          (3.1 )     13.4       10.3  
Impairment of goodwill
    (170.9 )           (0.5 )     (171.4 )
Foreign currency translation
          12.5       44.0       56.5  
                                 
Balance as of December 31, 2006
    3.1       146.4       442.6       592.1  
Acquisitions
          7.5             7.5  
Adjustments related to income taxes
                (7.9 )     (7.9 )
Foreign currency translation
          29.8       44.1       73.9  
                                 
Balance as of December 31, 2007
    3.1       183.7       478.8       665.6  
Adjustments related to income taxes
                (16.8 )     (16.8 )
Foreign currency translation
          (42.1 )     (19.7 )     (61.8 )
                                 
Balance as of December 31, 2008
  $ 3.1     $ 141.6     $ 442.3     $ 587.0  
                                 


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AGCO CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Long-Lived Assets
 
During 2008, 2007 and 2006, the Company reviewed its long-lived assets for impairment whenever events or changes in circumstances indicated that the carrying amount of an asset may not be recoverable in accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”). Under SFAS No. 144, an impairment loss is recognized when the undiscounted future cash flows estimated to be generated by the asset to be held and used are not sufficient to recover the unamortized balance of the asset. An impairment loss would be recognized based on the difference between the carrying values and estimated fair value. The estimated fair value is determined based on either the discounted future cash flows or other appropriate fair value methods with the amount of any such deficiency charged to income in the current year. If the asset being tested for recoverability was acquired in a business combination, intangible assets resulting from the acquisition that are related to the asset are included in the assessment. Estimates of future cash flows are based on many factors, including current operating results, expected market trends and competitive influences. The Company also evaluates the amortization periods assigned to its intangible assets to determine whether events or changes in circumstances warrant revised estimates of useful lives. Assets to be disposed of by sale are reported at the lower of the carrying amount or fair value, less estimated costs to sell.
 
Accrued Expenses
 
Accrued expenses at December 31, 2008 and 2007 consisted of the following (in millions):
 
                 
    2008     2007  
 
Reserve for volume discounts and sales incentives
  $ 169.8     $ 157.2  
Warranty reserves
    164.3       152.5  
Accrued employee compensation and benefits
    183.9       176.1  
Accrued taxes
    135.9       152.7  
Other
    145.9       134.7  
                 
    $ 799.8     $ 773.2  
                 
 
Warranty Reserves
 
The warranty reserve activity for the years ended December 31, 2008, 2007 and 2006 consisted of the following (in millions):
 
                         
    2008     2007     2006  
 
Balance at beginning of the year
  $ 167.1     $ 136.9     $ 122.8  
Accruals for warranties issued during the year
    170.3       148.5       124.5  
Settlements made (in cash or in kind) during the year
    (142.8 )     (129.9 )     (117.6 )
Foreign currency translation
    (11.2 )     11.6       7.2  
                         
Balance at the end of the year
  $ 183.4     $ 167.1     $ 136.9  
                         
 
The Company’s agricultural equipment products are generally under warranty 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 $19.1 million and $14.6 million of warranty reserves are included in “Other noncurrent liabilities” in the Company’s Consolidated Balance Sheet as of December 31, 2008 and 2007, respectively.


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AGCO CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Insurance Reserves
 
Under the Company’s insurance programs, coverage is obtained for significant liability limits as well as those risks required to be insured by law or contract. It is the policy of the Company to self-insure a portion of certain expected losses related primarily to workers’ compensation and comprehensive general, product and vehicle liability. Provisions for losses expected under these programs are recorded based on the Company’s estimates of the aggregate liabilities for the claims incurred.
 
Stock Incentive Plans
 
Stock Compensation Expense
 
During the first quarter of 2006, the Company adopted SFAS No. 123R (Revised 2004), “Share-Based Payment” (“SFAS No. 123R”), which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” During 2008, 2007 and 2006, the Company recorded approximately $33.5 million, $26.0 million and $3.6 million, respectively, of stock compensation expense in accordance with SFAS No. 123R. Refer to Note 10 for additional information regarding the Company’s stock incentive plans that were in place during 2008, 2007 and 2006. Stock compensation expense was recorded as follows (in millions):
 
                         
    Years Ended
 
    December 31,  
    2008     2007     2006  
 
Cost of goods sold
  $ 1.5     $ 1.0     $ 0.1  
Selling, general and administrative expenses
    32.0       25.0       3.5  
                         
Total stock compensation expense
  $ 33.5     $ 26.0     $ 3.6  
                         
 
Research and Development Expenses
 
Research and development expenses are expensed as incurred and are included in engineering expenses in the Company’s Consolidated Statements of Operations.
 
Advertising Costs
 
The Company expenses all advertising costs as incurred. Cooperative advertising costs are normally expensed at the time the revenue is earned. Advertising expenses for the years ended December 31, 2008, 2007 and 2006 totaled approximately $65.6 million, $52.5 million and $39.8 million, respectively.
 
Shipping and Handling Expenses
 
All shipping and handling fees charged to customers are included as a component of net sales. Shipping and handling costs are included as a part of cost of goods sold, with the exception of certain handling costs included in selling, general and administrative expenses in the amount of $25.7 million, $22.5 million and $19.8 million for the years ended December 31, 2008, 2007 and 2006, respectively.


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AGCO CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Interest Expense, Net
 
Interest expense, net for the years ended December 31, 2008, 2007 and 2006 consisted of the following (in millions):
 
                         
    2008     2007     2006  
 
Interest expense
  $ 53.3     $ 50.5     $ 71.4  
Interest income
    (34.2 )     (26.4 )     (16.2 )
                         
    $ 19.1     $ 24.1     $ 55.2  
                         
 
Income Taxes
 
Income taxes are accounted for under the asset and liability method, as prescribed under the provisions of SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
 
Net Income (Loss) Per Common Share
 
The computation, presentation and disclosure requirements for income (loss) per share are presented in accordance with SFAS No. 128, “Earnings Per Share.” Basic income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during each period. Diluted income (loss) per common share assumes exercise of outstanding stock options, vesting of restricted stock and performance share awards, and the appreciation of the excess conversion value of the contingently convertible senior subordinated notes using the treasury stock method when the effects of such assumptions are dilutive.
 
The Company’s $201.3 million aggregate principal amount of 13/4% convertible senior subordinated notes and its $201.3 million aggregate principal amount of 11/4% convertible senior subordinated notes provide for (i) the settlement upon conversion in cash up to the principal amount of the converted 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 new notes are converted in connection with certain change of control transactions. Dilution of weighted shares outstanding will depend on the Company’s stock price for the excess conversion value using the treasury stock method (Note 7). A reconciliation of net income (loss) and weighted


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AGCO CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
average common shares outstanding for purposes of calculating basic and diluted income (loss) per share during the years ended December 31, 2008, 2007 and 2006 is as follows (in millions, except per share data):
 
                         
    2008     2007     2006  
 
Basic net income (loss) per share:
                       
Net income (loss)
  $ 400.0     $ 246.3     $ (64.9 )
                         
Weighted average number of common shares outstanding
    91.7       91.5       90.8  
                         
Basic net income (loss) per share
  $ 4.36     $ 2.69     $ (0.71 )
                         
Diluted net income (loss) per share:
                       
Net income (loss)
  $ 400.0     $ 246.3     $ (64.9 )
                         
Weighted average number of common shares outstanding
    91.7       91.5       90.8  
Dilutive stock options, performance share awards and restricted stock awards
    0.4       0.3        
Weighted average assumed conversion of contingently convertible senior subordinated notes
    5.6       4.8        
                         
Weighted average number of common and common share equivalents outstanding for purposes of computing diluted income (loss) per share
    97.7       96.6       90.8  
                         
Diluted net income (loss) per share
  $ 4.09     $ 2.55     $ (0.71 )
                         
 
Stock options and stock-settled stock appreciation rights (“SSARs”) to purchase 0.4 million and 0.1 million shares for the years ended December 31, 2008 and 2006, respectively, were outstanding but not included in the calculation of weighted average common and common equivalent shares outstanding because they had an antidilutive impact. In addition, the weighted average common shares outstanding for purposes of computing diluted net loss per share for the year ended December 31, 2006 did not include the assumed conversion of the Company’s 13/4% convertible senior subordinated notes or the impact of dilutive stock options and SSARs, as the impact would have been antidilutive. The number of shares excluded from the weighted average common shares outstanding for purposes of computing diluted net loss per share for the year ended December 31, 2006 was approximately 1.2 million shares.
 
Comprehensive Income (Loss)
 
The Company reports comprehensive income (loss), defined as the total of net income (loss) and all other non-owner changes in equity and the components thereof in its Consolidated Statements of Stockholders’ Equity. The components of other comprehensive income (loss) and the related tax effects for the years ended December 31, 2008, 2007 and 2006 are as follows (in millions):
 
                         
    2008  
    Before-tax
    Income
    After-tax
 
    Amount     Taxes     Amount  
 
Defined benefit pension plans
  $ (63.5 )   $ 12.2     $ (51.3 )
Unrealized loss on derivatives
    (65.4 )     21.0       (44.4 )
Unrealized loss on derivatives held by affiliates
    (1.0 )           (1.0 )
Foreign currency translation adjustments
    (418.7 )           (418.7 )
                         
Total components of other comprehensive loss
  $ (548.6 )   $ 33.2     $ (515.4 )
                         
 


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AGCO CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
                         
    2007  
    Before-tax
    Income
    After-tax
 
    Amount     Taxes     Amount  
 
Defined benefit pension plans
  $ 116.6     $ (33.4 )   $ 83.2  
Unrealized gain on derivatives
    11.4       (3.7 )     7.7  
Unrealized loss on derivatives held by affiliates
    (4.4 )           (4.4 )
Foreign currency translation adjustments
    182.8             182.8  
                         
Total components of other comprehensive income
  $ 306.4     $ (37.1 )   $ 269.3  
                         
 
                         
    2006  
    Before-tax
    Income
    After-tax
 
    Amount     Taxes     Amount  
 
Additional minimum pension liability
  $ 7.8     $ (1.2 )   $ 6.6  
Unrealized gain on derivatives
    0.1             0.1  
Unrealized loss on derivatives held by affiliates
    (2.0 )           (2.0 )
Foreign currency translation adjustments
    136.7             136.7  
                         
Total components of other comprehensive income
  $ 142.6     $ (1.2 )   $ 141.4  
                         
 
Financial Instruments
 
The carrying amounts reported in the Company’s Consolidated Balance Sheets for “Cash and cash equivalents,” “Accounts and notes receivable” and “Accounts payable” approximate fair value due to the immediate or short-term maturity of these financial instruments. The carrying amount of long-term debt under the Company’s credit facility (Note 7) approximates fair value based on the borrowing rates currently available to the Company for loans with similar terms and average maturities. At December 31, 2008, the estimated fair values of the Company’s 67/8% senior subordinated notes, 13/4% convertible notes (Note 7) and 11/4% convertible notes (Note 7), based on their listed market values, were $171.5 million, $230.4 million and $145.4 million, respectively, compared to their carrying values of $279.4 million, $201.3 million and $201.3 million, respectively. At December 31, 2007, the estimated fair values of the Company’s 67/8% senior subordinated notes, 13/4% convertible notes (Note 7) and 11/4% convertible notes (Note 7), based on their listed market values, were $293.3 million, $624.4 million and $347.7 million, respectively, compared to their carrying values of $291.8 million, $201.3 million and $201.3 million, respectively.
 
The Company enters into foreign currency forward contracts to hedge the foreign currency exposure of certain receivables, payables and committed purchases and sales. These contracts are for periods consistent with the exposure being hedged and generally have maturities of one year or less. The Company also enters into foreign currency option and forward contracts designated as cash flow hedges of expected sales. At December 31, 2008 and 2007, the Company had foreign currency contracts outstanding with gross notional amounts of $807.5 million and $657.1 million, respectively. The Company had unrealized losses of approximately $27.2 million and unrealized gains of approximately $14.9 million, respectively, on foreign currency contracts at December 31, 2008 and 2007, respectively. At December 31, 2008 and 2007, approximately $20.7 million and $3.5 million, respectively, of unrealized gains were reflected in the Company’s results of operations, as the gains related to forward contracts. The Company’s foreign currency contracts mitigate risk due to exchange rate fluctuations because gains and losses on these contracts generally offset gains and losses on the exposure being hedged. The Company had $54.1 million of unrealized losses and $11.4 million of unrealized gains as of December 31, 2008 and 2007, respectively, that were reflected in other comprehensive income (loss).

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AGCO CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
During 2008, 2007 and 2006, the Company designated certain foreign currency option and forward contracts as cash flow hedges of expected sales. The effective portion of the fair value gains or losses on these cash flow hedges are recorded in other comprehensive income and subsequently reclassified into cost of sales during the period the sales are recognized. These amounts offset the effect of the changes in foreign exchange rates on the related sale transactions. The amount of the gain included in other comprehensive income (loss) that was reclassified to cost of goods sold during the years ended December 31, 2008, 2007 and 2006 was approximately $14.1 million, $4.1 million and $4.0 million, respectively, on an after-tax basis. The amount of the (loss) gain recorded in other comprehensive income (loss) related to the outstanding cash flow hedges as of December 31, 2008, 2007 and 2006 was approximately $(36.7) million, $7.7 million and $0.1 million, respectively, on an after-tax basis. The outstanding contracts range in maturity through December 2009.
 
The notional amounts of foreign exchange option and forward contracts do not represent amounts exchanged by the parties and therefore are not a measure of the Company’s risk. The amounts exchanged are calculated on the basis of the notional amounts and other terms of the contracts. The credit and market risks under these contracts are not considered to be significant. The Company’s hedging policy prohibits it from entering into any foreign currency derivative contracts for speculative trading purposes.
 
Recent Accounting Pronouncements
 
In December 2008, the FASB affirmed FASB Staff Position (“FSP”) No. FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (“FSP FAS 132(R)-1”). FSP FAS 132(R)-1 requires additional disclosures about assets held in an employer’s defined benefit pension or postretirement plan, primarily related to categories and fair value measurements of plan assets. FSP FAS 132(R)-1 is effective for fiscal years ending after December 15, 2009. The Company will therefore adopt the disclosure requirements for its fiscal year ended December 31, 2009.
 
In September 2008, the FASB issued FSP FIN 45-4, “An amendment of FIN 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” The FSP requires additional disclosure about the current status of the payment/performance risk of a guarantee. The FSP is effective for financial statements issued for fiscal years and interim periods ending after November 15, 2008, with early adoption encouraged. The Company adopted the provisions of the FSP as of the year ended December 31, 2008.
 
In May 2008, the FASB issued FSP Accounting Principles Board (“APB”) 14-1, “Accounting for Convertible Debt Instruments That May be Settled in Cash Upon Conversion (including Partial Cash Settlement).” The FSP requires that the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement), commonly referred to as an Instrument C under EITF Issue No. 90-19, “Convertible Bonds with Issuer Options to Settle for Cash Upon Conversion” (“EITF Issue No. 90-19”), be separated to account for the fair value of the debt and equity components as of the date of issuance to reflect the issuer’s nonconvertible debt borrowing rate. The FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and is to be applied retrospectively to all periods presented (retroactive restatement) pursuant to the guidance in SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154”). The FSP will impact the accounting treatment of the Company’s 13/4% convertible senior subordinated notes due 2033 and its 11/4% convertible senior subordinated notes due 2036 by reclassifying a portion of the convertible notes balances to additional paid-in capital representing the estimated fair value of the conversion feature as of the date of issuance and creating a discount on the convertible notes that will be amortized through interest expense over the life of the convertible notes. The FSP will result in a significant increase in interest expense and, therefore, reduce net income and basic and diluted earnings per share within the Company’s Consolidated Statements of Operations. The Company will adopt the requirements of the FSP on January 1, 2009, and estimates that upon adoption, its “Retained earnings” balance will be reduced by approximately $37 million, its “Convertible


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AGCO CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
senior subordinated notes” balance will be reduced by approximately $57 million and its “Additional paid-in capital” balance will increase by approximately $57 million, including a deferred tax impact of approximately $37 million. “Interest expense, net” attributable to the convertible senior subordinated notes during the fiscal year ended December 31, 2009 is expected to increase by approximately $15 million, compared to 2008, as a result of the adoption.
 
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133” (“SFAS No. 161”). SFAS No. 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early adoption encouraged. The Company will adopt SFAS No. 161 on January 1, 2009.
 
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141R”), and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS No. 160”). SFAS No. 141R requires an acquirer to measure the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. SFAS No. 141R also requires the fair value measurement of certain other assets and liabilities related to the acquisition, such as contingencies and research and development. SFAS No. 160 clarifies that a noncontrolling interest in a subsidiary should be reported as equity in a company’s consolidated financial statements. Consolidated net income should include the net income for both the parent and the noncontrolling interest, with disclosure of both amounts on a company’s consolidated statement of operations. The calculation of earnings per share will continue to be based on income amounts attributable to the parent. The Company is required to adopt SFAS No. 141R and SFAS No. 160 on January 1, 2009.
 
In March 2007, the EITF reached a consensus on EITF Issue No. 06-10, “Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements” (“EITF 06-10”), which requires that an employer recognize a liability for the postretirement benefit related to a collateral assignment split-dollar life insurance arrangement in accordance with either SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions” (“SFAS No. 106”) (if, in substance, a postretirement benefit plan exists), or Accounting Principles Board Opinion No. 12 (if the arrangement is, in substance, an individual deferred compensation contract) if the employer has agreed to maintain a life insurance policy during the employee’s retirement or provide the employee with a death benefit based on the substantive agreement with the employee. In addition, the EITF reached a consensus that an employer should recognize and measure an asset based on the nature and substance of the collateral assignment split-dollar life insurance arrangement. The EITF observed that in determining the nature and substance of the arrangement, the employer should assess what future cash flows the employer is entitled to, if any, as well as the employee’s obligation and ability to repay the employer. EITF 06-10 is effective for fiscal years beginning after December 15, 2007. The adoption of EITF 06-10 on January 1, 2008 did not have a material effect on the Company’s consolidated results of operations or financial position.
 
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 provides companies with an option to report selected financial assets and liabilities at fair value and to provide additional information that will help investors and other users of financial statements to understand more easily the effect on earnings of a company’s choice to use fair value. It also requires companies to display the fair value of those assets and liabilities for which they have chosen to use fair value on the face of their balance sheets. The adoption of SFAS No. 159 on January 1, 2008 did not have a material effect on the Company’s consolidated results of operations or financial position.


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AGCO CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 establishes a common definition for fair value to be applied to guidance regarding U.S. generally accepted accounting principles requiring use of fair value, establishes a framework for measuring fair value and expands disclosure about such fair value measurements. SFAS No. 157 is effective for fair value measures already required or permitted by other standards for fiscal years beginning after November 15, 2007. In November 2007, the FASB proposed a one-year deferral of SFAS No. 157’s fair value measurement requirements for nonfinancial assets and liabilities that are not required or permitted to be measured at fair value on a recurring basis. The adoption of SFAS No. 157 on January 1, 2008 did not have a material effect on the Company’s consolidated results of operations or financial position.
 
In June 2006, the EITF reached a consensus on EITF Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements” (“EITF 06-4”), which requires the application of the provisions of SFAS No. 106 to endorsement split-dollar life insurance arrangements. SFAS No. 106 would require the Company to recognize a liability for the discounted future benefit obligation that the Company would have to pay upon the death of the underlying insured employee. An endorsement-type arrangement generally exists when the Company owns and controls all incidents of ownership of the underlying policies. EITF 06-4 is effective for fiscal years beginning after December 15, 2007. The adoption of EITF 06-4 on January 1, 2008 did not have a material effect on the Company’s consolidated results of operations or financial position.
 
2.   Acquisitions and Joint Venture
 
On September 28, 2007, the Company acquired 50% of Laverda S.p.A. (“Laverda”) for approximately €46.0 million (or approximately $65.6 million), thereby creating an operating joint venture between the Company and the Italian ARGO group. Laverda is located in Breganze, Italy and manufactures harvesting equipment. In addition to producing Laverda branded combines, the Breganze factory has been manufacturing mid-range combine harvesters for AGCO’s Massey Ferguson, Fendt and Challenger brands for distribution in Europe, Africa and the Middle East since 2004. The joint venture also includes Laverda’s ownership in Fella-Werke GMBH (“Fella”), a German manufacturer of grass and hay machinery, and its 30% stake in Gallignani S.p.A. (“Gallignani”), an Italian manufacturer of balers. The addition of the Fella and Gallignani product lines enables the Company to provide a comprehensive harvesting offering to its customers. The investment was financed with available cash on hand. The Company has accounted for the operating joint venture in accordance with APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock” (“APB No. 18”). In accordance with APB No. 18, the Company identified approximately $17.6 million of goodwill and $12.9 million of other identifiable intangible assets as the Company’s investment was greater than the preliminary estimate of the fair value of the underlying equity in the net assets received. The goodwill and intangible asset balances are included in the recorded balance of the “Investments in Affiliates” line of the Company’s Consolidated Balance Sheet. The amortization of the other identifiable intangible assets is included in the Company’s share of its earnings or losses from its investment within the “Equity in net earnings of affiliates” line item of the Company’s Consolidated Statements of Operations. In addition, the Company allocated approximately $28.2 million of its investment as an addition to the joint venture’s property, plant and equipment to reflect land, buildings, and machinery and equipment at their preliminary respective fair values as compared to their historical net book values. The depreciation expense associated with the increase in recorded amounts with respect to property, plant and equipment is also included in the Company’s share of its earnings or losses from its investment. The investment balance as of December 31, 2008 and 2007 includes


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AGCO CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
transaction costs and related fees incurred during 2008 and 2007. The acquired other identifiable assets are summarized in the following table (in millions):
 
             
          Weighted-Average
Intangible Asset
  Amount     Useful Life
 
Tradenames
  $ 4.3     Indefinite
Technology and patents
    0.8     5 years
Distribution network
    7.8     17 years
             
    $ 12.9      
             
 
The Company determined that the Laverda and Fella tradenames have an indefinite useful life. The Laverda tradename has been in existence since 1890 and is currently sold in over 35 countries worldwide. The Fella tradename has been in existence since 1918. Both the Laverda brand and the Fella brand are primary product lines of the Company’s Laverda operating joint venture and the joint venture partners plan to use these tradenames for an indefinite period of time. The joint venture partners plan to continue to make investments in product development to enhance the value of these brands into the future. There are no legal, regulatory, contractual, competitive, economic or other factors that the joint venture partners are aware of that they believe would limit the useful lives of the tradenames. The Laverda and Fella tradename registrations can be renewed at a nominal cost in the countries in which the operating joint venture operates. The Company performed an annual impairment test of the investment in Laverda as of October 1, 2008 pursuant to guidance provided by APB No. 18 and concluded that there is no indication that impairment exists.
 
On September 10, 2007, the Company acquired Industria Agricola Fortaleza Limitada (“SFIL”), a Brazilian company, for approximately 38.0 million Brazilian Reais (or approximately $20.0 million). In accordance with the purchase agreement, cash of approximately 5.2 million Brazilian reais (or approximately $2.7 million) was placed in escrow on the date of acquisition. This portion of the purchase price was established to fund certain disclosed contingent obligations and to compensate the Company for potential customer bad debt losses. During 2008, a portion of the escrowed funds was released to the sellers due to the resolution of certain contingencies and the collection of outstanding accounts receivable. The balance of escrowed funds as of December 31, 2008 was approximately $1.8 million. The escrowed funds are reflected within “Other current assets” and “Other assets” in the Company’s Consolidated Balance Sheet as of December 31, 2008 and 2007. SFIL is located in Ibirubá, Rio Grande do Sul, Brazil and manufactures and distributes a line of farm implements, including drills, planters, corn headers and front loaders. The acquisition was financed with available cash on hand. The SFIL acquisition was accounted for in accordance with SFAS No. 141, “Business Combinations,” and, accordingly, the Company allocated the purchase price to the assets acquired and the liabilities assumed based on a preliminary estimate of their fair values as of the acquisition date. The results of operations for the SFIL acquisition have been included in the Company’s Consolidated Financial Statements as of and from the date of acquisition. The Company recorded approximately $7.5 million of goodwill and approximately $0.4 million for an identifiable intangible asset, the SFIL tradename, associated with the acquisition. The acquired intangible asset has a useful life of approximately five years. The net assets acquired include transaction costs and related fees incurred during 2007.
 
The Company acquired the Valtra tractor and diesel engine operations of Kone Corporation, a Finnish company in January 2004. At the date of acquisition, there were two components of tax-deductible goodwill specifically related to the operations of Valtra Finland. The first component of tax deductible goodwill of approximately $201.1 million related to goodwill for financial reporting purposes, and this asset will generate deferred income taxes in the future as the asset is amortized for income tax purposes. The second component of tax-deductible goodwill of approximately $157.7 million related to tax deductible goodwill in excess of goodwill for financial reporting purposes. The tax benefits associated with this excess will be applied to reduce the amount of goodwill for financial reporting purposes in the future, if and when such tax benefits are


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AGCO CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
realized for income tax return purposes. During 2006, the Company recorded additional goodwill of approximately €17.7 million (or approximately $23.3 million as of December 31, 2006) associated with the reallocation of certain intangible assets to goodwill for income tax purposes in Finland as well as additional pre-acquisition income tax contingencies identified at a Valtra European sales office. During 2007, the Company recorded a reduction of goodwill of approximately €0.1 million (or approximately $0.2 million as of December 31, 2007) associated with the utilization of certain tax losses during 2007 of certain Valtra European sales offices. During 2008, 2007 and 2006, the Company reduced goodwill for financial reporting purposes by approximately $16.8 million, $7.7 million and $9.9 million, respectively, related to the realization of tax benefits associated with the excess tax basis deductible goodwill.
 
At the date of acquisition, the Company identified certain income tax contingencies associated with the operations of Valtra Brazil that related to pre-acquisition tax years. During 2006, it was determined that the identified contingencies no longer existed. The Company therefore recognized a reduction in goodwill of approximately $3.1 million associated with the reversal of such contingent liabilities.
 
3.   Restructuring and Other Infrequent Expenses (Income)
 
The Company recorded restructuring and other infrequent expenses (income) of $0.2 million, $(2.3) million and $1.0 million for the years ended December 31, 2008, 2007 and 2006, respectively. The charges in 2008 primarily related to severance and employee relocation costs associated with the Company’s rationalization of its Valtra sales office located in France. The income in 2007 primarily related to a $3.2 million gain on the sale of a portion of the buildings, land and improvements associated with the Company’s Randers, Denmark facility. The gain was partially offset by $0.9 million of severance, employee relocation and other facility closure costs associated with the rationalization of the Company’s Valtra sales office located in France as well as the rationalization of certain parts, sales and marketing and administrative functions in Germany. The Company did not record a tax provision associated with the gain on the sale of the Randers property during 2007. The charges in 2006 included severance costs associated with the rationalization of certain parts, sales, marketing and administrative functions in the United Kingdom and Germany, as well as the rationalization of certain Valtra European sales offices located in Denmark, Norway, Germany and the United Kingdom.
 
Randers, Denmark rationalization
 
During 2004, the Company announced and initiated a plan to restructure its European combine manufacturing operations located in Randers, Denmark in order to reduce the cost and complexity of the Randers manufacturing operation by simplifying the model range and eliminating the facility’s component manufacturing operations. By retaining only the facility assembly operations, the Company reduced the Randers workforce by 298 employees and permanently eliminated 70% of the square footage utilized. The facility’s component manufacturing operations ceased in February 2005 and as of December 31, 2005, all affected employees had been terminated and all severance, employee retention and other facility closure costs had been paid. The Company now outsources manufacturing of the majority of parts and components to suppliers and has retained critical key assembly operations at the Randers facility. The plans also included a rationalization of the combine model range assembled in Randers, retaining the production of the high specification, high value combines. During 2004, the Company recorded an $8.2 million write-down of property, plant and equipment associated with the component manufacturing operations in addition to other restructuring charges incurred associated with the rationalization. The impairment charge was based upon the estimated fair value of the assets compared to their carrying value. The estimated fair value of the property, plant and equipment was based on current conditions in the market. The carrying value of the property, plant and equipment was approximately $11.6 million before the $8.2 million impairment charge. The impaired property, plant and equipment associated with the Randers rationalization was reported within the Company’s Europe/Africa/Middle East segment. During 2007, the Company sold a portion of the land, buildings and improvements of the Randers facility for proceeds of approximately $4.4 million and recorded a gain of


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AGCO CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
approximately $3.2 million associated with the sale. The gain was reflected in “Restructuring and other infrequent expenses (income)” within the Company’s Consolidated Statements of Operations.
 
Valtra European sales office rationalizations
 
During 2007, the Company announced the closure of its Valtra sales office located in France. The closure resulted in the termination of approximately 15 employees. The Company recorded severance and other facility closure costs of approximately $0.8 million and $0.2 million associated with the closure during 2007 and 2008, respectively. The Company paid approximately $0.3 million in severance costs during 2007 and paid approximately $0.7 million of severance and other facility closure costs during 2008. As of December 31, 2008, all of the employees had been terminated.
 
During 2005, the Company announced that it was changing its distribution arrangements for its Valtra and Fendt products in Scandinavia by entering into a distribution agreement with a third-party distributor to distribute Valtra and Fendt equipment in Sweden and Valtra equipment in Norway and Denmark. As a result of this agreement and the decision to close other Valtra European sales offices, the Company initiated the restructuring and closure of its Valtra sales offices located in the United Kingdom, Spain, Denmark and Norway, resulting in the termination of 24 employees. The Danish and Norwegian sales offices were transferred to the third-party Scandinavian equipment distributor in October 2005, which included the transfer of certain employees, assets and lease and supplier contracts. During 2006, the Company recorded $0.1 million of severance costs related to these closures. As of December 31, 2006, all of the employees had been terminated and all severance and other facility closure costs had been paid.
 
German sales office rationalizations
 
During 2006, the Company announced the closure of two of its sales offices located in Germany, one of which was a Valtra sales office. The closures resulted in the termination of seven employees. The Company recorded severance costs of approximately $0.5 million associated with the closures during 2006. During 2007, the Company recorded additional severance and relocation costs of approximately $0.1 million associated with these closures and paid approximately $0.6 million of severance and relocation costs. As of December 31, 2007, all of the employees had been terminated and primarily all severance and relocation costs had been paid.
 
Coventry, United Kingdom Sales and Administrative Office rationalization
 
During 2006, the Company initiated the restructuring of certain parts, sales, marketing and administrative functions within its Coventry, United Kingdom location, resulting in the termination of 13 employees. The Company recorded severance costs of approximately $0.4 million associated with the restructuring during 2006. All employees had been terminated and all severance costs had been paid as of December 31, 2006.
 
Valtra Finland administrative and European parts rationalizations
 
During 2004, the Company initiated the restructuring of certain administrative functions within its Finnish operations, resulting in the termination of 58 employees and recorded severance costs of approximately $1.4 million associated with this rationalization. During 2005 and 2007, the Company paid approximately $1.0 million of severance costs. All of the 58 employees had been terminated during 2006. During the first quarter of 2008, the Company was notified that it could offset the remaining $0.4 million of accrued severance payments against future pension-related refunds from the Finnish government and thus reversed the accrual.


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AGCO CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
 
4.   Accounts Receivable Securitization
 
At December 31, 2008 and 2007, the Company had accounts receivable securitization facilities in the United States and Canada and in Europe totaling approximately $489.7 million and $495.9 million, respectively. The United States and Canadian securitization facilities expire in December 2013 and the European facility expires in October 2011, but each is subject to annual renewal. In December 2008, the Company renewed and amended its United States and Canadian securitization facilities, extending the expiration date from April 2009 to December 2013. Outstanding funding under these facilities totaled approximately $483.2 million at December 31, 2008 and $446.3 million at December 31, 2007. The funded balance has the effect of reducing accounts receivable and short-term liabilities by the same amount.
 
Under these facilities, wholesale accounts receivable are sold on a revolving basis to commercial paper conduits through a wholly-owned special purpose U.S. subsidiary and a qualifying special purpose entity (a “QSPE”) in the United Kingdom. The Company has reviewed its accounting for its securitization facilities and its wholly-owned special purpose entity in the United States and its QSPE in the United Kingdom in accordance with SFAS No. 140 and FIN 46R. In the United States, due to the fact that the receivables sold to the commercial paper conduits are an insignificant portion of the conduits’ total asset portfolios and such receivables are not siloed, consolidation is not appropriate under FIN 46R, as the Company does not absorb a majority of losses under such transactions. In Europe, the commercial paper conduit that purchases a majority of the receivables is deemed to be the majority beneficial interest holder of the QSPE, and, thus, consolidation by the Company is not appropriate under FIN 46R, as the Company does not absorb a majority of losses under such transactions. In addition, these facilities are accounted for as off-balance sheet transactions in accordance with the provisions of SFAS No. 140.
 
Losses on sales of receivables primarily from securitization facilities were $27.3 million in 2008, $36.1 million in 2007 and $29.9 million in 2006, and are included in “other expense, net” in the Company’s Consolidated Statements of Operations. The losses are determined by calculating the estimated present value of receivables sold compared to their carrying amount. The present value is based on historical collection experience and a discount rate representing the spread over LIBOR as prescribed under the terms of the agreements. Other information related to these facilities and assumptions used in loss calculations are summarized below (dollar amounts in millions):
 
                                                                 
    United States     Canada     Europe     Total  
    2008     2007     2008     2007     2008     2007     2008     2007  
 
Unpaid balance of receivables sold at December 31
  $ 336.2     $ 311.9     $ 74.5     $ 81.9     $ 154.5     $ 163.0     $ 565.2     $ 556.8  
Retained interest in receivables sold
  $ 55.8     $ 71.5     $ 9.4     $ 21.9     $ 16.2     $ 17.1     $ 82.0     $ 110.5  
Credit losses on receivables sold
  $ 0.4     $ 2.0     $ 0.1     $ 0.5     $     $     $ 0.5     $ 2.5  
Average liquidation period (months)
    2.7       3.1       2.7       3.1       2.1       2.3                  
Discount rate
    3.6 %     5.8 %     4.2 %     5.2 %     4.7 %     4.5 %                
 
The Company continues to service the sold receivables and maintains a retained interest in the receivables. No servicing asset or liability has been recorded as the estimated fair value of the servicing of the receivables approximates the servicing income. The retained interest in the receivables sold is included in the caption “Accounts and notes receivable, net” in the accompanying Consolidated Balance Sheets. The Company’s risk of loss under the securitization facilities is limited to a portion of the unfunded balance of receivables sold, which is approximately 15% of the funded amount. The Company maintains reserves for the portion of the residual interest it estimates is uncollectible. At December 31, 2008 and 2007, approximately $0.1 million and $0.0 million, respectively, of the unpaid balance of receivables sold was past due 60 days or more. At December 31, 2008 and 2007, the fair value of the retained interest recorded was approximately $81.4 million and $108.8 million, respectively, compared to the carrying amount of $82.0 million and


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AGCO CORPORATION
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
$110.5 million, respectively, and was based on the present value of the receivables calculated in a method consistent with the losses on sales of receivables discussed above. The retained interest fair value measurement falls within the Level 3 fair value hierarchy under SFAS No. 157. Level 3 measurements are model-derived valuations in which one or more significant inputs or significant value-drivers are unobservable. Assuming a 10% and 20% increase in the average liquidation period, the fair value of the residual interest would decline by $0.1 million and $0.1 million, respectively. Assuming a 10% and 20% increase in the discount rate, the fair value of the residual interest would decline by $0.1 million and $0.1 million, respectively. For 2008, the Company received approximately $1,745.6 million from sales of receivables and approximately $4.7 million from servicing fees. For 2007, the Company received approximately $1,393.8 million from sales of receivables and $4.6 million from servicing fees. For 2006, the Company received approximately $1,162.4 million from sales of receivables and $5.2 million from servicing fees.
 
The following table summarizes the activity with respect to the fair value of the Company’s retained interest in receivables sold during the year ended December 31, 2008 (in millions):
 
         
Balance at December 31, 2007
  $ 108.8  
Realized gains
    1.1  
Purchases, issuances and settlements
    (28.5 )
         
Balance at December 31, 2008
  $ 81.4  
         
 
The Company has an agreement to permit transferring, on an ongoing basis, the majority of its wholesale interest-bearing receivables in North America to AGCO Finance LLC and AGCO Finance Canada, Ltd., its United States and Canadian retail finance joint ventures. The Company has a 49% ownership interest in these joint ventures. The transfer of the receivables is without recourse to the Company, and the Company continues to service the receivables. The Company does not maintain any direct retained interest in the receivables. No servicing asset or liability has been recorded since the estimated fair value of the servicing of the receivables approximates servicing income. As of De