UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarter ended September 30, 2005

of

AGCO CORPORATION

A Delaware Corporation
IRS Employer Identification No. 58-1960019
SEC File Number 1-12930

4205 River Green Parkway
Duluth, GA 30096
(770) 813-9200

     AGCO Corporation (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.

     As of October 31, 2005, AGCO Corporation had 90,508,221 shares of common stock outstanding. AGCO Corporation is an accelerated filer.

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

 

 

AGCO CORPORATION AND SUBSIDIARIES

INDEX

		Page
		Numbers
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004			1
Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2005 and 2004			2
Condensed Consolidated Statements of Operations for the Nine Months Ended September 30, 2005 and 2004			3
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2005 and 2004			4
Notes to Condensed Consolidated Financial Statements			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 3. Quantitative and Qualitative Disclosures about Market Risk			33
Item 4. Controls and Procedures			34
PART II. OTHER INFORMATION:
Item 6. Exhibits			35
SIGNATURES			36
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.0 SECTION 906 CERTIFICATION OF CEO AND CFO

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AGCO CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited and in millions, except shares)

		September 30,				December 31,
		2005				2004
ASSETS
Current Assets:
Cash and cash equivalents		$	27.3			$	325.6
Accounts and notes receivable, net			791.3				823.2
Inventories, net			1,304.2				1,069.4
Deferred tax assets			107.3				127.5
Other current assets			91.0				58.8
Total current assets			2,321.1				2,404.5
Property, plant and equipment, net			546.0				593.3
Investment in affiliates			160.2				114.5
Deferred tax assets			130.5				146.1
Other assets			64.6				70.1
Intangible assets, net			218.7				238.2
Goodwill			704.4				730.6
Total assets		$	4,145.5			$	4,297.3
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Current portion of long-term debt		$	6.5			$	6.9
Accounts payable			540.2				601.9
Accrued expenses			573.7				660.3
Other current liabilities			139.0				89.9
Total current liabilities			1,259.4				1,359.0
Long-term debt, less current portion			1,018.6				1,151.7
Pensions and postretirement health care benefits			227.7				247.3
Other noncurrent liabilities			105.0				116.9
Total liabilities			2,610.7				2,874.9
Stockholders’ Equity:
Common stock; $0.01 par value, 150,000,000 shares authorized, 90,508,221 and 90,394,292 shares issued and outstanding at September 30, 2005 and December 31, 2004, respectively			0.9				0.9
Additional paid-in capital			894.7				893.2
Retained earnings			889.2				793.8
Unearned compensation			(0.1	)			(0.2	)
Accumulated other comprehensive loss			(249.9	)			(265.3	)
Total stockholders’ equity			1,534.8				1,422.4
Total liabilities and stockholders’ equity		$	4,145.5			$	4,297.3

See accompanying notes to condensed consolidated financial statements.

AGCO CORPORATION AND SUBSIDIARIES

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

		Three Months Ended September 30,
		2005				2004
Net sales		$	1,233.6			$	1,216.5
Cost of goods sold			1,014.6				989.9
Gross profit			219.0				226.6
Selling, general and administrative expenses (includes restricted stock compensation expense of $0.2 million and $0.1 million for the three months ended September 30, 2005 and 2004, respectively)			126.2				122.6
Engineering expenses			29.9				26.3
Restructuring and other infrequent expenses			—				1.7
Amortization of intangibles			4.1				3.9
Income from operations			58.8				72.1
Interest expense, net			15.8				16.4
Other expense, net			8.8				7.2
Income before income taxes and equity in net earnings of affiliates			34.2				48.5
Income tax provision			12.7				18.6
Income before equity in net earnings of affiliates			21.5				29.9
Equity in net earnings of affiliates			6.3				4.9
Net income		$	27.8			$	34.8
Net income per common share:
Basic		$	0.31			$	0.39
Diluted		$	0.31			$	0.36
Weighted average number of common and common equivalent shares outstanding:
Basic			90.4				90.2
Diluted			90.7				99.6

See accompanying notes to condensed consolidated financial statements.

AGCO CORPORATION AND SUBSIDIARIES

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

		Nine Months Ended September 30,
		2005				2004
Net sales		$	4,064.8			$	3,739.2
Cost of goods sold			3,355.1				3,051.1
Gross profit			709.7				688.1
Selling, general and administrative expenses (includes restricted stock compensation expense of $0.3 million and $0.4 million for the nine months ended September 30, 2005 and 2004, respectively)			384.1				363.7
Engineering expenses			92.0				77.4
Restructuring and other infrequent expenses			0.2				1.1
Amortization of intangibles			12.4				11.7
Income from operations			221.0				234.2
Interest expense, net			64.7				61.8
Other expense, net			27.8				15.5
Income before income taxes and equity in net earnings of affiliates			128.5				156.9
Income tax provision			50.6				63.6
Income before equity in net earnings of affiliates			77.9				93.3
Equity in net earnings of affiliates			17.5				14.8
Net income		$	95.4			$	108.1
Net income per common share:
Basic		$	1.06			$	1.27
Diluted		$	1.01			$	1.18
Weighted average number of common and common equivalent shares outstanding:
Basic			90.4				84.9
Diluted			96.6				94.3

See accompanying notes to condensed consolidated financial statements.

AGCO CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in millions)

		Nine Months Ended September 30,
		2005				2004
Cash flows from operating activities:
Net income		$	95.4			$	108.1
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation			66.7				62.2
Deferred debt issuance cost amortization			6.2				11.7
Amortization of intangibles			12.4				11.7
Restricted stock compensation			0.2				0.3
Equity in net earnings of affiliates, net of cash received			(14.7	)			(7.2	)
Deferred income tax (benefit) provision			(1.5	)			5.3
Gain on sale of property, plant and equipment			(1.9	)			(7.9	)
Write-down of property, plant and equipment			—				8.0
Changes in operating assets and liabilities, net of effects from purchase of businesses:
Accounts and notes receivable, net			(3.7	)			(100.4	)
Inventories, net			(271.7	)			(157.5	)
Other current and noncurrent assets			(16.8	)			(27.5	)
Accounts payable			(10.2	)			73.7
Accrued expenses			(28.7	)			44.7
Other current and noncurrent liabilities			(17.7	)			(5.0	)
Total adjustments			(281.4	)			(87.9	)
Net cash (used in) provided by operating activities			(186.0	)			20.2
Cash flows from investing activities:
Purchases of property, plant and equipment			(44.8	)			(46.8	)
Proceeds from sales of property, plant and equipment			9.5				39.8
Purchase of businesses, net of cash acquired			—				(766.3	)
(Investments in) proceeds from the sale of unconsolidated affiliates			(22.5	)			0.2
Net cash used in investing activities			(57.8	)			(773.1	)
Cash flows from financing activities:
(Payment of) proceeds from debt obligations, net			(46.7	)			393.0
Payment of debt issuance costs			—				(20.9	)
Proceeds from issuance of common stock			1.4				301.7
Net cash (used in) provided by financing activities			(45.3	)			673.8
Effect of exchange rate changes on cash and cash equivalents			(9.2	)			0.3
Decrease in cash and cash equivalents			(298.3	)			(78.8	)
Cash and cash equivalents, beginning of period			325.6				147.0
Cash and cash equivalents, end of period		$	27.3			$	68.2

See accompanying notes to condensed consolidated financial statements.

AGCO CORPORATION AND SUBSIDIARIES

1. BASIS OF PRESENTATION

     The condensed consolidated financial statements of AGCO Corporation and subsidiaries (the “Company” or “AGCO”) included herein have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, which are of a normal recurring nature, necessary to present fairly the Company’s financial position, results of operations and cash flows at the dates and for the periods presented. These condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. Certain reclassifications of previously reported financial information were made to conform to the current presentation. Results for interim periods are not necessarily indicative of the results for the year.

     Stock Compensation Plans

     The Company accounts for all stock-based compensation awarded under its Non-employee Director Incentive Plan (the “Director Plan”), Long-Term Incentive Plan (the “LTIP”) and Stock Option Plan (the “Option Plan”) as prescribed under Accounting Principles Board (“APB”) No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), and also provides the disclosures required under Statement of Financial Accounting Standard (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), and SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure” (“SFAS No. 148”). APB No. 25 requires no recognition of compensation expense for options granted under the Option Plan as long as certain conditions are met. There has been no compensation expense recorded under APB No. 25 for the Option Plan. APB No. 25 requires recognition of compensation expense under the Director Plan and the LTIP at the time the award is earned.

     There were no grants of options under the Option Plan during the nine months ended September 30, 2005 and 2004. For disclosure purposes only, under SFAS No. 123, the Company estimated the fair value of grants under the Company’s Option Plan using the Black-Scholes option pricing model and the Barrier option model for awards granted under the Director Plan and the LTIP. Based on these models, the weighted average fair value of options granted under the Option Plan and the weighted average fair value of awards granted under the Director Plan and the LTIP were as follows for the three and nine months ended September 30, 2005 and 2004:

		Three Months Ending September 30,								Nine Months Ending September 30,
		2005				2004				2005				2004
Director Plan		$	—			$	—			$	13.61			$	17.62
LTIP			15.65				16.42				15.65				16.21
Option Plan			—				—				—				—
Weighted average assumptions under Black-Scholes and Barrier option models:
Expected life of awards (years)			5.0				5.0				4.4				4.8
Risk-free interest rate			3.9	%			3.6	%			3.8	%			3.2	%
Expected volatility			42.9	%			47.1	%			42.4	%			48.9	%
Expected dividend yield			—				—				—				—

     The fair value of the grants and awards are amortized over the vesting period for stock options and awards earned under the Director Plan and LTIP and over the performance period for unearned awards under the Director Plan and LTIP. The following table illustrates the effect on net income and earnings per common share if the Company had applied the fair value recognition provisions of SFAS No. 123 and SFAS No. 148:

Notes to Condensed Consolidated Financial Statements — Continued
(unaudited, in millions, except per share data)

		Three Months Ending September 30,								Nine Months Ending September 30,
		2005				2004				2005				2004
Net income, as reported		$	27.8			$	34.8			$	95.4			$	108.1
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects			0.1				0.1				0.2				0.3
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			(1.4	)			(2.0	)			(5.6	)			(5.7	)
Pro forma net income		$	26.5			$	32.9			$	90.0			$	102.7
Earnings per share:
Basic — as reported		$	0.31			$	0.39			$	1.06			$	1.27
Basic — pro forma		$	0.29			$	0.37			$	1.00			$	1.21
Diluted — as reported		$	0.31			$	0.36			$	1.01			$	1.18
Diluted — pro forma		$	0.29			$	0.34			$	0.96			$	1.13

Recent Accounting Pronouncements

     In June 2005, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and Statement No. 3, Reporting Accounting Changes in Interim Financial Statements” (“SFAS No. 154”). SFAS No. 154 changes the requirements for the accounting for, and reporting of, a change in accounting principle. Previously, most voluntary changes in accounting principles were required to be recognized by way of a cumulative effect adjustment within net income during the period of the change. SFAS No. 154 requires retrospective application to prior periods’ financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005; however, the Statement does not change the transition provisions of any existing accounting pronouncements. The Company does not believe the adoption of SFAS No. 154 will have a material effect on its consolidated results of operations or financial position.

     In April 2005, the SEC adopted a new rule that changes the adoption dates of SFAS No. 123R (Revised 2004), “Share-Based Payment” (“SFAS No. 123R”), which is a revision of SFAS No. 123. The SEC’s new rule allows companies to implement SFAS No. 123R at the beginning of their next fiscal year, instead of the next reporting period, that begins after June 15, 2005. The rule does not change the accounting required by SFAS No. 123R; it only changes the dates for compliance with the standard. The Company currently plans to adopt SFAS No. 123R using the modified prospective method effective January 1, 2006 and, based upon current outstanding awards, estimates the application of the expensing provisions of SFAS No. 123R will result in a pre-tax expense of approximately $4.9 million in 2006.

     In March 2005, the FASB issued FASB Interpretation (“FIN”) No. 47, “Accounting for Conditional Asset Retirement Obligations — An Interpretation of FASB Statement No. 143” (“FIN 47”), which will result in (a) more consistent recognition of liabilities relating to asset retirement obligations, (b) more information about expected future cash outflows associated with those obligations, and (c) more information about investments in long-lived assets because additional asset retirement costs will be recognized as part of the carrying amounts of the assets. FIN 47 clarifies that the term conditional asset retirement obligation as used in SFAS No. 143, “Accounting for Asset Retirement Obligations,” refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Uncertainty about the timing and (or) method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later

Notes to Condensed Consolidated Financial Statements — Continued
(unaudited, in millions, except per share data)

than the end of fiscal years ending after December 15, 2005. The Company plans to adopt FIN 47 at the end of its 2005 fiscal year and is currently evaluating the impact on its consolidated results of operations and financial position.

     In November 2004, the FASB issued SFAS No. 151, “Inventory Costs — An Amendment of ARB No. 43, Chapter 4” (“SFAS No. 151”). SFAS No. 151 amends the guidance in Accounting Research Bulletin (“ARB”) No. 43, Chapter 4, “Inventory Pricing” (“ARB No. 43”), to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight, and rehandling costs be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal” as stated in ARB No. 43. Additionally, SFAS No. 151 requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for fiscal years beginning after June 15, 2005 and is required to be adopted in the first quarter of 2006. The Company is currently evaluating the effect that the adoption of SFAS No. 151 will have on its consolidated results of operations and financial position.

     On October 22, 2004, the American Jobs Creation Act of 2004 (“AJCA”) was enacted. The AJCA provides a deduction for income from qualified domestic production activities, which will be phased in from 2005 through 2010. The AJCA also provides for a two-year phase out of the existing extra-territorial income exclusion (“ETI”) for foreign sales that was viewed to be inconsistent with international trade protocols by the European Union. Under the guidance in FASB Staff Position No. 109-1, “Application of FASB Statement No. 109, ‘Accounting for Income Taxes, ’ to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004,” the deduction will be treated as a “special deduction” as described in SFAS No. 109, “Accounting for Income Taxes.” As such, the special deduction has no effect on deferred tax assets and liabilities existing at the enactment date.

     In December 2004, the FASB issued Staff Position No. 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004.” The AJCA provides multi-national companies an election to deduct from taxable income 85% of eligible dividends repatriated from foreign subsidiaries. The Company’s eligible dividend cannot exceed $718.2 million, which is the amount of permanently invested earnings outside the United States, as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. The eligible dividend must meet certain business purposes to qualify for the deduction. In addition, there are provisions which prohibit the use of net operating losses to avoid a tax liability on the taxable portion of a qualifying dividend. The estimated impact to current tax expense in the United States is generally equal to 5.25% of the qualifying dividend. The AJCA generally allows companies to take advantage of this special deduction from November 2004 through the end of calendar year 2005. The Company did not propose a qualifying plan of repatriation for 2004. The Company is continuing to assess whether it will propose a plan of qualifying repatriation in 2005. The estimated range of dividend amounts that the Company may consider would not exceed eligible dividend amounts allowable under the AJCA.

     On May 19, 2004, the FASB issued FASB Staff Position No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (“FSP No. 106-2”). FSP No. 106-2 relates to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) signed into law on December 8, 2003. The Act introduced a prescription drug benefit under Medicare, as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare. Based upon the final regulations released in January 2005, during the third quarter of 2005, the Company reviewed the provisions of its postretirement health care plans with its actuaries to determine whether the benefits offered by its plans met the statutory definition of “actuarially equivalent” prescription drug benefits that qualify for the federal subsidy. Based upon this review, the Company believes that two of its plans qualify for the subsidy. In accordance with FSP No. 106-2, the Company began reflecting the impact of the anticipated subsidies as of July 1, 2005 on a prospective basis, and revalued its projected benefit obligation as of July 1, 2005 to (1) incorporate the benefit associated with the federal subsidy expected to be received and (2) reduce the discount rate from 5.75% as of December 31, 2004

Notes to Condensed Consolidated Financial Statements — Continued
(unaudited, in millions, except per share data)

to 5.25% as of July 1, 2005. The revised obligation as of July 1, 2005 reflects a reduction of approximately $5.0 million due to the impact of the federal subsidy, offset by an increase of approximately $1.8 million due to the change in the discount rate. During the third quarter of 2005, the Company’s net postretirement cost was reduced by approximately $0.1 million due to the impact of the expected federal subsidy. The reduction was evenly split between reduced interest cost and lower amortization of net actuarial losses (Note 10).

2. RESTRUCTURING AND OTHER INFREQUENT EXPENSES

     During the second quarter of 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 approximately 22 employees. The Danish and Norwegian sales offices were transferred to the third party Scandinavian equipment distributor in October 2005. The Company recorded severance costs and asset write-downs of approximately $0.3 million and $0.1 million, respectively, related to these closures during the second quarter of 2005, and recorded an additional $0.1 million of severance costs during the third quarter of 2005. Approximately $0.1 million of severance costs had been paid as of September 30, 2005, and one of the 22 employees had been terminated. The remaining $0.3 million of severance costs will be paid through 2006.

     During the fourth quarter of 2004, the Company initiated the restructuring of certain administrative functions within its Finnish tractor manufacturing operations, resulting in the termination of approximately 58 employees. During 2004, the Company recorded severance costs of approximately $1.4 million associated with this rationalization. The Company recorded an additional $0.1 million associated with this rationalization during the first quarter of 2005, and incurred and paid $0.4 million of severance costs. During the second quarter of 2005, the Company incurred and paid an additional $0.3 million of severance costs associated with this rationalization. As of September 30, 2005, 53 of the 58 employees had been terminated. The $0.7 million of severance payments accrued at September 30, 2005 will be paid through 2009. In addition, during the first quarter of 2005, the Company incurred and expensed approximately $0.3 million of contract termination costs associated with the rationalization of its Valtra European parts distribution operations.

     On July 2, 2004, the Company announced and initiated a plan related to the restructuring of its European combine manufacturing operations located in Randers, Denmark, to include the elimination of the facility’s component manufacturing operations, as well as the rationalization of the combine model range to be assembled in Randers. The restructuring plan will reduce the cost and complexity of the Randers manufacturing operations by simplifying the model range and eliminating the facility’s component manufacturing operations. 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. Component manufacturing operations ceased in February 2005. The components of the restructuring expenses are summarized in the following table:

Notes to Condensed Consolidated Financial Statements — Continued
(unaudited, in millions, except per share data)

		Write-down
		of Property,								Employee				Facility
		Plant and				Employee				Retention				Closure
		Equipment				Severance				Payments				Costs				Total
2004 provision		$	8.2			$	1.1			$	2.1			$	0.1			$	11.5
Less: Non-cash expense			8.2				—				—				—				8.2
Cash expense			—				1.1				2.1				0.1				3.3
2004 cash activity			—				(0.2	)			(0.4	)			—				(0.6	)
Foreign currency translation			—				—				0.1				—				0.1
Balances as of December 31, 2004			—				0.9				1.8				0.1				2.8
First quarter 2005 provision			—				—				0.4				0.2				0.6
First quarter 2005 cash activity			—				(0.5	)			(1.5	)			(0.3	)			(2.3	)
Foreign currency translation			—				—				(0.1	)			—				(0.1	)
Balances as of March 31, 2005			—				0.4				0.6				—				1.0
Second quarter 2005 provision			—				—				0.2				0.1				0.3
Second quarter 2005 cash activity			—				(0.4	)			(0.6	)			(0.1	)			(1.1	)
Foreign currency translation			—				—				(0.1	)			—				(0.1	)
Balances as of June 30, 2005			—				—				0.1				—				0.1
Third quarter 2005 provision reversal			—				—				(0.1	)			—				(0.1	)
Balances as of September 30, 2005		$	—			$	—			$	—			$	—			$	—

     The write-down of certain property, plant and equipment within the component manufacturing operation represents the impairment of real estate and machinery and equipment resulting from the restructuring, as the rationalization eliminated a majority of the square footage utilized in the facility. 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 machinery, equipment and tooling was disposed of or sold. The buildings, land and improvements are being marketed for sale. The impaired property, plant and equipment associated with the Randers rationalization is reported within the Company’s Europe/Africa/Middle East segment. During the second quarter of 2005, the Company completed auctions of remaining machinery and equipment and recorded a gain of approximately $1.5 million associated with such actions. The gain was reflected within “Restructuring and other infrequent expenses” within the Company’s Condensed Consolidated Statements of Operations. The severance costs relate to the termination of 298 employees. As of September 30, 2005, 295 of the 298 employees had been terminated. The employee retention payments relate to incentives paid to Randers employees who remained employed until certain future termination dates and were accrued over the term of the retention period. During the third quarter of 2005, the Company reversed $0.1 million of previously established provisions related to retention payments as employee retention claims were finalized during the quarter. The facility closure costs include certain noncancelable operating lease terminations and other facility exit costs. The Company also recorded a write-down of approximately $3.7 million of inventory, reflected in costs of goods sold, during 2004, related to inventory that was identified as obsolete as a result of the rationalization.

     During 2002, the Company announced and initiated a restructuring plan related to the closure of its tractor manufacturing facility in Coventry, England and the relocation of existing production at Coventry to the Company’s Beauvais, France and Canoas, Brazil manufacturing facilities. The closure of this facility was consistent with the Company’s strategy to reduce excess manufacturing capacity. This particular facility manufactured transaxles and assembled tractors in the range of 50-110 horsepower. The trend towards higher horsepower tractors resulting from the consolidation of farms had caused this product segment of the industry to decline over recent years, which negatively impacted the facility’s utilization. The components of the restructuring expenses are summarized in the following table:

Notes to Condensed Consolidated Financial Statements — Continued
(unaudited, in millions, except per share data)

		Write-down
		of Property,								Employee				Facility
		Plant and				Employee				Retention				Closure
		Equipment				Severance				Payments				Costs				Total
Balances as of December 31, 2002		$	—			$	8.2			$	18.0			$	2.1			$	28.3
2003 provision			—				—				10.2				1.8				12.0
2003 cash activity			—				(8.9	)			(26.7	)			(2.5	)			(38.1	)
Foreign currency translation			—				1.2				0.5				0.2				1.9
Balances as of December 31, 2003			—				0.5				2.0				1.6				4.1
2004 provision reversal			—				—				(0.4	)			(0.5	)			(0.9	)
2004 cash activity			—				(0.5	)			(1.4	)			(0.8	)			(2.7	)
Foreign currency translation			—				—				0.1				0.1				0.2
Balances as of December 31, 2004			—				—				0.3				0.4				0.7
First quarter 2005 cash activity			—				—				(0.3	)			(0.3	)			(0.6	)
Balances as of March 31, 2005			—				—				—				0.1				0.1
Second quarter 2005 cash activity			—				—				—				—				—
Balances as of June 30, 2005			—				—				—				0.1				0.1
Third quarter 2005 cash activity			—				—				—				(0.1	)			(0.1	)
Balances as of September 30, 2005		$	—			$	—			$	—			$	—			$	—

     During 2003, the Company sold certain machinery and equipment of the Coventry facility at auction and, as a result of those sales, recognized a net gain of approximately $2.0 million. This gain was reflected in “Restructuring and other infrequent expenses” in the Company’s Consolidated Statements of Operations for the year ended December 31, 2003. On January 30, 2004, the Company sold the land, buildings and improvements of the Coventry facility for approximately $41.0 million, and as a result of that sale, recognized a net gain, after selling costs, of approximately $6.9 million. This gain was reflected in “Restructuring and other infrequent expenses” in the Company’s Consolidated Statements of Operations for the year ended December 31, 2004. The Company will lease part of the facility back from the buyers for a period of three years, with the ability to exit the lease within two years from the date of the sale. The Company received approximately $34.4 million of the sale proceeds on January 30, 2004 and the remaining $6.6 million on January 28, 2005. In addition, the Company completed the auctions of the remaining machinery and equipment, as well as finalized the sale of the facility (and associated selling costs) during the second quarter of 2004, and recorded an additional $1.4 million in net gains related to such actions. The net gains were reflected in “Restructuring and other infrequent expenses” in the Company’s Consolidated Statements of Operations for the year ended December 31, 2004.

     The employee severance costs relate to the termination of 1,049 employees. All employees had been terminated as of December 31, 2004. The employee retention payments relate to incentives paid to Coventry employees who remain employed until certain future termination dates and were accrued over the term of the retention period. The facility closure costs include certain noncancelable operating lease terminations and other facility exit costs. During 2004, the Company reversed approximately $0.9 million of provisions related to the restructuring that had been previously established. The reversals were necessary to adequately reflect more accurate estimates of remaining obligations related to retention payments, lease termination payouts and other exit costs, as some employees had been redeployed or had been terminated earlier than estimated, and as some supplier and rental contracts had been finalized and terminated earlier than anticipated.

     In October 2002, the Company applied to the High Court in London, England, for clarification of a provision in its U.K. pension plan that governs the value of pension payments payable to an employee who is over 50 years old and who retires from service in certain circumstances prior to his normal retirement date. The primary matter before the High Court was whether pension payments to such employees, including those who take early retirement and those terminated due to the closure of the Company’s Coventry facility, should be

Notes to Condensed Consolidated Financial Statements — Continued
(unaudited, in millions, except per share data)

reduced to compensate for the fact that the pension payments begin prior to a normal retirement age of 65. In July 2003, a U.K. Court of Appeal ruled that employees terminated as a result of the closure of the Coventry facility do not qualify for full pensions, but ruled that other employees might qualify.

     As a result of the ruling in that case, certain employees who took early retirement in prior years under voluntary retirement arrangements would be entitled to additional payments, and therefore the Company recorded a charge in the second quarter of 2003, included in “Restructuring and other infrequent expenses,” of approximately £7.5 million (or approximately $12.4 million) to reflect its estimate of the additional pension liability associated with previous early retirement programs. Subsequently, as full details of the Court of Appeal judgment were published, the Company received more detailed legal advice regarding the specific circumstances in which the past voluntary retirements would be subject to the Court’s ruling. Based on this advice, the Company completed a detailed review of past terminations during the fourth quarter of 2004, and concluded that the number of former employees who are considered to be eligible to receive enhanced pensions under the Court’s ruling was lower than the Company’s initial estimate. The Company therefore recorded a reversal of the established provision of approximately £2.5 million (or approximately $4.1 million) during the fourth quarter of 2004, which was included in “Restructuring and other infrequent expenses” in the Company’s Consolidated Statements of Operations.

     During 2002 through 2004, the Company initiated several rationalization plans and recorded restructuring and other infrequent expenses in total of approximately $5.1 million during 2002, 2003 and 2004. The expenses primarily related to severance costs and certain lease termination and other exit costs associated with the rationalization of the Company’s European engineering and marketing personnel, certain components of the Company’s German manufacturing facilities located in Kempten and Marktoberdorf, Germany, the rationalization of the Company’s European combine engineering operations and the closure and consolidation of the Company’s Valtra U.S. and Canadian sales offices into its existing U.S. and Canadian sales organizations. The Company did not record any costs associated with these rationalizations during 2005. Of the $5.1 million of total costs, approximately $4.0 million relate to severance costs associated with the termination of approximately 215 employees in total. At September 30, 2005, a total of approximately $5.0 million of expenses had been incurred and paid. The remaining accrued balance of $0.1 million as of September 30, 2005 is expected to be incurred during 2005.

3. GOODWILL AND OTHER INTANGIBLE ASSETS

     Changes in the carrying amount of acquired intangible assets during the nine months ended September 30, 2005 are summarized as follows:

		Trademarks
		and				Customer				Patents and
		Tradenames				Relationships				Technology				Total
Gross carrying amounts:
Balance as of December 31, 2004		$	32.9			$	81.7			$	51.4			$	166.0
Foreign currency translation			(0.1	)			2.4				(5.7	)			(3.4	)
Balance as of September 30, 2005		$	32.8			$	84.1			$	45.7			$	162.6

		Trademarks
		and				Customer				Patents and
		Tradenames				Relationships				Technology				Total
Accumulated amortization:
Balance as of December 31, 2004		$	3.7			$	9.4			$	7.8			$	20.9
Amortization expense			0.9				6.2				5.3				12.4
Foreign currency translation			(0.1	)			0.5				(1.1	)			(0.7	)
Balance as of September 30, 2005		$	4.5			$	16.1			$	12.0			$	32.6

Notes to Condensed Consolidated Financial Statements — Continued
(unaudited, in millions, except per share data)

		Trademarks
		and
		Tradenames
Unamortized intangible assets:
Balance as of December 31, 2004		$	93.1
Foreign currency translation			(4.4	)
Balance as of September 30, 2005		$	88.7

Changes in the carrying amount of goodwill during the nine months ended September 30, 2005 are summarized as follows:

		North				South				Europe/Africa/
		America				America				Middle East				Consolidated
Balance as of December 31, 2004		$	165.5			$	120.8			$	444.3			$	730.6
Foreign currency translation			—				22.9				(49.1	)			(26.2	)
Balance as of September 30, 2005		$	165.5			$	143.7			$	395.2			$	704.4

     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 initial assessment and its 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. 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 (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 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 Company utilized a combination of valuation techniques, including a discounted cash flow approach, a market multiple approach and a comparable transaction approach when making its initial and subsequent 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 most recent analyses, conducted as of October 1, 2004, indicated that no reduction in the carrying amount of goodwill was required in 2004.

     The Company amortizes certain acquired intangible assets primarily on a straight-line basis over their estimated useful lives which range from 3 to 30 years.

4. LONG-TERM DEBT

     Long-term debt consisted of the following at September 30, 2005 and December 31, 2004:

		September 30,				December 31,
		2005				2004
Credit facility		$	573.7			$	424.7
13/4% Convertible senior subordinated notes due 2033			201.3				201.3
91/2% Senior notes due 2008			—				250.0
67/8% Senior subordinated notes due 2014			240.5				271.1
Other long-term debt			9.6				11.5
			1,025.1				1,158.6
Less: Current portion of long-term debt			(6.5	)			(6.9	)
Total long-term debt, less current portion		$	1,018.6			$	1,151.7

Notes to Condensed Consolidated Financial Statements — Continued
(unaudited, in millions, except per share data)

     On June 23, 2005, the Company completed the redemption of its $250 million 9¹/2% senior notes due 2008. The Company redeemed the notes at a price of approximately $261.9 million, which included a premium of 4.75% over the face amount of the notes. The premium of approximately $11.9 million and the write-off of the remaining balance of deferred debt issuance costs of approximately $2.2 million were recognized in interest expense, net during the second quarter of 2005. The funding source for the redemption was a combination of cash generated from the transfer of North American wholesale interest-bearing receivables to the Company’s U.S. and Canadian retail finance joint ventures, AGCO Finance LLC and AGCO Finance Canada, Ltd., as well as from revolving credit facility borrowings and available cash on hand (Note 9).

     On June 29, 2005, the Company completed an exchange of its $201.3 million 1³/4% convertible senior subordinated notes, exchanging its then existing convertible notes for new notes (Note 7).

5. INVENTORIES

     Inventories are valued at the lower of cost or market using the first-in, first-out method. Market is net realizable value for finished goods and repair and replacement parts. For work in process, production parts and raw materials, market is replacement cost.

     Inventories at September 30, 2005 and December 31, 2004 were as follows:

		September 30,				December 31,
		2005				2004
Finished goods		$	695.9			$	432.5
Repair and replacement parts			319.7				313.2
Work in process			80.7				103.6
Raw materials			207.9				220.1
Inventories, net		$	1,304.2			$	1,069.4

6. PRODUCT WARRANTY

The warranty reserve activity for the three months ended September 30, 2005 and 2004 consisted of the following:

		Three Months Ended
		September 30,
		2005				2004
Balance at beginning of quarter		$	128.8			$	121.7
Accruals for warranties issued during the period			32.5				26.3
Settlements made (in cash or in kind) during the period			(36.3	)			(24.0	)
Foreign currency translation			2.5				2.0
Balance at September 30		$	127.5			$	126.0

     The warranty reserve activity for the nine months ended September 30, 2005 and 2004 consisted of the following:

		Nine Months Ended
		September 30,
		2005				2004
Balance at beginning of year		$	135.0			$	98.5
Acquisitions			—				14.9
Accruals for warranties issued during the period			90.9				82.3
Settlements made (in cash or in kind) during the period			(91.4	)			(68.9	)
Foreign currency translation			(7.0	)			(0.8	)
Balance at September 30		$	127.5			$	126.0

Notes to Condensed Consolidated Financial Statements — Continued
(unaudited, in millions, except per share data)

     The Company’s agricultural equipment products are generally warranted against defects in material and workmanship for a period of one to four years. The Company accrues for future warranty costs at the time of sale based on historical warranty experience.

7. NET INCOME PER COMMON SHARE

     The computation, presentation and disclosure requirements for earnings per share are presented in accordance with SFAS No. 128, “Earnings Per Share.” Basic earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding during each period. Diluted earnings per common share assumes exercise of outstanding stock options and vesting of restricted stock when the effects of such assumptions are dilutive.

     During the fourth quarter of 2004, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 04-08, “Accounting Issues Related to Certain Features of Contingently Convertible Debt and the Effect on Diluted Earnings per Share,” which requires that 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. The Company adopted the statement during the fourth quarter of 2004 and included approximately 9.0 million additional shares of common stock that may have been issued upon conversion of the Company’s former 1³/4% convertible senior subordinated notes in its diluted earnings per share calculation for the three months ended September 30, 2004 and the nine months ended September 30, 2004. In addition, diluted earnings per share are required to be restated for each period that the former convertible notes were outstanding. The convertible notes were issued on December 23, 2003. As the Company is not benefiting losses in the United States for tax purposes, the interest expense associated with the convertible notes included in the diluted earnings per share calculation does not reflect a tax benefit. A reconciliation of net income and weighted average common shares outstanding for purposes of calculating basic and diluted earnings per share for the three and nine months ended September 30, 2005 and 2004 is as follows:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2005				2004				2005				2004
Basic net income per share:
Net income		$	27.8			$	34.8			$	95.4			$	108.1
Weighted average number of common shares outstanding			90.4				90.2				90.4				84.9
Basic net income per share		$	0.31			$	0.39			$	1.06			$	1.27
Diluted net income per share:
Net income		$	27.8			$	34.8			$	95.4			$	108.1
After-tax interest expense on contingently convertible senior subordinated notes			—				1.2				2.3				3.5
Net income for purposes of computing diluted net income per share		$	27.8			$	36.0			$	97.7			$	111.6
Weighted average number of common shares outstanding			90.4				90.2				90.4				84.9
Dilutive stock options and restricted stock awards			0.3				0.4				0.3				0.4
Weighted average assumed conversion of contingently convertible senior subordinated notes			—				9.0				5.9				9.0
Weighted average number of common and common share equivalents outstanding for purposes of computing diluted earnings per share			90.7				99.6				96.6				94.3
Diluted net income per share		$	0.31			$	0.36			$	1.01			$	1.18

Notes to Condensed Consolidated Financial Statements — Continued
(unaudited, in millions, except per share data)

     On June 29, 2005, the Company completed an exchange of its $201.3 million aggregate principal amount of 1³/4% convertible senior subordinated notes. The Company exchanged its existing convertible notes for new notes that 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 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 occurring prior to December 10, 2010, but otherwise are substantially the same as the old notes. The impact of the exchange resulted in an initial reduction in the diluted weighted average shares outstanding of approximately 9.0 million shares. In the future, dilution of weighted shares outstanding will depend on the Company’s stock price once the market price trigger or other specified conversion circumstances are met (Note 4).

     There were options to purchase 0.5 million shares for both the three months and nine months ended September 30, 2005 and September 30, 2004 that were excluded from the calculation of diluted earnings per share because the option exercise prices were higher than the average market price of the Company’s common stock during the related period.

8. COMPREHENSIVE INCOME

     Total comprehensive income for the three and nine months ended September 30, 2005 and 2004 was as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2005				2004				2005				2004
Net income		$	27.8			$	34.8			$	95.4			$	108.1
Other comprehensive income, net of tax:
Foreign currency translation adjustments			16.7				37.8				13.3				(3.5	)
Unrealized gain (loss) on derivatives held by affiliates			2.0				(1.4	)			2.1				2.7
Total comprehensive income		$	46.5			$	71.2			$	110.8			$	107.3

9. ACCOUNTS RECEIVABLE SECURITIZATION

     At September 30, 2005, the Company had accounts receivable securitization facilities in the United States, Canada and Europe totaling approximately $482.3 million. Under the securitization facilities, wholesale accounts receivable are sold on a revolving basis to commercial paper conduits either on a direct basis or through a wholly-owned special purpose U.S. subsidiary. The Company has reviewed its accounting for its securitization facilities and its wholly-owned special purpose U.S. subsidiary in accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities — a Replacement of FASB Statement No. 125” (“SFAS No. 140”), and FIN No. 46R, “Consolidation of Variable Interest Entities — An Interpretation of ARB No. 51” (“FIN 46R”). 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 addition, these facilities are accounted for as off-balance sheet transactions in accordance with SFAS No. 140.

     Outstanding funding under these facilities totaled approximately $444.5 million at September 30, 2005 and $458.9 million at December 31, 2004. The funded balance has the effect of reducing accounts receivable and short-term liabilities by the same amount. Losses on sales of receivables primarily from securitization facilities included in other expense, net were $5.9 million and $3.7 million for the three months ended September 30, 2005 and 2004, respectively, and $16.5 million and $11.3 million for the nine months ended September 30, 2005 and 2004, respectively. 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

Notes to Condensed Consolidated Financial Statements — Continued
(unaudited, in millions, except per share data)

agreements.

     During the second quarter of 2005, the Company completed 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 U.S. 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 will continue to service the receivables. The initial transfer of the wholesale interest-bearing receivables resulted in net proceeds of approximately $94 million, which were used to redeem the Company’s $250 million 9¹/2% senior notes (Note 4). As of September 30, 2005, the balance of interest-bearing receivables transferred to AGCO Finance LLC and AGCO Finance Canada, Ltd. under this agreement was approximately $84.8 million.

10. EMPLOYEE BENEFIT PLANS

     The Company has defined benefit pension plans covering certain employees principally in the United States, the United Kingdom, Germany, Finland, Norway, France, Australia and Brazil. The Company also provides certain postretirement health care and life insurance benefits for certain employees principally in the United States, as well as a supplemental executive retirement plan which is an unfunded plan that provides Company executives with retirement income for a period of ten years after retirement.

     Net pension and postretirement cost (income) for the plans for the three months ended September 30, 2005 and 2004 are set forth below:

		Three Months Ended
		September 30,
		2005				2004
Pension benefits
Service cost		$	1.5			$	1.8
Interest cost			10.3				7.7
Expected return on plan assets			(8.6	)			(6.8	)
Amortization of net actuarial loss and prior service cost			4.5				3.6
Net pension cost		$	7.7			$	6.3

		2005				2004
Postretirement benefits
Service cost		$	0.1			$	0.1
Interest cost			0.5				0.5
Amortization of transition and prior service cost			0.1				(0.2	)
Amortization of unrecognized net loss			0.2				0.3
Curtailment gain			(1.1	)			—
Net postretirement cost (income)		$	(0.2	)		$	0.7

     Net pension and postretirement cost for the plans for the nine months ended September 30, 2005 and 2004 are set forth below:

		Nine Months Ended
		September 30,
		2005				2004
Pension benefits
Service cost		$	4.5			$	5.4
Interest cost			30.8				23.4
Expected return on plan assets			(25.9	)			(20.5	)
Amortization of net actuarial loss and prior service cost			13.6				10.9
Net pension cost		$	23.0			$	19.2

		2005				2004
Postretirement benefits
Service cost		$	0.5			$	0.3
Interest cost			1.7				1.5
Amortization of transition and prior service cost			0.2				(0.5	)
Amortization of unrecognized net loss			0.9				0.9
Curtailment gain			(1.1	)			—
Net postretirement cost		$	2.2			$	2.2

Notes to Condensed Consolidated Financial Statements — Continued
(unaudited, in millions, except per share data)

     In December 2003, the U.S. Congress enacted the Medicare Prescription Drug, Improvement and Modernization Act of 2003 that will provide a prescription drug subsidy, beginning in 2006, to companies that sponsor postretirement health care plans that provide drug benefits. Based upon the final regulations released in January 2005, during the third quarter of 2005 the Company reviewed the provisions of its postretirement health care plans with its actuaries to determine whether the benefits offered by its plans met the statutory definition of “actuarially equivalent” prescription drug benefits that qualify for the federal subsidy. Based upon this review, the Company believes that two of its plans qualify for the subsidy. In accordance with FSP No. 106-2 (as more fully described in Note 1), the Company began reflecting the impact of the anticipated subsidies as of July 1, 2005 on a prospective basis, and revalued its projected benefit obligation as of July 1, 2005 to (1) incorporate the benefit associated with the federal subsidy expected to be received and (2) reduce the discount rate from 5.75% as of December 31, 2004 to 5.25% as of July 1, 2005. The revised obligation as of July 1, 2005 reflects a reduction of approximately $5.0 million due to the impact of the federal subsidy, offset by an increase of approximately $1.8 million due to the change in the discount rate. During the third quarter of 2005, the Company’s net postretirement cost was reduced by approximately $0.1 million due to the impact of the expected federal subsidy. The reduction was evenly split between reduced interest cost and lower amortization of net actuarial losses.

     During the third quarter of 2005, the Company recognized a curtailment of one of its postretirement health care plans, resulting in a $1.1 million decrease to its net postretirement cost.

     As of September 30, 2005, approximately $21.0 million of contributions had been made to the Company’s defined benefit pension plans. The Company currently estimates its minimum contributions for 2005 to its defined benefit pension plans will aggregate approximately $26.0 million. As of September 30, 2005, the Company had made approximately $2.2 million of contributions to its U.S.-based postretirement health care and life insurance benefit plans.

11. SEGMENT REPORTING

     The Company has four reportable segments: North America; South America; Europe/Africa/Middle East; and Asia/Pacific. Each regional segment distributes a full range of agricultural equipment and related replacement parts. The Company evaluates segment performance primarily based on income from operations. Sales for each regional segment are based on the location of the third-party customer. The Company’s selling, general and administrative expenses and engineering expenses are charged to each segment based on the region and division where the expenses are incurred. As a result, the components of operating income for one segment may not be comparable to another segment. Segment results for the three and nine months ended September 30, 2005 and 2004 and assets as of September 30, 2005 and December 31, 2004 are as follows:

Three Months Ended		North				South				Europe/Africa				Asia/
September 30,		America				America				/Middle East				Pacific				Consolidated
2005
Net sales		$	350.2			$	167.9			$	658.5			$	57.0			$	1,233.6
Income from operations			1.6				13.1				48.3				10.1				73.1
Depreciation			6.1				3.7				11.0				0.7				21.5
Capital expenditures			2.5				1.4				15.0				0.1				19.0
2004
Net sales		$	329.2			$	214.2			$	622.6			$	50.5			$	1,216.5
Income from operations			8.8				35.8				33.3				9.3				87.2
Depreciation			5.9				2.6				11.5				1.0				21.0
Capital expenditures			3.9				2.9				15.0				—				21.8

Notes to Condensed Consolidated Financial Statements — Continued
(unaudited, in millions, except per share data)

Nine Months Ended		North				South				Europe/Africa				Asia/
September 30,		America				America				/Middle East				Pacific				Consolidated
2005
Net sales		$	1,208.2			$	505.5			$	2,200.9			$	150.2			$	4,064.8
Income from operations			24.1				36.4				177.0				25.3				262.8
Depreciation			19.7				10.3				34.5				2.2				66.7
Capital expenditures			9.3				3.3				31.8				0.4				44.8
2004
Net sales		$	1,014.0			$	602.3			$	1,983.6			$	139.3			$	3,739.2
Income from operations			29.3				104.0				116.1				24.4				273.8
Depreciation			16.0				8.6				34.8				2.8				62.2
Capital expenditures			8.6				4.2				29.4				4.6				46.8
Assets
As of September 30, 2005		$	913.1			$	440.2			$	1,180.1			$	102.0			$	2,635.4
As of December 31, 2004			766.9				298.0				1,349.5				63.6				2,478.0

     A reconciliation from the segment information to the consolidated balances for income from operations and total assets is set forth below:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2005				2004				2005				2004
Segment income from operations		$	73.1			$	87.2			$	262.8			$	273.8
Corporate expenses			(10.0	)			(9.4	)			(28.9	)			(26.4	)
Restricted stock compensation expense			(0.2	)			(0.1	)			(0.3	)			(0.4	)
Restructuring and other infrequent expenses			—				(1.7	)			(0.2	)			(1.1	)
Amortization of intangibles			(4.1	)			(3.9	)			(12.4	)			(11.7	)
Consolidated income from operations		$	58.8			$	72.1			$	221.0			$	234.2

		As of				As of
		September				December
		30, 2005				31, 2004
Segment assets		$	2,635.4			$	2,478.0
Cash and cash equivalents			27.3				325.6
Receivables from affiliates			6.1				7.9
Investments in affiliates			160.2				114.5
Deferred tax assets			237.8				273.6
Other current and noncurrent assets			155.6				128.9
Intangible assets, net			218.7				238.2
Goodwill			704.4				730.6
Consolidated total assets		$	4,145.5			$	4,297.3

12. CONTINGENCIES

     The Company has received assessments from Brazilian tax authorities regarding transaction taxes payable on certain foreign currency gains and losses. The Company is currently contesting the assessments and disputing the calculation method applied by the tax authorities. The Company believes that it is neither probable nor likely the assessments will have to be paid. The range of the total assessment is approximately $9.0 million to $9.5 million. The Company anticipates that it may take significant time to resolve the dispute with the Brazilian tax authorities.

     In October 2004, the Company was notified of a customer claim for costs and damages arising out of alleged breaches of a supply agreement. The customer’s initial evaluation indicated a claim of approximately €10.5 million (or approximately $13.0 million). The Company is vigorously contesting the claim. No legal proceedings have been initiated, and discussions between the Company and the customer are ongoing.

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

GENERAL

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

RESULTS OF OPERATIONS

     For the three months ended September 30, 2005, we generated net income of $27.8 million, or $0.31 per share, compared to net income of $34.8 million, or $0.36 per share, for the same period in 2004. For the first nine months of 2005, we generated net income of $95.4 million, or $1.01 per share, compared to net income of $108.1 million, or $1.18 per share, for the same period in 2004.

     The results for the third quarter of 2004 included restructuring and other infrequent expenses of $1.7 million, or $0.02 per share, primarily related to severance charges incurred associated with the rationalization of our Randers, Denmark combine manufacturing operations.

     The results for the first nine months of 2005 included restructuring and other infrequent expenses of $0.2 million. During the second quarter of 2005, we recorded a gain on the sale of machinery and equipment associated with the rationalization of our Randers, Denmark combine manufacturing operations. This gain was offset by charges associated with the Randers rationalization, as well as our rationalization of our Finnish tractor manufacturing, sales and parts operations throughout Europe during the first nine months of 2005. The results for the first nine months of 2004 included restructuring and other infrequent expenses of $1.1 million, or $0.04 per share, primarily related to the write down of property, plant and equipment and severance charges associated with the Randers rationalization, offset by gains on the sale of our Coventry, England facility and related machinery and equipment, as well as the reversal of certain Coventry closure reserves.

     Net sales increased 1.4% for the third quarter and 8.7% for the first nine months of 2005 primarily due to sales growth in the North America and Europe/Africa/Middle East regions, as well as positive currency translation impacts. This growth offset significant sales declines in South America due to weak market demand. Operating income was $58.8 million in the third quarter of 2005 compared to $72.1 million for the same period in 2004. Operating income was $221.0 million for the first nine months of 2005 compared to $234.2 million for the same period in 2004. The decrease in operating income was primarily due to lower operating income in South America, partially offset by improvements in the Europe/Africa/Middle East operations as a result of margin improvements. Operating margins declined in 2005 as a result of reduced margins in South America primarily due to a significant reduction in industry demand and the impact of the strengthening Brazilian Real.

     Operating income increased in our Europe/Africa/Middle East region in the third quarter and first nine months of 2005 primarily due to margin improvements achieved through productivity improvements, new product introductions, expense control measures and pricing changes. In the South American region, operating income decreased in the third quarter and first nine months of 2005 due to sales declines resulting from the continued deterioration in market conditions. Operating margins in South America declined significantly in 2005 resulting from lower production levels, unfavorable sales mix and the impact of the continued strengthening of the Brazilian Real on sales outside of Brazil. Operating income in North America was lower in the third quarter and first nine months of 2005 primarily due to higher costs from the impact of the weak

Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Continued)

dollar on products produced primarily in Brazil, higher warranty costs and increased engineering expenses related to new product offerings. Operating income in our Asia/Pacific region was relatively flat in the third quarter and the first nine months of 2005 compared to 2004.

Retail Sales

     In North America, industry unit retail sales of tractors for the first nine months of 2005 decreased slightly over the first nine months of the prior year resulting from a decrease in the compact tractor segment, offset by increases in the utility and high horsepower segments. In North America, drought conditions in certain areas of the United States impacted recent demand. Industry unit retail sales of combines were approximately 7% higher than the prior year. Our unit retail sales of tractors were higher for the first nine months of 2005, while unit retail sales of combines were lower for 2005 compared to 2004.

     In Western Europe, industry unit retail sales of tractors for the first nine months of 2005 were approximately 3% lower than the comparable prior year period. For the third quarter of 2005, retail tractor demand declined approximately 8% versus the prior year. Retail demand for the first nine months of 2005 improved in Italy and Germany but declined in Spain, France, the United Kingdom and Finland. Industry demand has softened in Western Europe as a result of dry weather conditions in certain regions of Southern Europe, as well as uncertainty related to Common Agricultural Policy farm subsidy reforms. Our unit retail sales for the first nine months of 2005 were also lower when compared to the prior year period.

     South American industry unit retail sales of tractors in the first nine months of 2005 decreased approximately 22% over the prior year period. Retail sales of tractors in the major market of Brazil declined approximately 38% during the first nine months of 2005. Industry unit retail sales of combines for the first nine months of 2005 were 64% lower than the prior year, with a decline in Brazil of approximately 75% compared to the prior year period. Market demand in South America has declined significantly in 2005 primarily due to drought conditions in southern Brazil which impacted the recent harvest, as well as the impact of lower commodity prices and the weak dollar on farm income. Our South American unit retail sales of tractors and combines also decreased in the first nine months of 2005 compared to the same period in 2004.

     Outside of North America, Western Europe and South America, net sales for the first nine months of 2005 were higher than the prior year period due to higher sales in the Middle East and Eastern Europe.

STATEMENTS OF OPERATIONS

Net sales for the third quarter of 2005 were $1,233.6 million compared to $1,216.5 million for the same period in 2004. Net sales for the first nine months of 2005 were $4,064.8 million compared to $3,739.2 million for the prior year period. The increase in net sales was primarily due to sales growth in the North America and Europe/Africa/Middle East regions, as well as positive currency translation impacts. Foreign currency translation positively impacted net sales by $34.4 million, or 2.8%, in the third quarter of 2005 and by $144.8 million, or 3.9%, in the first nine months of 2005. The following table sets forth, for the three months and nine months ended September 30, 2005 and 2004, the impact to net sales of currency translation by geographical segment (in millions, except percentages):

		Three Months Ended																Change Due to Currency
		September 30,								Change								Translation
		2005				2004				$				%				$				%
North America		$	350.2			$	329.2			$	21.0				6.4	%		$	5.8				1.8	%
South America			167.9				214.2				(46.3	)			(21.6	)%			28.6				13.4	%
Europe/Africa/Middle East			658.5				622.6				35.9				5.8	%			(1.1	)			(0.2	)%
Asia/Pacific			57.0				50.5				6.5				12.9	%			1.1				2.2	%
		$	1,233.6			$	1,216.5			$	17.1				1.4	%		$	34.4				2.8	%

Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Continued)

		Nine Months Ended																Change Due to Currency
		September 30,								Change								Translation
		2005				2004				$				%				$				%
North America		$	1,208.2			$	1,014.0			$	194.2				19.2	%		$	14.5				1.4	%
South America			505.5				602.3				(96.8	)			(16.1	)%			65.2				10.8	%
Europe/Africa/Middle East			2,200.9				1,983.6				217.3				11.0	%			60.8				3.1	%
Asia/Pacific			150.2				139.3				10.9				7.8	%			4.3				3.1	%
		$	4,064.8			$	3,739.2			$	325.6				8.7	%		$	144.8				3.9	%