GENERAL

Our operations are subject to the cyclical nature of the agricultural industry. Sales of our equipment are affected by, among other things, changes in net cash farm income, farm land values, weather conditions, the demand for agricultural commodities, commodity prices and general economic conditions. We record sales when we sell equipment and replacement parts to our independent dealers, distributors and other customers. To the extent possible, we attempt to sell products to our dealers and distributors on a level basis throughout the year to reduce the effect of seasonal demands on manufacturing operations and to minimize our investment in inventories. However, retail sales by dealers to farmers are highly seasonal and largely are a function of the timing of the planting and harvesting seasons. As a result, our net sales historically have been the lowest in the first quarter and have increased in subsequent quarters.

The coronavirus ("COVID-19") pandemic has created significant volatility in the global economy and has led to substantially reduced economic activity, employment disruptions and supply chain constraints and delays. In most areas, our business has been deemed essential, thereby allowing us to maintain operations. However, production has been severely impacted by component availability, particularly during late March and throughout April, which directly impacted net sales levels. The affected plants all resumed production in late April, and all but one of our major production facilities currently are operational. The ability to maintain full-time production remains uncertain for the foreseeable future due to potential supply chain constraints, workforce limitations, safety equipment availability and government restrictions. We are enacting cost saving measures as well as managing our cash flows and capital deployment to respond to the volatile environment.

RESULTS OF OPERATIONS For the three months ended March 31, 2020, we generated net income of $64.7 million, or $0.85 per share, compared to $65.1 million, or $0.84 per share, for the same period in 2019.

Net sales during the three months ended March 31, 2020 were $1,928.3 million, which were approximately 3.4% lower than the same period in 2019. This decrease was primarily the result of the negative impact of currency translation. Regionally, net sales, excluding negative currency translation impacts, were higher in our North America and South America regions, but were offset by declines in net sales in our Europe/Middle East ("EME") and Asia/Pacific/Africa ("APA") regions due to reduced production volumes caused by the impacts of the COVID-19 pandemic.

Income from operations for the three months ended March 31, 2020 was $100.4 million compared to $92.4 million for the same period in 2019. The increase was primarily the result of improved operating margins which benefited from a richer sales mix and cost control initiatives, partially offset by the impact of lower production volumes.

Regionally, income from operations in our EME region decreased for the three months ended March 31, 2020 compared to the same period in 2019. The decrease was primarily due to lower net sales and production volumes. In our North American region, income from operations increased for the three months ended March 31, 2020 compared to the same period in 2019. The increase was primarily due to the benefit of increased net sales and a favorable sales mix. In our South America region, operating losses in the three months ended March 31, 2020 were relatively flat compared to the same period in 2019. These losses reflect low levels of industry demand and company production, as well as the cost impact of newer product technology localized into our Brazilian factories. In our APA region, income from operations decreased for the three months ended March 31, 2020 compared to the same period in 2019, primarily due to lower net sales and production volumes.

Industry Market Conditions The COVID-19 pandemic is projected to have minimal impact on global crop production. Most farm operations, which generally have been deemed essential, are operating at normal levels. However, the consumption of grain for food, fuel and livestock feed is being negatively impacted by the economic constraints caused by the pandemic. As a result, grain inventories are expected to increase in 2020, and soft commodity prices trended significantly lower in the first quarter. In addition, protein processing has been severely constrained, which pressures protein producers. Future demand for agricultural equipment will be influenced by farm income, which is a function of commodity and protein prices, crop yields and government support.

In North America, industry unit retail sales of utility and high horsepower tractors for the first three months of 2020 decreased approximately 6% compared to the same period in 2019. Industry unit retail sales of combines for the first three months of 2020 decreased approximately 22% compared to the first three months of 2019. Lower commodity prices and a


                                       30

--------------------------------------------------------------------------------


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

cautious farmer sentiment both contributed to weak demand in the large farm sector during the first three months of 2020, compared to the same period in 2019. Retail sales of low horsepower tractors also declined in the first three months of 2020 compared to the prior year period.

In Western Europe, industry unit retail sales of tractors for the first three months of 2020 decreased approximately 4% compared to the same period in 2019. Industry unit retail sales of combines for the first three months of 2020 decreased approximately 17% compared to the first three months of 2019. During the first three months of 2020, industry sales declined across the markets of Spain and Italy, partially offset by growth in Germany compared to the same period in 2019.

In South America, industry unit retail sales of tractors for the first three months of 2020 decreased approximately 8% compared to the same period in 2019. Industry unit retail sales of combines for the first three months of 2020 decreased approximately 27% compared to the first three months of 2019. Industry retail sales in Brazil were relatively level compared to the prior year but declined in most other South American markets.

© Edgar Online, source Glimpses