10-K 1 a09-32005_110k.htm 10-K

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-K

 


 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED OCTOBER 31, 2009

 

Commission file number 1-4121

 

DEERE & COMPANY

(Exact name of registrant as specified in its charter)

 

Delaware

 

 

 

36-2382580

(State of incorporation)

 

 

 

(IRS Employer Identification No.)

 

 

 

 

 

One John Deere Place, Moline, Illinois

 

61265

 

(309) 765-8000

(Address of principal executive offices)

 

(Zip Code)

 

(Telephone Number)

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT

 

Title of each class

 

Name of each exchange on which registered

Common stock, $1 par value

 

New York Stock Exchange

8-1/2% Debentures Due 2022

 

New York Stock Exchange

6.55% Debentures Due 2028

 

New York Stock Exchange

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes  x   No  o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes  o   No  x

 

Indicate by check mark whether the registrant (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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x   No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  x   No  o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

Accelerated filer o

 

Non-accelerated filer o   

Smaller reporting company o

 

(Do not check if a smaller reporting company)

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes  o   No  x

 

The aggregate quoted market price of voting stock of registrant held by non-affiliates at April 30, 2009 was $18,057,734,215. At November 30, 2009, 422,637,808 shares of common stock, $1 par value, of the registrant were outstanding. Documents Incorporated by Reference. Portions of the proxy statement for the annual meeting of stockholders to be held on February 24, 2010 are incorporated by reference into Part III of this Form 10-K.

 

 

 



 

PART I

 

ITEM 1.                                                     BUSINESS.

 

Products

 

Deere & Company (Company) and its subsidiaries (collectively called John Deere) have operations which are categorized into three major business segments.

 

The agriculture and turf segment, created by combining the former agricultural equipment and commercial and consumer equipment segments, manufactures and distributes a full line of farm and turf equipment and related service parts — including large, medium and utility tractors; loaders; combines, cotton and sugarcane harvesters and related front-end equipment and sugarcane loaders; tillage, seeding and application equipment, including sprayers, nutrient management and soil preparation machinery; hay and forage equipment, including self-propelled forage harvesters and attachments, balers and mowers; turf and utility equipment, including riding lawn equipment and walk-behind mowers, golf course equipment, utility vehicles, and commercial mowing equipment, along with a broad line of associated implements; integrated agricultural management systems technology; precision agricultural irrigation equipment and supplies; landscape and nursery products; and other outdoor power products.

 

The construction and forestry segment manufactures, distributes to dealers and sells at retail a broad range of machines and service parts used in construction, earthmoving, material handling and timber harvesting — including backhoe loaders; crawler dozers and loaders; four-wheel-drive loaders; excavators; motor graders; articulated dump trucks; landscape loaders; skid-steer loaders; and log skidders, feller bunchers, log loaders, log forwarders, log harvesters and related attachments.

 

The products and services produced by the segments above are marketed primarily through independent retail dealer networks and major retail outlets.

 

The credit segment primarily finances sales and leases by John Deere dealers of new and used agriculture and turf equipment and construction and forestry equipment. In addition, it provides wholesale financing to dealers of the foregoing equipment, provides operating loans, finances retail revolving charge accounts, offers certain crop risk mitigation products and invests in wind energy generation.

 

John Deere’s worldwide agriculture and turf operations and construction and forestry operations are sometimes referred to as the “Equipment Operations.” The credit and certain miscellaneous service operations are sometimes referred to as “Financial Services.”

 

Additional information is presented in the discussion of business segment and geographic area results on pages 18 — 19. The John Deere enterprise has manufactured agricultural machinery since 1837. The present Company was incorporated under the laws of Delaware in 1958.

 

The Company’s Internet address is http://www.JohnDeere.com. Through that address, the Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are available free of charge as soon as reasonably practicable after they are filed with the United States Securities and Exchange Commission (“Securities and Exchange Commission” or “Commission”). The information contained on the Company’s website is not included in, or incorporated by reference into, this annual report on Form 10-K.

 

Market Conditions and Outlook

 

Company equipment sales are projected to be down about 1 percent for fiscal year 2010 and be down about 10 percent for the first quarter compared with the same periods a year ago. This includes a favorable currency-translation impact of about 1 percent for the year and about 3 percent for the quarter. The Company’s net income is anticipated to be approximately $900 million for 2010. Mainly due to lower discount rates, the Company expects postretirement benefit costs to be about $400 million higher on a pretax basis in 2010 than in 2009.

 

Agriculture and Turf. Worldwide sales of the agriculture and turf segment are forecast to decrease by about 4 percent for the fiscal year 2010, including a favorable currency translation impact of about 2 percent. On an industry basis, farm-machinery sales in the U.S. and Canada are forecast to be down about 10 percent for the year. Cash receipts and commodity prices, while below their prior peaks, are anticipated to remain at healthy levels. However, farmers are expected to be cautious in their purchasing decisions as a result of negative overall economic conditions and near term profitability issues in the livestock and dairy sectors.

 

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In other parts of the world, industry farm machinery sales in Western Europe are forecast to decline 10 to 15 percent for the year mainly due to weakness in the livestock, dairy and grain sectors. Sales in Central Europe and the Commonwealth of Independent States are expected to remain under pressure partly as a result of weak general economic conditions, including low levels of available credit. In South America, industry sales are projected to increase by 10 to 15 percent in 2010. Among other positive factors, parts of South America are benefiting from a return to more normal weather patterns after last year’s severe drought. The Brazilian market is expected to receive support from good incomes for soybean and sugarcane producers and the continued availability of attractive government supported financing. The forecast assumes that the Brazilian currency does not strengthen further against the U.S. dollar. Industry sales of turf equipment and compact utility tractors in the U.S. and Canada are expected to be flat for the year as a result of negative U.S. economic conditions.

 

Construction and Forestry. The Company’s worldwide sales of construction and forestry equipment are forecast to increase by about 18 percent in 2010. Sales are expected to be helped by aggressive inventory reductions in the previous year that position the Company to align production with retail demand. Despite an increase in housing starts from historically low levels, U.S. construction equipment markets are forecast to be down for the year resulting from a decline in non-residential construction activity and lower used equipment values. Global forestry markets are expected to experience some recovery based on higher demand for pulp and paper, driven by higher worldwide economic output, as well as the expected increase in U.S. housing starts.

 

Credit. Full-year 2010 net income for the Company’s credit operations is forecast to be approximately $240 million. The forecast increase from 2009 primarily is due to higher commissions from crop insurance and increased revenue from wind energy projects.

 

2009 Consolidated Results Compared with 2008

 

Worldwide net income in 2009 was $873 million, or $2.06 per share diluted ($2.07 basic), compared with $2,053 million, or $4.70 per share diluted ($4.76 basic), in 2008. Included in net income for 2009 were charges of $381 million pretax ($332 million after-tax) or $.78 per share diluted and basic, related to impairment of goodwill and voluntary employee separation expenses (see Note 5). Net sales and revenues decreased 19 percent to $23,112 million in 2009, compared with $28,438 million in 2008. Net sales of the Equipment Operations decreased 20 percent in 2009 to $20,756 million from $25,803 million last year. The sales decrease was primarily due to lower shipment volumes. The decrease also included an unfavorable effect for currency translation of 4 percent, more than offset by price realization of 5 percent. Net sales in the U.S. and Canada decreased 14 percent in 2009. Net sales outside the U.S. and Canada decreased by 28 percent, which included an unfavorable effect of 8 percent for currency translation.

 

Worldwide Equipment Operations had an operating profit of $1,365 million in 2009, compared with $2,927 million in 2008. The deterioration in operating profit was primarily due to lower shipment and production volumes, the unfavorable effects of foreign currency exchange, a goodwill impairment charge, higher raw material costs and voluntary employee separation expenses, partially offset by improved price realization and lower selling, administrative and general expenses.

 

The Equipment Operations’ net income was $678 million in 2009, compared with $1,676 million in 2008. The same operating factors mentioned above, in addition to a higher effective tax rate, affected these results.

 

Trade receivables and inventories at October 31, 2009 were $5,014 million, compared with $6,276 million last year, or 24 percent of net sales in both years.

 

Net income of the Company’s Financial Services operations in 2009 decreased to $203 million, compared with $337 million in 2008. The decrease was primarily a result of a higher provision for credit losses, lower commissions from crop insurance, narrower financing spreads and higher losses from construction equipment operating lease residual values, partially offset by a lower effective tax rate primarily from wind energy tax credits and lower selling, administrative and general expenses.  Additional information is presented in the following discussion of the credit operations.

 

The cost of sales to net sales ratio for 2009 was 78.3 percent, compared with 75.9 percent last year. The increase was primarily due to lower shipment and production volumes, unfavorable effects of foreign exchange, a goodwill impairment charge, higher raw material costs and voluntary employee separation expenses.

 

Additional information on 2009 results is presented on pages 17 – 19.

 

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EQUIPMENT OPERATIONS

 

Agriculture and Turf

 

The John Deere agriculture and turf segment was created at the beginning of the third quarter of 2009 by combining the former agricultural equipment segment and the commercial and consumer equipment segment in order to achieve greater alignment and efficiency by leveraging common processes, standards and resources. Combining these segments into a new agriculture and turf segment was one of the early components in the adoption of a new global operating model designed to enable geographic growth and increase competitiveness for the segment.

 

The agriculture and turf segment manufactures and distributes a full line of agricultural and turf equipment and related service parts. As an additional component of the global operating model, the segment is currently consolidating its equipment operations into five product platforms — including crop harvesting (combines, cotton and sugarcane harvesters and related front-end equipment and sugarcane loaders); turf and utility (utility vehicles, riding lawn equipment, walk behind mowers, commercial mowing equipment, golf course equipment, implements for mowing, tilling, snow and debris handling, aerating and many other residential, commercial, golf and sports turf care applications; and other outdoor power products); hay and forage (self-propelled forage harvesters and attachments, balers and mowers); crop care (tillage, seeding and application equipment, including sprayers, nutrient management and soil preparation machinery); and tractors (loaders and large, medium and utility tractors).  The segment also provides integrated agricultural management systems technology and landscapes and nursery products.

 

In addition to the John Deere brand, the agriculture and turf segment also manufactures and sells a variety of equipment attachments under the Frontier brand name, walk-behind mowers and scarifiers in Europe under the SABO brand name, and tractors in China under the Benye brand name. The segment also builds products for sale by mass retailers, including The Home Depot and Lowe’s.  John Deere Landscapes, a unit of the segment, distributes irrigation equipment, nursery products and landscape supplies, including seed, fertilizer and hardscape materials, primarily to landscape service professionals. John Deere Water, a unit of the agriculture and turf segment, manufactures and distributes precision agriculture irrigation equipment and supplies. In 2008, John Deere expanded its water technology business with the acquisitions of T-Systems International, Inc. and Plastro Irrigation Systems, Ltd. John Deere also purchases certain products from other manufacturers for resale.

 

Sales of agricultural equipment are affected by total farm cash receipts, which reflect levels of farm commodity prices, acreage planted, crop yields and governmental policies, including the amount and timing of government payments. Sales are also influenced by general economic conditions, farm land prices, farmers’ debt levels and access to financing, interest and exchange rates, agricultural trends, including the production of and demand for renewable fuels, energy costs and other input costs associated with farming. Other important factors affecting new agricultural equipment sales are the value and level of used equipment, including tractors, harvesting equipment, self-propelled sprayers, hay and forage equipment and seeding equipment. Weather and climatic conditions can also affect buying decisions of agricultural equipment purchasers.

 

Innovations in machinery and technology also influence agricultural equipment buying. For example, larger, more productive equipment is well accepted where farmers are striving for more efficiency in their operations. Large, cost-efficient, highly-mechanized agricultural operations account for an important share of worldwide farm output. The large-size agricultural equipment used on such farms has been particularly important to John Deere. A large proportion of the Equipment Operations’ total agricultural equipment sales in the United States and Canada, and a growing proportion of sales in many countries outside North America, is comprised of tractors over 100 horsepower, self-propelled combines, self-propelled cotton pickers, self-propelled forage harvesters, self-propelled sprayers and seeding equipment. Additionally, as John Deere expands its business globally, especially in developing countries where demand for smaller equipment is greater, John Deere’s sales of tractors below 100 horsepower have increased. The Company has developed a comprehensive agricultural management systems approach using advanced technology and global satellite positioning to enable farmers to better control input costs and yields, improve soil conservation and minimize chemical use and to gather information.

 

Retail sales of lawn and garden tractors, compact utility tractors, residential and commercial mowers, utility vehicles, and golf and turf equipment are influenced by weather conditions, consumer spending patterns and general economic conditions.

 

Seasonality. Seasonal patterns in retail demand for agricultural equipment result in substantial variations in the volume and mix of products sold to retail customers during various times of the year. Seasonal demand must be estimated in advance, and equipment must be manufactured in anticipation of such demand in order to achieve efficient utilization of manpower and facilities throughout the year. For certain equipment, the Company offers early order discounts to retail customers. Production schedules are based, in part, on these early order programs. The segment incurs substantial seasonal variation in cash flows to finance production and inventory of agricultural equipment. The segment also incurs costs to finance sales to dealers in advance of seasonal demand. New combine and cotton harvesting equipment has been sold under early order programs with waivers of retail finance charges available to customers

 

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who take delivery of machines during off-season periods. In the United States and Canada, there are typically several used equipment trade-in transactions for every new combine and cotton harvesting equipment sale. To provide support to the Company’s dealers for these used equipment trade-ins, the Company provides dealers with a fixed pool of funds which can be used to either defray the costs of carrying used equipment inventory or to provide financing incentives to customers purchasing the used equipment.

 

Retail demand for turf and utility equipment normally is higher in the second and third quarters. John Deere is pursuing a strategy of building and shipping as close to retail demand as possible. Consequently, to increase asset turnover and reduce the average level of field inventories through the year, production and shipment schedules of these product lines normally will be proportionately higher in the second and third quarters of each year, corresponding closely to the seasonal pattern of retail sales.

 

Construction and Forestry

 

John Deere construction, earthmoving, material handling and forestry equipment includes a broad range of backhoe loaders, crawler dozers and loaders, four-wheel-drive loaders, excavators, motor graders, articulated dump trucks, landscape loaders, skid-steer loaders, log skidders, log feller bunchers, log loaders, log forwarders, log harvesters and a variety of attachments.  This segment’s forestry machines and attachments are distributed under the John Deere and Waratah brand names. In addition to the equipment manufactured by the construction and forestry segment, John Deere purchases certain products from other manufacturers for resale.

 

The prevailing levels of residential, commercial and public construction and the condition of the forest products industry influence retail sales of John Deere construction, earthmoving, material handling and forestry equipment. General economic conditions, the level of interest rates, availability of credit and certain commodity prices such as those applicable to pulp, paper and saw logs also influence sales.

 

Pursuant to agreements between John Deere and Bell Equipment Limited (Bell), Bell and Deere collaborate to design articulated dump trucks  which are manufactured  by Deere in the United States for John Deere’s distribution under the Deere trade name in North, Central and South America. Deere licenses Bell to manufacture and sell certain Deere-designed construction equipment in specified territories of Africa.  Bell is also the distributor of certain Deere manufactured construction equipment under the Bell trade name and forestry equipment under the Deere trade name in certain territories of Africa.

 

John Deere and Hitachi have a joint venture for the manufacture of hydraulic excavators and track log loaders in the United States and Canada. John Deere also distributes Hitachi brands of construction and mining equipment in North, Central and South America. John Deere also has supply agreements with Hitachi under which a range of construction, earthmoving, material handling and forestry products manufactured by John Deere in the United States, Finland and New Zealand are distributed by Hitachi in certain Asian markets.

 

John Deere has expanded the construction and forestry segment’s business outside of the United States and Canada by entering into a joint venture in China. In 2008, John Deere entered into a joint venture with Xuzhou Bohui Science & Technology Development CO. Ltd. (“Xuzhou”) by purchasing a 50% ownership interest in Xuzhou’s wholly-owned excavator manufacturing subsidiary, Xuzhou Xuwa Excavator Machinery CO. Ltd. (now known as Xuzhou XCG John Deere Machinery Manufacturing Co., Ltd. (“Xuzhou XCG”)).

 

The segment has a number of initiatives in the rent-to-rent, or short-term rental, market for construction, earthmoving and material handling equipment. These include specially designed rental programs for John Deere dealers and expanded cooperation with major, national equipment rental companies.

 

John Deere also owns Nortrax, Inc. and Nortrax Canada Inc. (formerly known as Ontrac Equipment Services, Inc.) (collectively called Nortrax). Nortrax is an authorized John Deere dealer for construction, earthmoving, material handling and forestry equipment in a variety of markets in the United States and Canada.  John Deere also owns retail forestry operations in Finland, Ireland, Norway, Russia, Sweden and the United Kingdom.

 

Competition

 

The Equipment Operations sell products and services into a variety of highly competitive global and regional markets. The principal competitive factors in all markets include product performance, innovation and quality, distribution, customer service and price. In North America and many other parts of the world, the Company’s brand recognition is a competitive factor.

 

The competitive environment for the agriculture and turf segment includes some global competitors, including AGCO Corporation, CNH Global N.V., Kubota Tractor Corporation and The Toro Company, and many regional and local competitors.  These competitors have varying numbers of product lines competing with the segment’s products and each have varying degrees of regional focus. An important part of the competition within the agricultural equipment industry during the past decade has come from a diverse variety of

 

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short-line and specialty manufacturers with differing manufacturing and marketing methods. Because of industry conditions, including the merger of certain large integrated competitors and the emergence and expanding global capability of many competitors, particularly in emerging and high potential markets such as India and China where John Deere seeks to increase market share, the agricultural equipment business continues to undergo significant change and is becoming even more competitive. Additionally, John Deere has announced plans to increase its business in Russia, including establishing a new manufacturing facility near Moscow for equipment assembly. Recent industry and regulatory changes have negatively impacted John Deere’s competitive position in the potential high growth Russian markets during the fiscal year. Although these changes may continue to have an impact in the future, John Deere believes the new manufacturing facility in Russia will help mitigate this effect. The segment’s turf equipment is sold primarily in highly competitive North American and Western European markets. The agriculture and turf segment’s recently adopted global operating model, currently in the implementation phase, is designed to enhance the segment’s competitive position by reducing complexity, implementing standard processes and increasing customer focus, speed and flexibility while building on the segment’s broad global reach and deep understanding of the agriculture and turf care markets.

 

The construction and forestry segment operates in highly competitive North American and global markets, and is seeking to grow its competitive position in other parts of the world, including China, Russia and India. Global competitors of the construction and forestry segment include Caterpillar, Inc., Komatsu Ltd., Volvo Construction Equipment (part of Volvo Group AB), CNH Global N.V., Tigercat Industries Inc. and Ponsse Plc. This segment provides equipment that competes for over 90 percent of the estimated total North American market for those sized categories of construction, earthmoving and material handling equipment. The segment also provides the most complete line of forestry machines and attachments available in the world. These forestry machines and attachments are distributed under the John Deere and Waratah brand names. During the fiscal year, the global economic downturn has led to significant reductions in demand for construction and forestry equipment, creating excess capacity and an environment of increased pricing pressure.

 

Engineering and Research

 

John Deere invests heavily in engineering and research to improve the quality and performance of its products and to develop new products. Such expenditures were $977 million or 4.7 percent of net sales of equipment in 2009, $943 million or 3.7 percent in 2008, and $817 million or 3.8 percent in 2007.

 

Manufacturing

 

Manufacturing Plants. In the United States and Canada, the Equipment Operations own and operate 18 factory locations and lease and operate another five locations, which contain approximately 26.8 million square feet of floor space. Of these 23 factories, 17 are devoted primarily to agriculture and turf equipment, two to construction and forestry equipment, and one engine factory, one engine remanufacturing factory and two hydraulic and power train component facilities. Outside the United States and Canada, the Equipment Operations own or lease and operate: agriculture and turf equipment factories in Brazil, China, France, Germany, India, Mexico, the Netherlands and Russia; engine factories in Argentina, France, India and Mexico; a component factory in Spain; and forestry equipment factories in Finland and New Zealand. In addition, John Deere Water has manufacturing operations outside of North America in Argentina, Australia, Brazil, Chile, Ecuador, France, India, Israel and Spain. These factories and manufacturing operations outside the United States and Canada contain approximately 16.4 million square feet of floor space. The engine factories referred to above manufacture non-road, heavy duty diesel engines a majority of which are manufactured for the Company’s Equipment Operations. The remaining engines are sold to other regional and global original equipment manufacturers.

 

The Equipment Operations also have financial interests in other manufacturing organizations, which include agricultural equipment manufacturers in the United States, an industrial truck manufacturer in South Africa, the Hitachi joint venture that builds hydraulic excavators and track log loaders in the United States and Canada, the Xuzhou XCG joint venture that builds excavators, ventures that manufacture transaxles and transmissions used in certain agriculture and turf segment products and a venture that remanufactures turbochargers, diesel particulate filters and electronics.

 

John Deere’s facilities are well maintained, in good operating condition and are suitable for their present purposes. These facilities, together with both short-term and long-term planned capital expenditures, are expected to meet John Deere’s manufacturing needs in the foreseeable future.

 

Capacity is adequate to satisfy the Company’s current expectations for retail market demand. The Equipment Operations’ manufacturing strategy involves the implementation of appropriate levels of technology and automation to allow manufacturing processes to remain profitable at varying production levels. Operations are also designed to be flexible enough to accommodate the product design changes required to meet market conditions. Common manufacturing facilities and techniques are employed in the production of components for agriculture and turf equipment and construction and forestry equipment.

 

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In order to utilize manufacturing facilities and technology more effectively, the Equipment Operations pursue continuous improvements in manufacturing processes. These include steps to streamline manufacturing processes and enhance responsiveness to customers. The Company has implemented flexible assembly lines that can handle a wider product mix and deliver products in line with dealer and customer demand. Additionally, considerable effort is being directed to manufacturing cost reduction through process improvement, product design, advanced manufacturing technology, enhanced environmental management systems, supply management and logistics as well as compensation incentives related to productivity and organizational structure. The Company is experiencing volatility in the price of many raw materials. The Company has responded to cost pressures by implementing the cost-reduction measures described above and increasing prices. Significant cost increases, if they occur, could have an adverse effect on the Company’s operating results. The Equipment Operations also pursue external sales of selected parts and components that can be manufactured and supplied to third parties on a competitive basis.

 

Capital Expenditures. The Equipment Operations’ capital expenditures totaled $772 million in 2009, compared with $781 million in 2008, and $575 million in 2007. Provisions for depreciation applicable to these operations’ property and equipment during these years were $450 million, $432 million, and $389 million, respectively. Capital expenditures for the Equipment Operations in 2010 are currently estimated to be approximately $850 million to $900 million. The 2010 expenditures will relate primarily to Tier 4 emission requirements and the modernization and restructuring of key manufacturing facilities, and will also relate to the development of new products. Future levels of capital expenditures will depend on business conditions.

 

Patents and Trademarks

 

John Deere owns a significant number of patents, trade secrets, licenses and trademarks related to John Deere products and services, and expects the number to grow as the Company continues to pursue technological innovations. The Company’s policy is to further John Deere’s competitive position by filing patent applications in the United States and internationally to protect technology and improvements considered important to the business. The Company believes that, in the aggregate, the rights under these patents and licenses are generally important to its operations and competitive position, but does not regard any of its businesses as being dependent upon any single patent or group of patents. However, certain John Deere trademarks, which contribute to the Company’s identity and the recognition of its products and services, including but not limited to the “John Deere” mark, the leaping deer logo, the “Nothing Runs Like a Deere” slogan and green and yellow equipment colors, are an integral part of the Company’s business, and their loss could have a material adverse effect on John Deere’s business.

 

Marketing

 

In the United States and Canada, the Equipment Operations distribute equipment and service parts through the following facilities: two agriculture and turf equipment sales and administration offices located in Lenexa, Kansas and Cary, North Carolina and one sales branch located in Grimsby, Ontario; and one construction, earthmoving, material handling and forestry equipment sales and administration office located in Moline, Illinois. In addition, the Equipment Operations operate a centralized parts distribution warehouse in coordination with several regional parts depots and distribution centers in the United States and Canada and have an agreement with a third party to operate a high-volume parts warehouse in Indiana.  John Deere Landscapes operates its business from 539 branch locations throughout the United States and Canada, along with 87 “Stores-on-Wheels.”

 

The facilities in the United States and Canada market John Deere products at approximately 2,565 dealer locations, most of which are independently owned. Of these, approximately 1,557 sell agricultural equipment, while 402 sell construction, earthmoving, material handling and/or forestry equipment. Nortrax owns some of the 402 locations. Turf equipment is sold at most John Deere agricultural equipment locations, a few construction, earthmoving, material handling and forestry equipment locations, and about 606 turf-only locations, many of which also handle dissimilar lines of products. In addition, certain lawn and garden product lines are sold through The Home Depot and Lowe’s.

 

Outside the United States and Canada, John Deere agriculture and turf equipment is sold to distributors and dealers for resale in over 100 countries. Sales and administrative offices are located in Argentina, Australia, Brazil, China, Germany, France, India, Italy, Mexico, Poland, Russia, Singapore, South Africa, Spain, Switzerland, Turkey, the United Kingdom and Uruguay. Associated companies doing business in China also sell agricultural equipment. Turf equipment sales outside the United States and Canada occur primarily in Europe and Australia. Construction, earthmoving, material handling and forestry equipment is sold to distributors and dealers primarily by sales offices located in the United States, Brazil, Finland, Russia and Singapore. Some of these dealers are independently owned while the Company owns others.  The Equipment Operations operate a centralized parts distribution warehouse in Germany in coordination with several regional parts depots and distribution centers in Argentina, Brazil, Russia, Sweden, South Africa and the United Kingdom.

 

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John Deere Water operates from 24 sales and marketing locations and 21 warehousing locations in 14 countries including Argentina, Australia, Brazil, Chile, China, Columbia, Ecuador, France, India, Israel, Peru, Spain, Turkey and the United States. Its products are marketed through approximately 1,500 independent dealers and distributors in over 100 countries.

 

John Deere engines are marketed worldwide through select sales branches to large original equipment manufacturers and independently owned engine distributors.

 

Raw Materials

 

The Company purchases raw materials and some manufactured components and replacement parts for its equipment, engine and other products from leading suppliers both domestically and internationally. These materials and components include a variety of steel products, steel and iron castings and forgings and ready to assemble components made to certain specifications. The Company also purchases various goods and services used in production, logistics, offices and research and development processes. The Company maintains strategic sourcing models to meet its production needs and build upon long-term supplier relationships. The Company uses a variety of agreements with suppliers intended to drive innovation, ensure availability and delivery of industry-leading quality raw materials and components, manage costs on a globally competitive basis, protect the Company’s intellectual property and minimize other supply-related risks. Supplier-related risks monitored by the Company to minimize the likelihood of the supply base causing business disruption include supplier financial viability, business continuity, quality and delivery. In fiscal year 2009, the Company experienced no significant work stoppages as a result of shortages of raw materials or other commodities.

 

Backlog Orders

 

The dollar amount of backlog orders for the agriculture and turf segment believed to be firm was approximately $3.6 billion at October 31, 2009, compared with $6.7 billion at October 31, 2008. The agriculture and turf backlog is generally highest in the second and third quarters due to seasonal buying trends in these industries. John Deere generally produces and ships its construction and forestry equipment on average within approximately 60 days after an order is deemed to become firm. Therefore, no significant amount of backlog orders accumulates during any period.

 

Trade Accounts and Notes Receivable

 

Trade accounts and notes receivable arise primarily from sales of goods to independent dealers. Most trade receivables originated by the Equipment Operations are purchased by Financial Services. The Equipment Operations compensate Financial Services at market rates of interest for these receivables. Additional information appears in Note 12 to the Consolidated Financial Statements.

 

FINANCIAL SERVICES

 

Credit Operations

 

United States and Canada. The Company’s credit segment (collectively referred to as the Credit Companies) primarily provide and administer financing for retail purchases from John Deere dealers of new equipment manufactured by the Company’s agriculture and turf and construction and forestry divisions and used equipment taken in trade for this equipment. The Company and John Deere Construction & Forestry Company are referred to as the “sales companies.” John Deere Capital Corporation (Capital Corporation), a United States credit subsidiary, generally purchases retail installment sales and loan contracts (retail notes) from the sales companies. These retail notes are acquired by the sales companies through John Deere retail dealers in the United States. John Deere Credit Inc., a Canadian credit subsidiary, purchases and finances retail notes acquired by John Deere Limited, the Company’s Canadian sales branch. The terms of retail notes and the basis on which the Credit Companies acquire retail notes from the sales companies are governed by agreements with the sales companies. The Credit Companies also finance and service revolving charge accounts, in most cases acquired from and offered through merchants in the agriculture and turf and construction and forestry markets (revolving charge accounts). Further, the Credit Companies finance and service operating loans, in most cases offered through and acquired from farm input providers or through direct relationships with agricultural producers or agribusinesses (operating loans). Additionally, the Credit Companies provide wholesale financing for inventories of John Deere agriculture and turf equipment and construction and forestry equipment owned by dealers of those products (wholesale notes). In the United States, certain Company subsidiaries included in the credit segment also offer certain crop risk mitigation products and invest in wind energy generation.

 

Retail notes acquired by the sales facilities are immediately sold to the Credit Companies. The Equipment Operations are the Credit Companies’ major source of business, but many retail purchasers of John Deere products finance their purchases outside the John Deere organization.

 

The Credit Companies offer retail leases to equipment users in the United States. A small number of leases are executed with units of local government. Leases are usually written for periods of two to five years, and typically contain an option permitting the customer

 

8



 

to purchase the equipment at the end of the lease term. Retail leases are also offered in a generally similar manner to customers in Canada through John Deere Credit Inc. and John Deere Limited.

 

The Credit Companies’ terms for financing equipment retail sales (other than smaller items financed with unsecured revolving charge accounts) provide for retention of a security interest in the equipment financed. The Credit Companies’ guidelines for minimum down payments, which vary with the types of equipment and repayment provisions, are generally not less than 20 percent on agricultural equipment, 10 percent on construction and forestry equipment and 10 percent on turf care equipment used for personal use. Finance charges are sometimes waived for specified periods or reduced on certain John Deere products sold or leased in advance of the season of use or in other sales promotions. The Credit Companies generally receive compensation from the sales facilities equal to a competitive interest rate for periods during which finance charges are waived or reduced on the retail notes or leases. The cost is accounted for as a deduction in arriving at net sales by the Equipment Operations.

 

The Company has an agreement with the Capital Corporation to make income maintenance payments to the Capital Corporation such that its ratio of earnings to fixed charges is not less than 1.05 to 1 for any fiscal quarter. For 2009 and 2008, the Capital Corporation’s ratios were 1.28 to 1 and 1.52 to 1, respectively, and never less than 1.12 to 1 and 1.43 to 1 for any fiscal quarter of 2009 and 2008, respectively. The Company has also committed to continue to own at least 51 percent of the voting shares of capital stock of the Capital Corporation and to maintain the Capital Corporation’s consolidated tangible net worth at not less than $50 million. The Company’s obligations to make payments to the Capital Corporation under the agreement are independent of whether the Capital Corporation is in default on its indebtedness, obligations or other liabilities. Further, the Company’s obligations under the agreement are not measured by the amount of the Capital Corporation’s indebtedness, obligations or other liabilities. The Company’s obligations to make payments under this agreement are expressly stated not to be a guaranty of any specific indebtedness, obligation or liability of the Capital Corporation and are enforceable only by or in the name of the Capital Corporation. No payments were required under this agreement in 2009 or 2008.

 

Outside the United States and Canada. The Credit Companies also offer financing, primarily for John Deere products, in Australia, New Zealand, Russia, and in several countries in Europe and in Latin America. In certain areas, financing is offered through cooperation agreements or joint ventures. Financing outside of the United States and Canada is affected by a variety of customs and regulations.

 

The Credit Companies also offer to select customers and dealers credit enhanced international export financing for the purchase of John Deere products.

 

Capital Expenditures. The Credit operations’ capital expenditures (cost reductions) totaled $(5) million in 2009, compared with $337 million in 2008, and $450 million in 2007. The capital expenditures for 2009 were more than offset by cost reductions due to becoming eligible for government grants for certain wind energy investments related to costs recognized in prior and current periods.  Provisions for depreciation applicable to these operations’ property and equipment during these years were $62 million, $34 million, and $13 million, respectively. Capital expenditures for the credit operations in 2010 are currently estimated to be approximately $200 million. The increases in capital expenditures since 2004 have related primarily to investments in wind energy generation.

 

Additional information on the Credit Companies appears on pages 18, 19, 21 and 24.

 

ENVIRONMENTAL MATTERS

 

The Company is subject to a wide variety of state, federal and international environmental laws, rules and regulations. These laws, rules and regulations may affect the way the Company conducts its operations and failure to comply with these regulations could lead to fines and other penalties. The Company is also involved in the evaluation and clean-up of a limited number of sites. Management does not expect that these matters will have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company. With respect to acquired properties and businesses, the Company cannot be certain that it has identified all adverse environmental conditions. The Company expects that it will acquire additional properties and businesses in the future.

 

EMPLOYEES

 

At October 31, 2009, John Deere had approximately 51,300 full-time employees, including approximately 28,000 employees in the United States and Canada. From time to time, John Deere also retains consultants, independent contractors, and temporary and part-time workers. Unions are certified as bargaining agents for approximately 34 percent of John Deere’s United States employees. Most of the Company’s United States production and maintenance workers are covered by a collective bargaining agreement with the United Auto Workers (UAW), with an expiration date of October 1, 2015.

 

Unions also represent the majority of employees at John Deere manufacturing facilities outside the United States.

 

9



 

EXECUTIVE OFFICERS OF THE REGISTRANT

 

Following are the names and ages of the executive officers of the Company, their positions with the Company and summaries of their backgrounds and business experience. All executive officers are elected or appointed by the Board of Directors and hold office until the annual meeting of the Board of Directors following the annual meeting of stockholders in each year.

 

Name, age and office (at December 1, 2009), and year elected to office

 

Principal occupation during last
five years other than office
of the Company currently held

Samuel R. Allen

 

56

 

President and Chief Executive Officer

 

2009

 

2005-2009 President, Worldwide Construction & Forestry Division and John Deere Power Systems

David C. Everitt

 

57

 

President, Agriculture and Turf Division-North America, Asia, Australia, Sub-Saharan and South Africa, and Global Tractor and Turf Products

 

2009

 

2006-2009 President, Agricultural Division - North America, Australia, Asia and Global Tractor & Implement Sourcing 2001-2006 President, Agricultural Division - Europe, Africa, Middle East, South America and Global Harvesting Equipment Sourcing

James M. Field

 

46

 

Senior Vice President and Chief Financial Officer

 

2009

 

2007-2009 President, Worldwide Commercial & Consumer Equipment Division; 2002-2007 Vice President and Comptroller

Jean H. Gilles

 

52

 

Senior Vice President, John Deere Power Systems, John Deere Intelligent Solutions Group, and Advanced Technology and Innovation

 

2009

 

2005-2009 Senior Vice President, John Deere Power Systems

James A. Israel

 

53

 

President, John Deere Credit

 

2006

 

2003-2006 Vice President Marketing and Product Support - Europe, Africa and Middle East, Worldwide Agricultural Division

James R. Jenkins

 

64

 

Senior Vice President and General Counsel

 

2000

 

Has held this position for the last five years

Michael J. Mack, Jr.

 

53

 

President, Worldwide Construction & Forestry Division

 

2009

 

2006-2009 Senior Vice President and Chief Financial Officer; 2004-2006 Vice President and Treasurer; 2001-2004 Senior Vice President Marketing and Administration, Worldwide Commercial & Consumer Equipment Division

Markwart von Pentz

 

46

 

President, Agriculture and Turf Division-Europe, CIS, Northern Africa, Middle East, Latin America, and Global Harvesting, Crop Care, Hay & Forage Products

 

2009

 

2007-2009 President, Agricultural Division - Europe, Africa, South America and Global Harvesting Equipment Sourcing; 2006-2007 Senior Vice President Marketing and Product Support - Europe, Africa and Middle East; 2005-2006 Vice President Agricultural Marketing U.S. & Canada

 

ITEM 1A.

RISK FACTORS.

 

Governmental Actions. The Company’s businesses are exposed to a variety of risks and uncertainties related to the action or inaction of governmental bodies. The outcome of the global negotiations under the auspices of the World Trade Organization could have a material effect on the international flow of agricultural commodities which may result in a corresponding effect on the demand for agricultural equipment in many areas of the world. The policies of the Brazilian government (including those related to exchange rates and commodity prices) and Argentine government could significantly change the dynamics of the agricultural economy in South America.

 

With respect to the ongoing global economic conditions, changes in governmental banking, monetary and fiscal policies to restore liquidity and increase the availability of credit may not be effective and could have a material impact on the Company’s customers and markets. To the extent that the Company participates in governmental programs designed to address current negative conditions, both in the United States and in other countries, there is no assurance such programs will remain available for sufficient periods of time or

 

10



 

on acceptable terms to benefit the Company, and the expiration of such programs could have unintended adverse effects. In addition, certain competitors may be eligible for certain programs that the Company is ineligible for, which may create a competitive disadvantage. The Company’s operations and results could also be materially impacted by financial regulatory reform. Governmental policies on taxes and spending can also affect the Company, especially the construction and forestry segment due to the impact of government spending on infrastructure development.

 

Changing Demand for Farm Outputs. Changing worldwide demand for food and the demand for different forms of bio-energy could have an effect on prices for farm commodities and consequently the demand for the Company’s agricultural equipment. In addition, global economic conditions may have an impact on agricultural commodity prices.

 

Impact of Globalization. The continuing globalization of businesses may significantly change the dynamics of the Company’s competition, customer base and product offerings. The Company’s efforts to grow its businesses depend to a large extent on access to, and its success in developing market share and operating profitably in, additional geographic markets including but not limited to Brazil, Russia, India and China. In some cases, these countries have greater political and economic volatility and greater vulnerability to infrastructure and labor disruptions. Operating in a large number of different regions and countries exposes the Company to multiple regulatory requirements that are subject to change; increased exposure to currency fluctuations; differing local product preferences and product requirements; differing labor regulations and differing tax laws. Simultaneously, these emerging markets are becoming more important as their economies grow, as other international companies grow globally and local low cost manufacturers expand their production capacities.

 

Economic Conditions and Outlook. Conditions in the global financial markets and general economy materially affect the Company’s results of operations. The demand for the Company’s products and services could be adversely affected in an economic environment characterized by higher unemployment, lower consumer spending, lower corporate earnings and lower business investment. Significant changes in market liquidity conditions could impact access to funding and associated funding costs, which could reduce the Company’s earnings and cash flows. The Company’s investment management activities could be adversely impacted by changes in the equity and bond markets, which would negatively affect earnings. General economic conditions can affect the demand for the Company’s equipment. Current negative economic conditions and outlook have decreased housing starts and other construction and dampened demand for certain construction equipment. The Company’s turf operations and its construction and forestry segment are dependent on construction activity and general economic conditions. Significant or prolonged declines in construction activity and housing starts could have a material adverse effect on the Company’s results of operations. If continuing negative economic conditions extend to the overall farm economy, there could be a similar effect on agricultural equipment sales.

 

Currency Fluctuations. The reporting currency for the Company’s consolidated financial statements is the U.S. dollar. Certain of the Company’s assets, liabilities, expenses and revenues are denominated in other countries’ currencies. Those assets, liabilities, expenses and revenues are translated into U.S. dollars at the applicable exchange rates to prepare the Company’s consolidated financial statements. Therefore, increases or decreases in exchange rates between the U.S. dollar and those other currencies affect the value of those items as reflected in the Company’s consolidated financial statements, even if their value remains unchanged in their original currency. Substantial fluctuations in the value of the U.S. dollar could have a significant impact on the Company’s results.

 

Risks to Financial Services. Current negative economic conditions have adversely affected the financial industry in which the credit segment operates. The credit segment provides financing to a significant portion of John Deere sales worldwide. The credit segment’s inability to access funds to support its financing activities to the Company’s customers could have a material adverse effect on the Company’s business. The credit segment’s liquidity and ongoing profitability depend largely on timely access to capital to meet future cash flow requirements and fund operations and the costs associated with engaging in diversified funding activities. Additionally, continued negative market conditions could further reduce customer confidence levels, resulting in declines in credit applications and increases in delinquencies and default rates, which could materially impact the credit segment’s write-offs and provisions for credit losses.

 

Consumer Attitudes. The confidence the Company’s customers have in the general economic outlook can have a significant effect on their propensity to purchase equipment and, consequently, on the Company’s sales. Continuing negative economic conditions could significantly impair customer confidence. The Company’s ability to match its new product offerings to its customers’ anticipated preferences for enhanced technologies and different types and sizes of equipment is important as well.

 

Weather Conditions. Poor or unusual weather conditions, particularly in the spring, can significantly affect the purchasing decisions of the Company’s customers, particularly the customers of the agriculture and turf segment. Sales of turf care equipment in the important spring selling season can be dramatically impacted by weather.

 

Supply Base and Raw Material Costs. Many of the Company’s suppliers also supply the automotive industry. The severe downturn in automotive sales and the weak financial condition and restructuring of some major automakers could cause these suppliers to face severe financial hardship and disrupt the Company’s access to critical components. Changes in the availability and price of raw

 

11



 

materials, which are more likely to occur during times of economic volatility, could have a material negative impact on the Company’s costs of production and, in turn, on the profitability of the business.

 

Interest Rates and Credit Ratings. Rising interest rates could have a dampening effect on overall economic activity and could affect the demand for the Company’s equipment. In addition, credit market dislocations could have an impact on funding costs which are very important to the Company’s credit segment. Decisions and actions by credit rating agencies can affect the availability and cost of funding for the Company. Credit rating downgrades or negative changes to ratings outlooks can increase the Company’s cost of capital and hurt its competitive position. Guidance from rating agencies as to acceptable leverage can affect the Company’s returns as well.

 

Environmental Risk. The Company’s operations are subject to and affected by increasingly rigorous environmental, health and safety laws and regulations of federal, state and local authorities in the United States and regulatory authorities with jurisdiction over the Company’s foreign operations. Violations of such laws or regulations can lead to investigation and remediation costs, significant fines or penalties. In addition, new or more stringent requirements of governmental authorities, and claims for damages to property or injury to persons resulting from the environmental, health or safety impacts of the Company’s operations or past contamination, could prevent or restrict the Company’s operations, require significant expenditures to achieve compliance, involve the imposition of cleanup liens and/or give rise to civil or criminal liability. There can be no assurance that violations of such legislation and/or regulations, which could result in enforcement actions or private claims, would not have consequences that result in a material adverse effect on the Company’s business, financial condition or results of operations.

 

Beginning in 2011, the Company’s Equipment Operations must meet new and increasingly stringent engine emission standards, including Interim Tier 4 and Stage IIIb nonroad diesel emission requirements applicable to many engines manufactured by the Company and many models of John Deere agricultural and construction and forestry equipment. While the Company has developed and is executing comprehensive plans to meet these requirements, and does not currently foresee obstacles that would prevent timely compliance, these plans are subject to many variables that could delay or impact the Company’s ability to distribute certain equipment or engines, which could negatively impact business results.

 

Climate Change. There is a growing political and scientific consensus that emissions of greenhouse gases (“GHG”) continue to alter the composition of the global atmosphere in ways that are affecting and are expected to continue to affect the global climate. Various stakeholders, including legislators and regulators, shareholders and non-governmental organizations, as well as companies in many business sectors, are considering ways to reduce GHG emissions. There is growing consensus that some form of U.S. regulation will be forthcoming at the federal level with respect to greenhouse gas emissions and such regulation could result in the creation of additional costs in the form of taxes or emission allowances. The impact of any future mandatory GHG legislative, regulatory or product standard requirements on the Company’s global businesses and products is dependent on the design of the mandate or standard, and so the Company is unable to predict its significance at this time.

 

Furthermore, the potential physical impacts of climate change on the Company’s customers, and therefore on the Company’s operations, are highly uncertain, and will be particular to the circumstances developing in various geographical regions. These may include changes in weather patterns (including drought and rainfall levels), water availability, storm patterns and intensities, and temperature levels. These potential physical effects may adversely impact the cost, production, sales and financial performance of John Deere’s operations.

 

The risks identified above should be considered in conjunction with Management’s Discussion and Analysis beginning on page 17 and, specifically, the other risks described in the Safe Harbor Statement on pages 19 and 20. The Company’s results of operations may be affected by these identified risks and/or by risks not currently contemplated.

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS.

 

None.

 

ITEM 2.

PROPERTIES.

 

See “Manufacturing” in Item 1.

 

The Equipment Operations own or lease 19 facilities housing one centralized parts depot, regional parts depots and distribution centers throughout the United States and Canada. These facilities contain approximately 4.7 million square feet of floor space. The Equipment Operations also own and occupy buildings housing sales facilities, one centralized parts depot and regional parts depots in Argentina, Australia, Brazil, Europe and New Zealand. These facilities contain approximately 1.1 million square feet of floor space.

 

12



 

Deere & Company administrative offices and research facilities, all of which are owned by John Deere, together contain about 2.7 million square feet of floor space and miscellaneous other facilities total 1.1 million square feet.

 

Overall, the Company owns approximately 50 million square feet of facilities and leases approximately 14.3 million additional square feet in various locations.

 

ITEM 3.

LEGAL PROCEEDINGS.

 

The Company is subject to various unresolved legal actions which arise in the normal course of its business, the most prevalent of which relate to product liability (including asbestos-related liability), retail credit, software licensing, patent and trademark matters. Although it is not possible to predict with certainty the outcome of these unresolved legal actions or the range of possible loss, the Company believes these unresolved legal actions will not have a material effect on its financial statements.

 

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

 

None.

 

PART II

 

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

(a)                                 The Company’s common stock is listed on the New York Stock Exchange. See the information concerning quoted prices of the Company’s common stock, the number of stockholders and the data on dividends declared and paid per share in Note 29.

 

(b)                                Not applicable.

 

(c)                                 The Company’s purchases of its common stock during the fourth quarter of 2009 were as follows:

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

Period

 

Total Number of
Shares
Purchased 
(thousands)

 

Average Price
Paid Per
Share

 

Total Number of 
Shares Purchased
as Part of Publicly
Announced Plans
or Programs(1) 
(thousands)

 

Maximum
Number of Shares
that May Yet Be
Purchased under
the Plans or
Programs (1)
(millions)

 

 

 

 

 

 

 

 

 

 

 

Aug 1 to Aug 31

 

 

 

 

 

 

 

123.5

 

 

 

 

 

 

 

 

 

 

 

Sept 1 to Sept 30

 

 

 

 

 

 

 

123.5

 

 

 

 

 

 

 

 

 

 

 

Oct 1 to Oct 31

 

 

 

 

 

 

 

123.5

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 


(1)         During the fourth quarter of 2009, the Company had a share repurchase plan that was announced in May 2007 to purchase up to 40 million shares of the Company’s common stock. In May 2008, an announcement was made to purchase up to $5 billion of additional shares of the Company’s common stock after the previous 40 million share plan is completed. The maximum number of shares that may yet be purchased above is based on the remaining shares under the previous 40 million share plan plus 109.8 million shares for the $5 billion addition using the October 31, 2009 closing share price of $45.55 per share.

 

13



 

ITEM 6.

SELECTED FINANCIAL DATA.

 

Financial Summary

 

(Millions of dollars except per share amounts)

 

2009*

 

2008*

 

2007

 

2006*

 

2005

 

For the Year Ended October 31:

 

 

 

 

 

 

 

 

 

 

 

Total net sales and revenues

 

$

23,112

 

$

28,438

 

$

24,082

 

$

22,148

 

$

21,191

 

Income from continuing operations

 

$

873

 

$

2,053

 

$

1,822

 

$

1,453

 

$

1,414

 

Net income

 

$

873

 

$

2,053

 

$

1,822

 

$

1,694

 

$

1,447

 

Income per share from continuing operations – basic**

 

$

2.07

 

$

4.76

 

$

4.05

 

$

3.11

 

$

2.90

 

Income per share from continuing operations – diluted**

 

$

2.06

 

$

4.70

 

$

4.00

 

$

3.08

 

$

2.87

 

Net income per share – basic**

 

$

2.07

 

$

4.76

 

$

4.05

 

$

3.63

 

$

2.97

 

Net income per share – diluted**

 

$

2.06

 

$

4.70

 

$

4.00

 

$

3.59

 

$

2.94

 

Dividends declared per share**

 

$

1.12

 

$

1.06

 

$

.91

 

$

.78

 

$

.60 ½

 

At October 31:

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

41,133

 

$

38,735

 

$

38,576

 

$

34,720

 

$

33,637

 

Long-term borrowings

 

$

17,392

 

$

13,899

 

$

11,798

 

$

11,584

 

$

11,739

 

 


*In 2009, the Company had a goodwill impairment charge of $274 million after-tax, or $.65 per share, voluntary employee separation expenses of $58 million after tax, or $.13 per share, and special charges related to Welland, Ontario, Canada of $30 million after tax, or $.07 per share.  In 2008, the Company had special charges of $31 million after-tax, or $.07 per share, related to closing a facility in Welland. In 2006, the Company recognized a gain from the sale of discontinued operations (health care operations) of $223 million after-tax, or $.47 per share diluted ($.48 basic). In 2006, the Company also had special charges of $44 million after-tax, or $.09 per share, for a tender offer and repurchase of outstanding notes and $28 million after-tax, or $.06 per share, related to closing a facility in Woodstock, Ontario, Canada.

 

**Adjusted for two-for-one stock split effected in the form of a 100 percent stock dividend in November 2007. Additional information is in Note 23 to the Consolidated Financial Statements.

 

ITEM 7.

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

 

See the information under the caption “Management’s Discussion and Analysis” on pages 17 - 27.

 

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

The Company is exposed to a variety of market risks, including interest rates and currency exchange rates. The Company attempts to actively manage these risks. See the information under “Management’s Discussion and Analysis” on page 27 and in Note 27 to the Consolidated Financial Statements.

 

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

See the Consolidated Financial Statements and notes thereto and supplementary data on pages 28 - 58.

 

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

 

Not applicable.

 

ITEM 9A.

CONTROLS AND PROCEDURES.

 

Disclosure Controls and Procedures

 

The Company’s principal executive officer and its principal financial officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (“the Act”)) were effective as of October 31, 2009, based on the evaluation of these controls and procedures required by Rule 13a-15(b) or 15d-15(b) of the Act. During the fourth quarter, there were no changes that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

 

14



 

Management’s Report on Internal Control Over Financial Reporting

 

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Deere & Company’s internal control system was designed to provide reasonable assurance regarding the preparation and fair presentation of published financial statements in accordance with generally accepted accounting principles.

 

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation in accordance with generally accepted accounting principles.

 

Management assessed the effectiveness of the Company’s internal control over financial reporting as of October 31, 2009, using the criteria set forth in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, management believes that, as of October 31, 2009, the Company’s internal control over financial reporting was effective.

 

The Company’s independent registered public accounting firm has issued an audit report on the effectiveness of the Company’s internal control over financial reporting. That report is included herein.

 

ITEM 9B.

OTHER INFORMATION.

 

Not applicable.

 

PART III

 

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

 

The information regarding directors in the proxy statement expected to be filed January 13, 2010 but no later than February 12, 2010 (proxy statement), under the captions “Election of Directors,” “Directors Continuing in Office,” and in the third paragraph under the caption “Committees - The Audit Review Committee,” is incorporated herein by reference. Information regarding the process set forth in the Company’s restated bylaws for recommending nominees to the board of directors in the proxy statement under the caption “Stockholder Proposals and Nominations” is incorporated herein by reference. Information regarding executive officers is presented in Item 1 of this report under the caption “Executive Officers of the Registrant.”

 

The Company has adopted a code of ethics that applies to its principal executive officer, principal financial officer and principal accounting officer. This code of ethics and the Company’s corporate governance policies are posted on the Company’s website at http://www.JohnDeere.com. The Company intends to satisfy disclosure requirements regarding amendments to or waivers from its code of ethics by posting such information on this website. The charters of the Audit Review, Corporate Governance and Compensation committees of the Company’s Board of Directors are available on the Company’s website as well. This information is also available in print free of charge to any person who requests it.

 

ITEM 11.

EXECUTIVE COMPENSATION.

 

The information in the proxy statement under the captions “Compensation of Directors,” “Compensation Discussion & Analysis,” “Compensation Committee Report,” and “Executive Compensation Tables” is incorporated herein by reference.

 

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

 

(a)                                 Securities authorized for issuance under equity compensation plans.

 

Equity compensation plan information in the proxy statement, under the caption “Equity Compensation Plan Information,” is incorporated herein by reference.

 

(b)                                Security ownership of certain beneficial owners.

 

The information on the security ownership of certain beneficial owners in the proxy statement under the caption “Security Ownership of Certain Beneficial Owners and Management” is incorporated herein by reference.

 

15



 

(c)                                 Security ownership of management.

 

The information on shares of common stock of the Company beneficially owned by, and under option to (i) each director, (ii) certain named executive officers and (iii) the directors and officers as a group, contained in the proxy statement under the captions “Security Ownership of Certain Beneficial Owners and Management,” and “Executive Compensation Tables – Outstanding Equity Awards at Fiscal 2009 Year-End” is incorporated herein by reference.

 

(d)                                Change in control.

 

None.

 

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

 

The information in the proxy statement under the captions “Corporate Governance Policies,” “Director Independence,” and “Review and Approval of Related Person Transactions” is incorporated herein by reference.

 

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES.

 

The information in the proxy statement under the caption “Fees Paid to the Independent Registered Public Accounting Firm” is incorporated herein by reference.

 

PART IV

 

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

 

 

 

 

 

Page

(1)

 

Financial Statements

 

 

 

 

 

 

 

 

 

Statement of Consolidated Income for the years ended October 31, 2009, 2008 and 2007

 

28

 

 

 

 

 

 

 

Consolidated Balance Sheet, October 31, 2009 and 2008

 

29

 

 

 

 

 

 

 

Statement of Consolidated Cash Flows for the years ended October 31, 2009, 2008 and 2007

 

30

 

 

 

 

 

 

 

Statement of Changes in Consolidated Stockholders’ Equity for the years ended October 31, 2007, 2008 and 2009

 

31

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

32

 

 

 

 

 

(2)

 

Schedule to Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

Schedule II - Valuation and Qualifying Accounts for the years ended October 31, 2009, 2008 and 2007

 

63

 

 

 

 

 

(3)

 

Exhibits

 

 

 

 

 

 

 

 

 

See the “Index to Exhibits” on pages 64 – 66 of this report.

 

 

 

 

 

 

 

 

 

Certain instruments relating to long-term borrowings, constituting less than 10 percent of registrant’s total assets, are not filed as exhibits herewith pursuant to Item 601(b)4(iii)(A) of Regulation S-K. Registrant agrees to file copies of such instruments upon request of the Commission.

 

 

 

 

 

 

 

Financial Statement Schedules Omitted

 

 

 

 

 

 

 

The following schedules for the Company and consolidated subsidiaries are omitted because of the absence of the conditions under which they are required: I, III, IV and V.

 

 

 

16



 

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

RESULTS OF OPERATIONS FOR THE YEARS ENDED OCTOBER 31, 2009, 2008 AND 2007

 

OVERVIEW

 

Organization

 

The company’s Equipment Operations generate revenues and cash primarily from the sale of equipment to John Deere dealers and distributors. The Equipment Operations manufacture and distribute a full line of agricultural equipment; lawn and turf care equipment, landscaping and irrigation products; and a broad range of equipment for construction and forestry. The company’s Financial Services primarily provide credit services, which mainly finance sales and leases of equipment by John Deere dealers and trade receivables purchased from the Equipment Operations. In addition, Financial Services offer certain crop risk mitigation products and invest in wind energy generation. The information in the following discussion is presented in a format that includes information grouped as consolidated, Equipment Operations and Financial Services. The company also views its operations as consisting of two geographic areas, the U.S. and Canada, and outside the U.S. and Canada. The company’s reportable operating segments consist of agriculture and turf, construction and forestry and credit. The previous agricultural equipment segment and commercial and consumer equipment segment were combined into the agriculture and turf segment at the beginning of the third quarter of 2009 (see Note 28). The following discussions of operating segment results have been revised to conform to the current reportable segments.

 

Trends and Economic Conditions

 

Industry farm machinery sales in the U.S. and Canada in 2010 are forecast to be down about 10 percent. Industry sales in Western Europe are forecast to decline 10 to 15 percent and South America industry sales are projected to increase by 10 to 15 percent for the year. The company’s agriculture and turf equipment sales declined 14 percent in 2009 and are forecast to decrease by about 4 percent for 2010, including a favorable currency translation impact of about 2 percent. U.S. construction equipment markets are forecast to be down in 2010 resulting from a decline in non-residential construction activity and lower used equipment values. Global forestry markets are expected to experience some recovery in 2010 based on higher demand for pulp and paper. The company’s construction and forestry sales declined 45 percent in 2009 and are forecast to increase by approximately 18 percent in 2010. Net income for the company’s credit operations in 2010 is forecast to increase to approximately $240 million.

 

Items of concern include the decline in global economic activity and expected slow recovery, capital market disruptions, the effectiveness of governmental policies to promote economic recovery, the availability of credit for the company’s customers and suppliers and financial regulatory reform. Significant fluctuations in foreign currency exchange rates and volatility in the price of many commodities could also impact the company’s results. The availability of certain components that could impact the company’s ability to meet production schedules continues to be monitored. Designing and producing products with engines that continue to meet high performance standards and increasingly stringent emissions regulations is one of the company’s major priorities.

 

In an environment of intense global economic pressure, the company has completed a solidly profitable year and maintained its strong financial condition. The company’s plans for meeting the world’s growing need for food and infrastructure are continuing to move forward.

 

2009 COMPARED WITH 2008

 

CONSOLIDATED RESULTS

 

Worldwide net income in 2009 was $873 million, or $2.06 per share diluted ($2.07 basic), compared with $2,053 million, or $4.70 per share diluted ($4.76 basic), in 2008. Included in net income for 2009 were charges of $381 million pretax ($332 million after-tax), or $.78 per share diluted and basic, related to impairment of goodwill and voluntary employee separation expenses (see Note 5). Net sales and revenues decreased 19 percent to $23,112 million in 2009, compared with $28,438 million in 2008. Net sales of the Equipment Operations decreased 20 percent in 2009 to $20,756 million from $25,803 million last year. The sales decrease was primarily due to lower shipment volumes. The decrease also included an unfavorable effect for currency translation of 4 percent, more than offset by price realization of 5 percent. Net sales in the U.S. and Canada decreased 14 percent in 2009. Net sales outside the U.S. and Canada decreased by 28 percent in 2009, which included an unfavorable effect of 8 percent for currency translation.

 

Worldwide Equipment Operations had an operating profit of $1,365 million in 2009, compared with $2,927 million in 2008. The deterioration in operating profit was primarily due to lower shipment and production volumes, the unfavorable effects of foreign currency exchange, a goodwill impairment charge, higher raw material costs and voluntary employee separation expenses, partially offset by improved price realization and lower selling, administrative and general expenses.

 

The Equipment Operations’ net income was $678 million in 2009, compared with $1,676 million in 2008. The same operating factors mentioned above, in addition to a higher effective tax rate, affected these results.

 

Trade receivables and inventories at October 31, 2009 were $5,014 million, compared with $6,276 million last year, or 24 percent of net sales in both years.

 

Net income of the company’s Financial Services operations in 2009 decreased to $203 million, compared with $337 million in 2008. The decrease was primarily a result of a higher provision for credit losses, lower commissions from crop insurance, narrower financing spreads and higher losses from construction equipment operating lease residual values, partially offset by a lower effective tax rate primarily from wind energy tax credits and lower selling, administrative and general expenses. Additional information is presented in the following discussion of the “Worldwide Credit Operations”.

 

17



 

The cost of sales to net sales ratio for 2009 was 78.3 percent, compared with 75.9 percent last year. The increase was primarily due to lower shipment and production volumes, unfavorable effects of foreign exchange, a goodwill impairment charge, higher raw material costs and voluntary employee separation expenses.

 

Finance and interest income declined this year due to lower financing rates and a smaller average portfolio. Other income decreased primarily as a result of lower commissions from crop insurance and lower earnings from marketable securities. Research and development expenses increased primarily as a result of increased spending in support of new products including designing and producing products with engines to meet more stringent emissions regulations. Selling, administrative and general expenses decreased primarily due to lower compensation expenses and the effect of currency translation. Interest expense decreased due to lower average borrowing rates, partially offset by higher average borrowings. The equity in income of unconsolidated affiliates decreased as a result of lower income from construction equipment manufacturing affiliates impacted by the low levels of construction activity.

 

The company has several defined benefit pension plans and defined benefit health care and life insurance plans. The company’s postretirement benefit costs for these plans in 2009 were $312 million, compared with $277 million in 2008. The long-term expected return on plan assets, which is reflected in these costs, was an expected gain of 8.2 percent in 2009 and 2008, or $857 million in 2009 and $920 million in 2008. The actual return was a gain of $1,142 million in 2009 and a loss of $2,158 million in 2008. In 2010, the expected return will be approximately 8.2 percent. The company expects postretirement benefit costs in 2010 to be approximately $400 million higher than in 2009, primarily due to lower discount rates. The company makes any required contributions to the plan assets under applicable regulations and voluntary contributions from time to time based on the company’s liquidity and ability to make tax-deductible contributions. Total company contributions to the plans were $358 million in 2009 and $431 million in 2008, which include direct benefit payments for unfunded plans. These contributions also included voluntary contributions to total plan assets of approximately $150 million in 2009 and $297 million in 2008. Total company contributions in 2010 are expected to be approximately $390 million, which are primarily direct benefit payments. The company has no significant contributions to pension plan assets required in 2010 under applicable funding regulations. See the following discussion of “Critical Accounting Policies” for more information about postretirement benefit obligations.

 

BUSINESS SEGMENT AND GEOGRAPHIC AREA RESULTS

 

The following discussion relates to operating results by reportable segment and geographic area. Operating profit is income before external interest expense, certain foreign exchange gains or losses, income taxes and corporate expenses. However, operating profit of the credit segment includes the effect of interest expense and foreign exchange gains or losses.

 

Worldwide Agriculture and Turf Operations

 

The agriculture and turf segment had an operating profit of $1,448 million in 2009, compared with $2,461 million in 2008. Net sales decreased 14 percent this year due to lower shipment volumes and the unfavorable effects of currency translation, partially offset by improved price realization. The decrease in operating profit was primarily due to lower shipment and production volumes, unfavorable effects of foreign currency exchange, a goodwill impairment charge, higher raw material costs and voluntary employee separation expenses, partially offset by improved price realization and lower selling, administrative and general expenses.

 

Worldwide Construction and Forestry Operations

 

The construction and forestry segment had an operating loss of $83 million in 2009, compared with an operating profit of $466 million in 2008. Net sales decreased 45 percent for the year reflecting the pressure from market conditions. The operating profit was lower primarily due to lower shipment and production volumes and lower equity in income from unconsolidated affiliates, partially offset by improved price realization and lower selling, administrative and general expenses.

 

Worldwide Credit Operations

 

The operating profit of the credit operations was $223 million in 2009, compared with $478 million in 2008. The decrease in operating profit was primarily due to a higher provision for credit losses, lower commissions from crop insurance, narrower financing spreads, a higher pretax loss from wind energy projects and higher losses from construction equipment operating lease residual values, partially offset by lower selling, administrative and general expenses. Total revenues of the credit operations, including intercompany revenues, decreased 11 percent in 2009, primarily reflecting the lower financing rates and a smaller portfolio. The average balance of receivables and leases financed was 1 percent lower in 2009, compared with 2008. Interest expense decreased 8 percent in 2009 as a result of lower average borrowing rates, partially offset by higher average borrowings. The credit operations’ ratio of earnings to fixed charges was 1.24 to 1 in 2009, compared with 1.45 to 1 in 2008.

 

Equipment Operations in U.S. and Canada

 

The equipment operations in the U.S. and Canada had an operating profit of $1,129 million in 2009, compared with $1,831 million in 2008. The decrease was primarily due to lower shipment and production volumes, a goodwill impairment charge, higher raw material costs and voluntary employee separation expenses, partially offset by improved price realization and decreased selling, administrative and general expenses. Net sales decreased 14 percent due to lower volumes and the unfavorable effects of currency translation, partially offset by improved price realization. The physical volume decreased 18 percent, compared with 2008.

 

18



 

Equipment Operations outside U.S. and Canada

 

The equipment operations outside the U.S. and Canada had an operating profit of $236 million in 2009, compared with $1,096 million in 2008. The decrease was primarily due to the effects of lower shipment and production volumes, unfavorable effects of foreign currency exchange rates and increases in raw material costs, partially offset by improved price realization and decreased selling, administrative and general expenses. Net sales were 28 percent lower reflecting lower volumes and the effect of currency translation, partially offset by improvements in price realization. The physical volume decreased 26 percent, compared with 2008.

 

MARKET CONDITIONS AND OUTLOOK

 

Company equipment sales are projected to be down about 1 percent for fiscal year 2010 and decline about 10 percent for the first quarter, compared with the same periods in 2009. This includes a favorable currency translation impact of about 1 percent for the year and about 3 percent for the quarter. The company’s net income is anticipated to be approximately $900 million for 2010. Mainly due to lower discount rates, the company expects postretirement benefit costs to be about $400 million higher on a pretax basis in 2010 than in 2009.

 

Agriculture and Turf. Worldwide sales of the agriculture and turf segment are forecast to decrease by about 4 percent for fiscal year 2010, including a favorable currency translation impact of about 2 percent.

 

On an industry basis, farm machinery sales in the U.S. and Canada are forecast to be down about 10 percent for the year. Cash receipts and commodity prices, while below their prior peaks, are anticipated to remain at healthy levels. However, farmers are expected to be cautious in their purchasing decisions as a result of negative overall economic conditions and near term profitability issues in the livestock and dairy sectors. In other parts of the world, industry farm machinery sales in Western Europe are forecast to decline 10 to 15 percent for the year mainly due to weakness in the livestock, dairy and grain sectors. Sales in Central Europe and the Commonwealth of Independent States are expected to remain under pressure partly as a result of weak general economic conditions, including low levels of available credit. In South America, industry sales are projected to increase by 10 to 15 percent for the year. Among other positive factors, parts of South America are benefiting from a return to more normal weather patterns after last year’s severe drought. The Brazilian market is expected to receive support from good incomes for soybean and sugarcane producers and the continued availability of attractive government supported financing. The forecast assumes that the Brazilian currency does not strengthen further against the U.S. dollar. Industry sales of turf equipment and compact utility tractors in the U.S. and Canada are expected to be flat for the year as a result of negative U.S. economic conditions.

 

Construction and Forestry. The company’s worldwide sales of construction and forestry equipment are forecast to increase by about 18 percent for fiscal year 2010. Sales are expected to be helped by aggressive inventory reductions in the previous year that position the company to align production with retail demand. Despite an increase in housing starts from historically low levels, U.S. construction equipment markets are forecast to be down for the year resulting from a decline in non-residential construction activity and lower used equipment values. Global forestry markets are expected to experience some recovery based on higher demand for pulp and paper, driven by higher worldwide economic output, as well as the increase in U.S. housing starts.

 

Credit. Net income in fiscal year 2010 for the company’s credit operations is forecast to be approximately $240 million. The forecast increase from 2009 primarily is due to higher commissions from crop insurance and increased revenue from wind energy projects.

 

SAFE HARBOR STATEMENT

 

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: Statements under “Overview,” “Market Conditions and Outlook” and other forward-looking statements herein that relate to future events, expectations and operating periods involve certain factors that are subject to change, and important risks and uncertainties that could cause actual results to differ materially. Some of these risks and uncertainties could affect particular lines of business, while others could affect all of the company’s businesses.

 

The company’s agricultural equipment business is subject to a number of uncertainties including the many interrelated factors that affect farmers’ confidence. These factors include worldwide economic conditions, demand for agricultural products, world grain stocks, weather conditions (including its effects on timely planting and harvesting), soil conditions, harvest yields, prices for commodities and livestock, crop and livestock production expenses, availability of transport for crops, the growth of non-food uses for some crops (including ethanol and biodiesel production), real estate values, available acreage for farming, the land ownership policies of various governments, changes in government farm programs and policies (including those in the U.S. and Brazil), international reaction to such programs, global trade agreements, animal diseases and their effects on poultry and beef consumption and prices, crop pests and diseases, and the level of farm product exports (including concerns about genetically modified organisms).

 

Factors affecting the outlook for the company’s turf and utility equipment include general economic conditions, consumer confidence, weather conditions, customer profitability, consumer borrowing patterns, consumer purchasing preferences, housing starts, infrastructure investment, spending by municipalities and golf courses, and consumable input costs.

 

General economic conditions, consumer spending patterns, real estate and housing prices, the number of housing starts and interest rates are especially important to sales of the company’s construction and forestry equipment. The levels of public and non-residential construction also impact the results of the company’s construction and forestry segment. Prices for pulp, paper, lumber and structural panels are important to sales of forestry equipment.

 

19



 

All of the company’s businesses and its reported results are affected by general economic conditions in the global markets in which the company operates, especially material changes in economic activity in these markets; customer confidence in general economic conditions; foreign currency exchange rates, especially fluctuations in the value of the U.S. dollar (including fluctuations in the value of the Brazilian real); interest rates; and inflation and deflation rates. General economic conditions can affect demand for the company’s equipment as well. Current negative economic conditions and outlook have dampened demand for equipment.

 

Customer and company operations and results could be affected by changes in weather patterns; the political and social stability of the global markets in which the company operates; the effects of, or response to, terrorism; wars and other international conflicts and the threat thereof; and the spread of major epidemics (including H1N1 and other influenzas).

 

With respect to the global economic downturn and expected slow recovery, changes in governmental banking, monetary and fiscal policies to restore liquidity and increase the availability of credit may not be effective and could have a material impact on the company’s customers and markets. Significant changes in market liquidity conditions could impact access to funding and associated funding costs, which could reduce the company’s earnings and cash flows. Current market conditions could also negatively impact customer access to capital for purchases of the company’s products; borrowing and repayment practices; and the number and size of customer loan delinquencies and defaults. The company’s investment management activities could be impaired by changes in the equity and bond markets, which would negatively affect earnings.

 

Additional factors that could materially affect the company’s operations and results include changes in and the impact of governmental trade, banking, monetary and fiscal policies, including financial regulatory reform, and governmental programs in particular jurisdictions or for the benefit of certain industries or sectors (including protectionist policies that could disrupt international commerce); actions by the U.S. Federal Reserve Board and other central banks; actions by the U.S. Securities and Exchange Commission (SEC); actions by environmental, health and safety regulatory agencies, including those related to engine emissions (in particular Interim Tier 4 and Final Tier 4 emission requirements), noise and the risk of climate change; changes in labor regulations; changes to accounting standards; changes in tax rates and regulations; and actions by other regulatory bodies including changes in laws and regulations affecting the sectors in which the company operates.

 

Other factors that could materially affect results include production, design and technological innovations and difficulties, including capacity and supply constraints and prices; the availability and prices of strategically sourced materials, components and whole goods; delays or disruptions in the company’s supply chain due to weather, natural disasters or financial hardship or the loss of liquidity by suppliers (including common suppliers with the automotive industry); start-up of new plants and new products; the success of new product initiatives and customer acceptance of new products; oil and energy prices and supplies; the availability and cost of freight; actions of competitors in the various industries in which the company competes, particularly price discounting; dealer practices especially as to levels of new and used field inventories; labor relations; acquisitions and divestitures of businesses, the integration of new businesses; the implementation of organizational changes, such as combining of the agricultural and commercial and consumer equipment segments; changes in company declared dividends and common stock issuances and repurchases.

 

Company results are also affected by changes in the level of employee retirement benefits, changes in market values of investment assets and the level of interest rates, which impact retirement benefit costs, and significant changes in health care costs including those which may result from governmental action.

 

The current economic downturn has adversely affected the financial industry in which John Deere Capital Corporation and other credit subsidiaries (Credit) operate. Credit’s liquidity and ongoing profitability depend largely on timely access to capital to meet future cash flow requirements and fund operations and the costs associated with engaging in diversified funding activities and to fund purchases of the company’s products. If market disruption and volatility continue or worsen or access to governmental liquidity programs decreases, funding could be unavailable or insufficient. Additionally, under current market conditions customer confidence levels may result in declines in credit applications and increases in delinquencies and default rates, which could materially impact Credit’s write-offs and provisions for credit losses.

 

The company’s outlook is based upon assumptions relating to the factors described above, which are sometimes based upon estimates and data prepared by government agencies. Such estimates and data are often revised. The company, except as required by law, undertakes no obligation to update or revise its outlook, whether as a result of new developments or otherwise. Further information concerning the company and its businesses, including factors that potentially could materially affect the company’s financial results, is included in other filings with the SEC.

 

2008 COMPARED WITH 2007

 

CONSOLIDATED RESULTS

 

Worldwide net income in 2008 was $2,053 million, or $4.70 per share diluted ($4.76 basic), compared with $1,822 million, or $4.00 per share diluted ($4.05 basic), in 2007. Net sales and revenues increased 18 percent to $28,438 million in 2008, compared with $24,082 million in 2007. Net sales of the Equipment Operations increased 20 percent in 2008 to $25,803 million from $21,489 million in 2007. This included a positive effect for currency translation of 4 percent and price changes of 2 percent. Net sales in the U.S. and Canada increased 9 percent in 2008. Net sales outside the U.S. and Canada increased by 40 percent, which included a positive effect of 10 percent for currency translation.

 

20



 

Worldwide Equipment Operations had an operating profit of $2,927 million in 2008, compared with $2,318 million in 2007. Higher operating profit was primarily due to the favorable impact of higher shipment volumes and improved price realization. Partially offsetting these factors were increased raw material costs, higher selling, administrative and general expenses, increased research and development costs and expenses to close a facility in Canada (see Note 5).

 

The Equipment Operations’ net income was $1,676 million in 2008, compared with $1,429 million in 2007. The same operating factors mentioned above as well as a higher effective tax rate in 2008 affected these results.

 

Net income of the company’s Financial Services operations in 2008 decreased to $337 million, compared with $364 million in 2007. The decrease was primarily a result of increased selling, administrative and general expenses, an increase in average leverage and a higher provision for credit losses, partially offset by growth in the average credit portfolio. Additional information is presented in the following discussion of the credit operations.

 

The cost of sales to net sales ratio for 2008 was 75.9 percent, compared with 75.6 percent in 2007. The increase was primarily due to higher raw material costs, partially offset by higher sales and production volumes and improved price realization.

 

Other income increased in 2008 primarily from increased crop insurance commissions. Research and development costs increased in 2008 primarily due to increased spending in support of new products, Tier 4 emission requirements and the effect of currency translation. Selling, administrative and general expenses increased in 2008 primarily due to growth and acquisitions, the effect of currency translation and the provision for credit losses. Other operating expenses were higher in 2008 primarily as a result of higher expenses related to wind energy entities, expenses from crop insurance, depreciation on operating lease equipment and foreign exchange losses.

 

The company has several defined benefit pension plans and defined benefit health care and life insurance plans. The company’s postretirement benefit costs for these plans in 2008 were $277 million, compared with $415 million in 2007. The long-term expected return on plan assets, which is reflected in these costs, was an expected gain of 8.2 percent in 2008 and 8.3 percent in 2007, or $920 million in 2008 and $838 million in 2007. The actual return was a loss of $2,158 million in 2008 and a gain of $1,503 million in 2007. Total company contributions to the plans were $431 million in 2008 and $646 million in 2007, which include direct benefit payments for unfunded plans. These contributions also included voluntary contributions to total plan assets of approximately $297 million in 2008 and $520 million in 2007.

 

BUSINESS SEGMENT AND GEOGRAPHIC AREA RESULTS

 

Worldwide Agriculture and Turf Operations

 

The agriculture and turf segment had an operating profit of $2,461 million in 2008, compared with $1,747 million in 2007. Net sales increased 28 percent in 2008 due to higher shipment volumes, the favorable effects of currency translation and improved price realization. The increase in operating profit in 2008 was primarily due to higher shipment volumes and improved price realization, partially offset by higher raw material costs, increased selling, administrative and general expenses, higher research and development costs and expenses to close a facility in Canada.

 

Worldwide Construction and Forestry Operations

 

The construction and forestry segment had an operating profit of $466 million in 2008, compared with $571 million in 2007. Net sales decreased 4 percent in 2008 reflecting the pressure from U.S. market conditions. The operating profit was lower in 2008 primarily due to lower shipment volumes and higher raw material costs, partially offset by improved price realization.

 

Worldwide Credit Operations

 

The operating profit of the credit operations was $478 million in 2008, compared with $548 million in 2007. The decrease in operating profit in 2008 was primarily due to higher selling, administrative and general expenses, an increase in average leverage, a higher provision for credit losses and foreign exchange losses, partially offset by growth in the average credit portfolio and increased commissions from crop insurance. Total revenues of the credit operations, including intercompany revenues, increased 3 percent in 2008, primarily reflecting the larger portfolio. The average balance of receivables and leases financed was 6 percent higher in 2008, compared with 2007. An increase in average borrowings, offset by lower average interest rates, resulted in approximately the same interest expense in both 2008 and 2007. The credit operations’ ratio of earnings to fixed charges was 1.45 to 1 in 2008, compared with 1.55 to 1 in 2007.

 

Equipment Operations in U.S. and Canada

 

The equipment operations in the U.S. and Canada had an operating profit of $1,831 million in 2008, compared with $1,539 million in 2007. The increase was primarily due to higher shipment volumes and improved price realization, partially offset by higher raw material costs, increased selling, administrative and general expenses, higher research and development costs and expenses to close the previously mentioned Canadian facility. Net sales increased 9 percent in 2008 due to higher volumes, improved price realization and the favorable effects of currency translation. The physical volume increased 4 percent in 2008 excluding acquisitions, compared with 2007.

 

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Equipment Operations outside U.S. and Canada

 

The equipment operations outside the U.S. and Canada had an operating profit of $1,096 million in 2008, compared with $779 million in 2007. The increase in 2008 was primarily due to the effects of higher shipment volumes and improved price realization, partially offset by increases in raw material costs, increased selling, administrative and general expenses and higher research and development costs. Net sales were 40 percent higher in 2008 reflecting higher volumes, the effect of currency translation and improvements in price realization. The physical volume increased 27 percent in 2008 excluding acquisitions, compared with 2007.

 

CAPITAL RESOURCES AND LIQUIDITY

 

The discussion of capital resources and liquidity has been organized to review separately, where appropriate, the company’s consolidated totals, Equipment Operations and Financial Services operations.

 

CONSOLIDATED

 

Positive cash flows from consolidated operating activities in 2009 were $1,985 million. This resulted primarily from net income adjusted for non-cash provisions and a decrease in inventories and trade receivables, which were partially offset by a decrease in accounts payable and accrued expenses and a change in accrued income taxes payable/receivable. Cash outflows from investing activities were $57 million in 2009, primarily due to the purchases of property and equipment of $907 million and acquisitions of businesses of $50 million, which were partially offset by proceeds from maturities and sales of marketable securities exceeding the purchases of marketable securities by $796 million and collections of receivables and the proceeds from sales of equipment on operating leases exceeding the cost of receivables and equipment on operating leases by $94 million. Cash inflows from financing activities were $470 million in 2009 primarily due to an increase in borrowings of $1,068 million, which were partially offset by dividends paid of $473 million. Cash and cash equivalents increased $2,440 million during 2009.

 

Over the last three years, operating activities have provided an aggregate of $6,693 million in cash. In addition, increases in borrowings were $3,636 million, proceeds from maturities and sales of marketable securities exceeded purchases by $1,600 million, proceeds from issuance of common stock were $411 million, proceeds from sales of financing receivables were $199 million and the proceeds from sales of businesses were $119 million. The aggregate amount of these cash flows was used mainly to repurchase common stock of $3,199 million, purchase property and equipment of $3,042 million, acquire receivables and equipment on operating leases that exceeded collections and the proceeds from sales of equipment on operating leases by $1,792 million, pay dividends to stockholders of $1,308 million and acquire businesses for $491 million. Cash and cash equivalents also increased $2,964 million over the three-year period.

 

Given the downturn in global economic activity and capital market disruptions, the sources of funds for the company have been impacted. However, the company expects to have sufficient sources of liquidity to meet its funding needs. Sources of liquidity for the company include cash and cash equivalents, marketable securities, funds from operations, the issuance of commercial paper and term debt, the securitization of retail notes (both public and private markets) and committed and uncommitted bank lines of credit. The company’s commercial paper outstanding at October 31, 2009 and 2008 was $286 million and $2,961 million, respectively, while the total cash and cash equivalents and marketable securities position was $4,844 million and $3,189 million, respectively.

 

On December 4, 2008, John Deere Capital Corporation (Capital Corporation) and FPC Financial, f.s.b., a wholly-owned subsidiary of Capital Corporation, elected to continue to participate in the debt guaranty program that is part of the Federal Deposit Insurance Corporation’s (FDIC’s) Temporary Liquidity Guarantee Program (TLGP). During December 2008, Capital Corporation issued $2.0 billion of fixed-rate medium-term notes due June 19, 2012 at a rate of 2.875%, which are guaranteed by the FDIC under the TLGP. Following that issuance, the FDIC notified Capital Corporation that it needed additional review and written determination from the FDIC prior to issuing additional guaranteed debt. Accordingly, Capital Corporation submitted documentation to the FDIC seeking further guidance. Capital Corporation received written notification from the FDIC that the FDIC denied the request and that the FDIC had determined that such a denial was appropriate because the request was inconsistent with the primary purpose of the TLGP. The notes issued under the TLGP during December 2008 continue to carry the FDIC guarantee.

 

During January 2009, Capital Corporation entered into a revolving credit agreement to utilize bank conduit facilities to securitize retail notes (see Note 13). At October 31, 2009, this facility had a total capacity, or “financing limit,” of up to $2,500 million of secured financings at any time. After a 364 day revolving period, unless the banks and Capital Corporation agree to renew for an additional 364 days, Capital Corporation would liquidate the secured borrowings over time as payments on the retail notes are collected. At October 31, 2009, $1,224 million of secured short-term borrowings was outstanding under the agreement. During November 2009, Capital Corporation reduced the capacity under this revolving credit agreement to $1,500 million and renewed it for an additional 364 days.

 

In June and October 2009, Capital Corporation issued $674 million and $727 million, respectively, in retail note securitization transactions. The retail notes related to these secured borrowings were eligible collateral under the Federal Reserve Bank of New York’s Term Asset-Backed Securities Loan Facility (TALF).

 

Lines of Credit. The company also has access to bank lines of credit with various banks throughout the world. Some of the lines are available to both Deere & Company and Capital Corporation. Worldwide lines of credit totaled $4,558 million at October 31, 2009, $4,214 million of which were unused.

 

22



 

For the purpose of computing unused credit lines, commercial paper and short-term bank borrowings, excluding secured borrowings and the current portion of long-term borrowings, were primarily considered to constitute utilization. Included in the total credit lines at October 31, 2009 was a long-term credit facility agreement of $3.75 billion, expiring in February 2012. The credit agreement requires Capital Corporation to maintain its consolidated ratio of earnings to fixed charges at not less than 1.05 to 1 for each fiscal quarter and the ratio of senior debt, excluding securitization indebtedness, to capital base (total subordinated debt and stockholder’s equity excluding accumulated other comprehensive income (loss)) at not more than 11 to 1 at the end of any fiscal quarter. The credit agreement also requires the Equipment Operations to maintain a ratio of total debt to total capital (total debt and stockholders’ equity excluding accumulated other comprehensive income (loss)) of 65 percent or less at the end of each fiscal quarter according to accounting principles generally accepted in the U.S. in effect at October 31, 2006. Under this provision, the company’s excess equity capacity and retained earnings balance free of restriction at October 31, 2009 was $6,494 million. Alternatively under this provision, the Equipment Operations had the capacity to incur additional debt of $12,060 million at October 31, 2009. All of these requirements of the credit agreement have been met during the periods included in the consolidated financial statements.

 

Debt Ratings. To access public debt capital markets, the company relies on credit rating agencies to assign short-term and long-term credit ratings to the company’s securities as an indicator of credit quality for fixed income investors. A security rating is not a recommendation by the rating agency to buy, sell or hold company securities. A credit rating agency may change or withdraw company ratings based on its assessment of the company’s current and future ability to meet interest and principal repayment obligations. Each agency’s rating should be evaluated independently of any other rating. Lower credit ratings generally result in higher borrowing costs and reduced access to debt capital markets. The senior long-term and short-term debt ratings and outlook currently assigned to unsecured company securities by the rating agencies engaged by the company are as follows:

 

 

 

Senior

 

 

 

 

 

 

Long-Term

 

Short-Term

 

Outlook

Moody’s Investors Service, Inc.

 

A2

 

Prime-1

 

Stable

Standard & Poor’s

 

A

 

A-1

 

Stable

 

Trade accounts and notes receivable primarily arise from sales of goods to independent dealers. Trade receivables decreased by $618 million in 2009, primarily due to lower production and shipment volumes. The ratio of trade accounts and notes receivable at October 31 to fiscal year net sales was 13 percent in 2009 and 2008. Total worldwide agriculture and turf receivables decreased $354 million and construction and forestry receivables decreased $264 million. The collection period for trade receivables averages less than 12 months. The percentage of trade receivables outstanding for a period exceeding 12 months was 4 percent and 2 percent at October 31, 2009 and 2008, respectively.

 

Stockholders’ equity was $4,819 million at October 31, 2009, compared with $6,533 million at October 31, 2008. The decrease of $1,714 million resulted primarily from a retirement benefits adjustment of $2,537 million and dividends declared of $474 million, partially offset by net income of $873 million, a change in the cumulative translation adjustment of $327 million and an increase in common stock of $62 million.

 

EQUIPMENT OPERATIONS

 

The company’s equipment businesses are capital intensive and are subject to seasonal variations in financing requirements for inventories and certain receivables from dealers. The Equipment Operations sell a significant portion of their trade receivables to Financial Services. To the extent necessary, funds provided from operations are supplemented by external financing sources.

 

Cash provided by operating activities of the Equipment Operations during 2009, including intercompany cash flows, was $1,425 million primarily due to net income adjusted for non-cash provisions and a decrease in inventories and trade receivables, partially offset by a decrease in accounts payable and accrued expenses.

 

Over the last three years, these operating activities, including intercompany cash flows, have provided an aggregate of $6,478 million in cash.

 

Trade receivables held by the Equipment Operations decreased by $238 million during 2009. The Equipment Operations sell a significant portion of their trade receivables to Financial Services (see previous consolidated discussion).

 

Inventories decreased by $645 million in 2009 primarily reflecting the decrease in production and sales. Most of these inventories are valued on the last-in, first-out (LIFO) method. The ratios of inventories on a first-in, first-out (FIFO) basis (see Note 15), which approximates current cost, to fiscal year cost of sales were 23 percent and 22 percent at October 31, 2009 and 2008, respectively.

 

Total interest-bearing debt of the Equipment Operations was $3,563 million at the end of 2009, compared with $2,209 million at the end of 2008 and $2,103 million at the end of 2007. The ratio of total debt to total capital (total interest-bearing debt and stockholders’ equity) at the end of 2009, 2008 and 2007 was 43 percent, 25 percent and 23 percent, respectively.

 

Property and equipment cash expenditures for the Equipment Operations in 2009 were $788 million, compared with $773 million in 2008. Capital expenditures in 2010 are estimated to be approximately $850 million to $900 million.

 

During 2009, the Equipment Operations issued $750 million of 4.375% Notes due 2019 and $500 million of 5.375% Notes due 2029. The Equipment Operations also retired $56 million of 8.95% Debentures due 2019.

 

23



 

FINANCIAL SERVICES

 

The Financial Services’ credit operations rely on their ability to raise substantial amounts of funds to finance their receivable and lease portfolios. Their primary sources of funds for this purpose are a combination of commercial paper, term debt, securitization of retail notes and equity capital.

 

Cash flows from the Financial Services’ operating activities, including intercompany cash flows, were $897 million in 2009. The cash provided by operating activities was used primarily for investing and financing activities. Cash used by investing activities totaled $331 million in 2009, primarily due to the cost of receivables and equipment on operating leases exceeding collections of receivables and the proceeds from sales of equipment on operating leases by $265 million and purchases of property and equipment of $119 million, partially offset by proceeds from sales of financing receivables of $34 million. Cash used for financing activities totaled $796 million in 2009, representing primarily a decrease in borrowings from Deere & Company of $551 million and a $189 million decrease in external borrowings. Cash and cash equivalents decreased $215 million.

 

Over the last three years, the Financial Services’ operating activities, including intercompany cash flows, have provided $2,687 million in cash. In addition, an increase in total borrowings of $2,488 million, capital investment from Deere & Company of $663 million and proceeds from sales of financing receivables of $353 million provided cash inflows. These amounts have been used mainly to fund receivable and equipment on operating lease acquisitions, which exceeded collections and the proceeds from sales of equipment on operating leases by $3,268 million, pay dividends to Deere & Company of $1,153 million and fund purchases of property and equipment of $923 million. Cash and cash equivalents also increased $751 million over the three-year period.

 

Receivables and equipment on operating leases increased by $482 million in 2009, compared with 2008. Acquisition volumes of receivables and equipment on operating leases decreased 7 percent in 2009, compared with 2008. The volumes of wholesale notes and revolving charge accounts increased approximately 34 percent and 1 percent, respectively. The volumes of operating loans, financing leases, retail notes, operating leases and trade receivables decreased approximately 54 percent, 31 percent, 15 percent, 8 percent and 8 percent, respectively. At October 31, 2009 and 2008, net receivables and leases administered, which include receivables administered but not owned, were $22,729 million and $22,281 million, respectively.

 

Total external interest-bearing debt of the credit operations was $20,988 million at the end of 2009, compared with $20,210 million at the end of 2008 and $19,665 million at the end of 2007. Included in this debt are secured borrowings of $3,132 million at the end of 2009, $1,682 million at the end of 2008 and $2,344 million at the end of 2007. Total external borrowings have increased generally corresponding with the level of the receivable and lease portfolio, the level of cash and cash equivalents and the change in payables owed to Deere & Company. The credit operations’ ratio of total interest-bearing debt to total stockholder’s equity was 7.4 to 1 at the end of 2009, 8.3 to 1 at the end of 2008 and 8.2 to 1 at the end of 2007.

 

During 2009, the credit operations issued $4,898 million and retired $3,755 million of long-term borrowings. The retirements included $300 million of 6% Notes due 2009 and the remainder consisted primarily of medium-term notes.

 

Property and equipment cash expenditures for Financial Services in 2009 were $119 million, compared with $339 million in 2008, primarily related to investments in wind energy generation in both years. Capital expenditures for 2010 are estimated to be approximately $200 million, also primarily related to investments in wind energy generation.

 

OFF-BALANCE-SHEET ARRANGEMENTS

 

The company’s credit operations offer crop insurance products through managing general agency agreements (Agreements) with insurance companies (Insurance Carriers) rated “Excellent” by A.M. Best Company. The credit operations have guaranteed certain obligations under the Agreements, including the obligation to pay the Insurance Carriers for any uncollected premiums. At October 31, 2009, the maximum exposure for uncollected premiums was approximately $60 million. Substantially all of the crop insurance risk under the Agreements have been mitigated by a syndicate of private reinsurance companies. In the event of a widespread catastrophic crop failure throughout the U.S. and the default of all the reinsurance companies on their obligations, the company would be required to reimburse the Insurance Carriers approximately $981 million at October 31, 2009. The company believes the likelihood of this event is substantially remote.

 

At October 31, 2009, the company had approximately $170 million of guarantees issued primarily to banks outside the U.S. related to third-party receivables for the retail financing of John Deere equipment. The company may recover a portion of any required payments incurred under these agreements from repossession of the equipment collateralizing the receivables. The maximum remaining term of the receivables guaranteed at October 31, 2009 was approximately six years.

 

AGGREGATE CONTRACTUAL OBLIGATIONS

 

The payment schedule for the company’s contractual obligations at October 31, 2009 in millions of dollars is as follows:

 

 

 

 

 

Less

 

 

 

 

 

More

 

 

 

 

 

than

 

2&3

 

4&5

 

than

 

 

 

Total

 

1 year

 

years

 

years

 

5 years

 

Debt*

 

 

 

 

 

 

 

 

 

 

 

Equipment Operations

 

$

3,469

 

$

490

 

$

173

 

$

700

 

$

2,106

 

Financial Services**

 

20,578

 

5,090

 

9,626

 

3,823

 

2,039

 

Total

 

24,047

 

5,580

 

9,799

 

4,523

 

4,145

 

Interest on debt

 

4,468

 

803

 

1,285

 

561

 

1,819

 

Accounts payable

 

1,784

 

1,668

 

81

 

31

 

4

 

Purchase obligations

 

2,270

 

2,242

 

21

 

6

 

1

 

Operating leases

 

544

 

128

 

180

 

95

 

141

 

Capital leases

 

56

 

19

 

19

 

4

 

14

 

Total

 

$

33,169

 

$

10,440

 

$

11,385

 

$

5,220

 

$

6,124

 

 


*                 Principal payments.

**          Notes payable of $3,132 million classified as short-term on the balance sheet related to the securitization of retail notes are included in this table based on the expected payment schedule (see Note 18).

 

24



 

The previous table does not include unrecognized tax benefit liabilities of approximately $260 million at October 31, 2009 since the timing of future payments is not reasonably estimable at this time (see Note 8). For additional information regarding pension and other postretirement employee benefit obligations, short-term borrowings, long-term borrowings and lease obligations, see Notes 7, 18, 20 and 21, respectively.

 

CRITICAL ACCOUNTING POLICIES

 

The preparation of the company’s consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect reported amounts of assets, liabilities, revenues and expenses. Changes in these estimates and assumptions could have a significant effect on the financial statements. The accounting policies below are those management believes are the most critical to the preparation of the company’s financial statements and require the most difficult, subjective or complex judgments. The company’s other accounting policies are described in the Notes to the Consolidated Financial Statements.

 

Sales Incentives

 

At the time a sale to a dealer is recognized, the company records an estimate of the future sales incentive costs for allowances and financing programs that will be due when the dealer sells the equipment to a retail customer. The estimate is based on historical data, announced incentive programs, field inventory levels and settlement volumes. The final cost of these programs and the amount of accrual required for a specific sale are fully determined when the dealer sells the equipment to the retail customer. This is due to numerous programs available at any particular time and new programs that may be announced after the company records the sale. Changes in the mix and types of programs affect these estimates, which are reviewed quarterly.

 

The sales incentive accruals at October 31, 2009, 2008 and 2007 were $806 million, $737 million and $711 million, respectively. The increase in 2009 was primarily due to higher sales incentive accruals related to foreign operations. The increase in 2008 was primarily due to higher sales volumes, compared with 2007.

 

The estimation of the sales incentive accrual is impacted by many assumptions. One of the key assumptions is the historical percent of sales incentive costs to settlements from dealers. Over the last five fiscal years, this percent has varied by an average of approximately plus or minus .5 percent, compared to the average sales incentive costs to settlements percent during that period. Holding other assumptions constant, if this estimated cost experience percent were to increase or decrease .5 percent, the sales incentive accrual at October 31, 2009 would increase or decrease by approximately $30 million.

 

Product Warranties

 

At the time a sale to a dealer is recognized, the company records the estimated future warranty costs. The company generally determines its total warranty liability by applying historical claims rate experience to the estimated amount of equipment that has been sold and is still under warranty based on dealer inventories and retail sales. The historical claims rate is primarily determined by a review of five-year claims costs and consideration of current quality developments. Variances in claims experience and the type of warranty programs affect these estimates, which are reviewed quarterly.

 

The product warranty accruals, excluding extended warranty unamortized premiums, at October 31, 2009, 2008 and 2007 were $513 million, $586 million and $549 million, respectively. The changes were primarily due to lower sales volumes in 2009 and higher sales volumes in 2008.

 

Estimates used to determine the product warranty accruals are significantly affected by the historical percent of warranty claims costs to sales. Over the last five fiscal years, this percent has varied by an average of approximately plus or minus .04 percent, compared to the average warranty costs to sales percent during that period. Holding other assumptions constant, if this estimated cost experience percent were to increase or decrease .05 percent, the warranty accrual at October 31, 2009 would increase or decrease by approximately $15 million.

 

Postretirement Benefit Obligations

 

Pension obligations and other postretirement employee benefit (OPEB) obligations are based on various assumptions used by the company’s actuaries in calculating these amounts. These assumptions include discount rates, health care cost trend rates, expected return on plan assets, compensation increases, retirement rates, mortality rates and other factors. Actual results that differ from the assumptions and changes in assumptions affect future expenses and obligations.

 

The pension liabilities, net of pension assets, recognized on the balance sheet at October 31, 2009 were $1,307 million. The pension assets, net of pension liabilities, recognized on the balance sheet at 2008 and 2007 were $683 million and $1,467 million, respectively. The OPEB liabilities on these same dates were $4,652 million, $2,535 million and $3,065 million, respectively. The increase in the pension and OPEB net liabilities in 2009 was primarily due to the decrease in the discount rates for the liabilities. The decrease in the pension net assets in 2008 was primarily due to the decrease in market value of plan assets, partially offset by the increase in discount rates for the liabilities. The decrease in the OPEB liabilities in 2008 was primarily due to the increase in discount rates.

 

25



 

The effect of hypothetical changes to selected assumptions on the company’s major U.S. retirement benefit plans would be as follows in millions of dollars:

 

 

 

 

 

October 31, 2009

 

2010

 

 

 

 

 

Increase

 

Increase

 

 

 

Percentage

 

(Decrease)

 

(Decrease)

 

Assumptions

 

Change

 

PBO/APBO*

 

Expense

 

Pension

 

 

 

 

 

 

 

Discount rate**

 

+/-.5

 

$

(438)/481

 

$

(23)/25

 

Expected return on assets

 

+/-.5

 

 

 

(42)/42

 

OPEB

 

 

 

 

 

 

 

Discount rate**

 

+/-.5

 

(351)/387

 

(49)/53

 

Expected return on assets

 

+/-.5

 

 

 

(8)/8

 

Health care cost trend rate**

 

+/-1.0

 

742/(621)

 

171/(142

)

 


*                 Projected benefit obligation (PBO) for pension plans and accumulated postretirement benefit obligation (APBO) for OPEB plans.

**          Pretax impact on service cost, interest cost and amortization of gains or losses.

 

Goodwill

 

Goodwill is not amortized and is tested for impairment annually and when events or circumstances change such that it is more likely than not that the fair value of a reporting unit is reduced below its carrying amount. The end of the third quarter is the annual measurement date. To test for goodwill impairment, the carrying value of each reporting unit is compared with its fair value. If the carrying value of the goodwill is considered impaired, a loss is recognized based on the amount by which the carrying value exceeds the implied fair value of the goodwill.

 

An estimate of the fair value of the reporting unit is determined through a combination of comparable market values for similar businesses and discounted cash flows. These estimates can change significantly based on such factors as the reporting unit’s financial performance, economic conditions, interest rates, growth rates, pricing, changes in business strategies and competition.

 

Based on this testing, the company identified one reporting unit in 2009 for which the goodwill was impaired. In the fourth quarter of 2009, the company recorded a non-cash charge in cost of sales of $289 million pretax, or $274 million after-tax. The charge was related to a write-down of the goodwill associated with the company’s John Deere Landscapes reporting unit, which is included in the agriculture and turf operating segment. The key factor contributing to the impairment was a decline in the reporting unit’s forecasted financial performance as a result of weak economic conditions.

 

A 10 percent decrease in the estimated fair value of the company’s other reporting units would have had no impact on the carrying value of goodwill at the annual measurement date.

 

Allowance for Credit Losses

 

The allowance for credit losses represents an estimate of the losses expected from the company’s receivable portfolio. The level of the allowance is based on many quantitative and qualitative factors, including historical loss experience by product category, portfolio duration, delinquency trends, economic conditions and credit risk quality. The adequacy of the allowance is assessed quarterly. Different assumptions or changes in economic conditions would result in changes to the allowance for credit losses and the provision for credit losses.

 

The total allowance for credit losses at October 31, 2009, 2008 and 2007 was $316 million, $226 million and $236 million, respectively. The increase in 2009 was primarily due to an increase in loss experience and delinquencies in the construction and forestry retail notes, revolving charge financing receivables and operating loans. The decrease in 2008 was primarily due to foreign currency translation.

 

The assumptions used in evaluating the company’s exposure to credit losses involve estimates and significant judgment. The historical loss experience on the receivable portfolio represents one of the key assumptions involved in determining the allowance for credit losses. Over the last five fiscal years, this percent has varied by an average of approximately plus or minus .15 percent, compared to the average loss experience percent during that period. Holding other assumptions constant, if this estimated loss experience on the receivable portfolio were to increase or decrease .15 percent, the allowance for credit losses at October 31, 2009 would increase or decrease by approximately $30 million.

 

Operating Lease Residual Values

 

The carrying value of equipment on operating leases is affected by the estimated fair values of the equipment at the end of the lease (residual values). Upon termination of the lease, the equipment is either purchased by the lessee or sold to a third party, in which case the company may record a gain or a loss for the difference between the estimated residual value and the sales price. The residual values are dependent on current economic conditions and are reviewed quarterly. Changes in residual value assumptions would affect the amount of depreciation expense and the amount of investment in equipment on operating leases.

 

The total operating lease residual values at October 31, 2009, 2008 and 2007 were $1,128 million, $1,055 million and $1,072 million, respectively. The changes in 2009 and 2008 were primarily due to the levels of operating leases.

 

Estimates used in determining end of lease market values for equipment on operating leases significantly impact the amount and timing of depreciation expense. If future market values for this equipment were to decrease 10 percent from the company’s present estimates, the total impact would be to increase the company’s annual depreciation for equipment on operating leases by approximately $40 million.

 

26



 

FINANCIAL INSTRUMENT RISK INFORMATION

 

The company is naturally exposed to various interest rate and foreign currency risks. As a result, the company enters into derivative transactions to manage certain of these exposures that arise in the normal course of business and not for the purpose of creating speculative positions or trading. The company’s credit operations manage the relationship of the types and amounts of their funding sources to their receivable and lease portfolio in an effort to diminish risk due to interest rate and foreign currency fluctuations, while responding to favorable financing opportunities. Accordingly, from time to time, these operations enter into interest rate swap agreements to manage their interest rate exposure. The company also has foreign currency exposures at some of its foreign and domestic operations related to buying, selling and financing in currencies other than the local currencies. The company has entered into agreements related to the management of these currency transaction risks. The credit risk under these interest rate and foreign currency agreements is not considered to be significant.

 

Interest Rate Risk

 

Quarterly, the company uses a combination of cash flow models to assess the sensitivity of its financial instruments with interest rate exposure to changes in market interest rates. The models calculate the effect of adjusting interest rates as follows. Cash flows for financing receivables are discounted at the current prevailing rate for each receivable portfolio. Cash flows for marketable securities are primarily discounted at the applicable benchmark yield curve. Cash flows for unsecured borrowings are discounted at the applicable benchmark yield curve plus market credit spreads for similarly rated borrowers. Cash flows for securitized borrowings are discounted at the swap yield curve plus a market credit spread for similarly rated borrowers. Cash flows for interest rate swaps are projected and discounted using forward rates from the swap yield curve at the repricing dates. The net loss in these financial instruments’ fair values which would be caused by decreasing the interest rates by 10 percent from the market rates at October 31, 2009 would have been approximately $71 million. The net loss from decreasing the interest rates by 10 percent at October 31, 2008 would have been approximately $87 million.

 

Foreign Currency Risk

 

In the Equipment Operations, it is the company’s practice to hedge significant currency exposures. Worldwide foreign currency exposures are reviewed quarterly. Based on the Equipment Operations’ anticipated and committed foreign currency cash inflows, outflows and hedging policy for the next twelve months, the company estimates that a hypothetical 10 percent weakening of the U.S. dollar relative to other currencies through 2010 would decrease the 2010 expected net cash inflows by $20 million. At last year end, a hypothetical 10 percent weakening of the U.S. dollar under similar assumptions and calculations indicated a potential $31 million adverse effect on the 2009 net cash inflows.

 

In the Financial Services operations, the company’s policy is to hedge the foreign currency risk if the currency of the borrowings does not match the currency of the receivable portfolio. As a result, a hypothetical 10 percent adverse change in the value of the U.S. dollar relative to all other foreign currencies would not have a material effect on the Financial Services cash flows.

 

27



 

DEERE & COMPANY

STATEMENT OF CONSOLIDATED INCOME

For the Years Ended October 31, 2009, 2008 and 2007

(In millions of dollars and shares except per share amounts)

 

 

 

 

 

 

 

 

 

 

2009

 

2008

 

2007

 

Net Sales and Revenues

 

 

 

 

 

 

 

Net sales

 

$

20,756.1

 

$

25,803.5

 

$

21,489.1

 

Finance and interest income

 

1,842.1

 

2,068.4

 

2,054.8

 

Other income

 

514.2

 

565.7

 

538.3

 

Total

 

23,112.4

 

28,437.6

 

24,082.2

 

 

 

 

 

 

 

 

 

Costs and Expenses

 

 

 

 

 

 

 

Cost of sales

 

16,255.2

 

19,574.8

 

16,252.8

 

Research and development expenses

 

977.0

 

943.1

 

816.8

 

Selling, administrative and general expenses

 

2,780.6

 

2,960.2

 

2,620.8

 

Interest expense

 

1,042.4

 

1,137.0

 

1,151.2

 

Other operating expenses

 

717.4

 

698.7

 

565.1

 

Total

 

21,772.6

 

25,313.8

 

21,406.7

 

 

 

 

 

 

 

 

 

Income of Consolidated Group before Income Taxes

 

1,339.8

 

3,123.8

 

2,675.5

 

Provision for income taxes

 

460.0

 

1,111.2

 

883.0

 

Income of Consolidated Group

 

879.8

 

2,012.6

 

1,792.5

 

Equity in income (loss) of unconsolidated affiliates

 

(6.3

)

40.2

 

29.2

 

Net Income

 

$

873.5

 

$

2,052.8

 

$

1,821.7

 

 

 

 

 

 

 

 

 

Per Share Data

 

 

 

 

 

 

 

Net Income - basic

 

$

2.07

 

$

4.76

 

$

4.05

 

Net Income - diluted

 

$

2.06

 

$

4.70

 

$

4.00

 

Dividends declared

 

$

1.12

 

$

1.06

 

$

.91

 

 

 

 

 

 

 

 

 

Average Shares Outstanding

 

 

 

 

 

 

 

Basic

 

422.8

 

431.1

 

449.3

 

Diluted

 

424.4

 

436.3

 

455.0

 

 

 

 

 

 

 

 

 

 

The notes to consolidated financial statements are an integral part of this statement.

 

28



 

DEERE & COMPANY

CONSOLIDATED BALANCE SHEET

As of October 31, 2009 and 2008

(In millions of dollars except per share amounts)

 

 

 

 

 

 

 

 

2009

 

2008

 

ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

4,651.7

 

$

2,211.4

 

Marketable securities

 

192.0

 

977.4

 

Receivables from unconsolidated affiliates

 

38.4

 

44.7

 

Trade accounts and notes receivable - net

 

2,616.9

 

3,234.6

 

Financing receivables - net

 

15,254.7

 

16,017.0

 

Restricted financing receivables - net

 

3,108.4

 

1,644.8

 

Other receivables

 

864.5

 

664.9

 

Equipment on operating leases - net

 

1,733.3

 

1,638.6

 

Inventories

 

2,397.3

 

3,041.8

 

Property and equipment - net

 

4,532.2

 

4,127.7

 

Investments in unconsolidated affiliates

 

212.8

 

224.4

 

Goodwill

 

1,036.5

 

1,224.6

 

Other intangible assets - net

 

136.3

 

161.4

 

Retirement benefits

 

94.4

 

1,106.0

 

Deferred income taxes

 

2,804.8

 

1,440.6

 

Other assets

 

1,458.4

 

974.7

 

 

 

 

 

 

 

Total Assets

 

$

41,132.6

 

$

38,734.6

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Short-term borrowings

 

$

7,158.9

 

$

8,520.5

 

Payables to unconsolidated affiliates

 

55.0

 

169.2

 

Accounts payable and accrued expenses

 

5,371.4

 

6,393.6

 

Deferred income taxes

 

167.3

 

171.8

 

Long-term borrowings

 

17,391.7

 

13,898.5

 

Retirement benefits and other liabilities

 

6,169.6

 

3,048.3

 

Total liabilities

 

36,313.9

 

32,201.9

 

 

 

 

 

 

 

Commitments and contingencies (Note 22)

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

Common stock, $1 par value (authorized – 1,200,000,000 shares; issued – 536,431,204 shares in 2009 and 2008), at paid-in amount

 

2,996.2

 

2,934.0

 

Common stock in treasury, 113,188,823 shares in 2009 and 114,134,933 shares in 2008, at cost

 

(5,564.7

)

(5,594.6

)

Retained earnings

 

10,980.5

 

10,580.6

 

Accumulated other comprehensive income (loss):

 

 

 

 

 

Retirement benefits adjustment

 

(3,955.0

)

(1,418.4

)

Cumulative translation adjustment

 

400.2

 

73.4

 

Unrealized loss on derivatives

 

(44.1

)

(40.1

)

Unrealized gain (loss) on investments

 

5.6

 

(2.2

)

Accumulated other comprehensive income (loss)

 

(3,593.3

)

(1,387.3

)

Total stockholders’ equity

 

4,818.7

 

6,532.7

 

 

 

 

 

 

 

Total Liabilities and Stockholders’ Equity

 

$

41,132.6

 

$

38,734.6

 

 

 

 

 

 

 

 

The notes to consolidated financial statements are an integral part of this statement.

 

29



 

DEERE & COMPANY

STATEMENT OF CONSOLIDATED CASH FLOWS

For the Years Ended October 31, 2009, 2008 and 2007

(In millions of dollars)

 

 

 

2009

 

2008

 

2007

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

Net income

 

$

873.5

 

$

2,052.8

 

$

1,821.7

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Provision for doubtful receivables

 

231.8

 

95.4

 

71.0

 

Provision for depreciation and amortization

 

873.3

 

831.0

 

744.4

 

Goodwill impairment charge

 

289.2

 

 

 

 

 

Share-based compensation expense

 

70.5

 

70.6

 

82.0

 

Undistributed earnings of unconsolidated affiliates

 

7.0

 

(18.7

)

(17.1

)

Provision (credit) for deferred income taxes

 

171.6

 

89.7

 

(4.2

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

Trade, notes and financing receivables related to sales

 

481.8

 

(428.4

)

131.1

 

Inventories

 

452.5

 

(1,195.4

)

(357.2

)

Accounts payable and accrued expenses

 

(1,168.3

)

702.1

 

418.6

 

Accrued income taxes payable/receivable

 

(234.2

)

92.8

 

10.5

 

Retirement benefits

 

(27.9

)

(133.2

)

(163.2

)

Other

 

(36.0

)

(209.7

)

21.8

 

Net cash provided by operating activities

 

1,984.8

 

1,949.0

 

2,759.4

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

Collections of receivables

 

11,252.0

 

12,608.8

 

10,335.3

 

Proceeds from sales of financing receivables

 

12.2

 

45.2

 

141.4

 

Proceeds from maturities and sales of marketable securities

 

825.1

 

1,738.5

 

2,458.5

 

Proceeds from sales of equipment on operating leases

 

477.3

 

465.7

 

355.2

 

Proceeds from sales of businesses, net of cash sold

 

 

 

42.0

 

77.2

 

Cost of receivables acquired

 

(11,234.2

)

(13,304.4

)

(11,388.3

)

Purchases of marketable securities

 

(29.5

)

(1,141.4

)

(2,251.6

)

Purchases of property and equipment

 

(906.7

)

(1,112.3

)

(1,022.5

)

Cost of equipment on operating leases acquired

 

(401.4

)

(495.9

)

(461.7

)

Acquisitions of businesses, net of cash acquired

 

(49.8

)

(252.3

)

(189.3

)

Other

 

(2.0

)

(19.9

)

12.5

 

Net cash used for investing activities

 

(57.0

)

(1,426.0

)

(1,933.3

)

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

 

Increase (decrease) in short-term borrowings

 

(1,384.8

)

(413.0

)

99.4

 

Proceeds from long-term borrowings

 

6,282.8

 

6,320.2

 

4,283.9

 

Payments of long-term borrowings

 

(3,830.3

)

(4,585.4

)

(3,136.5

)

Proceeds from issuance of common stock

 

16.5

 

108.9

 

285.7

 

Repurchases of common stock

 

(3.2

)

(1,677.6

)

(1,517.8

)

Dividends paid

 

(473.4

)

(448.1

)

(386.7

)

Excess tax benefits from share-based compensation

 

4.6

 

72.5

 

102.2

 

Other

 

(141.9

)

(26.0

)

(11.2

)

Net cash provided by (used for) financing activities

 

470.3

 

(648.5

)

(281.0

)

 

 

 

 

 

 

 

 

Effect of Exchange Rate Changes on Cash and Cash Equivalents

 

42.2

 

58.3

 

46.0

 

 

 

 

 

 

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

 

2,440.3

 

(67.2

)

591.1

 

Cash and Cash Equivalents at Beginning of Year

 

2,211.4

 

2,278.6

 

1,687.5

 

Cash and Cash Equivalents at End of Year

 

$

4,651.7

 

$

2,211.4

 

$

2,278.6

 

 

 

The notes to consolidated financial statements are an integral part of this statement.

 

30



 

DEERE & COMPANY

STATEMENT OF CHANGES IN CONSOLIDATED STOCKHOLDERS’ EQUITY

For the Years Ended October 31, 2007, 2008 and 2009

(In millions of dollars)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

Total

 

Common

 

Treasury

 

Retained

 

Comprehensive

 

 

 

Equity

 

Stock

 

Stock

 

Earnings

 

Income (Loss)

 

Balance October 31, 2006

 

$

7,491.2

 

$

2,203.5

 

$

(2,673.4

)

$

7,886.8

 

$

74.3

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

Net income

 

1,821.7

 

 

 

 

 

1,821.7

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

Minimum pension liability adjustment

 

65.8

 

 

 

 

 

 

 

65.8

 

Cumulative translation adjustment

 

329.1

 

 

 

 

 

 

 

329.1

 

Unrealized loss on derivatives

 

(14.4

)

 

 

 

 

 

 

(14.4

)

Unrealized loss on investments

 

(1.0

)

 

 

 

 

 

 

(1.0

)

Total comprehensive income

 

2,201.2

 

 

 

 

 

 

 

 

 

Repurchases of common stock

 

(1,517.8

)

 

 

(1,517.8

)

 

 

 

 

Treasury shares reissued

 

175.8

 

 

 

175.8

 

 

 

 

 

Dividends declared

 

(408.4

)

 

 

 

 

(408.4

)

 

 

Stock options and other

 

305.1

 

305.3

 

 

 

(.2

)

 

 

Adjustment to adopt FASB ASC 715 (FASB Statement No. 158), net of tax

 

(1,091.3

)

 

 

 

 

 

 

(1,091.3

)

Transfer for two-for-one stock split effective November 26, 2007

 

 

 

268.2

 

 

 

(268.2

)

 

 

Balance October 31, 2007

 

7,155.8

 

2,777.0

 

(4,015.4

)

9,031.7

 

(637.5

)

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

Net income

 

2,052.8

 

 

 

 

 

2,052.8

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

Retirement benefits adjustment

 

(305.3

)

 

 

 

 

 

 

(305.3

)

Cumulative translation adjustment

 

(406.0

)

 

 

 

 

 

 

(406.0

)

Unrealized loss on derivatives

 

(32.5

)

 

 

 

 

 

 

(32.5

)

Unrealized loss on investments

 

(6.0

)

 

 

 

 

 

 

(6.0

)

Total comprehensive income

 

1,303.0

 

 

 

 

 

 

 

 

 

Adjustment to adopt FASB ASC 740 (FASB Interpretation No. 48)

 

(48.0

)

 

 

 

 

(48.0

)

 

 

Repurchases of common stock

 

(1,677.6

)

 

 

(1,677.6

)

 

 

 

 

Treasury shares reissued

 

98.4

 

 

 

98.4

 

 

 

 

 

Dividends declared

 

(455.9

)

 

 

 

 

(455.9

)

 

 

Stock options and other

 

157.0

 

157.0

 

 

 

 

 

 

 

Balance October 31, 2008

 

6,532.7

 

2,934.0

 

(5,594.6

)

10,580.6

 

(1,387.3

)

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

Net income

 

873.5

 

 

 

 

 

873.5

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

Retirement benefits adjustment

 

(2,536.6

)

 

 

 

 

 

 

(2,536.6

)

Cumulative translation adjustment

 

326.8

 

 

 

 

 

 

 

326.8

 

Unrealized loss on derivatives

 

(4.0

)

 

 

 

 

 

 

(4.0

)

Unrealized gain on investments

 

7.8

 

 

 

 

 

 

 

7.8

 

Total comprehensive income

 

(1,332.5

)

 

 

 

 

 

 

 

 

Repurchases of common stock

 

(3.2

)

 

 

(3.2

)

 

 

 

 

Treasury shares reissued

 

33.1

 

 

 

33.1

 

 

 

 

 

Dividends declared

 

(473.6

)

 

 

 

 

(473.6

)

 

 

Stock options and other

 

62.2

 

62.2

 

 

 

 

 

 

 

Balance October 31, 2009

 

$

4,818.7

 

$

2,996.2

 

$

(5,564.7

)

$

10,980.5

 

$

(3,593.3

)

 

 

The notes to consolidated financial statements are an integral part of this statement.

 

31



 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. ORGANIZATION AND CONSOLIDATION

 

Structure of Operations

 

Certain information in the notes and related commentary are presented in a format which includes data grouped as follows:

 

Equipment Operations – Includes the company’s agriculture and turf operations and construction and forestry operations with Financial Services reflected on the equity basis.

 

Financial Services – Includes the company’s credit and certain miscellaneous service operations.

 

Consolidated – Represents the consolidation of the Equipment Operations and Financial Services. References to “Deere & Company” or “the company” refer to the entire enterprise.

 

Principles of Consolidation

 

The consolidated financial statements represent primarily the consolidation of all companies in which Deere & Company has a controlling interest. Certain variable interest entities (VIEs) are consolidated since the company is the primary beneficiary. Deere & Company records its investment in each unconsolidated affiliated company (generally 20 to 50 percent ownership) at its related equity in the net assets of such affiliate (see Note 10). Other investments (less than 20 percent ownership) are recorded at cost.

 

Variable Interest Entities

 

The company is the primary beneficiary of and consolidates a supplier that is a VIE. The company would absorb more than a majority of the VIE’s expected losses based on a cost sharing supply contract. No additional support beyond what was previously contractually required has been provided during 2009. The VIE produces blended fertilizer and other lawn care products for the agriculture and turf segment. The assets of the VIE that were consolidated at October 31, 2009, less the intercompany receivables of $32 million eliminated in consolidation, totaled $44 million and consisted of $36 million of inventory, $5 million of property and equipment and $3 million of other assets. The liabilities of the VIE totaled $82 million and consisted of $59 million of accounts payable and accrued expenses and $23 million of short-term borrowings. The VIE is financed through its own accounts payable and short-term borrowings. The assets of the VIE can only be used to settle the obligations of the VIE. The creditors of the VIE do not have recourse to the general credit of the company.

 

The company is the primary beneficiary of and consolidates certain wind energy entities that are VIEs, which invest in wind farms that own and operate turbines to generate electrical energy. Although the company owns less than a majority of the equity voting rights, it owns most of the financial rights that would absorb the VIEs’ expected losses or returns. No additional support to the VIEs beyond what was previously contractually required has been provided during 2009. The assets of the VIEs that were consolidated at October 31, 2009 totaled $174 million and consisted of $32 million of receivables, $141 million of property and equipment and $1 million of other assets. The liabilities of the VIEs, less the intercompany borrowings of $55 million eliminated in consolidation, totaled $6 million and consisted primarily of accounts payable and accrued expenses. The VIEs are financed primarily through intercompany borrowings and equity. The VIEs’ assets are pledged as security interests for the intercompany borrowings. The remaining creditors of the VIEs do not have recourse to the general credit of the company.

 

See Note 13 for VIEs related to securitization of financing receivables.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The following are significant accounting policies in addition to those included in other notes to the consolidated financial statements.

 

Use of Estimates in Financial Statements

 

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts and related disclosures. Actual results could differ from those estimates.

 

Revenue Recognition

 

Sales of equipment and service parts are recorded when the sales price is determinable and the risks and rewards of ownership are transferred to independent parties based on the sales agreements in effect. In the U.S. and most international locations, this transfer occurs primarily when goods are shipped. In Canada and some other international locations, certain goods are shipped to dealers on a consignment basis under which the risks and rewards of ownership are not transferred to the dealer. Accordingly, in these locations, sales are not recorded until a retail customer has purchased the goods. In all cases, when a sale is recorded by the company, no significant uncertainty exists surrounding the purchaser’s obligation to pay. No right of return exists on sales of equipment. Service parts returns are estimable and accrued at the time a sale is recognized. The company makes appropriate provisions based on experience for costs such as doubtful receivables, sales incentives and product warranty.

 

Financing revenue is recorded over the lives of related receivables using the interest method. Deferred costs on the origination of financing receivables are recognized as a reduction in finance revenue over the expected lives of the receivables using the interest method. Income and deferred costs on the origination of operating leases are recognized on a straight-line basis over the scheduled lease terms in finance revenue.

 

Sales Incentives

 

At the time a sale is recognized, the company records an estimate of the future sales incentive costs for allowances and financing programs that will be due when a dealer sells the equipment to a retail customer. The estimate is based on historical data, announced incentive programs, field inventory levels and settlement volumes.

 

Product Warranties

 

At the time a sale is recognized, the company records the estimated future warranty costs. These costs are usually estimated based on historical warranty claims (see Note 22).

 

32



 

Sales Taxes

 

The company collects and remits taxes assessed by different governmental authorities that are both imposed on and concurrent with revenue producing transactions between the company and its customers. These taxes may include sales, use, value-added and some excise taxes. The company reports the collection of these taxes on a net basis (excluded from revenues).

 

Securitization of Receivables

 

Certain financing receivables are periodically transferred to special purpose entities (SPEs) in securitization transactions (see Note 13). These securitizations qualify as collateral for secured borrowings and no gains or losses are recognized at the time of securitization. The receivables remain on the balance sheet and are classified as “Restricted financing receivables - net.” The company recognizes finance income over the lives of these receivables using the interest method.

 

Shipping and Handling Costs

 

Shipping and handling costs related to the sales of the company’s equipment are included in cost of sales.

 

Advertising Costs

 

Advertising costs are charged to expense as incurred. This expense was $175 million in 2009, $188 million in 2008 and $169 million in 2007.

 

Depreciation and Amortization

 

Property and equipment, capitalized software and other intangible assets are depreciated over their estimated useful lives generally using the straight-line method. Equipment on operating leases is depreciated over the terms of the leases using the straight-line method. Property and equipment expenditures for new and revised products, increased capacity and the replacement or major renewal of significant items are capitalized. Expenditures for maintenance, repairs and minor renewals are generally charged to expense as incurred.

 

Receivables and Allowances

 

All financing and trade receivables are reported on the balance sheet at outstanding principal adjusted for any charge-offs, the allowance for credit losses and doubtful accounts, and any deferred fees or costs on originated financing receivables. Allowances for credit losses and doubtful accounts are maintained in amounts considered to be appropriate in relation to the receivables outstanding based on collection experience, economic conditions and credit risk quality.

 

Impairment of Long-Lived Assets, Goodwill and Other Intangible Assets

 

The company evaluates the carrying value of long-lived assets (including property and equipment, goodwill and other intangible assets) when events and circumstances warrant such a review. Goodwill and intangible assets with indefinite lives are also tested for impairment annually at the end of the third fiscal quarter each year. Goodwill is allocated and reviewed for impairment by reporting units, which consist primarily of the operating segments and certain other reporting units. The goodwill is allocated to the reporting unit in which the business that created the goodwill resides. To test for goodwill impairment, the carrying value of each reporting unit is compared with its fair value. If the carrying value of the goodwill or long-lived asset is considered impaired, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the asset.

 

Derivative Financial Instruments

 

It is the company’s policy that derivative transactions are executed only to manage exposures arising in the normal course of business and not for the purpose of creating speculative positions or trading. The company’s credit operations manage the relationship of the types and amounts of their funding sources to their receivable and lease portfolio in an effort to diminish risk due to interest rate and foreign currency fluctuations, while responding to favorable financing opportunities. The company also has foreign currency exposures at some of its foreign and domestic operations related to buying, selling and financing in currencies other than the local currencies.

 

All derivatives are recorded at fair value on the balance sheet. Cash collateral received or paid is not offset against the derivative fair values on the balance sheet. Each derivative is designated as either a cash flow hedge, a fair value hedge, or remains undesignated. Changes in the fair value of derivatives that are designated and effective as cash flow hedges are recorded in other comprehensive income and reclassified to the income statement when the effects of the item being hedged are recognized in the income statement. Changes in the fair value of derivatives that are designated and effective as fair value hedges are recognized currently in net income. These changes are offset in net income to the extent the hedge was effective by fair value changes related to the risk being hedged on the hedged item. Changes in the fair value of undesignated hedges are recognized currently in the income statement. All ineffective changes in derivative fair values are recognized currently in net income.

 

All designated hedges are formally documented as to the relationship with the hedged item as well as the risk-management strategy. Both at inception and on an ongoing basis the hedging instrument is assessed as to its effectiveness, when applicable. If and when a derivative is determined not to be highly effective as a hedge, or the underlying hedged transaction is no longer likely to occur, or the derivative is terminated, the hedge accounting discussed above is discontinued (see Note 27).

 

Foreign Currency Translation

 

The functional currencies for most of the company’s foreign operations are their respective local currencies. The assets and liabilities of these operations are translated into U.S. dollars at the end of the period exchange rates. The revenues and expenses are translated at weighted-average rates for the period. The gains or losses from these translations are recorded in other comprehensive income. Gains or losses from transactions denominated in a currency other than the functional currency of the subsidiary involved and foreign exchange forward contracts and options are included in net income. The total foreign exchange pretax net losses for 2009, 2008 and 2007 were $68 million, $13 million and $28 million, respectively.

 

Subsequent Events

 

Subsequent events have been evaluated through December 17, 2009, which is the date these financial statements were issued on Form 10-K with the SEC (see Note 30).

 

33



 

3. NEW ACCOUNTING STANDARDS

 

New Accounting Standards Adopted

 

In 2009, the company adopted Accounting Standards Update (ASU) No. 2009-01, Statement of Financial Accounting Standards No. 168 – The Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) and the Hierarchy of Generally Accepted Accounting Principles (GAAP). This ASU includes FASB Statement No. 168 in its entirety. The ASU establishes the FASB ASC as the source of authoritative accounting principles recognized by the FASB. Rules and interpretive releases of the SEC under federal securities laws are also sources of authoritative GAAP for SEC registrants. All guidance contained in the ASC carries an equal level of authority. Following this ASU, the FASB will issue only ASUs to update the ASC. The adoption did not have a material effect on the company’s consolidated financial statements.

 

The following standards were also adopted in 2009 and they also did not have a material effect on the company’s consolidated financial statements.

 

In the first quarter of 2009, the company adopted FASB ASC 820, Fair Value Measurements and Disclosures (FASB Statement No. 157, Fair Value Measurements), for financial assets and liabilities recognized or disclosed at fair value (see Note 26). ASC 820 defines fair value and expands disclosures about fair value measurements. These definitions apply to other accounting standards that use fair value measurements and may change the application of certain measurements used in current practice. For nonfinancial assets and liabilities, the effective date is the beginning of fiscal year 2010, except items that are recognized or disclosed at fair value on a recurring basis. The adoption for these assets and liabilities will not have a material effect on the company’s consolidated financial statements.

 

In the first quarter of 2009, the company adopted FASB ASC 825, Financial Instruments (FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities). ASC 825 permits entities to measure most financial instruments at fair value if desired. It may be applied on a contract by contract basis and is irrevocable once applied to those contracts. The new standard may be applied at the time of adoption for existing eligible items, or at initial recognition of eligible items. After election of this option, changes in fair value are reported in earnings. The items measured at fair value must be shown separately on the balance sheet. The company did not change the valuation of any financial instruments at adoption based on this standard. The cumulative effect of adoption would have been reported as an adjustment to beginning retained earnings.

 

In the first quarter of 2009, the company adopted FASB ASC 815, Derivatives and Hedging (FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities). ASC 815 increases the disclosure requirements for derivative instruments (see Note 27). Most disclosures are required on an interim and annual basis.

 

In the first quarter of 2009, the company adopted FASB ASC 860, Transfers and Servicing (FASB Staff Position (FSP) Financial Accounting Statement (FAS) 140-4 and FASB Interpretation (FIN) 46(R)-8, Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities) (see Note 13). ASC 860 requires additional disclosure for transfers of financial assets in securitization transactions and an entity’s involvement with variable interest entities.

 

In the third quarter of 2009, the company adopted FASB ASC 855, Subsequent Events (FASB Statement No. 165, Subsequent Events). ASC 855 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued, or available to be issued if not widely distributed. The financial statements should reflect all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet. The financial statements should not reflect subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet. An entity must disclose the date through which subsequent events have been evaluated, as well as whether that date is the date the financial statements were issued, or the date they were available to be issued.

 

In the third quarter of 2009, the company adopted FASB ASC 825, Financial Instruments (FSP FAS 107-1 and Accounting Principles Bulletin (APB) 28-1, Interim Disclosures about Fair Value of Financial Instruments). ASC 825 requires fair value disclosures on an interim basis. Previously, this has been disclosed on an annual basis only.

 

New Accounting Standards to be Adopted

 

In December 2007, the FASB issued ASC 805, Business Combinations (FASB Statement No. 141 (revised 2007), Business Combinations) and ASC 810, Consolidation (FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements). ASC 805 requires an acquirer to measure the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. This standard also requires the fair value measurement of certain other assets and liabilities related to the acquisition such as contingencies and research and development. ASC 810 clarifies that a noncontrolling interest in a subsidiary should be reported as equity in the consolidated financial statements. Consolidated net income should include the net income for both the parent and the noncontrolling interest with disclosure of both amounts on the consolidated statement of income. The calculation of earnings per share will continue to be based on income amounts attributable to the parent. The effective date for both standards is the beginning of fiscal year 2010. The adoptions will not have material effects on the company’s consolidated financial statements.

 

34



 

In December 2008, the FASB issued ASC 715, Compensation-Retirement Benefits (FSP FAS 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets). ASC 715 requires additional disclosures relating to how investment allocation decisions are made, the major categories of plan assets, the inputs and valuation techniques used to measure the fair value of plan assets, the levels within the fair value hierarchy in which the measurements fall, a reconciliation of the beginning and ending balances for level 3 measurements, the effect of fair value measurements using significant unobservable inputs on changes in plan assets for the period and significant concentrations of risk with plan assets. The effective date of this standard is the end of fiscal year 2010. The adoption will not have a material effect on the company’s consolidated financial statements.

 

In June 2009, the FASB issued ASC 860, Transfers and Servicing (FASB Statement No. 166, Accounting for Transfers of Financial Assets an amendment of FASB Statement No. 140). ASC 860 eliminates qualifying special purpose entities from the consolidation guidance and clarifies the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting. It requires additional disclosures about the risks from continuing involvement in transferred financial assets accounted for as sales. The effective date is the beginning of fiscal year 2011. The adoption is not expected to have a material effect on the company’s consolidated financial statements.

 

In June 2009, the FASB issued ASC 810, Consolidations (FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R)). ASC 810 requires a qualitative analysis to determine the primary beneficiary of a VIE. The analysis identifies the primary beneficiary as the enterprise that has both the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits that could be significant to the VIE. The standard also requires additional disclosures about an enterprise’s involvement in a VIE. The effective date is the beginning of fiscal year 2011. The company has currently not determined the potential effects on the consolidated financial statements.

 

4. ACQUISITIONS

 

In November 2008, the company acquired the remaining 50 percent ownership interest in ReGen Technologies, LLC, a remanufacturing company located in Springfield, Missouri, for $42 million. The values assigned to the assets and liabilities related to the 50 percent acquisition were $14 million of inventories, $31 million of goodwill, $6 million of other assets, $3 million of accounts payable and accrued expenses and $6 million of long-term borrowings. The goodwill generated in the transaction was the result of future cash flows and related fair values of the additional acquisition exceeding the fair value of the identifiable assets and liabilities. The goodwill is expected to be deductible for tax purposes. The entity was consolidated and the results of these operations have been included in the company’s consolidated financial statements since the date of the acquisition. The acquisition was allocated between the company’s agriculture and turf segment and the construction and forestry segment. The pro forma results of operations as if the acquisition had occurred at the beginning of the fiscal year would not differ significantly from the reported results.

 

5. SPECIAL ITEMS

 

Restructuring

 

In September 2008, the company announced it would close its manufacturing facility in Welland, Ontario, Canada, and transfer production to company operations in Horicon, Wisconsin, U.S., and Monterrey and Saltillo, Mexico. The Welland factory manufactured utility vehicles and attachments for the agriculture and turf business. The move supports ongoing efforts aimed at improved efficiency and profitability. The factory discontinued manufacturing in the fourth quarter of 2009.

 

The closure is expected to result in total expenses recognized in cost of sales in millions of dollars as follows:

 

 

 

2008

 

2009

 

2010

 

Total

 

Pension and other postretirement benefits

 

$

10

 

$

27

 

$

8

 

$

45

 

Property and equipment impairments

 

21

 

3

 

 

 

24

 

Employee termination benefits

 

18

 

7

 

 

 

25

 

Other expenses

 

 

 

11

 

 

 

11

 

Total

 

$

49

 

$

48

 

$

8

 

$

105

 

 

All expenses are included in the agriculture and turf segment. The total pretax cash expenditures associated with this closure will be approximately $52 million. The annual pretax increase in earnings and cash flows in the future due to this restructuring is expected to be approximately $40 million in 2010. Property and equipment impairment values are based primarily on market appraisals.

 

The remaining liability for employee termination benefits at October 31, 2009 was $14 million, which included accrued benefit expenses to date of $25 million and an increase due to foreign currency translation of $2 million, which were partially offset by $13 million of benefits paid during 2009.

 

Voluntary Employee Separations

 

In April 2009, the company announced it was combining the agricultural equipment segment with the commercial and consumer equipment segment into the agriculture and turf segment effective at the beginning of the third quarter of 2009 (see Note 28). By combining these segments, the company expects to achieve greater alignment and efficiency to meet worldwide customer needs while reducing overall costs.  The company further expects the combination will extend the reach of turf management equipment, utility vehicles and lower horsepower equipment through the improved access to established global markets. Voluntary employee separations related to the new organizational structure resulted in pretax expenses of $91 million in 2009. The expenses were approximately 60 percent cost of sales and 40 percent selling, administrative and general expenses. Annual savings from the separation program are expected to be approximately $50 million to $60 million in 2010.

 

35



 

Goodwill Impairment

 

In the fourth quarter of 2009, the company recorded a non-cash charge in cost of sales for the impairment of goodwill of $289 million pretax, or $274 million after-tax. The charge was associated with the company’s John Deere Landscapes reporting unit, which is included in the agriculture and turf operating segment. The key factor contributing to the goodwill impairment was a decline in the reporting unit’s forecasted financial performance as a result of weak economic conditions. The method for determining the fair value of the reporting unit to measure the fair value of the goodwill was a combination of comparable market values for similar businesses and discounted cash flows.

 

6. CASH FLOW INFORMATION

 

For purposes of the statement of consolidated cash flows, the company considers investments with purchased maturities of three months or less to be cash equivalents. Substantially all of the company’s short-term borrowings, excluding the current maturities of long-term borrowings, mature or may require payment within three months or less.

 

The Equipment Operations sell a significant portion of their trade receivables to Financial Services. These intercompany cash flows are eliminated in the consolidated cash flows.

 

All cash flows from the changes in trade accounts and notes receivable (see Note 12) are classified as operating activities in the Statement of Consolidated Cash Flows as these receivables arise from sales to the company’s customers. Cash flows from financing receivables that are related to sales to the company’s customers (see Note 12) are also included in operating activities. The remaining financing receivables are related to the financing of equipment sold by independent dealers and are included in investing activities.

 

The company had the following non-cash operating and investing activities that were not included in the Statement of Consolidated Cash Flows. The company transferred inventory to equipment on operating leases of $320 million, $307 million and $269 million in 2009, 2008 and 2007, respectively. The company had accounts payable related to purchases of property and equipment of $81 million, $158 million and $100 million at October 31, 2009, 2008 and 2007, respectively.

 

Cash payments (receipts) for interest and income taxes consisted of the following in millions of dollars:

 

 

 

2009

 

2008

 

2007

 

Interest:

 

 

 

 

 

 

 

Equipment Operations

 

$

388

 

$

414

 

$

423

 

Financial Services

 

878

 

1,001

 

1,005

 

Intercompany eliminations

 

(273

)

(288

)

(294

)

Consolidated

 

$

993

 

$

1,127

 

$

1,134

 

 

 

 

 

 

 

 

 

Income taxes:

 

 

 

 

 

 

 

Equipment Operations

 

$

170

 

$

667

 

$

601

 

Financial Services

 

(73

)

95

 

196

 

Intercompany eliminations

 

109

 

(50

)

(157

)

Consolidated

 

$

206

 

$

712

 

$

640

 

 

7. PENSION AND OTHER POSTRETIREMENT BENEFITS

 

The company has several defined benefit pension plans covering its U.S. employees and employees in certain foreign countries. The company has several postretirement health care and life insurance plans for retired employees in the U.S. and Canada. The company uses an October 31 measurement date for these plans.

 

On October 31, 2007, the company adopted FASB ASC 715, Compensation-Retirement Benefits (FASB Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans). ASC 715 requires retirement benefit liabilities or benefit assets on the balance sheet to be adjusted to the difference between the benefit obligations and the plan assets at fair value. The offset to the adjustment is recorded directly in stockholders’ equity net of tax. The amount recorded in stockholders’ equity represents the after-tax unamortized actuarial gains or losses and unamortized prior service cost (credit). ASC 715 also requires all benefit obligations and plan assets to be measured at fiscal year end, which the company presently does. Prospective application of the new accounting was required.

 

The components of net periodic pension cost and the assumptions related to the cost consisted of the following in millions of dollars and in percents:

 

 

 

2009

 

2008

 

2007

 

Pensions

 

 

 

 

 

 

 

Service cost

 

$

124

 

$

159

 

$

168

 

Interest cost

 

563

 

514

 

488

 

Expected return on plan assets

 

(739

)

(743

)

(682

)

Amortization of actuarial loss

 

1

 

48

 

94

 

Amortization of prior service cost

 

25

 

26

 

27

 

Early-retirement benefits

 

4

 

10

 

 

 

Settlements/curtailments

 

27

 

3

 

4

 

Net cost

 

$

5

 

$

17

 

$

99

 

 

 

 

 

 

 

 

 

Weighted-average assumptions

 

 

 

 

 

 

 

Discount rates

 

8.1

%

6.2

%

5.7

%

Rate of compensation increase

 

3.9

%

3.9

%

3.8

%

Expected long-term rates of return

 

8.3

%

8.3

%

8.4

%

 

The components of net periodic postretirement benefits cost and the assumptions related to the cost consisted of the following in millions of dollars and in percents: