| 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, financial condition, future economic 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, production levels, net sales and income, restructuring and other infrequent expenses, cost reductions from facility rationalizations, realization of net deferred tax assets and 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 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, debt levels and land values, all of which reflect levels of commodity prices, acreage planted, crop yields, demand, government policies and government subsidies |
| Sales also are influenced by economic conditions, interest rate and exchange rate levels, and the availability of retail financing |
| 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 |
| December is also typically a large month for retail sales because of our customers’ 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 |
| 12 _________________________________________________________________ [49]Table of Contents 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 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 NV, are substantially larger than we are and may 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, 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 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 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 |
| 13 _________________________________________________________________ [50]Table of Contents 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 2004 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 |
| 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, 2005, we derived approximately dlra4dtta2 billion or 76prca 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 and Finland |
| In addition, we have significant manufacturing operations in France, Germany, Brazil, Finland and Denmark |
| 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 |
| 14 _________________________________________________________________ [51]Table of Contents Currency exchange rate and interest rate changes can adversely affect the pricing and profitability 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 and the Canadian dollar in relation to the United States dollar |
| Where naturally offsetting currency positions do not occur, we attempt to manage these risks by economically hedging some, but not all, of our exposures through the use of foreign currency forward exchange 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 |
| For example, our SisuDiesel engine division and our engine suppliers are subject to air quality standards, and production at our facilities could be impaired if SisuDiesel 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 15 _________________________________________________________________ [52]Table of Contents 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 |
| 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 the applicable pension plan |
| If 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 |
| As of December 31, 2005, we had approximately dlra281dtta6 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 significant amount of indebtedness |
| As of December 31, 2005, we had total long-term indebtedness, including current portions of long-term indebtedness, of approximately dlra848dtta1 million, stockholders’ equity of approximately dlra1cmam416dtta0 million and a ratio of long-term indebtedness to equity of approximately 0dtta6 to 1dtta0 |
| We also had short-term obligations of dlra95dtta4 million, capital lease obligations of dlra1dtta6 million, unconditional purchase or other long-term obligations of dlra402dtta5 million, and amounts funded under an accounts receivable securitization facility of dlra462dtta7 million |
| In addition, we had guaranteed indebtedness owed to third parties of approximately dlra93dtta8 million, primarily related to dealer and end-user financing of equipment |
| 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 conduit |
| The European facility agreement provides that the agent, Rabobank, has the right to terminate the securitization facilities if our senior unsecured debt rating moves below B+ by Standard & Poor’s or B1 by Moody’s Investor Services |
| Based on our current ratings, a downgrade of two levels by Standard & Poors and Moody’s would need to occur |