UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 


 

FORM 10-Q

 


 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended January 31, 2009

 

Commission file no: 1-4121

 


 

DEERE  &  COMPANY

 

Delaware

36-2382580

(State of incorporation)

(IRS employer identification no.)

 

One John Deere Place

Moline, Illinois 61265

(Address of principal executive offices)

 

Telephone Number:  (309) 765-8000

 


 

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 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 Exchange Act).

Yes   o No   x

 

At January 31, 2009, 422,672,599 shares of common stock, $1 par value, of the registrant were outstanding.

 

 

Index to Exhibits:  Page 35


 

PART I.  FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

DEERE & COMPANY
STATEMENT OF CONSOLIDATED INCOME
For the Three Months Ended January 31, 2009 and 2008
(In millions of dollars and shares except per share amounts) Unaudited

 


 

 

2009

 

2008

 

 

 

 

 

 

 

Net Sales and Revenues

 

 

 

 

 

Net sales

 

$

4,560.2

 

$

4,530.6

 

Finance and interest income

 

466.6

 

527.9

 

Other income

 

119.1

 

142.5

 

Total

 

5,145.9

 

5,201.0

 

 

 

 

 

 

 

Costs and Expenses

 

 

 

 

 

Cost of sales

 

3,542.5

 

3,361.8

 

Research and development expenses

 

219.4

 

204.3

 

Selling, administrative and general expenses

 

638.9

 

652.8

 

Interest expense

 

274.5

 

295.1

 

Other operating expenses

 

196.9

 

155.5

 

Total

 

4,872.2

 

4,669.5

 

 

 

 

 

 

 

 

 

 

 

 

 

Income of Consolidated Group before Income Taxes

 

273.7

 

531.5

 

Provision for income taxes

 

73.5

 

170.0

 

Income of Consolidated Group

 

200.2

 

361.5

 

Equity in income of unconsolidated affiliates

 

3.7

 

7.6

 

Net Income

 

$

203.9

 

$

369.1

 

 

 

 

 

 

 

Per Share Data

 

 

 

 

 

Net income - basic

 

$

.48

 

$

.84

 

Net income - diluted

 

$

.48

 

$

.83

 

 

 

 

 

 

 

Average Shares Outstanding

 

 

 

 

 

Basic

 

422.5

 

437.7

 

Diluted

 

423.7

 

444.2

 


 

2


See Condensed Notes to Interim Financial Statements.


 

DEERE & COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET
(In millions of dollars) Unaudited

 


 

 

January 31

 

October 31

 

January 31

 

 

 

2009

 

2008

 

2008

 

Assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

5,004.1

 

$

2,211.4

 

$

1,496.3

 

Marketable securities

 

230.5

 

977.4

 

1,153.6

 

Receivables from unconsolidated affiliates

 

45.3

 

44.7

 

39.2

 

Trade accounts and notes receivable - net

 

3,475.4

 

3,234.6

 

3,199.3

 

Financing receivables - net

 

13,379.3

 

16,017.0

 

15,233.1

 

Restricted financing receivables - net

 

3,268.9

 

1,644.8

 

1,960.6

 

Other receivables

 

688.8

 

664.9

 

648.7

 

Equipment on operating leases - net

 

1,543.7

 

1,638.6

 

1,628.4

 

Inventories

 

3,836.6

 

3,041.8

 

3,288.8

 

Property and equipment - net

 

4,149.4

 

4,127.7

 

3,651.7

 

Investments in unconsolidated affiliates

 

213.7

 

224.4

 

157.1

 

Goodwill

 

1,241.0

 

1,224.6

 

1,248.3

 

Other intangible assets - net

 

152.0

 

161.4

 

131.2

 

Retirement benefits

 

1,131.8

 

1,106.0

 

2,016.5

 

Deferred income taxes

 

1,419.9

 

1,440.6

 

1,451.4

 

Other assets

 

1,559.2

 

974.7

 

911.1

 

Total Assets

 

$

41,339.6

 

$

38,734.6

 

$

38,215.3

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Short-term borrowings

 

$

9,333.2

 

$

8,520.5

 

$

9,461.6

 

Payables to unconsolidated affiliates

 

118.6

 

169.2

 

174.4

 

Accounts payable and accrued expenses

 

5,524.5

 

6,393.6

 

5,519.3

 

Deferred income taxes

 

166.2

 

171.8

 

188.4

 

Long-term borrowings

 

16,574.7

 

13,898.5

 

12,344.4

 

Retirement benefits and other liabilities

 

3,067.5

 

3,048.3

 

3,488.8

 

Total liabilities

 

34,784.7

 

32,201.9

 

31,176.9

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock, $1 par value (issued shares at January 31, 2009 - 536,431,204)

 

2,968.2

 

2,934.0

 

2,882.4

 

Common stock in treasury

 

(5,582.7

)

(5,594.6

)

(4,449.4

)

Retained earnings

 

10,666.1

 

10,580.6

 

9,243.4

 

Accumulated other comprehensive income (loss)

 

(1,496.7

)

(1,387.3

)

(638.0

)

Stockholders’ equity

 

6,554.9

 

6,532.7

 

7,038.4

 

Total Liabilities and Stockholders’ Equity

 

$

41,339.6

 

$

38,734.6

 

$

38,215.3

 


 

3


See Condensed Notes to Interim Financial Statements.


 

DEERE & COMPANY
STATEMENT OF CONSOLIDATED CASH FLOWS
For the Three Months Ended January 31, 2009 and 2008
(In millions of dollars) Unaudited

 


 

 

2009

 

2008

 

 

 

 

 

 

 

Cash Flows from Operating Activities

 

 

 

 

 

Net income

 

$

203.9

 

$

369.1

 

Adjustments to reconcile net income to net cash used for operating activities:

 

 

 

 

 

Provision for doubtful receivables

 

40.0

 

17.4

 

Provision for depreciation and amortization

 

216.9

 

199.7

 

Share-based compensation expense

 

45.7

 

45.5

 

Undistributed earnings of unconsolidated affiliates

 

(3.9

)

(5.8

)

Provision (credit) for deferred income taxes

 

29.9

 

(20.2

)

Changes in assets and liabilities:

 

 

 

 

 

Trade, notes and financing receivables related to sales

 

(283.0

)

53.0

 

Inventories

 

(874.0

)

(1,013.0

)

Accounts payable and accrued expenses

 

(882.4

)

(378.8

)

Accrued income taxes payable/receivable

 

(12.9

)

183.1

 

Retirement benefits

 

6.7

 

(195.2

)

Other

 

(102.4

)

(79.8

)

Net cash used for operating activities

 

(1,615.5

)

(825.0

)

Cash Flows from Investing Activities

 

 

 

 

 

Collections of receivables

 

3,381.2

 

3,118.3

 

Proceeds from sales of financing receivables

 

5.7

 

6.6

 

Proceeds from maturities and sales of marketable securities

 

764.4

 

692.8

 

Proceeds from sales of equipment on operating leases

 

117.9

 

125.2

 

Proceeds from sales of businesses, net of cash sold

 

 

 

18.4

 

Cost of receivables acquired

 

(2,613.8

)

(2,723.8

)

Purchases of marketable securities

 

(7.9

)

(220.4

)

Purchases of property and equipment

 

(262.1

)

(233.1

)

Cost of equipment on operating leases acquired

 

(74.6

)

(79.2

)

Acquisitions of businesses, net of cash acquired

 

(40.9

)

(34.0

)

Other

 

1.9

 

(14.0

)

Net cash provided by investing activities

 

1,271.8

 

656.8

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

Increase (decrease) in short-term borrowings

 

1,157.1

 

(116.2

)

Proceeds from long-term borrowings

 

2,842.2

 

1,037.7

 

Payments of long-term borrowings

 

(653.1

)

(1,039.9

)

Proceeds from issuance of common stock

 

3.1

 

68.7

 

Repurchases of common stock

 

(3.2

)

(481.5

)

Dividends paid

 

(118.2

)

(110.4

)

Excess tax benefits from share-based compensation

 

.5

 

35.1

 

Other

 

(96.0

)

(1.2

)

Net cash provided by (used for) financing activities

 

3,132.4

 

(607.7

)

 

 

 

 

 

 

Effect of Exchange Rate Changes on Cash and Cash Equivalents

 

4.0

 

(6.4

)

 

 

 

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

 

2,792.7

 

(782.3

)

Cash and Cash Equivalents at Beginning of Period

 

2,211.4

 

2,278.6

 

Cash and Cash Equivalents at End of Period

 

$

5,004.1

 

$

1,496.3

 


 

4


See Condensed Notes to Interim Financial Statements.

 


 

Condensed Notes to Interim Financial Statements (Unaudited)

 

(1)         The consolidated financial statements of Deere & Company and consolidated subsidiaries have been prepared by the Company, without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission.  Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the U.S. have been condensed or omitted as permitted by such rules and regulations.  All adjustments, consisting of normal recurring adjustments, have been included.  Management believes that the disclosures are adequate to present fairly the financial position, results of operations and cash flows at the dates and for the periods presented.  It is suggested that these interim financial statements be read in conjunction with the financial statements and the notes thereto included in the Company’s latest annual report on Form 10-K.  Results for interim periods are not necessarily indicative of those to be expected for the fiscal year.

 

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.

 

Certain items previously reported in specific financial statement captions in the first quarter of 2008 have been reclassified to conform to the year end 2008 and first quarter of 2009 financial statement presentation.  In particular, “Accrued taxes” previously presented separately has been combined with “Accounts payable and accrued expenses” on the consolidated balance sheet.

 

Cash Flow Information

 

All cash flows from the changes in trade accounts and notes receivable 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 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 approximately $34 million and $57 million in the first three months of 2009 and 2008, respectively.  The Company also had non-cash transactions for accounts payable related to purchases of property and equipment of approximately $118 million and $83 million at January 31, 2009 and 2008, respectively.

 

Variable Interest Entities

 

The Company is the primary beneficiary and consolidates a supplier that is a variable interest entity (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 the first quarter of 2009.  The VIE produces blended fertilizer and other lawn care products for the commercial and consumer equipment segment.  The assets of the VIE that were consolidated, less the intercompany receivables of $26 million eliminated in consolidation, totaled $88 million and consisted of $79 million of inventory, $6 million of property and equipment and $3 million of other assets.  The liabilities of the VIE totaled $126 million and consisted of $101 million of accounts payable and accrued expenses and $25 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.  See Note 6 for VIEs related to securitization of financing receivables.

 

5



 

(2)         The information in the notes and related commentary are presented in a format which includes data grouped as follows:

 

Equipment Operations - Includes the Company’s agricultural equipment, commercial and consumer equipment 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.

 

(3)         An analysis of the Company’s retained earnings in millions of dollars follows:

 

 

 

Three Months Ended
January 31

 

 

 

2009

 

2008

 

 

 

 

 

 

 

Balance, beginning of period

 

$

10,580.6

 

$

9,031.7

 

Net income

 

203.9

 

369.1

 

Dividends declared

 

(118.3

)

(109.3

)

Adoption of FIN No. 48 *

 

 

 

(48.0

)

Other

 

(.1

)

(.1

)

Balance, end of period

 

$

10,666.1

 

$

9,243.4

 

 

*                  Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes

 

(4)         Most inventories owned by Deere & Company and its U.S. equipment subsidiaries are valued at cost on the “last-in, first-out” (LIFO) method.  If all of the Company’s inventories had been valued on a “first-in, first-out” (FIFO) method, estimated inventories by major classification in millions of dollars would have been as follows:

 

 

 

January 31
2009

 

October 31
2008

 

January 31
2008

 

Raw materials and supplies

 

$

1,346

 

$

1,170

 

$

1,052

 

Work-in-process

 

581

 

519

 

543

 

Finished goods and parts

 

3,242

 

2,677

 

2,941

 

Total FIFO value

 

5,169

 

4,366

 

4,536

 

Less adjustment to LIFO basis

 

1,332

 

1,324

 

1,247

 

Inventories

 

$

3,837

 

$

3,042

 

$

3,289

 

 

(5)         Commitments and contingencies:

 

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 current quality developments.

 

The premiums for extended warranties are primarily recognized in income in proportion to the costs expected to be incurred over the contract period.  These unamortized warranty premiums (deferred revenue) included in the following table totaled $225 million and $231 million at January 31, 2009 and 2008, respectively.

 

6



 

A reconciliation of the changes in the warranty liability in millions of dollars follows:

 

 

 

Three Months Ended
January 31

 

 

 

2009

 

2008

 

 

 

 

 

 

 

Balance, beginning of period

 

$

814

 

$

774

 

Payments

 

(124

)

(125

)

Amortization of premiums received

 

(26

)

(19

)

Accruals for warranties

 

117

 

117

 

Premiums received

 

23

 

27

 

Foreign exchange

 

(3

)

4

 

Balance, end of period

 

$

801

 

$

778

 

 

At January 31, 2009, the Company had approximately $150 million of guarantees issued primarily to banks outside the U.S. and Canada 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.  At January 31, 2009, the Company had an accrued liability of approximately $6 million under these agreements.  The maximum remaining term of the receivables guaranteed at January 31, 2009 was approximately six years.

 

The credit operation’s subsidiary, John Deere Risk Protection, Inc., offers crop insurance products through managing general agency agreements (Agreements) with insurance companies (Insurance Carriers) rated “Excellent” by A.M. Best Company.  As a managing general agent, John Deere Risk Protection, Inc. will receive commissions from the Insurance Carriers for selling crop insurance to producers.  The credit operations have guaranteed certain obligations under the Agreements, including the obligation to pay the Insurance Carriers for any uncollected premiums.  At January 31, 2009, the maximum exposure for uncollected premiums was approximately $17 million.  Substantially all of the credit operations’ crop insurance risk under the Agreements has been mitigated by a syndicate of private reinsurance companies.  The reinsurance companies are rated “Excellent” or higher by A.M. Best Company.  In the event of a widespread catastrophic crop failure throughout the U.S. and the default of these highly rated private reinsurance companies on their reinsurance obligations, the credit operations would be required to reimburse the Insurance Carriers for exposure under the Agreements of approximately $20 million at January 31, 2009.  The credit operations believe that the likelihood of the occurrence of events that give rise to the exposures under these Agreements is substantially remote and as a result, at January 31, 2009, the credit operations’ accrued liability under the Agreements was not material.

 

At January 31, 2009, the Company had commitments of approximately $366 million for the construction and acquisition of property and equipment.  Also, at January 31, 2009, the Company had pledged or restricted assets of $189 million, primarily as collateral for borrowings.  See Note 6 for additional restricted assets associated with borrowings related to securitizations.

 

The Company also had other miscellaneous contingent liabilities totaling approximately $50 million at January 31, 2009, for which it believes the probability for payment is substantially remote.  The accrued liability for these contingencies was not material at January 31, 2009.

 

7



 

(6)         Securitization of financing receivables:

 

The Company, as a part of its overall funding strategy, periodically transfers certain financing receivables (retail notes) into variable interest entities (VIEs) that are special purpose entities (SPEs) as part of its asset-backed securities programs (securitizations).  The structure of these transactions is such that the transfer of the retail notes did not meet the criteria of sales in accordance with FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, and are, therefore, accounted for as secured borrowings.  SPEs utilized in securitizations of retail notes differ from other entities included in the Company’s consolidated statements because the assets they hold are legally isolated.  For bankruptcy analysis purposes, the Company has sold the receivables to the SPEs in a true sale and the SPEs are separate legal entities.  Use of the assets held by the SPEs is restricted by terms of the documents governing the securitization transaction.

 

In securitizations of retail notes related to secured borrowings, the retail notes are transferred to certain SPEs which in turn issue debt to investors.  The resulting secured borrowings are included in short-term borrowings on the balance sheet as shown in the following table.  The securitized retail notes are recorded as “Restricted financing receivables — net” on the balance sheet.  The total restricted assets on the balance sheet related to these securitizations include the restricted financing receivables less an allowance for credit losses, and other assets primarily representing restricted cash as shown in the following table.  The SPEs supporting the secured borrowings to which the retail notes are transferred are consolidated unless the Company is not the primary beneficiary in accordance with FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities.  No additional support to these SPEs beyond what was previously contractually required has been provided during the first quarter of 2009.

 

In certain securitizations, the Company is the primary beneficiary of the SPEs and, as such, consolidates the entities.  The restricted assets (retail notes, allowance for credit losses and other assets) of the consolidated SPEs totaled $1,517 million, $1,303 million and $1,325 million at January 31, 2009, October 31, 2008 and January 31, 2008, respectively.  The liabilities (short-term borrowings and accrued interest) of these SPEs totaled $1,518 million, $1,287 million and $1,352 million at January 31, 2009, October 31, 2008 and January 31, 2008, respectively.  The credit holders of these SPEs do not have legal recourse to the Company’s general credit.

 

In other securitizations, the Company transfers retail notes into bank-sponsored, multi-seller, commercial paper conduits, which are SPEs that are not consolidated.  The Company is not considered to be the primary beneficiary of these conduits, because the Company’s variable interests in the conduits will not absorb a majority of the conduits’ expected losses, residual returns, or both.  This is primarily due to these interests representing significantly less than a majority of the conduits’ total assets and liabilities.  These conduits provide a funding source to the Company (as well as other transferors into the conduit) as they fund the retail notes through the issuance of commercial paper.  The Company’s carrying values and variable interests related to these conduits were restricted assets (retail notes, allowance for credit losses and other assets) of $1,835 million, $398 million and $680 million at January 31, 2009, October 31, 2008 and January 31, 2008, respectively.  The liabilities (short-term borrowings and accrued interest) related to these conduits were $1,778 million, $398 million and $701 million at January 31, 2009, October 31, 2008 and January 31, 2008, respectively.

 

The Company’s carrying amount of the liabilities to the unconsolidated conduits, compared to the maximum exposure to loss related to these conduits, which would only be incurred in the event of a complete loss on the restricted assets, was as follows in millions of dollars:

 

 

 

January 31, 2009

 

 

 

 

 

Carrying value of liabilities

 

$

1,778       

 

Maximum exposure to loss

 

1,835       

 

 

8



 

The assets of unconsolidated conduits related to securitizations in which the Company’s variable interests were considered significant were approximately $46 billion at January 31, 2009.

 

The components of consolidated restricted assets related to secured borrowings in securitization transactions follow in millions of dollars:

 

 

 

January 31
2009

 

October 31
2008

 

January 31
2008

 

Restricted financing receivables (retail notes)

 

$

3,281

 

$

1,656

 

$

1,972

 

Allowance for credit losses

 

(12

)

(11

)

(11

)

Other assets

 

83

 

56

 

44

 

Total restricted securitized assets

 

$

3,352

 

$

1,701

 

$

2,005

 

 

The components of consolidated secured borrowings and other liabilities related to securitizations follow in millions of dollars:

 

 

 

January 31
2009

 

October 31
2008

 

January 31
2008

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

$

3,292

 

$

1,682

 

$

2,050

 

Accrued interest on borrowings

 

4

 

3

 

3

 

Total liabilities related to restricted securitized assets

 

$

3,296

 

$

1,685

 

$

2,053

 

 

The secured borrowings related to these restricted securitized retail notes are obligations that are payable as the retail notes are liquidated.  Repayment of the secured borrowings depends primarily on cash flows generated by the restricted assets.  Due to the Company’s short-term credit rating, cash collections from these restricted assets are not required to be placed into a restricted collection account until immediately prior to the time payment is required to the secured creditors.  At January 31, 2009, the maximum remaining term of all restricted receivables was approximately six years.

 

(7)         Dividends declared and paid on a per share basis were as follows:

 

 

 

Three Months Ended
January 31

 

 

 

2009

 

2008

 

Dividends declared

 

$

.28

 

$

.25

 

Dividends paid

 

$

.28

 

$

.25

 

 

9



 

(8)         Worldwide net sales and revenues, operating profit and identifiable assets by segment in millions of dollars follow:

 

 

 

Three Months Ended January 31

 

 

 

 

 

 

 

%

 

 

 

2009

 

2008

 

Change

 

Net sales and revenues:

 

 

 

 

 

 

 

Agricultural equipment *

 

$

3,261

 

$

2,758

 

+18

 

Commercial and consumer equipment

 

558

 

743

 

-25

 

Construction and forestry *

 

741

 

1,030

 

-28

 

Total net sales **

 

4,560

 

4,531

 

+1

 

Credit revenues *

 

474

 

550

 

-14

 

Other revenues

 

112

 

120

 

-7

 

Total net sales and revenues **

 

$

5,146

 

$

5,201

 

-1

 

 

 

 

 

 

 

 

 

Operating profit (loss): ***

 

 

 

 

 

 

 

Agricultural equipment

 

$

348

 

$

332

 

+5

 

Commercial and consumer equipment

 

(59

)

8

 

 

 

Construction and forestry

 

18

 

117

 

-85

 

Credit

 

53

 

133

 

-60

 

Other

 

4

 

3

 

+33

 

Total operating profit **

 

364

 

593

 

-39

 

Interest, corporate expenses – net and income taxes

 

(160

)

(224

)

-29

 

Net income

 

$

204

 

$

369

 

-45

 

 

 

 

 

 

 

 

 

Identifiable assets:

 

 

 

 

 

 

 

Agricultural equipment

 

$

5,947

 

$

4,962

 

+20

 

Commercial and consumer equipment

 

1,801

 

1,865

 

-3

 

Construction and forestry

 

2,318

 

2,430

 

-5

 

Credit

 

26,748

 

23,309

 

+15

 

Other

 

271

 

210

 

+29

 

Corporate

 

4,255

 

5,439

 

-22

 

Total assets

 

$

41,340

 

$

38,215

 

+8

 

 

*

Additional intersegment sales and revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agricultural equipment sales

 

$

12

 

$

15

 

-20

 

 

Construction and forestry sales

 

1

 

2

 

-50

 

 

Credit revenues

 

68

 

63

 

-8

 

 

 

 

 

 

 

 

 

 

**

Includes equipment operations outside the U.S. and Canada as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

1,817

 

$

1,808

 

 

 

 

Operating profit

 

79

 

210

 

-62

 

 

 

 

 

 

 

 

 

 

***

Operating profit (loss) is income from continuing operations before external interest expense, certain foreign exchange gains and losses, income taxes and certain corporate expenses.  However, operating profit of the credit segment includes the effect of interest expense and foreign exchange gains or losses.

 

 

10



 

(9)         A reconciliation of basic and diluted net income per share in millions, except per share amounts, follows:

 

 

 

Three Months Ended
January 31

 

 

 

2009

 

2008

 

 

 

 

 

 

 

Net income

 

$

203.9

 

$

369.1

 

Average shares outstanding

 

422.5

 

437.7

 

Basic net income per share

 

$

.48

 

$

.84

 

 

 

 

 

 

 

Average shares outstanding

 

422.5

 

437.7

 

Effect of dilutive stock options

 

1.2

 

6.5

 

Total potential shares outstanding

 

423.7

 

444.2

 

Diluted net income per share

 

$

.48

 

$

.83

 

 

Out of the total stock options outstanding during the first quarter of 2009 and 2008, options to purchase 9.4 million shares and 2.0 million shares, respectively, were excluded from the above diluted per share computation because the incremental shares under the treasury stock method for the exercise of these options would have caused an antidilutive effect on net income per share.

 

(10)    Comprehensive income, which includes all changes in the Company’s equity during the period except transactions with stockholders, was as follows in millions of dollars:

 

 

 

Three Months Ended
January 31

 

 

 

2009

 

2008

 

Net income

 

$

203.9

 

$

369.1

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

Retirement benefits adjustment

 

10.5

 

30.5

 

Cumulative translation adjustment

 

(93.1

)

(.7

)

Unrealized gain on investments

 

5.6

 

3.2

 

Unrealized loss on derivatives

 

(32.4

)

(33.5

)

 

 

 

 

 

 

Comprehensive income

 

$

94.5

 

$

368.6

 

 

(11) 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 consolidated financial statements.

 

11



 

(12)   The Company has several defined benefit pension plans covering its U.S. employees and employees in certain foreign countries.  The Company also has several defined benefit postretirement health care and life insurance plans for employees in the U.S. and Canada.

 

The worldwide components of net periodic pension cost (income) consisted of the following in millions of dollars:

 

 

 

Three Months Ended
January 31

 

 

 

2009

 

2008

 

Service cost

 

$

29

 

$

41

 

Interest cost

 

139

 

128

 

Expected return on plan assets

 

(184

)

(186

)

Amortization of actuarial loss

 

2

 

11

 

Amortization of prior service cost

 

7

 

7

 

Early-retirement benefits

 

2

 

 

 

Net cost (income)

 

$

(5

)

$

1

 

 

The worldwide components of net periodic postretirement benefits cost (health care and life insurance) consisted of the following in millions of dollars:

 

 

 

Three Months Ended
January 31

 

 

 

2009

 

2008

 

 

 

 

 

 

 

Service cost

 

$

8

 

$

14

 

Interest cost

 

83

 

81

 

Expected return on plan assets

 

(30

)

(44

)

Amortization of actuarial loss

 

10

 

23

 

Amortization of prior service credit

 

(3

)

(4

)

Early-retirement benefits

 

1

 

 

 

Net cost

 

$

69

 

$

70

 

 

During the first quarter of 2009, the Company contributed approximately $15 million to its pension plans and $34 million to its other postretirement benefit plans.  The Company presently anticipates contributing an additional $66 million to its pension plans and $65 million to its other postretirement benefit plans during the remainder of fiscal year 2009.  These contributions include payments from Company funds to either increase plan assets or make direct payments to plan participants.

 

(13)   In December 2008, the Company granted options to employees for the purchase of 4.6 million shares of common stock at an exercise price of $39.67 per share and a binomial lattice model fair value of $12.66 per share.  At January 31, 2009, options for 20.5 million shares were outstanding with a weighted-average exercise price of $40.45 per share.  The Company also granted .3 million of restricted stock units with a weighted-average fair value of $39.67 per share in the first quarter of 2009.  A total of 10.8 million shares remained available for the granting of future options and restricted stock.

 

12



 

(14) Assets and liabilities measured at fair value on a recurring basis in millions of dollars follow:

 

 

 

January 31, 2009

 

 

 

Total

 

Level 1

 

Level 2

 

Marketable securities

 

$

231

 

$

35

 

$

196

 

 

 

 

 

 

 

 

 

Other assets

 

 

 

 

 

 

 

Derivatives:

 

 

 

 

 

 

 

Interest rate contracts

 

746

 

 

 

746

 

Foreign exchange contracts

 

69

 

 

 

69

 

Cross-currency interest rate contracts

 

14

 

 

 

14

 

Total assets

 

$

1,060

 

$

35

 

$

1,025

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

 

 

 

 

 

 

Derivatives:

 

 

 

 

 

 

 

Interest rate contracts

 

$

194

 

 

 

$

194

 

Foreign exchange contracts

 

40

 

 

 

40

 

Cross-currency interest rate contracts

 

25

 

 

 

25

 

Total liabilities

 

$

259

 

 

 

$

259

 

 

Financial assets measured at fair value on a nonrecurring basis and the losses during the period in millions of dollars were as follows:

 

 

 

 

 

Three Months Ended

 

 

 

January 31, 2009

 

January 31, 2009

 

 

 

Level 3

 

Losses

 

Financing receivables

 

$

16

 

$

5

 

 

Level 1 measurements consist of quoted prices in active markets for identical assets or liabilities.  Level 2 measurements include significant other observable inputs such as quoted prices for similar assets or liabilities in active markets; identical assets or liabilities in inactive markets; observable inputs such as interest rates and yield curves; and other market-corroborated inputs.  Level 3 measurements include significant unobservable inputs.

 

FASB Statement No. 157, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  In determining fair value, the Company uses various methods including market and income approaches.  The Company utilizes valuation models and techniques that maximize the use of observable inputs.  The models are industry-standard models that consider various assumptions including time values and yield curves as well as other economic measures.  These valuation techniques are consistently applied.

 

The following is a description of the valuation methodologies the Company uses to measure financial instruments at fair value:

 

Investments Available for Sale — The majority of the Company’s investment portfolio consists of various debt securities such as U.S. government, agencies and agency mortgage-backed securities; and corporate and municipal bonds.  This portfolio of investments is primarily valued on a matrix pricing model in which all significant inputs are observable or can be derived from or corroborated by observable market data.

 

13



 

Derivative Instruments — The Company’s derivative financial instruments consist of interest rate swaps and caps, foreign currency forwards and cross-currency interest rate swaps.  The portfolio is valued based on a discounted cash flow approach using market observable inputs, including swap curves and both forward and spot exchange rates for currencies.

 

Financing Receivables — Receivables with specific reserves established due to payment defaults are valued based on a discounted cash flow approach for the underlying collateral.  The related credit allowances represent cumulative adjustments to measure those specific receivables at fair value.

 

(15)           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.  Each derivative is designated as a cash flow hedge, a fair value hedge, or remains undesignated.  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, hedge accounting is discontinued.  Any past or future changes in the derivative’s fair value, which will not be effective as an offset to the income effects of the item being hedged, are recognized currently in the income statement.

 

Certain of the Company’s derivative agreements contain credit support provisions that require the Company to post collateral if certain value or ratings thresholds are exceeded.  For some transactions the counterparty may request posting of full collateral if the Company’s debt rating were to fall below investment grade.  At January 31, 2009, there were no aggregate derivative positions requiring the posting of collateral.

 

Derivative instruments are subject to significant concentrations of credit risk to the banking sector.  The Company manages individual counterparty exposure by setting limits that consider the credit rating of the counterparty and the size of other financial commitments and exposures between the Company and the counterparty banks.  All interest rate derivatives are transacted under International Swaps and Derivatives Association (ISDA) documentation.  Some of these agreements include collateral support arrangements or mutual put options at fair value.  Each master agreement permits the net settlement of amounts owed in the event of early termination.  The maximum amount of loss that the Company would incur if counterparties to derivative instruments fail to meet their obligations, not considering collateral received or netting arrangements, was $829 million as of January 31, 2009.  The amount of collateral received at January 31, 2009 to offset this potential maximum loss was $50 million.  The netting provisions of the agreements would reduce the maximum amount of loss the Company would incur if the counterparties to derivative instruments fail to meet their obligations by an additional $167 million as of January 31, 2009.  None of the concentrations of risk with any individual counterparty was considered significant at January 31, 2009.

 

14



 

Cash flow hedges

 

Certain interest rate contracts (swaps) were designated as hedges of future cash flows from variable interest rate borrowings.  The total notional amount of these receive-variable/pay-fixed interest rate contracts at January 31, 2009 was $3,694 million.  The effective portions of the fair value gains or losses on these cash flow hedges were recorded in other comprehensive income (OCI) and subsequently reclassified into interest expense as payments were accrued and the contracts approach maturity.  These amounts offset the effects of interest rate changes on the related borrowings.  Any ineffective portions of the gains or losses on all cash flow interest rate contracts designated as hedges were recognized currently in interest expense and no components were excluded from the assessment of effectiveness.  The cash flows from these contracts were recorded in operating activities in the consolidated statement of cash flows.

 

The amount of loss recorded in other comprehensive income at January 31, 2009 that is expected to be reclassified to interest expense in the next twelve months if interest rates remain unchanged is approximately $16 million after-tax.  These contracts mature in up to 28 months.  There were no significant gains or losses reclassified from OCI to earnings based on the probability that the original forecasted transaction would not occur.

 

Fair value hedges

 

Certain interest rate contracts (swaps) were designated as fair value hedges of fixed-rate, long-term borrowings.  The total notional amount of these receive-fixed/pay-variable interest rate contracts at January 31, 2009 was $5,450 million.  The effective portions of the fair value gains or losses on these contracts were offset by fair value gains or losses on the hedged items (fixed-rate borrowings).  Any ineffective portions of the gains or losses were recognized currently in interest expense and no components were excluded from the assessment of effectiveness.  The ineffective portions totaled $5 million gain in the first quarter of 2009.  The cash flows from these contracts were recorded in operating activities in the consolidated statement of cash flows.

 

 

 

Gains or (Losses)

 

Gains or (Losses)  

 

Classification

 

On Swaps

 

On Borrowings

 

 

 

 

 

 

 

Interest expense (millions)

 

$

345

 

$

(397

)

 

Derivatives not designated as hedging instruments

 

The Company has certain interest rate contracts (swaps and caps), foreign exchange contracts (forwards and swaps) and cross-currency interest rate contracts (swaps), which were not formally designated as hedges under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.  These derivatives were held as economic hedges for underlying interest rate or foreign currency exposures primarily for certain borrowings and purchases or sales of inventory.  The total notional amount of the interest rate swaps was $1,720 million, the foreign exchange contracts was $2,063 million and the cross-currency interest rate contracts was $848 million at January 31, 2009.  There were also $1,862 million of interest rate caps purchased and $1,862 million sold at the same capped interest rate to facilitate borrowings through securitization of retail notes at January 31, 2009.  The fair value gains or losses from the interest rate contracts were recognized currently in interest expense and the gains or losses from foreign exchange contracts in cost of sales or other operating expenses, generally offsetting over time the expenses on the exposures being hedged.  The cash flows from these non-designated contracts were recorded in operating activities in the consolidated statement of cash flows.

 

15



 

Fair values of derivative instruments in the condensed consolidated balance sheet in millions of dollars follow:

 

 

 

 

January 31, 2009

 

 

 

 

 

 

 

Accounts

 

 

 

 

 

 

 

Payable

 

 

 

 

 

 

 

and

 

 

 

 

 

Other

 

Accrued

 

 

 

 

 

Assets

 

Expenses

 

 

 

Designated as hedging instruments:

 

 

 

 

 

 

 

Interest rate contracts

 

$

672

 

$

122

 

 

 

 

 

 

 

 

 

 

 

Not designated as hedging instruments:

 

 

 

 

 

 

 

Interest rate contracts

 

74

 

72

 

 

 

Foreign exchange contracts

 

69

 

40

 

 

 

Cross-currency interest rate contracts

 

14

 

25

 

 

 

Total not designated

 

157

 

137

 

 

 

 

 

 

 

 

 

 

 

Total derivatives

 

$

829

 

$

259

 

 

 

 

 

The effects of derivative instruments on the statement of consolidated income consisted of the following in millions of dollars:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three

 

 

 

 

 

 

 

Months

 

 

 

 

 

 

 

Ended

 

 

 

 

 

Classification of

 

January 31,

 

 

 

 

 

Gains (Losses)

 

2009

 

 

 

Fair Value Hedges:

 

 

 

 

 

 

 

Interest rate contracts

 

Interest expense

 

$

345

 

 

 

 

 

 

 

 

 

 

 

Cash Flow Hedges:

 

 

 

 

 

 

 

Total Recognized in OCI

 

 

 

 

 

 

 

(Effective Portion):

 

 

 

 

 

 

 

Interest rate contracts

 

OCI (pretax)

 

$

(50

)

 

 

 

 

 

 

 

 

 

 

Reclassified from OCI

 

 

 

 

 

 

 

(Effective Portion):

 

 

 

 

 

 

 

Interest rate contracts

 

Interest expense

 

$

(8

)

 

 

 

 

 

 

 

 

 

 

Recognized Directly in Income

 

 

 

 

 

 

 

(Ineffective Portion) *:

 

 

 

 

 

 

 

Interest rate contracts

 

Interest expense

 

*

 

 

 

 

 

 

 

 

 

 

 

Not Designated as Hedges:

 

 

 

 

 

 

 

Interest rate contracts

 

Interest expense

 

$

(12

)

 

 

Foreign exchange contracts

 

Cost of sales

 

46

 

 

 

Foreign exchange contracts

 

Other operating expenses

 

55

 

 

 

Total

 

 

 

$

89

 

 

 

*  No gains or losses were excluded from effectiveness testing.

The amount is less than $.1 million.

 

16



 

(16)           In September 2008, the Company announced it will 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 manufactures utility vehicles and attachments for the agricultural equipment and commercial and consumer equipment businesses.  The move supports ongoing efforts aimed at improved efficiency and profitability.  The plant is scheduled to close by the end of 2009.

 

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

 

 

 

 

 

First

 

 

 

 

 

 

 

 

 

Quarter

 

 

 

 

 

 

 

2008

 

2009

 

Remainder

 

Total

 

Pension and other postretirement benefits

 

$

10

 

$

3

 

$

37

 

$

50

 

Property and equipment impairments

 

21

 

 

 

 

 

21

 

Employee termination benefits

 

18

 

7

 

 

 

25

 

Other expenses

 

 

 

1

 

10

 

11

 

Total

 

$

49

 

$

11

 

$

47

 

$

107

 

 

The total expenses will be approximately $64 million for the agricultural equipment segment and $43 million for the commercial and consumer equipment segment.  In 2008 and the first quarter of 2009, these expenses were $29 million and $7 million for the agricultural equipment segment and $20 million and $4 million for the commercial and consumer equipment segment, respectively.  The total pretax cash expenditures associated with this closure will be approximately $50 million.  The annual pretax increase in earnings and cash flows in the future due to this restructuring is estimated to be approximately $40 million.

 

The accrual for employee termination benefits was $18 million during 2008 and $7 million in the first quarter of 2009.  Due to a decrease of $1 million from the foreign currency translation adjustment, the remaining liability was $24 million at January 31, 2009.

 

(17)           New accounting standards adopted in the first quarter of 2009 were as follows:

 

In the first quarter of 2009, the Company adopted FASB Statement No. 157, Fair Value Measurements, for financial assets and liabilities recognized or disclosed at fair value (see Note 14).  This Statement 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 did not have a material effect on the Company’s consolidated financial statements.

 

In the first quarter of 2009, the Company adopted FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities.  This Statement 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 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 cumulative effect of adoption would be reported as an adjustment to beginning retained earnings.  The Company did not change the valuation of any financial instruments based on this Statement and, therefore, the adoption had no effect on the Company’s consolidated financial statements.

 

17



 

In the first quarter of 2009, the Company adopted FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities.  This Statement increases the disclosure requirements for derivative instruments (see Note 15).  Most disclosures are required on an interim and annual basis.  The adoption did not have a material effect on the Company’s consolidated financial statements.

 

In the first quarter of 2009, the Company adopted FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles.  This Statement identifies the sources for generally accepted accounting principles (GAAP) in the U.S. and lists the categories in descending order.  An entity should follow the highest category of GAAP applicable for each of its accounting transactions.  The adoption did not have a material effect on the Company’s consolidated financial statements.

 

In the first quarter of 2009, the Company adopted FASB Staff Position (FSP) Financial Accounting Statement (FAS) 140-4 and FIN 46(R)-8, Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities (see Notes 1 and 6).  The new standard requires additional disclosure for transfers of financial assets in securitization transactions and an entity’s involvement with variable interest entities.  The adoption did not have a material effect on the Company’s consolidated financial statements.

 

New accounting standard to be adopted as follows:

 

In December 2007, the FASB issued Statement No. 141 (revised 2007), Business Combinations, and Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements.  Statement No. 141 (revised 2007) 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.  Statement No. 160 requires that a noncontrolling interest in a subsidiary 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 Statements is the beginning of fiscal year 2010.  The Company has currently not determined the potential effects on the consolidated financial statements.

 

In December 2008, the FASB issued FSP FAS 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets.  The FSP 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 effect of fair value measurements using significant unobservable inputs on changes in plan assets for the period and significant concentrations of risk within plan assets.  The effective date of this FSP is the end of fiscal year 2010.  The adoption will not have a material effect on the Company’s consolidated financial statements.

 

(18)           In November 2008, the Company acquired the remaining 50 percent ownership interest in ReGen Technologies, LLC, a remanufacturing company located in Springfield, Missouri, for approximately $40 million dollars.  The preliminary values assigned to the assets and liabilities related to the 50 percent acquisition were approximately $13 million of inventories, $30 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 is allocated to the Company’s agricultural equipment 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.

 

18



 

(19) SUPPLEMENTAL CONSOLIDATING DATA

STATEMENT OF INCOME

For the Three Months Ended January 31, 2009 and 2008

(In millions of dollars) Unaudited

 


 

 

EQUIPMENT OPERATIONS*

 

FINANCIAL SERVICES

 

 

 

2009

 

2008

 

2009

 

2008

 

Net Sales and Revenues

 

 

 

 

 

 

 

 

 

Net sales

 

$

4,560.2

 

$

4,530.6

 

 

 

 

 

Finance and interest income

 

24.7

 

26.0

 

$

505.7

 

$

568.1

 

Other income

 

89.7

 

103.6

 

60.8

 

65.0

 

Total

 

4,674.6

 

4,660.2

 

566.5

 

633.1

 

 

 

 

 

 

 

 

 

 

 

Costs and Expenses

 

 

 

 

 

 

 

 

 

Cost of sales

 

3,542.9

 

3,362.2

 

 

 

 

 

Research and development expenses

 

219.4

 

204.3

 

 

 

 

 

Selling, administrative and general expenses

 

522.2

 

550.1

 

118.9

 

104.9

 

Interest expense

 

45.5

 

46.0

 

244.9

 

261.6

 

Interest compensation to Financial Services

 

48.0

 

53.6

 

 

 

 

 

Other operating expenses

 

79.4

 

47.8

 

146.2

 

131.4

 

Total

 

4,457.4

 

4,264.0

 

510.0

 

497.9

 

 

 

 

 

 

 

 

 

 

 

Income of Consolidated Group before Income Taxes

 

217.2

 

396.2

 

56.5

 

135.2

 

Provision for income taxes

 

63.7

 

132.2

 

9.8

 

37.7

 

Income of Consolidated Group

 

153.5

 

264.0

 

46.7

 

97.5

 

 

 

 

 

 

 

 

 

 

 

Equity in Income of Unconsolidated Subsidiaries and Affiliates

 

 

 

 

 

 

 

 

 

Credit

 

44.5

 

95.8

 

.1

 

.2

 

Other

 

5.9

 

9.3

 

 

 

 

 

Total

 

50.4

 

105.1

 

.1

 

.2

 

Net Income

 

$

203.9

 

$

369.1

 

$

46.8

 

$

97.7

 


 

*  Deere & Company with Financial Services on the equity basis.

 

The supplemental consolidating data is presented for informational purposes. Transactions between the “Equipment Operations” and “Financial Services” have been eliminated to arrive at the consolidated financial statements.

 

19



 

SUPPLEMENTAL CONSOLIDATING DATA (Continued)

CONDENSED BALANCE SHEET

(In millions of dollars) Unaudited

 


 

 

EQUIPMENT OPERATIONS *

 

FINANCIAL SERVICES

 

 

 

January 31

 

October 31

 

January 31

 

January 31

 

October 31

 

January 31

 

 

 

2009

 

2008

 

2008

 

2009

 

2008

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,881.3

 

$

1,034.6

 

$

1,199.0

 

$

3,122.8

 

$

1,176.8

 

$

297.3

 

Marketable securities

 

49.3

 

799.2

 

1,004.0

 

181.1

 

178.3

 

149.5

 

Receivables from unconsolidated subsidiaries and affiliates

 

364.1

 

976.2

 

376.3

 

 

 

 

 

1.1

 

Trade accounts and notes receivable - net

 

860.2

 

1,013.8

 

1,002.6

 

3,152.1

 

2,664.6

 

2,691.9

 

Financing receivables - net

 

2.0

 

10.4

 

4.4

 

13,377.3

 

16,006.6

 

15,228.6

 

Restricted financing receivables - net

 

 

 

 

 

 

 

3,268.9

 

1,644.8

 

1,960.6

 

Other receivables

 

546.9

 

599.3

 

575.1

 

134.9

 

67.7

 

76.1

 

Equipment on operating leases - net

 

 

 

 

 

 

 

1,543.7

 

1,638.6

 

1,628.4

 

Inventories

 

3,836.6

 

3,041.8

 

3,288.8

 

 

 

 

 

 

 

Property and equipment - net

 

3,023.9

 

2,991.1

 

2,716.9

 

1,125.6

 

1,136.6

 

934.8

 

Investments in unconsolidated  subsidiaries and affiliates

 

2,800.7

 

2,811.4

 

2,586.8

 

5.6

 

5.5

 

5.8

 

Goodwill

 

1,241.0

 

1,224.6

 

1,248.3

 

 

 

 

 

 

 

Other intangible assets - net

 

152.0

 

161.4

 

131.2

 

 

 

 

 

 

 

Retirement benefits

 

1,127.8

 

1,101.6

 

2,008.9

 

5.1

 

5.4

 

8.5

 

Deferred income taxes

 

1,492.1

 

1,479.4

 

1,445.1

 

78.9

 

80.2

 

58.3

 

Other assets

 

539.0

 

456.7

 

434.5

 

1,022.3

 

519.6

 

478.4

 

Total Assets

 

$

17,916.9

 

$

17,701.5

 

$

18,021.9

 

$

27,018.3

 

$

25,124.7

 

$

23,519.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

$

1,340.7

 

$

217.9

 

$

274.5

 

$

7,992.4

 

$

8,302.7

 

$

9,187.1

 

Payables to unconsolidated subsidiaries and affiliates

 

118.6

 

169.2

 

174.5

 

318.9

 

931.5

 

337.8

 

Accounts payable and accrued expenses

 

4,737.7

 

5,675.8

 

4,959.1

 

1,318.5

 

1,165.2

 

1,060.0

 

Deferred income taxes

 

98.1

 

99.8

 

107.2

 

219.2

 

191.0

 

133.2

 

Long-term borrowings

 

2,034.0

 

1,991.5

 

2,012.6

 

14,540.7

 

11,906.9

 

10,331.8

 

Retirement benefits and other liabilities

 

3,032.9

 

3,014.6

 

3,455.6

 

35.7

 

34.8

 

34.3

 

Total liabilities

 

11,362.0

 

11,168.8

 

10,983.5

 

24,425.4

 

22,532.1

 

21,084.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock, $1 par value (issued shares at January 31, 2009 - 536,431,204)

 

2,968.2

 

2,934.0

 

2,882.4

 

1,619.1

 

1,617.1

 

1,162.4

 

Common stock in treasury

 

(5,582.7

)

(5,594.6

)

(4,449.4

)

 

 

 

 

 

 

Retained earnings

 

10,666.1

 

10,580.6

 

9,243.4

 

1,024.2

 

979.3

 

1,165.0

 

Accumulated other comprehensive income (loss)

 

(1,496.7

)

(1,387.3

)

(638.0

)

(50.4

)

(3.8

)

107.7

 

Stockholders’ equity

 

6,554.9

 

6,532.7

 

7,038.4

 

2,592.9

 

2,592.6

 

2,435.1

 

Total Liabilities and Stockholders’ Equity

 

$

17,916.9

 

$

17,701.5

 

$

18,021.9

 

$

27,018.3

 

$

25,124.7

 

$

23,519.3

 


 

* Deere & Company with Financial Services on the equity basis.

 

The supplemental consolidating data is presented for informational purposes.  Transactions between the “Equipment Operations” and “Financial Services” have been eliminated to arrive at the consolidated financial statements.

 

20



 

SUPPLEMENTAL CONSOLIDATING DATA (Continued)
STATEMENT OF CASH FLOWS

For the Three Months Ended January 31, 2009 and 2008
(In millions of dollars) Unaudited

 


 

 

EQUIPMENT OPERATIONS*

 

FINANCIAL SERVICES

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

 

Net income

 

$

203.9

 

$

369.1

 

$

46.8

 

$

97.7

 

Adjustments to reconcile net income to net cash provided by (used for) operating activities:

 

 

 

 

 

 

 

 

 

Provision (credit) for doubtful receivables

 

5.8

 

(.3

)

34.2

 

17.7

 

Provision for depreciation and amortization

 

130.2

 

117.2

 

100.3

 

101.2

 

Undistributed (earnings) loss of unconsolidated subsidiaries and affiliates

 

(50.6

)

36.7

 

(.2

)

(.2

)

Provision (credit) for deferred income taxes

 

(13.3

)

(23.6

)

43.2

 

3.4

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

 

Receivables

 

124.9

 

2.1

 

(25.7

)

.4

 

Inventories

 

(840.3

)

(956.3

)

 

 

 

 

Accounts payable and accrued expenses

 

(808.7

)

(332.8

)

19.9

 

.3

 

Accrued income taxes payable/receivable

 

8.6

 

182.0

 

(21.5

)

1.1

 

Retirement benefits

 

5.5

 

(196.9

)

1.3

 

1.8

 

Other

 

2.7

 

10.5

 

(62.0

)

(44.4

)

Net cash provided by (used for) operating activities

 

(1,231.3

)

(792.3

)

136.3

 

179.0

 

 

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

 

Collections of receivables

 

 

 

 

 

7,835.1

 

7,041.6

 

Proceeds from sales of financing receivables

 

 

 

 

 

9.2

 

15.5

 

Proceeds from maturities and sales of marketable securities

 

757.9

 

679.1

 

6.6

 

13.7

 

Proceeds from sales of equipment on operating leases

 

 

 

 

 

117.9

 

125.2

 

Proceeds from sales of businesses, net of cash sold

 

 

 

18.4

 

 

 

 

 

Cost of receivables acquired

 

 

 

 

 

(7,546.4

)

(6,633.0

)

Purchases of marketable securities

 

(7.6

)

(216.3

)

(.4

)

(4.0

)

Purchases of property and equipment

 

(212.0

)

(132.5

)

(50.1

)

(100.6

)

Cost of equipment on operating leases acquired

 

 

 

 

 

(120.1

)

(156.0

)

Acquisitions of businesses, net of cash acquired

 

(40.9

)

(34.0

)

 

 

 

 

Other

 

(5.4

)

(72.9

)

7.3

 

.7

 

Net cash provided by investing activities

 

492.0

 

241.8

 

259.1

 

303.1

 

 

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

 

Increase (decrease) in short-term borrowings

 

1,116.0

 

146.3

 

41.1

 

(262.4

)

Change in intercompany receivables/payables

 

614.2

 

79.8

 

(614.2

)

(79.8

)

Proceeds from long-term borrowings

 

 

 

 

 

2,842.2

 

1,037.7

 

Payments of long-term borrowings

 

(19.6

)

(3.2

)

(633.4

)

(1,036.7

)

Proceeds from issuance of common stock

 

3.1

 

68.7

 

 

 

 

 

Repurchases of common stock

 

(3.2

)

(481.5

)

 

 

 

 

Dividends paid

 

(118.2

)

(110.4

)

 

 

(140.0

)

Excess tax benefits from share-based compensation

 

.5

 

35.1

 

 

 

 

 

Other

 

(4.5

)

2.9

 

(91.4

)

35.8

 

Net cash provided by (used for) financing activities

 

1,588.3

 

(262.3

)

1,544.3

 

(445.4

)

 

 

 

 

 

 

 

 

 

 

Effect of Exchange Rate Changes on Cash and Cash Equivalents

 

(2.3

)

(7.8

)

6.3

 

1.5

 

 

 

 

 

 

 

 

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

 

846.7

 

(820.6

)

1,946.0

 

38.2

 

Cash and Cash Equivalents at Beginning of Period

 

1,034.6

 

2,019.6

 

1,176.8

 

259.1

 

Cash and Cash Equivalents at End of Period

 

$

1,881.3

 

$

1,199.0

 

$

3,122.8

 

$

297.3

 


 

* Deere & Company with Financial Services on the equity basis.

 

The supplemental consolidating data is presented for informational purposes.  Transactions between the “Equipment Operations” and “Financial Services” have been eliminated to arrive at the consolidated financial statements.

 

21



 

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

 

RESULTS OF OPERATIONS

 

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; a variety of commercial, consumer and landscapes equipment and 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.

 

Trends and Economic Conditions

 

Farm conditions in the United States and Canada remain positive, benefitting from the sound financial health of the U.S. farm sector, although the outlook for the current year is uncertain.  Industry sales for 2009 are forecast to be flat to up 5 percent for the year in the U.S. and Canada led by an increase in large tractors and combines.  Sales in parts of Australia and South America are expected to be hurt by drought.  Sales in Western Europe are forecast to be down 10 to 15 percent for the year.  Significant sales declines are expected in Central Europe and the CIS (Commonwealth of Independent States) countries, including Russia.  South American markets are also expected to have sales declines, with industry sales forecast to decrease by 15 to 25 percent.  The Company’s agricultural equipment sales were up 18 percent for the first quarter of 2009 and are forecast to decrease about 2 percent for the full year, which includes a negative effect of about 7 percent for currency translation.  The Company’s commercial and consumer equipment sales declined 25 percent for the first quarter.  Commercial and consumer equipment sales are projected to decline about 14 percent for the year, reflecting the U.S. housing decline and recessionary economic conditions.  U.S. markets for construction and forestry equipment are forecast to remain under continued pressure due in large part to a declining global economy and historically low levels of construction activity in the U.S.  The Company’s construction and forestry sales declined 28 percent in the first quarter of 2009, and are expected to decrease approximately 24 percent for the year.  Net income for the Company’s credit operations in 2009 is forecast to decrease to approximately $250 million.

 

Items of concern include the sharp downturn in global economic activity, the turmoil in financial markets and the effectiveness of governmental policies to restore liquidity and the availability of credit for the Company’s customers.  The ability of the Company’s suppliers to access credit is a risk.  Significant fluctuations in foreign currency exchange rates could also impact the Company’s results.  The volatility in the price of many commodities used in the Company’s products is also a concern.  The availability of certain components that could impact the Company’s ability to meet production schedules continues to be monitored.  Producing engines that continue to meet high performance standards, yet also comply with increasingly stringent emissions regulations is one of the Company’s major priorities.

 

Ongoing high material costs, the deepening global recession and volatile foreign exchange rates have put downward pressure on the Company’s financial results.  However, demand for large productive agricultural machinery has held up well in the U.S. and Canada.  The Company’s investment in advanced technology and emphasis on disciplined asset management should benefit the Company.  Also of benefit has been the Company’s access to global capital markets, which is helping to ensure that financing remains available for many customers.

 

22



 

2009 Compared with 2008

 

Deere & Company’s net income was $203.9 million, or $.48 per share for the first quarter of 2009, compared with $369.1 million, or $.83 per share, for the same period last year.

 

Worldwide net sales and revenues decreased 1 percent to $5,146 million for the first quarter, compared with $5,201 million a year ago.  Net sales of the Equipment Operations increased 1 percent to $4,560 million for the first quarter, compared with $4,531 million last year.  Included in these sales were price changes of 6 percent, offset by an unfavorable currency translation effect of 6 percent.  Equipment sales in the U.S. and Canada increased 1 percent for the first quarter.  Net sales outside the U.S. and Canada were basically unchanged for the quarter, which included an unfavorable currency translation effect of 14 percent.

 

The Company’s Equipment Operations reported operating profit of $307 million for the first quarter, compared with $457 million last year.  The deterioration was largely due to increased raw material costs and unfavorable effects of volatile foreign currency exchange rates, partially offset by improved price realization.  The Equipment Operations had net income of $153.5 million for the first quarter of 2009, compared with $264.0 million last year.  The same factors mentioned above in addition to a lower effective tax rate this year affected these results.

 

Trade receivables and inventories at the end of the first quarter were $7,312 million, or 28 percent of the last 12 months’ net sales, compared with $6,488 million, or 29 percent of net sales, a year ago.

 

Net income of the Company’s Financial Services operations for the first quarter of 2009 was $46.8 million, compared with $97.7 million last year.  The decrease was primarily due to narrower financing spreads, lower commissions from crop insurance and a higher provision for credit losses.  See the following discussion for the credit operations.

 

Business Segment Results

 

·                 Agricultural Equipment.  Segment sales increased 18 percent for the first quarter, primarily as a result of higher shipment volumes and improved price realization, partially offset by unfavorable effects of currency translation.  Operating profit was $348 million for the quarter, compared with $332 million in the same period last year.  The operating profit increase was primarily due to improved prize realization and the favorable impact of higher shipment and production volumes, partially offset by higher raw material costs.  Also having a negative impact on operating profit was sharp volatility in foreign currency exchange rates.

 

·                 Commercial and Consumer Equipment.  Segment sales declined 25 percent for the first quarter.  The segment had an operating loss of $59 million for the quarter, compared with $8 million operating profit a year ago.  The operating loss was primarily due to the unfavorable impact of lower shipment and production volumes and higher raw material costs, partially offset by lower selling, administrative and general expenses and improved price realization.

 

·                 Construction and Forestry.  Segment sales were down 28 percent, while operating profit declined to $18 million for the first quarter, compared to $117 million a year ago.  The operating profit decrease was mainly due to the unfavorable impact of lower shipment and production volumes and higher raw material costs, partially offset by improved price realization and lower selling, administrative and general expenses.

 

23



 

·                  Credit.  The credit segment had an operating profit of $53 million for the first quarter, compared with $133 million in the same period last year.  The decline was primarily due to narrower financing spreads, lower commissions from crop insurance and a higher provision for credit losses.  Total revenues of the credit operations, including intercompany revenues, decreased 12 percent to $541 million in the current quarter from $614 million in the first quarter of 2008.  The average balance of receivables and leases financed was 1 percent lower in the first quarter, compared with the same period last year.  Interest expense decreased 6 percent in the current quarter, compared with last year, as a result of lower average interest rates, partially offset by an increase in average borrowings.  The credit operations’ consolidated ratio of earnings to fixed charges was 1.21 to 1 for the first quarter this year, compared with 1.52 to 1 in the same period last year.

 

The cost of sales to net sales ratios for the first quarter of 2009 and 2008 were 77.7 percent and 74.2 percent, respectively.  The deterioration was primarily due to increased raw material costs and unfavorable effects of volatility in foreign currency exchange rates, partially offset by improve