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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 April 30, 2005

 

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   ý   No    o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

Yes   ý   No    o

 

At April 30, 2005, 242,211,084 shares of common stock, $1 par value, of the registrant were outstanding.

 

 



 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

DEERE & COMPANY
STATEMENT OF CONSOLIDATED INCOME
For the Three Months Ended April 30, 2005 and 2004
(In millions of dollars and shares except per share amounts) Unaudited

 

 

 

2005

 

2004

 

 

 

 

 

 

 

Net Sales and Revenues

 

 

 

 

 

Net sales

 

$

6,019.2

 

$

5,296.1

 

Finance and interest income

 

341.9

 

294.0

 

Health care premiums and fees

 

176.6

 

194.3

 

Other income

 

83.7

 

92.6

 

Total

 

6,621.4

 

5,877.0

 

 

 

 

 

 

 

Costs and Expenses

 

 

 

 

 

Cost of sales

 

4,541.6

 

3,983.3

 

Research and development expenses

 

170.4

 

150.6

 

Selling, administrative and general expenses

 

597.9

 

583.7

 

Interest expense

 

180.1

 

151.2

 

Health care claims and costs

 

142.4

 

180.7

 

Other operating expenses

 

94.1

 

85.7

 

Total

 

5,726.5

 

5,135.2

 

 

 

 

 

 

 

Income of Consolidated Group
Before Income  Taxes

 

894.9

 

741.8

 

Provision for income taxes

 

297.2

 

262.6

 

Income of Consolidated Group

 

597.7

 

479.2

 

 

 

 

 

 

 

Equity in Income (Loss) of Unconsolidated Affiliates

 

 

 

 

 

Credit

 

.1

 

.2

 

Other

 

6.2

 

(2.1

)

Total

 

6.3

 

(1.9

)

 

 

 

 

 

 

Net Income

 

$

604.0

 

$

477.3

 

 

 

 

 

 

 

Per Share:

 

 

 

 

 

Net income - basic

 

$

2.46

 

$

1.93

 

Net income - diluted

 

$

2.43

 

$

1.88

 

 

 

 

 

 

 

Average Shares Outstanding:

 

 

 

 

 

Basic

 

245.4

 

247.7

 

Diluted

 

248.7

 

254.3

 

 

See Notes to Interim Financial Statements.

 

2



 

DEERE & COMPANY
STATEMENT OF CONSOLIDATED INCOME
For the Six Months Ended April 30, 2005 and 2004
(In millions of dollars and shares except per share amounts) Unaudited

 

 

 

2005

 

2004

 

 

 

 

 

 

 

Net Sales and Revenues

 

 

 

 

 

Net sales

 

$

9,545.7

 

$

8,207.7

 

Finance and interest income

 

667.5

 

588.7

 

Health care premiums and fees

 

365.5

 

375.6

 

Other income

 

169.8

 

188.8

 

Total

 

10,748.5

 

9,360.8

 

 

 

 

 

 

 

Costs and Expenses

 

 

 

 

 

Cost of sales

 

7,307.6

 

6,277.7

 

Research and development expenses

 

319.7

 

288.8

 

Selling, administrative and general expenses

 

1,059.6

 

1,001.5

 

Interest expense

 

347.2

 

298.6

 

Health care claims and costs

 

294.5

 

331.3

 

Other operating expenses

 

179.5

 

158.9

 

Total

 

9,508.1

 

8,356.8

 

 

 

 

 

 

 

Income of Consolidated Group
Before Income Taxes

 

1,240.4

 

1,004.0

 

Provision for income taxes

 

417.0

 

355.1

 

Income of Consolidated Group

 

823.4

 

648.9

 

 

 

 

 

 

 

Equity in Income (Loss) of Unconsolidated Affiliates

 

 

 

 

 

Credit

 

.3

 

.3

 

Other

 

3.1

 

(1.1

)

Total

 

3.4

 

(.8

)

 

 

 

 

 

 

Net Income

 

$

826.8

 

$

648.1

 

 

 

 

 

 

 

Per Share:

 

 

 

 

 

Net income - basic

 

$

3.36

 

$

2.63

 

Net income - diluted

 

$

3.31

 

$

2.56

 

 

 

 

 

 

 

Average Shares Outstanding:

 

 

 

 

 

Basic

 

246.2

 

246.5

 

Diluted

 

249.8

 

253.0

 

 

See Notes to Interim Financial Statements.

 

3



 

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

 

 

 

April 30

 

October 31

 

April 30

 

 

 

2005

 

2004

 

2004

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,056.7

 

$

3,181.1

 

$

2,995.7

 

Marketable securities

 

275.1

 

246.7

 

250.8

 

Receivables from unconsolidated affiliates

 

21.4

 

17.6

 

31.2

 

Trade accounts and notes receivable - net

 

4,389.6

 

3,206.9

 

3,887.1

 

Financing receivables - net

 

11,769.9

 

11,232.6

 

9,655.1

 

Restricted financing receivables - net

 

600.3

 

 

 

 

 

Other receivables

 

341.6

 

663.0

 

428.3

 

Equipment on operating leases - net

 

1,214.4

 

1,296.9

 

1,204.4

 

Inventories

 

2,890.0

 

1,999.1

 

2,226.2

 

Property and equipment - net

 

2,177.8

 

2,161.6

 

2,071.4

 

Investments in unconsolidated affiliates

 

109.7

 

106.9

 

109.2

 

Goodwill

 

973.8

 

973.6

 

928.4

 

Other intangible assets - net

 

21.0

 

21.7

 

255.5

 

Prepaid pension costs

 

2,652.7

 

2,493.1

 

60.8

 

Other assets

 

464.0

 

515.4

 

494.2

 

Deferred income taxes

 

597.3

 

528.1

 

1,249.2

 

Deferred charges

 

138.3

 

109.7

 

109.8

 

Total Assets

 

$

31,693.6

 

$

28,754.0

 

$

25,957.3

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Short-term borrowings

 

$

5,364.0

 

$

3,457.5

 

$

3,076.9

 

Payables to unconsolidated affiliates

 

174.3

 

142.3

 

146.0

 

Accounts payable and accrued expenses

 

4,279.2

 

3,973.6

 

3,612.0

 

Health care claims and reserves

 

130.6

 

135.9

 

128.3

 

Accrued taxes

 

188.7

 

179.2

 

205.1

 

Deferred income taxes

 

61.8

 

62.6

 

29.2

 

Long-term borrowings

 

11,324.3

 

11,090.4

 

10,878.3

 

Retirement benefit accruals and other liabilities

 

3,431.0

 

3,319.7

 

3,140.7

 

Total liabilities

 

24,953.9

 

22,361.2

 

21,216.5

 

Common stock, $1 par value (issued shares at April 30, 2005 – 268,215,602)

 

2,043.5

 

2,043.5

 

1,987.7

 

Common stock in treasury

 

(1,389.0

)

(1,040.4

)

(897.4

)

Unamortized restricted stock compensation

 

(24.6

)

(12.7

)

(16.7

)

Retained earnings

 

6,106.1

 

5,445.1

 

4,841.4

 

Total

 

6,736.0

 

6,435.5

 

5,915.0

 

Accumulated other comprehensive income (loss)

 

3.7

 

(42.7

)

(1,174.2

)

Stockholders’ equity

 

6,739.7

 

6,392.8

 

4,740.8

 

Total Liabilities and Stockholders’ Equity

 

$

31,693.6

 

$

28,754.0

 

$

25,957.3

 

 

See Notes to Interim Financial Statements.

 

4



 

DEERE & COMPANY
STATEMENT OF CONSOLIDATED CASH FLOWS
For the Six Months Ended April 30, 2005 and 2004
(In millions of dollars) Unaudited

 

 

 

2005

 

2004

 

 

 

 

 

 

 

Cash Flows from Operating Activities

 

 

 

 

 

Net income

 

$

826.8

 

$

648.1

 

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

 

 

 

 

 

Provision for doubtful receivables

 

4.6

 

34.5

 

Provision for depreciation and amortization

 

313.8

 

316.7

 

Undistributed earnings of unconsolidated affiliates

 

(2.3

)

21.5

 

Provision (credit) for deferred income taxes

 

(72.0

)

244.8

 

Changes in assets and liabilities:

 

 

 

 

 

Trade, notes and financing receivables related to sales of equipment

 

(1,201.5

)

(1,282.8

)

Inventories

 

(982.4

)

(707.7

)

Accounts payable and accrued expenses

 

266.5

 

579.9

 

Retirement benefit accruals/prepaid pension costs

 

(52.3

)

(829.8

)

Other

 

148.3

 

(103.3

)

Net cash used for operating activities

 

(750.5

)

(1,078.1

)

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

Collections of financing receivables

 

3,927.4

 

3,935.0

 

Proceeds from sales of financing receivables

 

51.5

 

1,593.0

 

Proceeds from maturities and sales of marketable securities

 

26.8

 

30.4

 

Proceeds from sales of equipment on operating leases

 

200.6

 

260.2

 

Proceeds from sales of businesses

 

46.0

 

78.7

 

Cost of financing receivables acquired

 

(4,935.8

)

(5,144.5

)

Purchases of marketable securities

 

(57.7

)

(51.2

)

Purchases of property and equipment

 

(182.4

)

(140.6

)

Cost of operating leases acquired

 

(136.0

)

(117.4

)

Acquisitions of businesses, net of cash acquired

 

(6.1

)

(163.3

)

Increase in receivables with unconsolidated affiliates

 

 

 

(14.9

)

Other

 

25.2

 

16.6

 

Net cash provided by (used for) investing activities

 

(1,040.5

)

282.0

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

Increase (decrease) in short-term borrowings

 

976.5

 

(452.5

)

Proceeds from long-term borrowings

 

1,480.1

 

802.8

 

Principal payments on long-term borrowings

 

(270.7

)

(1,080.2

)

Proceeds from issuance of common stock

 

96.6

 

216.5

 

Repurchases of common stock

 

(484.4

)

(.2

)

Dividends paid

 

(138.6

)

(107.6

)

Other

 

(.7

)

(.6

)

Net cash provided by (used for) financing activities

 

1,658.8

 

(621.8

)

 

 

 

 

 

 

Effect of Exchange Rate Changes on Cash

 

7.8

 

29.1

 

 

 

 

 

 

 

Net Decrease in Cash and Cash Equivalents

 

(124.4

)

(1,388.8

)

Cash and Cash Equivalents at Beginning of Period

 

3,181.1

 

4,384.5

 

Cash and Cash Equivalents at End of Period

 

$

3,056.7

 

$

2,995.7

 

 

See Notes to Interim Financial Statements.

 

5



 

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 appearing in Part II., Item 5. of the Company’s Form 10-Q for January 31, 2005. 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 amounts for prior years have been reclassified to conform with 2005 financial statement presentations.

 

Certain information in the Statement of Consolidated Cash Flows as shown in the following table has been reclassified for the six months ended April 30, 2004. This reclassification is related to concerns raised by the staff of the U.S. Securities and Exchange Commission. Previously, the Company reported an increase in cash flow from operating activities when a trade receivable was settled by a dealer through financing received from the Company’s credit operations. The Company also reported an increase in cash flow from operating activities when equipment that had been in the Company’s inventory was transferred to the credit operations and financed as an operating lease with a customer. The financing receivable or operating lease issued by the credit operations for these transactions was reported as a corresponding cash outflow from investing activities. There was no cash received by the Company on a consolidated basis at that time. These offsetting intercompany cash flows have been eliminated in the Statement of Consolidated Cash Flows to properly reflect consolidated operating and investing activities. Subsequent cash inflows from the collections or sales of these financing receivables were reclassified from investing to operating activities in order to properly classify cash receipts from the sale of inventory as operating activities. The Supplemental Consolidating Data Statement of Cash Flows in Note 15 for the Equipment Operations and the Financial Services operations on a stand-alone basis has not changed.

 

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 the sale of equipment to the Company’s customers. Cash flows from financing receivables that are related to the sale of equipment to the Company’s customers are also included in operating activities. The remaining financing receivables are related to the financing of equipment sold by an independent dealer and are included in investing activities.

 

The Company had non-cash operating and investing activities that were not included in the Statement of Consolidated Cash Flows for the transfer of inventory to equipment under operating leases of approximately $99 million and $77 million in the first six months of 2005 and 2004, respectively.

 

6



 

Reconciliations of the reclassifications in the Statement of Consolidated Cash Flows in millions of dollars are as follows:

 

 

 

Six Months Ended

 

 

 

April 30

 

 

 

2004

 

 

 

 

 

Cash Flows from Operating Activities

 

 

 

Net cash used for operating activities

 

 

 

Previous

 

$

(908.5

)

Reclassification

 

(169.6

)

Revised

 

$

(1,078.1

)

 

 

 

 

Cash Flows from Investing Activities

 

 

 

Collections of financing receivables

 

 

 

Previous

 

$

5,160.6

 

Reclassification

 

(1,225.6

)

Revised

 

$

3,935.0

 

 

 

 

 

Proceeds from sales of financing receivables

 

 

 

Previous

 

$

1,602.6

 

Reclassification

 

(9.6

)

Revised

 

$

1,593.0

 

 

 

 

 

Cost of financing receivables acquired

 

 

 

Previous

 

$

(6,445.5

)

Reclassification

 

1,301.0

 

Revised

 

$

(5,144.5

)

 

 

 

 

Cost of operating leases acquired

 

 

 

Previous

 

$

(221.2

)

Reclassification

 

103.8

 

Revised

 

$

(117.4

)

 

 

 

 

Net cash provided by investing activities

 

 

 

Previous

 

$

112.4

 

Reclassification

 

169.6

 

Revised

 

$

282.0

 

 

(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, health care and certain miscellaneous service operations.

 

7



 

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
April 30

 

Six Months Ended
April 30

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

5,583.7

 

$

4,446.2

 

$

5,445.1

 

$

4,329.5

 

Net income

 

604.0

 

477.3

 

826.8

 

648.1

 

Dividends declared

 

(76.1

)

(69.1

)

(145.2

)

(123.2

)

Other adjustments

 

(5.5

)

(13.0

)

(20.6

)

(13.0

)

Balance, end of period

 

$

6,106.1

 

$

4,841.4

 

$

6,106.1

 

$

4,841.4

 

 

(4)        The Company currently uses the intrinsic value method to account for stock-based employee compensation in its financial statements (see Note 13 for future adoption of the fair value method). The pro forma net income and net income per share, as if the fair value method in Financial Accounting Standards Board (FASB) Statement No. 123 had been used to account for stock-based compensation, with dollars in millions except per share amounts, were as follows:

 

 

 

Three Months Ended
April 30

 

Six Months Ended
April 30

 

 

 

2005

 

2004

 

2005

 

2004

 

Net income as reported

 

$

604.0

 

$

477.3

 

$

826.8

 

$

648.1

 

 

 

 

 

 

 

 

 

 

 

Add:

 

 

 

 

 

 

 

 

 

Stock-based employee compensation costs, net of tax, included in net income

 

2.2

 

1.3

 

4.2

 

2.5

 

 

 

 

 

 

 

 

 

 

 

Less:

 

 

 

 

 

 

 

 

 

Stock-based employee compensation costs, net of tax, as if fair value method had been applied

 

(10.1

)

(7.9

)

(19.5

)

(15.8

)

 

 

 

 

 

 

 

 

 

 

Pro forma net income

 

$

596.1

 

$

470.7

 

$

811.5

 

$

634.8

 

 

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

 

 

As reported - basic

 

$

2.46

 

$

1.93

 

$

3.36

 

$

2.63

 

Pro forma - basic

 

2.43

 

1.91

 

3.30

 

2.58

 

As reported - diluted

 

2.43

 

1.88

 

3.31

 

2.56

 

Pro forma - diluted

 

2.41

 

1.87

 

3.27

 

2.52

 

 

8



 

(5)        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:

 

 

 

April 30
2005

 

October 31
2004

 

April 30
2004

 

 

 

 

 

 

 

 

 

Raw materials and supplies

 

$

723

 

$

589

 

$

548

 

Work-in-process

 

475

 

408

 

435

 

Finished goods and parts

 

2,698

 

2,004

 

2,195

 

Total FIFO value

 

3,896

 

3,001

 

3,178

 

Less adjustment to LIFO basis

 

1,006

 

1,002

 

952

 

Inventories

 

$

2,890

 

$

1,999

 

$

2,226

 

 

(6)        Contingencies and restrictions:

 

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 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.

 

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

 

 

 

Three Months Ended
April 30

 

Six Months Ended
April 30

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

458

 

$

397

 

$

458

 

$

389

 

 

 

 

 

 

 

 

 

 

 

Payments

 

(93

)

(104

)

(186

)

(185

)

 

 

 

 

 

 

 

 

 

 

Accruals for warranties

 

111

 

113

 

204

 

202

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

$

476

 

$

406

 

$

476

 

$

406

 

 

In the second quarter of 2005, the credit operations’ new securitizations of financing receivables (retail notes) held by a special purpose entity (SPE) met the criteria for secured financings rather than sales of receivables under FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. The borrowings related to these securitizations of retail notes 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 recorded on the balance sheet related to these securitizations include the restricted financing receivables less an allowance for credit losses, and other assets representing restricted cash as shown in the following table. In addition to the restricted assets, the creditors of the SPE involved in the secured borrowings (a $2 billion revolving conduit facility described more fully under “Capital Resources and Liquidity” in Management’s Discussion and Analysis) have recourse to a letter of credit issued by the credit operations totaling approximately $80 million as of April 30, 2005. A portion of the previous transfers of retail notes to this facility qualified as sales of receivables under

 

9



 

FASB Statement No. 140. As a result, this letter of credit is also included in the maximum exposure to losses for receivables that have been sold, discussed below. The Company recognizes finance income on these restricted retail notes on an effective-yield basis and provides for credit losses incurred over the life of the retail notes in the allowance for credit losses.

 

The total components of consolidated restricted assets related to securitizations were as follows in millions of dollars:

 

 

 

April 30

 

 

 

2005

 

 

 

 

 

Restricted financing receivables

 

$

602

 

Allowance for credit losses

 

(2

)

Other assets

 

23

 

Total restricted securitized assets

 

$

623

 

 

The components of consolidated secured liabilities related to securitizations were as follows in millions of dollars :

 

 

 

April 30

 

 

 

2005

 

 

 

 

 

Short-term borrowings

 

$

621

 

Accrued interest on borrowings

 

1

 

Total liabilities related to securitized assets

 

$

622

 

 

The restricted retail notes on the balance sheet were transferred to a SPE that is not consolidated since the Company is not the primary beneficiary, however, the transfer qualified as a secured financing rather than a sale. The borrowings shown above are the obligations to this SPE that are payable as the retail notes are liquidated. 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, John Deere Capital Corporation (the “Capital Corporation”), which is included in the Company’s credit operations, has sold the receivables to the SPE in a true sale and the SPE is a separate legal entity from the Capital Corporation. Use of the assets held by the SPE is restricted by terms of governing documents. Repayment of the secured borrowings depends primarily on cash flows generated by the restricted assets and the letter of credit mentioned above. At April 30, 2005, the maximum remaining term of the restricted receivables included in the restricted assets was approximately six years.

 

The credit operations have guarantees for certain recourse obligations on financing receivables (primarily retail notes), which have been securitized and sold in prior periods. These transactions qualified as sales of receivables and the retail notes are not included on the balance sheet. If the retail notes sold are not collected, the Company would be required to cover those losses up to the amount of its recourse obligation. At April 30, 2005, the maximum amount of exposure to losses under these agreements was $180 million. The estimated risk associated with the sold receivables totaled $16 million at April 30, 2005. This risk of loss is recognized primarily in the retained interests on the Company’s balance sheet related to these sold retail notes. The retained interests are related to assets held by unconsolidated SPEs. At April 30, 2005, the assets of these SPEs related to the Company’s securitization and sale of retail notes totaled approximately $2,467 million. The Company may recover a portion of any required payments incurred under these agreements from the repossession of the equipment collateralizing the retail notes. At April 30, 2005, the maximum remaining term of these guaranteed receivables was approximately five years.

 

At April 30, 2005, the Company had approximately $133 million of guarantees issued primarily to

 

10



 

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. At April 30, 2005, the Company had accrued losses of approximately $1 million under these agreements. The maximum remaining term of the receivables guaranteed at April 30, 2005 was approximately six years.

 

At April 30, 2005, the Company had guaranteed approximately $40 million of residual value for two operating leases related to an administrative and a manufacturing building. The Company is obligated at the end of each lease term to pay to the lessor any reduction in market value of the leased property up to the guaranteed residual value. The Company recognizes the expense for these future estimated lease payments over the lives of the operating leases and had accrued expenses of $9 million related to these agreements at April 30, 2005. The leases have terms expiring from 2006 to 2007.

 

The credit operations’ subsidiary, John Deere Risk Protection, Inc., offers crop insurance products through a managing general agency agreement (MGA) with an insurance company rated “A” with A.M. Best Company (Insurance Carrier). As a managing general agent, John Deere Risk Protection, Inc. will receive commissions from the Insurance Carrier for selling crop insurance to producers.  The credit operations have guaranteed certain obligations under the MGA, including the obligation to pay the Insurance Carrier for any uncollected premiums. At April 30, 2005, the maximum exposure for uncollected premiums was approximately $37 million. Substantially all of the credit operations’ crop insurance risk under the MGA has been mitigated by public and private reinsurance. All private reinsurance companies are rated “A” or higher by A.M. Best Company. In the event of a complete crop failure on every policy written under the MGA in 17 states and the default of both the U.S. Department of Agriculture and a syndicate of highly rated private reinsurance companies on their reinsurance obligations, the credit operations would be required to reimburse the Insurance Carrier for the maximum exposure under the MGA of approximately $445 million at April 30, 2005. The credit operations believe that the likelihood of the ocurrence of substantially all of the events that give rise to the exposure under this MGA is extremely remote and as a result, at April 30, 2005, the credit operations have accrued losses of approximately $.2 million under the MGA.

 

The Company had pledged assets of $17 million, outside the U.S., as collateral for borrowings, and $17 million of restricted investments related to conducting the health care business in various states at April 30, 2005.

 

The Company also had other miscellaneous contingent liabilities totaling approximately $30 million at April 30, 2005, for which it believes the probability for payment is primarily remote.

 

John Deere B.V., located in the Netherlands, is a consolidated indirect wholly-owned finance subsidiary of the Company. The debt securities of John Deere B.V., including those that are registered with the U.S. Securities and Exchange Commission, are fully and unconditionally guaranteed by the Company. These registered debt securities totaled $250 million at April 30, 2005 and are included on the consolidated balance sheet.

 

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

 

11



 

 

 

Three Months Ended
April 30

 

Six Months Ended
April 30

 

 

 

2005

 

2004

 

2005

 

2004

 

Dividends declared

 

$

.31

 

$

.28

 

$

.59

 

$

.50

 

Dividends paid

 

$

.28

 

$

.22

 

$

.56

 

$

.44

 

 

12



 

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

 

 

 

Three Months Ended April 30

 

Six Months Ended April 30

 

 

 

2005

 

2004

 

%
Change

 

2005

 

2004

 

%
Change

 

Net sales and revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Agricultural equipment *

 

$

3,292

 

$

2,816

 

+17

 

$

5,302

 

$

4,412

 

+20

 

Commercial and consumer equipment

 

1,235

 

1,318

 

-6

 

1,758

 

1,888

 

-7

 

Construction and forestry *

 

1,492

 

1,162

 

+28

 

2,486

 

1,908

 

+30

 

Total net sales **

 

6,019

 

5,296

 

+14

 

9,546

 

8,208

 

+16

 

Credit revenues *

 

343

 

324

 

+6

 

673

 

639

 

+5

 

Other revenues

 

259

 

257

 

+1

 

529

 

514

 

+4

 

Total net sales and revenues **

 

$

6,621

 

$

5,877

 

+13

 

$

10,748

 

$

9,361

 

+15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating profit (loss): ***

 

 

 

 

 

 

 

 

 

 

 

 

 

Agricultural equipment

 

$

488

 

$

430

 

+13

 

$

651

 

$

516

 

+26

 

Commercial and consumer equipment

 

135

 

152

 

-11

 

133

 

171

 

-22

 

Construction and forestry

 

233

 

144

 

+62

 

334

 

237

 

+41

 

Credit

 

109

 

110

 

-1

 

235

 

227

 

+4

 

Other

 

6

 

(17

)

 

 

15

 

(12

)

 

 

Total operating profit **

 

971

 

819

 

+19

 

1,368

 

1,139

 

+20

 

Interest, corporate expenses - net and income taxes

 

(367

)

(342

)

+7

 

(541

)

(491

)

+10

 

Net income

 

$

604

 

$

477

 

+27

 

$

827

 

$

648

 

+28

 

Identifiable assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Agricultural equipment

 

 

 

 

 

 

 

$

3,891

 

$

3,181

 

+22

 

Commercial and consumer equipment

 

 

 

 

 

 

 

1,648

 

1,644

 

 

 

Construction and forestry

 

 

 

 

 

 

 

2,119

 

1,878

 

+13

 

Credit

 

 

 

 

 

 

 

17,991

 

14,882

 

+21

 

Other

 

 

 

 

 

 

 

425

 

371

 

+15

 

Corporate

 

 

 

 

 

 

 

5,620

 

4,001

 

+40

 

Total assets

 

 

 

 

 

 

 

$

31,694

 

$

25,957

 

+22

 

 


*                    Additional intersegment sales and revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Agricultural equipment sales

 

$

31

 

$

22

 

+41

 

$

53

 

$

39

 

+36

 

Construction and forestry sales

 

4

 

4

 

 

 

7

 

6

 

+17

 

Credit revenues

 

64

 

58

 

+10

 

113

 

106

 

+7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

1,800

 

$

1,550

 

+16

 

$

2,924

 

$

2,465

 

+19

 

Operating profit

 

253

 

227

 

+11

 

364

 

335

 

+9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Company views its operations as consisting of two geographic areas, the U.S. and Canada, and outside the U.S. and Canada.

 

 

 

***      Operating profit is income 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.

 

 

13



 

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

 

 

 

Three Months Ended
April 30

 

Six Months Ended
April 30

 

 

 

2005

 

2004

 

2005

 

2004

 

Net income

 

$

604.0

 

$

477.3

 

$

826.8

 

$

648.1

 

Average shares outstanding

 

245.4

 

247.7

 

246.2

 

246.5

 

Basic net income per share

 

$

2.46

 

$

1.93

 

$

3.36

 

$

2.63

 

 

 

 

 

 

 

 

 

 

 

Average shares outstanding

 

245.4

 

247.7

 

246.2

 

246.5

 

Effect of dilutive stock options

 

3.3

 

6.6

 

3.6

 

6.5

 

Total potential shares outstanding

 

248.7

 

254.3

 

249.8

 

253.0

 

Diluted net income per share

 

$

2.43

 

$

1.88

 

$

3.31

 

$

2.56

 

 

All stock options outstanding were included in the above computations during 2005 and 2004.

 

(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
April 30

 

Six Months Ended
April 30

 

 

 

2005

 

2004

 

2005

 

2004

 

Net income

 

$

604.0

 

$

477.3

 

$

826.8

 

$

648.1

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

Change in cumulative translation adjustment

 

4.6

 

(35.5

)

39.0

 

(12.8

)

Unrealized gain (loss) on investments

 

.4

 

(9.9

)

(.3

)

(2.7

)

Unrealized gain on derivatives

 

1.5

 

8.2

 

7.7

 

9.3

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

610.5

 

$

440.1

 

$

873.2

 

$

641.9

 

 

(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 financial statements.

 

14



 

(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 health care and life insurance plans for retired employees in the U.S. and Canada.

 

The components of net periodic pension cost consisted of the following in millions of dollars:

 

 

 

Three Months Ended
April 30

 

Six Months Ended
April 30

 

 

 

2005

 

2004

 

2005

 

2004

 

Service cost

 

$

36

 

$

33

 

$

73

 

$

67

 

Interest cost

 

114

 

117

 

226

 

229

 

Expected return on plan assets

 

(172

)

(165

)

(342

)

(308

)

Amortization of actuarial loss

 

22

 

13

 

50

 

27

 

Amortization of prior service cost

 

10

 

11

 

21

 

21

 

Net cost

 

$

10

 

$

9

 

$

28

 

$

36

 

 

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

 

 

 

Three Months Ended
April 30

 

Six Months Ended
April 30

 

 

 

2005

 

2004

 

2005

 

2004

 

Service cost

 

$

13

 

$

22

 

$

41

 

$

51

 

Interest cost

 

74

 

82

 

150

 

161

 

Expected return on plan assets

 

(17

)

(12

)

(33

)

(25

)

Amortization of actuarial loss

 

64

 

94

 

149

 

171

 

Amortization of prior service cost

 

(32

)

(38

)

(66

)

(64

)

Net cost

 

$

102

 

$

148

 

$

241

 

$

294

 

 

During the first six months of 2005, the Company contributed approximately $178 million to its pension plans and $145 million to its other postretirement benefit plans. The Company presently anticipates contributing an additional $16 million to its pension plans and $546 million to its other postretirement benefit plans in the remainder of fiscal year 2005. These contributions include payments from Company funds to either increase plan assets or to make direct payments to plan participants.

 

(13)    New accounting standards to be adopted are as follows:

 

In December 2004, the FASB issued Statement No. 123 (revised 2004), Share-Based Payment. This Statement eliminated the alternative of accounting for share-based compensation under Accounting Principles Board (APB) Opinion No. 25. The revised standard generally requires the recognition of the cost of employee services for share-based compensation based on the grant date fair value of the equity or liability instruments issued. The effective date for the Company was recently revised to the beginning of fiscal year 2006. The expected impact of the adoption on the Company’s net income in fiscal year 2006 will be an expense of approximately $40 million after-tax.

 

15



 

In November 2004, the FASB issued Statement No. 151, Inventory Costs an amendment of ARB No. 43, Chapter 4. This Statement clarifies that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current-period charges. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The effective date is the beginning of fiscal year 2006. In December 2004, the FASB issued Statement No. 152, Accounting for Real Estate Time-Sharing Transactions an amendment of FASB Statements No. 66 and 67. This Statement requires real estate time-sharing transactions to be accounted for as nonretail land sales and the effective date is the beginning of fiscal year 2006. In December 2004, the FASB issued Statement No. 153, Exchanges of Nonmonetary Assets an amendment of APB Opinion No. 29. This Statement eliminates the exception to fair value accounting for nonmonetary exchanges of similar productive assets and replaces it with an exception for nonmonetary exchanges that do not have commercial substance. Commercial substance is defined as a transaction that is expected to significantly change future cash flows as a result of the exchange. The effective date is the beginning of the fourth fiscal quarter of 2005. The adoption of these Statements is not expected to have a material effect on the Company’s financial position or net income.

 

(14)    On October 22, 2004, the American Jobs Creation Act of 2004 (the Act) was signed into law. The Act introduces a special one-time dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer (repatriation provision), provided certain criteria are met. The deduction would be 85 percent of certain foreign earnings that are repatriated in either an enterprise’s last tax year that began before the enactment date (the Company’s 2004 fiscal tax year), or the first tax year that begins during the one-year period beginning on the date of enactment (the Company’s 2005 fiscal tax year). At this time, the Company is still evaluating the final amount of foreign earnings that may be repatriated. The Company expects to substantially complete the evaluation by the end of its fiscal third quarter. During the second quarter and first six months of 2005, the Company recognized a tax benefit of $11 million related to the probable repatriation of foreign earnings under the Act. The reasonably possible amount of foreign earnings that is still being considered for repatriation under the Act in 2005 ranges up to approximately $20 million with a potential tax benefit of up to approximately $3 million.

 

16



 

(15) SUPPLEMENTAL CONSOLIDATING DATA
STATEMENT OF INCOME
For the Three Months Ended April 30, 2005 and 2004

(In millions of dollars) Unaudited

 

 

 

EQUIPMENT OPERATIONS*

 

FINANCIAL SERVICES

 

 

 

2005

 

2004

 

2005

 

2004

 

Net Sales and Revenues

 

 

 

 

 

 

 

 

 

Net sales

 

$

6,019.2

 

$

5,296.1

 

 

 

 

 

Finance and interest income

 

31.2

 

18.2

 

$

384.3

 

$

338.2

 

Health care premiums and fees

 

 

 

 

 

181.7

 

197.7

 

Other income

 

72.3

 

54.9

 

27.0

 

48.3

 

Total

 

6,122.7

 

5,369.2

 

593.0

 

584.2

 

 

 

 

 

 

 

 

 

 

 

Costs and Expenses

 

 

 

 

 

 

 

 

 

Cost of sales

 

4,545.7

 

3,986.0

 

 

 

 

 

Research and development expenses

 

170.4

 

150.6

 

 

 

 

 

Selling, administrative and general expenses

 

472.0

 

447.8

 

127.8

 

137.5

 

Interest expense

 

54.5

 

52.8

 

140.8

 

106.0

 

Interest compensation to Financial Services

 

58.3

 

54.8

 

 

 

 

 

Health care claims and costs

 

 

 

 

 

142.4

 

180.7

 

Other operating expenses

 

41.0

 

28.1

 

67.8

 

67.3

 

Total

 

5,341.9

 

4,720.1

 

478.8

 

491.5

 

 

 

 

 

 

 

 

 

 

 

Income of Consolidated Group
Before Income Taxes

 

780.8

 

649.1

 

114.2

 

92.7

 

Provision for income taxes

 

257.4

 

232.2

 

39.9

 

30.4

 

Income of Consolidated Group

 

523.4

 

416.9

 

74.3

 

62.3

 

 

 

 

 

 

 

 

 

 

 

Equity in Income (Loss) of Unconsolidated
Subsidiaries and Affiliates

 

 

 

 

 

 

 

 

 

Credit

 

71.0

 

72.9

 

.2

 

.2

 

Other

 

9.6

 

(12.5

)

 

 

 

 

Total

 

80.6

 

60.4

 

.2

 

.2

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

604.0

 

$

477.3

 

$

74.5

 

$

62.5

 

 


* 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.

 

17



 

SUPPLEMENTAL CONSOLIDATING DATA
STATEMENT OF INCOME
For the Six Months Ended April 30, 2005 and 2004

(In millions of dollars) Unaudited

 

 

 

EQUIPMENT OPERATIONS*

 

FINANCIAL SERVICES

 

 

 

2005

 

2004

 

2005

 

2004

 

Net Sales and Revenues

 

 

 

 

 

 

 

 

 

Net sales

 

$

9,545.7

 

$

8,207.7

 

 

 

 

 

Finance and interest income

 

60.2

 

36.5

 

$

741.5

 

$

667.1

 

Health care premiums and fees

 

 

 

 

 

375.5

 

383.7

 

Other income

 

144.5

 

123.1

 

52.9

 

86.4

 

Total

 

9,750.4

 

8,367.3

 

1,169.9

 

1,137.2

 

 

 

 

 

 

 

 

 

 

 

Costs and Expenses

 

 

 

 

 

 

 

 

 

Cost of sales

 

7,315.4

 

6,284.2

 

 

 

 

 

Research and development expenses

 

319.7

 

288.8

 

 

 

 

 

Selling, administrative and general expenses

 

839.2

 

760.3

 

224.5

 

244.6

 

Interest expense

 

111.3

 

105.9

 

265.5

 

208.0

 

Interest compensation to Financial Services

 

104.6

 

99.4

 

 

 

 

 

Health care claims and costs

 

 

 

 

 

294.5

 

331.3

 

Other operating expenses

 

69.5

 

39.6

 

135.7

 

138.4

 

Total

 

8,759.7

 

7,578.2

 

920.2

 

922.3

 

 

 

 

 

 

 

 

 

 

 

Income of Consolidated Group
Before Income Taxes

 

990.7

 

789.1

 

249.7

 

214.9

 

Provision for income taxes

 

329.5

 

281.9

 

87.5

 

73.2

 

Income of Consolidated Group

 

661.2

 

507.2

 

162.2

 

141.7

 

 

 

 

 

 

 

 

 

 

 

Equity in Income (Loss) of Unconsolidated
Subsidiaries and Affiliates

 

 

 

 

 

 

 

 

 

Credit

 

152.8

 

149.3

 

.3

 

.3

 

Other

 

12.8

 

(8.4

)

 

 

 

 

Total

 

165.6

 

140.9

 

.3

 

.3

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

826.8

 

$

648.1

 

$

162.5

 

$

142.0

 

 


* 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.

 

18



 

SUPPLEMENTAL CONSOLIDATING DATA

CONDENSED BALANCE SHEET
(In millions of dollars) Unaudited

 

 

 

EQUIPMENT OPERATIONS *

 

FINANCIAL SERVICES

 

 

 

April 30
2005

 

October 31
2004

 

April 30
2004

 

April 30
2005

 

October 31
2004

 

April 30
2004

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

2,727.9

 

$

2,915.1

 

$

2,654.2

 

$

328.8

 

$

266.0

 

$

341.6

 

Cash equivalents deposited with unconsolidated subsidiaries

 

236.0

 

224.4

 

213.8

 

 

 

 

 

 

 

Cash and cash equivalents

 

2,963.9

 

3,139.5

 

2,868.0

 

328.8

 

266.0

 

341.6

 

Marketable securities

 

 

 

 

 

 

 

275.1

 

246.7

 

250.8

 

Receivables from unconsolidated subsidiaries and affiliates

 

1,291.0

 

1,469.5

 

1,168.8

 

1.9

 

.7

 

 

 

Trade accounts and notes receivable - net

 

1,116.8

 

781.5

 

1,008.9

 

3,748.9

 

2,765.8

 

3,288.3

 

Financing receivables - net

 

11.1

 

64.7

 

45.5

 

11,758.8

 

11,167.9

 

9,609.5

 

Restricted financing receivables - net

 

 

 

 

 

 

 

600.3

 

 

 

 

 

Other receivables

 

216.0

 

498.4

 

225.8

 

125.6

 

164.6

 

202.4

 

Equipment on operating leases - net

 

1.0

 

8.9

 

10.7

 

1,213.4

 

1,288.0

 

1,193.6

 

Inventories

 

2,890.0

 

1,999.1

 

2,226.2

 

 

 

 

 

 

 

Property and equipment - net

 

2,123.0

 

2,112.3

 

2,025.7

 

54.8

 

49.4

 

45.7

 

Investments in unconsolidated subsidiaries and affiliates

 

2,314.5

 

2,250.2

 

2,396.8

 

4.4

 

4.1

 

3.6

 

Goodwill

 

973.8

 

973.6

 

928.4

 

 

 

 

 

 

 

Other intangible assets - net

 

21.0

 

21.6

 

255.3

 

 

 

.1

 

.2

 

Prepaid pension costs

 

2,636.7

 

2,474.5

 

60.3

 

16.0

 

18.6

 

.5

 

Other assets

 

201.1

 

206.2

 

205.5

 

262.9

 

309.1

 

288.7

 

Deferred income taxes

 

714.1

 

656.7

 

1,349.5

 

 

 

 

 

4.1

 

Deferred charges

 

114.8

 

86.8

 

87.7

 

25.1

 

23.7

 

23.7

 

Total Assets

 

$

17,588.8

 

$

16,743.5

 

$

14,863.1

 

$

18,416.0

 

$

16,304.7

 

$

15,252.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

$

551.2

 

$

311.9

 

$

599.3

 

$

4,812.8

 

$

3,145.6

 

$

2,477.6

 

Payables to unconsolidated subsidiaries and affiliates

 

176.3

 

142.8

 

145.9

 

1,505.6

 

1,676.3

 

1,351.4

 

Accounts payable and accrued expenses

 

4,106.6

 

3,683.8

 

3,365.9

 

650.3

 

631.0

 

657.7

 

Health care claims and reserves

 

 

 

 

 

 

 

130.6

 

135.9

 

128.3

 

Accrued taxes

 

160.4

 

162.0

 

188.9

 

28.3

 

17.2

 

16.3

 

Deferred income taxes

 

11.5

 

35.9

 

5.2

 

167.1

 

155.3

 

128.4

 

Long-term borrowings

 

2,450.9

 

2,728.5

 

2,725.0

 

8,873.4

 

8,361.9

 

8,153.3

 

Retirement benefit accruals and other liabilities

 

3,392.2

 

3,285.8

 

3,092.1

 

38.7

 

33.9

 

48.6

 

Total liabilities

 

10,849.1

 

10,350.7

 

10,122.3

 

16,206.8

 

14,157.1

 

12,961.6

 

Common Stock, $1 par value (issued shares at April 30, 2005 – 268,215,602)

 

2,043.5

 

2,043.5

 

1,987.7

 

987.0

 

974.1

 

968.6

 

Common stock in treasury

 

(1,389.0

)

(1,040.4

)

(897.4

)

 

 

 

 

 

 

Unamortized restricted stock compensation

 

(24.6

)

(12.7

)

(16.7

)

 

 

 

 

 

 

Retained earnings

 

6,106.1

 

5,445.1

 

4,841.4

 

1,177.0

 

1,142.7

 

1,326.9

 

Total

 

6,736.0

 

6,435.5

 

5,915.0

 

2,164.0

 

2,116.8

 

2,295.5

 

Accumulated other comprehensive income (loss)

 

3.7

 

(42.7

)

(1,174.2

)

45.2

 

30.8

 

(4.4

)

Stockholders’ equity

 

6,739.7

 

6,392.8

 

4,740.8

 

2,209.2

 

2,147.6

 

2,291.1

 

Total Liabilities and Stockholders’ Equity

 

$

17,588.8

 

$

16,743.5

 

$

14,863.1

 

$

18,416.0

 

$

16,304.7

 

$

15,252.7

 

 


* 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

STATEMENT OF CASH FLOWS

For the Six Months Ended April 30, 2005 and 2004

(In millions of dollars) Unaudited

 

 

 

EQUIPMENT OPERATIONS*

 

FINANCIAL SERVICES 

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

 

Net income

 

$

826.8

 

$

648.1

 

$

162.5

 

$

142.0

 

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

 

 

 

 

 

 

 

 

 

Provision for doubtful receivables

 

2.0

 

1.3

 

2.7

 

33.3

 

Provision for depreciation and amortization

 

192.5

 

188.6

 

144.1

 

144.4

 

Undistributed earnings of unconsolidated subsidiaries and affiliates

 

(36.2

)

(27.5

)

(.3

)

(.3

)

Provision (credit) for deferred income taxes

 

(82.0

)

257.1

 

9.9

 

(12.3

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

 

Receivables

 

(270.9

)

(306.9

)

37.1

 

(16.2

)

Inventories

 

(883.8

)

(630.9

)

 

 

 

 

Accounts payable and accrued expenses

 

388.6

 

653.5

 

14.5

 

31.3

 

Other

 

186.6

 

(916.5

)

(79.7

)

(11.6

)

Net cash provided by (used for) operating activities

 

323.6

 

(133.2

)

290.8

 

310.6

 

 

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

 

Collections of receivables

 

 

 

33.2

 

12,359.8

 

10,714.9

 

Proceeds from sales of financing receivables

 

 

 

 

 

82.0

 

1,602.6

 

Proceeds from maturities and sales of marketable securities

 

 

 

 

 

26.8

 

30.4

 

Proceeds from sales of equipment on operating leases

 

5.3

 

.2

 

195.4

 

260.0

 

Proceeds from sales of businesses

 

46.0

 

78.7

 

 

 

.1

 

Cost of receivables acquired

 

 

 

(.1

)

(14,502.2

)

(13,031.0

)

Purchases of marketable securities

 

 

 

 

 

(57.7

)

(51.2

)

Purchases of property and equipment

 

(173.5

)

(123.8

)

(8.9

)

(16.8

)

Cost of operating leases acquired

 

 

 

 

 

(269.2

)

(221.2

)

Acquisitions of businesses, net of cash acquired

 

(6.1

)

(163.3

)

 

 

 

 

Decrease in receivables with unconsolidated affiliates

 

 

 

 

 

 

 

274.3

 

Other

 

1.7

 

10.6

 

10.6

 

6.0

 

Net cash used for investing activities

 

(126.6

)

(164.5

)

(2,163.4

)

(431.9

)

 

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

 

Increase (decrease) in short-term borrowings

 

(29.7

)

35.7

 

1,006.4

 

(488.3

)

Change in intercompany receivables/payables

 

175.7

 

(1,279.1

)

(164.2

)

930.5

 

Proceeds from long-term borrowings

 

6.3

 

1.1

 

1,473.8

 

801.8

 

Principal payments on long-term borrowings

 

(3.3

)

(10.5

)

(267.4

)

(1,069.7

)

Proceeds from issuance of common stock

 

96.6

 

216.5

 

 

 

 

 

Repurchases of common stock

 

(484.4

)

(.2

)

 

 

 

 

Dividends paid

 

(138.6

)

(107.6

)

(128.3

)

(92.7

)

Other

 

(.7

)

(.6

)

12.9

 

 

 

Net cash provided by (used for) financing activities

 

(378.1

)

(1,144.7

)

1,933.2

 

81.6

 

 

 

 

 

 

 

 

 

 

 

Effect of Exchange Rate Changes on Cash

 

5.5

 

23.0

 

2.2

 

6.1

 

 

 

 

 

 

 

 

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

 

(175.6

)

(1,419.4

)

62.8

 

(33.6

)

Cash and Cash Equivalents at Beginning of Period

 

3,139.5

 

4,287.4

 

266.0

 

375.2

 

Cash and Cash Equivalents at End of Period

 

$

2,963.9

 

$

2,868.0

 

$

328.8

 

$

341.6

 

 


* 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



 

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

 

RESULTS OF OPERATIONS

 

Overview

 

The Company’s Equipment Operations primarily generate revenues and cash 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 and consumer equipment; and a broad range of equipment for construction and forestry. The Company’s Financial Services primarily provide credit services and managed health care plans. The credit operations primarily finance sales and leases of equipment by John Deere dealers and trade receivables purchased from the Equipment Operations. The health care operations provide managed health care services for the Company and certain outside customers. The information in the following discussion is presented in a format that includes information grouped as the Equipment Operations, Financial Services and consolidated. 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 businesses are currently affected by the following key trends and economic conditions. The U.S. farm sector is expected to remain in solid condition for the remainder of 2005 as a result of a high level of cash receipts, including increased government payments, and strong farmer balance sheets. Cash receipts for 2005 are forecast to be near last year’s record total. The Company’s agricultural equipment sales were up 17 percent for the second quarter of 2005, 20 percent for the first six months. These sales are forecast to be up approximately 9 to 11 percent for the year, excluding the impact of exchange rates. Currency is expected to add approximately three percentage points to these sales for the year. The Company’s commercial and consumer equipment sales decreased 6 percent in the second quarter of 2005 and 7 percent for six months, reflecting the impact of unseasonably cold, wet weather on sales of lawn equipment. For the year, these sales are expected to be flat to up approximately 3 percent due to extensive product introductions of commercial equipment. Construction and forestry markets are receiving continued support from positive U.S. economic conditions and fleet replenishment. The Company’s construction and forestry sales increased 28 percent in the second quarter of 2005, 30 percent for six months and are forecast to increase 18 to 20 percent for the year. The Company’s Financial Services operations are expected to report net income of approximately $315 million for the year, reflecting strong performance in the credit operations and an improvement in health care results.

 

Items of concern include the availability and price of raw materials, including steel and rubber, which have an impact on results of the Company’s Equipment Operations. To date, Company factories have been able to secure adequate supplies of such materials, though prices have risen. In addition, 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. In this regard, the Company is making and intends to continue to make the financial and technical investment needed to produce engines in conformance with global emissions rules for off-road diesel engines. There is also uncertainty concerning the impact of Asian rust and aphids on the U.S. soybean crop and soybean production practices in the U.S.

 

Strong customer response to Company products and a continuing focus on operating efficiency are contributing to the Company’s performance. The Company is continuing to add new customers worldwide, and at the same time, hold the line on operating costs and asset levels to help deliver record financial results. The Company is also providing value to investors in the form of higher dividends and stock repurchases.

 

21



 

2005 Compared with 2004

 

Deere & Company’s net income for the second quarter was $604.0 million, or $2.43 per share, compared with $477.3 million, or $1.88 per share, for the same period last year. For the first six months, net income was a record $826.8 million, or $3.31 per share, compared with $648.1 million, or $2.56 per share, last year.

 

Worldwide net sales and revenues grew 13 percent to $6,621 million for the second quarter and increased 15 percent to $10,748 million for the first six months. Net sales of the Equipment Operations were $6,019 million for the quarter and $9,546 million for the first six months, compared with $5,296 million and $8,208 million for the same periods last year. Company equipment sales in the U.S. and Canada rose 13 percent for the quarter and 15 percent for the six months. Outside the U.S. and Canada, sales increased by 11 percent and 13 percent for the respective periods excluding currency translation and by 16 percent and 19 percent on a reported basis.

 

The Company’s Equipment Operations reported operating profit of $856 million for the second quarter and $1,118 million for the first six months, compared with $726 million and $924 million in the same periods last year. The improvements were primarily due to improved price realization, increased shipments, efficiencies related to stronger production volumes and lower postretirement benefit costs. Partially offsetting these factors for both periods were higher raw material costs. The Equipment Operations had net income of $523.4 million for the second quarter and $661.2 million for the first six months, compared with $416.9 million and $507.2 million for the same periods last year. The same factors mentioned above along with a lower effective tax rate this year affected these results.

 

The Company’s asset management efforts are continuing to yield positive results. Trade receivables and inventories at April 30, 2005 were $7,280 million, or 38 percent of the last 12 month’s net sales, compared with $6,113 million, or 40 percent of net sales, a year ago.

 

Business Segment Results

 

                  Agricultural Equipment. Segment sales increased 17 percent for the second quarter and 20 percent for the first six months of 2005. The increases were mainly due to higher shipments, reflecting continued strong retail demand, as well as improved price realization and the impact of currency translation. Operating profit was $488 million for the quarter and $651 million for the six months, compared with $430 million and $516 million last year. The operating profit improvements were primarily driven by higher worldwide sales, efficiencies related to stronger production volumes, and lower postretirement benefit costs. Improved price realization offset the increase in raw material costs for the quarter and largely offset the increase experienced year to date.

 

                  Commercial and Consumer Equipment. Sales declined 6 percent for the second quarter and 7 percent for the first six months of 2005, reflecting the impact of unseasonably cold, wet weather on the sale of consumer riding lawn equipment during an important selling period. Operating profit was $135 million for the quarter and $133 million for the six months, compared with $152 million and $171 million last year. Having a positive impact for the quarter and the six months was improved price realization, which offset an increase in raw material costs.

 

22



 

                  Construction and Forestry. Segment sales rose 28 percent for the second quarter and 30 percent for the first six months reflecting strong activity at the retail level. Operating profit improved to $233 million for the quarter and $334 million for the six months, compared with $144 million and $237 million last year. The operating profit increases were mainly a result of higher sales and efficiencies related to stronger production volumes. Improved price realization offset higher raw material costs in both periods. Six-month operating profit last year included a $30 million pretax gain for the sale of an equipment rental company.

 

                  Credit. The credit segment had an operating profit of $109 million for the second quarter and $235 million for the first six months, compared with $110 million and $227 million in the same periods last year. The decrease for the quarter was primarily due to gains from retail notes sold during last year’s second quarter and lower financing spreads this year, partially offset by growth in the portfolio and a lower provision for credit losses.  The increase in the first six months was primarily due to the higher volume and the lower provision for credit losses, partially offset by gains from sales of retail notes last year and lower financing spreads this year. Total revenues of the credit operations, including intercompany revenues, increased 7 percent to $407 million in the current quarter from $382 million in the second quarter of 2004 and 5 percent in the first six months to $786 million this year from $746 million last year. The average balance of receivables and leases financed was 16 percent higher in the second quarter and 14 percent higher in the first six months of 2005, compared with the same periods last year. Interest expense increased 33 percent in the current quarter and 28 percent in the first six months of 2005, compared with last year, as a result of higher average borrowings and borrowing rates in both periods. The credit operations’ consolidated ratio of earnings to fixed charges was 1.83 to 1 for the second quarter this year, compared with 2.08 to 1 in the same period last year. The ratio was 1.96 to 1 for the first six months this year, compared to 2.12 to 1 last year.

 

                  Other. Other operations, which consist primarily of the health care operations, had an operating profit of $6 million for the second quarter and $15 million for the first six months, compared with operating losses of $17 million and $12 million in the same periods last year. The improvement was primarily due to increased underwriting margins in both periods.

 

The cost of sales to net sales ratios for the second quarter and first six months of 2005 were 75.5 percent and 76.6 percent, respectively, compared to 75.2 percent and 76.5 percent in the same periods last year. The increases were primarily due to increased raw material costs and a higher employee performance bonus provision, partially offset by manufacturing efficiencies related to higher production and sales, improved price realization and lower postretirement benefit costs.

 

Finance and interest income, and interest expense increased in both periods this year due to growth in the credit operations portfolio and higher financing rates. Health care premium revenue decreased in both periods due to lower enrollment, while claims costs are lower due to unusually high claims in the prior periods and the lower enrollment this year. Other income decreased in both periods primarily due to gains on retail notes sold last year. The first six months last year also included a gain on the previously mentioned sale of an equipment rental company. Research and development costs increased this year due to a higher level of new product development and exchange rate fluctuations. Selling, administrative and general expenses were higher in the first six months of 2005 primarily due to the August 2004 acquisition and consolidation of Ontrac Holdings, Inc. (Ontrac), a Canadian entity which owns construction and forestry dealerships. These expenses also increased in both periods this year due to a higher employee performance bonus provision and foreign currency exchange rate effects. Other operating expenses were higher primarily as a result of an increase in service expenses and the consolidation of Ontrac.

 

23



 

Market Conditions and Outlook

 

The Company’s net income is now projected to be $1.55 billion to $1.6 billion for 2005 and in a range of $450 million to $475 million for the third quarter. Excluding the impact of currency translation, Company equipment sales are expected to increase by 9 to 11 percent for the year and by 13 to 15 percent for the third quarter, compared to the same periods last year. Currency is forecast to add about two percentage points to sales for both periods. Production levels are expected to be down 7 to 9 percent in the second half of the year with most of the reduction occurring in the fourth quarter. The planned lower production rates are expected to bring down year-end trade receivable and inventory levels as Company factories prepare for the introduction of new products in 2006. Production in the second half of last year was unusually high as a result of strong retail demand related in part to expiring tax incentives.

 

                  Agricultural Equipment. The U.S. farm sector is expected to remain in solid condition for the remainder of 2005 as a result of a high level of cash receipts, including increased government payments, and strong farmer balance sheets. Cash receipts are forecast to be near last year’s record total, while farm debt levels remain steady and land values continue to increase. Given these conditions, the Company expects industry retail sales in the U.S. and Canada to be up 5 to 10 percent for fiscal 2005 in comparison with last year.

 

In other parts of the world, industry retail sales in Western Europe are forecast to be down 5 percent for the year. Farmers in the region are expected to see good levels of income this year; however, equipment sales in Spain and Portugal are being hurt by dry weather. In South America, industry sales are now forecast to be down about 40 percent, primarily due to conditions in Brazil, where negative factors include a weaker U.S. dollar, lower commodity prices, and increased input costs. In addition, drought conditions have had a negative impact on Brazilian soybean production.

 

Based on these factors and market conditions, worldwide sales of the Company’s agricultural equipment are forecast to be up 9 to 11 percent for the year, excluding the impact of exchange rates. Currency is expected to add about three percentage points to the Company’s farm machinery sales for the year.

 

                  Commercial and Consumer Equipment. Sales of the Company’s commercial and consumer equipment are now forecast to be flat to up 3 percent for the year. Increased shipments of commercial products are expected to offset weakness in consumer riding lawn equipment, where sales have made a slow start due to cold, wet weather. The Company’s commercial equipment sales are benefiting from the extensive product introductions of recent years.

 

                  Construction and Forestry. Markets for construction equipment are experiencing further growth as a result of generally positive U.S. economic conditions and an increased level of spending on construction projects. These factors are expected to continue driving fleet replenishment by contractors and rental companies. Forestry markets in the U.S. and Canada have moderated in recent months. However, demand in other parts of the world has continued to grow. In this environment, the Company’s sales of construction and forestry equipment are forecast to rise by 18 to 20 percent for fiscal 2005.

 

                  Financial Services. The net income for the year is expected to be about $315 million, reflecting strong performance in the Company’s credit operations and an improvement in health care results.

 

24



 

Safe Harbor Statement

 

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: Statements herein that relate to future operating periods are subject to 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.

 

Forward-looking statements involve certain factors that are subject to change, including for the Company’s agricultural equipment segment the many interrelated factors that affect farmers’ confidence. These factors include worldwide demand for agricultural products, world grain stocks, the growth of non-food uses for some crops, prices of commodities and livestock, crop production expenses (most notably fuel and fertilizer costs), weather and soil conditions, real estate values, available acreage for farming, the land ownership policies of various governments, changes in government farm programs, international reaction to such programs, animal diseases (including bovine spongiform encephalopathy, commonly known as “mad cow” disease), crop pests and diseases (including Asian rust and aphids), harvest yields, availability of transport for crops and the level of farm product exports (including concerns about genetically modified organisms).

 

Factors affecting the outlook for the Company’s commercial and consumer equipment segment include weather, general economic conditions in these markets, consumer confidence, consumer borrowing patterns, consumer purchasing preferences, housing starts, and spending by municipalities and golf courses.

 

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

 

All of the Company’s businesses and its reported results are affected by general economic conditions in and the political stability of the global markets in which the Company operates; production and technological difficulties, including capacity and supply constraints and prices, including for supply commodities such as steel and rubber; oil and energy prices and supplies; the availability and cost of freight; trade, monetary and fiscal policies of various countries; wars and other international conflicts and the threat thereof; actions by the U.S. Federal Reserve Board and other central banks; actions by the U.S. Securities and Exchange Commission; actions by environmental regulatory agencies, including those related to engine emissions and the risk of global warming; actions by other regulatory bodies, actions by rating agencies; capital market disruptions; investor sentiment; inflation and deflation rates, interest rate levels and foreign currency exchange rates; customer borrowing and repayment practices, and the number of customer loan delinquencies and defaults; 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; changes to accounting standards; the effects of terrorism and the response thereto; and legislation affecting the sectors in which the Company operates. Company results are also affected by changes in market values of investment assets and the level of interest rates, which impact postretirement benefit costs, and significant changes in health care costs.

 

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, however, 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 the Company’s most recent annual report on Form 10-K and other filings with the U.S. Securities and Exchange Commission.

 

25



 

Critical Accounting Policies

 

See the Company’s critical accounting policies discussed in the Management’s Discussion and Analysis of the most recent annual report filed on Form 10-K. There have been no material changes to these policies.

 

CAPITAL RESOURCES AND LIQUIDITY

 

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

 

Certain information in the Statement of Consolidated Cash Flows (Unaudited) has been reclassified for the six months ended April 30, 2004 to eliminate the effects of non-cash transactions. See Note 1 to the Interim Financial Statements for further discussion and quantification of the reclassification. The Supplemental Consolidating Data Statement of Cash Flows in Note 15 for the Equipment Operations and the Financial Services operations on a stand-alone basis has not changed.

 

Equipment Operations

 

The Company’s equipment businesses are capital intensive and are subject to large seasonal variations in financing requirements for inventories and certain receivables from dealers. The Equipment Operations sell most of their trade receivables to the Company’s credit operations. As a result, the seasonal variations in financing requirements of the Equipment Operations have decreased. To the extent necessary, funds provided from operations are supplemented by external financing sources.

 

Cash flows from operating activities in the first six months of 2005 of $324 million resulted primarily from net income, an increase in accounts payable and accrued expenses, and a decrease in taxes receivable. Partially offsetting these operating cash inflows were an increase in inventories and trade receivables. The resulting net cash flows from operating activities, along with a decrease in receivables from Financial Services, a decrease in cash and cash equivalents, issuances of common stock (which were the result of the exercise of stock options) and proceeds from sales of businesses were used for repurchases of common stock, purchases of property and equipment and payment of dividends.

 

Negative cash flows from operating activities in the first six months of 2004 of $133 million resulted primarily from contributions to employee benefit plans of approximately $1 billion, along with increases in inventories and trade receivables. Partially offsetting these operating cash outflows were positive cash flows from net income and an increase in accounts payable and accrued expenses. The resulting net cash requirement for operating activities, an increase in receivables from Financial Services, acquisitions of businesses, purchases of property and equipment and payment of dividends were provided primarily from a decrease in cash and cash equivalents, issuances of common stock (which were the result of the exercise of stock options) and proceeds from sales of businesses.

 

Trade receivables held by the Equipment Operations increased $335 million during the first six months and $108 million from a year ago. The Equipment Operations sell a significant portion of their trade receivables to the credit operations. See the following consolidated discussion of trade receivables.

 

26



 

Inventories increased by $891 million during the first six months, primarily reflecting a seasonal increase. Inventories increased $664 million, compared to a year ago primarily due to the increase in sales, the consolidation of Ontrac Holdings, Inc. and foreign currency exchange rate effects. 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, which approximates current cost, to the last 12 months’ cost of sales were 27 percent at April 30, 2005, compared to 22 percent at October 31, 2004 and 26 percent at April 30, 2004.

 

Total interest-bearing debt of the Equipment Operations was $3,002 million at April 30, 2005, compared with $3,040 million at the end of fiscal year 2004 and $3,324 million at April 30, 2004. The ratios of debt to total capital (total interest-bearing debt and stockholders’ equity) were 31 percent, 32 percent and 41 percent at April 30, 2005, October 31, 2004 and April 30, 2004, respectively.

 

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 through secured financings or sales, and equity capital.

 

During the first six months of 2005, the aggregate cash provided by operating and financing activities was used primarily to increase receivables. Cash provided by Financial Services operating activities was $291 million in the first six months. Cash provided by financing activities totaled $1,933 million in the first six months, resulting primarily from an increase in external borrowings, partially offset by a decrease in payables to the Equipment Operations and a dividend paid to the Equipment Operations. Cash used by investing activities totaled $2,163 million in the first six months, primarily due to the cost of receivables acquired exceeding collections. Cash and cash equivalents also increased $63 million.

 

In the first six months of 2004, the aggregate cash provided by operating and financing activities was used primarily to increase receivables. Cash provided by Financial Services operating activities was $311 million in the first six months of last year. Cash provided by financing activities totaled $82 million in the first six months of 2004, resulting primarily from an increase in payables to the Equipment Operations, partially offset by a decrease in total external borrowings and a dividend paid to the Equipment Operations. Cash used by investing activities totaled $432 million in the first six months of last year, primarily due to the cost of receivables acquired exceeding collections, partially offset by sales of retail notes. Cash and cash equivalents also decreased $34 million.

 

Receivables and leases held by the credit operations consist of retail notes originating in connection with retail sales of new and used equipment by dealers of John Deere products, retail notes from non-Deere equipment customers, trade receivables, wholesale note receivables, revolving charge accounts, operating loans, insured international export financing generally involving John Deere products, and financing and operating leases. Receivables and leases increased $2,100 million during the first six months of 2005 and $3,230 million during the past 12 months, primarily due to the cost of receivables and leases acquired exceeding collections. Total acquisitions of receivables and leases were 11 percent higher in the first six months of 2005, compared with the same period last year. Acquisition volumes of wholesale notes, trade receivables, leases, retail notes and revolving charge accounts were all higher in the first six months of 2005, compared to the same period last year. Also, beginning in the second quarter of 2005, the credit operations’ new securitizations of financing receivables (retail notes) met the criteria for secured financings rather than sales of receivables. These securitized retail notes were recorded as “Restricted financing receivables – net” on the balance sheet (see Note 6). Total receivables and leases administered by the credit operations, which include receivables previously sold, amounted to $19,791 million at April 30, 2005,

 

27



 

compared with $18,620 million at October 31, 2004 and $17,455 million at April 30, 2004. At April 30, 2005, the unpaid balance of all receivables previously sold was $2,469 million, compared with $3,398 million at October 31, 2004 and $3,363 million at April 30, 2004.

 

Total external interest-bearing debt of the credit operations was $13,686 million at April 30, 2005, which included $621 million of on-balance sheet secured borrowings (see Note 6), compared with $11,508 million at the end of fiscal year 2004 and $10,631 million at April 30, 2004. Total external borrowings increased during the first six months of 2005 and the past 12 months, 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 the Equipment Operations. The credit operations’ ratio of interest-bearing debt to stockholder’s equity was 7.3 to 1 at April 30, 2005, compared with 6.4 to 1 at October 31, 2004 and 5.4 to 1 at April 30, 2004.

 

The credit operations utilize a revolving conduit facility, special purpose entity (SPE), to securitize floating rate agricultural retail notes.  This facility has the capacity, or “purchase limit,” of up to $2 billion in secured financings or sales outstanding at any time.  Multiple conduits participate in this facility, which has no final maturity date.  Instead, upon the credit operations’ request, each conduit may elect to renew its commitment on an annual basis.  However, if this facility is not renewed, the credit operations would liquidate the securitizations as the retail notes are collected. At April 30, 2005, $2 billion was outstanding under the facility of which $621 million was recorded on the balance sheet (see Note 6). At April 30, 2004, $1.75 billion was outstanding under the facility of which none was included on the balance sheet. The amounts of borrowings and retail notes that are recorded on the balance sheet depend on whether terms of the transfer of retail notes to the SPE meet the criteria for a secured borrowing or a sale of receivables under FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.

 

During the first six months of 2005, the credit operations issued $1,474 million and retired $267 million of unsecured long-term borrowings, which were primarily medium-term notes.

 

On May 26, 2005, the credit operations borrowed $741 million in a separate public securitization of retail notes. The secured financing and the related retail notes remained on the balance sheet. The securitized retail notes were recorded as “Restricted financing receivables – net.”

 

Consolidated

 

Sources of liquidity for the Company include cash and short-term investments, funds from operations, the issuance of commercial paper and term debt, the securitization of retail notes through secured financings or sales, and committed and uncommitted, unsecured, bank lines of credit.

 

Because of the multiple funding sources that have been and continue to be available to the Company, the Company expects to have sufficient sources of liquidity to meet its ongoing funding needs. The Company’s commercial paper outstanding at April 30, 2005, October 31, 2004 and April 30, 2004 was approximately $2.2 billion, $1.9 billion and $1.7 billion, respectively, while the total cash and short-term investment position was approximately $3.1 billion, $3.2 billion and $3.0 billion, respectively. The Company has for many years accessed diverse funding sources, including short-term and long-term unsecured debt capital markets globally, as well as public and private securitization markets in the U.S. and Canada.

 

The Company maintains unsecured lines of credit with various banks. Some of the lines are available to both the Equipment Operations and certain credit operations. In February 2005, the Company replaced its existing short-term $1,250 million revolving credit facility agreement with a $625 million short-term credit facility agreement, expiring in February 2006, and a $625 million long-term credit facility agreement,

 

28



 

expiring in February 2010. Worldwide lines of credit totaled $3,362 million at April 30, 2005, $596 million of which were unused. For the purpose of computing unused credit lines, commercial paper and short-term bank borrowings, excluding on-balance sheet secured borrowings and the current portion of long-term borrowings, were considered to constitute utilization. Included in the total credit lines at April 30, 2005 was a long-term credit facility agreement of $1,250 million, expiring in February 2009, and the previously mentioned long-term credit facility agreement of $625 million, expiring in February 2010, for a total of $1,875 million long-term.

 

The credit agreements require 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. At April 30, 2005, this ratio was 31 percent. Under this provision, the Company’s excess equity capacity and retained earnings balance free of restriction at April 30, 2005 was $5,119 million. Alternatively under this provision, the Equipment Operations had the capacity to incur debt of $9,508 million at April 30, 2005.

 

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. 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 Company securities by the rating agencies engaged by the Company are as follows:

 

 

 

Senior

 

 

 

 

 

 

Long-Term

 

Short-Term

 

Outlook

Moody’s Investors Service, Inc.

 

A3

 

Prime-2

 

Stable

Standard & Poor’s

 

A-

 

A-2

 

Stable

 

Trade accounts and notes receivable result mainly from sales to dealers of equipment that is being carried in their inventories. Trade receivables increased $1,183 million during the first six months of 2005 primarily due to a seasonal increase and the effect of foreign currency exchange rates. These receivables increased $503 million, compared to a year ago, primarily due to the increase in sales, the effect of foreign exchange rates and the consolidation of Ontrac Holdings, Inc. The ratios of worldwide trade accounts and notes receivable to the last 12 months’ net sales were 23 percent at April 30, 2005, compared to 18 percent at October 31, 2004 and 25 percent at April 30, 2004. Agricultural equipment trade receivables increased $345 million, commercial and consumer equipment receivables decreased $41 million and construction and forestry receivables increased $199 million, compared to a year ago. The percentage of total worldwide trade receivables outstanding for periods exceeding 12 months was 2 percent, 2 percent and 3 percent at April 30, 2005, October 31, 2004 and April 30, 2004, respectively.

 

Capital expenditures for the Company for the 2005 fiscal year are currently estimated to be approximately $565 million.

 

Stockholders’ equity was $6,740 million at April 30, 2005, compared with $6,393 million at October 31, 2004 and $4,741 million at April 30, 2004. The increase of $347 million during the first six months of 2005 resulted primarily from net income of $827 million, which was partially offset by an increase in treasury stock of $349 million and dividends declared of $145 million.

 

The Board of Directors at its meeting on May 23, 2005 declared a quarterly dividend of $.31 per share

 

29



 

 

payable August 1, 2005, to stockholders of record on June 30, 2005.

 

Item 3.             QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

See the Company’s most recent annual report filed on Form 10-K (Item 7A). There has been no material change in this information.

 

Item 4.             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 April 30, 2005, based on the evaluation of these controls and procedures required by Rule 13a-15(b) or 15d-15(b) of the Act.

 

30



 

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

 

 

 

See Note 11 to the Interim Financial Statements.

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

 

The Company’s purchases of its common stock during the second quarter of 2005 were as follows:

 

Period

 

Total Number of
Shares
Purchased (2)

 

Average Price
Paid Per Share

 

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

 

Approximate
Dollar Value of
Shares that May
Yet Be Purchased
under the Plans or
77Programs (1)

 

 

 

(thousands)

 

 

 

(thousands)

 

(millions)

 

Feb 1 to Feb 28

 

 

 

 

 

 

 

$

838

 

 

 

 

 

 

 

 

 

 

 

Mar 1 to Mar 31

 

937

 

$

67.96

 

867

 

779

 

 

 

 

 

 

 

 

 

 

 

Apr 1 to Apr 30

 

4,024

 

65.23

 

4,024

 

516

 

 

 

 

 

 

 

 

 

 

 

Total

 

4,961

 

65.75

 

4,891

 

 

 

 

 

1.

During the second quarter of 2005, the Company had one active share purchase plan that was publicly announced in December 2004 (Plan) to purchase up to $1 billion of its common stock.

 

 

 

 

2.

Total shares purchased in March 2005 included approximately 60 thousand shares received from an officer to exercise certain stock option awards and approximately 10 thousand shares to pay the associated payroll taxes. All the shares were valued at the market price of $67.45 per share.

 

 

 

 

During the second quarter of 2005, the Company issued 11,016 shares of restricted stock as compensation to the Company’s nonemployee directors, all of whom are accredited investors. These shares were not registered under the Securities Act of 1933 (the “Securities Act”) pursuant to the exemption from registration provided by Section 4(2) of the Securities Act.

 

 

Item 3.

Defaults Upon Senior Securities

 

 

 

None

 

31



 

Item 4.

Submission of Matters to a Vote of Security Holders

 

 

 

At the annual meeting of stockholders held February 23, 2005:

 

 

 

a.

the following directors were elected for terms expiring at the annual meeting in 2008:

 

 

 

 

 

 

Votes For

 

Votes Withheld

 

 

 

John R. Block

 

218,571,419

 

3,324,188

 

 

 

T. Kevin Dunnigan

 

219,906,823

 

1,988,784

 

 

 

Dipak C. Jain

 

219,219,113

 

2,676,494

 

 

 

Joachim Milberg

 

220,004,419

 

1,891,188

 

 

 

 

 

 

Robert W. Lane, Antonio Madero B., Aulana L. Peters and John R. Walter continue to serve as directors of the Company for the terms expiring at the annual meeting in 2007.

 

 

 

 

Crandall C. Bowles, Vance D. Coffman, Leonard A. Hadley, Arthur L. Kelly and Thomas H. Patrick continue to serve as directors of the Company for terms expiring at the annual meeting in 2006.

 

b.

the John Deere Performance Bonus Plan was re-approved:

 

 

 

 

 

Shares Voted
For Proposal

 

Shares Voted
Against Proposal

 

Abstain

 

 

 

 

215,426,929

 

4,662,172

 

1,806,505

 

 

 

 

 

 

 

 

 

 

 

 

c.

Deloitte & Touche was ratified as the Company’s independent certified public accountants for the 2005 fiscal year:

 

 

 

 

 

Shares Voted
For Proposal

 

Shares Voted
Against Proposal

 

Abstain

 

 

 

 

218,397,774

 

2,049,151

 

1,448,682

 

 

 

 

Item 5.

Other Information

 

 

 

None

 

 

Item 6.

Exhibits

 

 

 

See the index to exhibits immediately preceding the exhibits filed with this report.

 

 

 

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

 

32



 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

DEERE & COMPANY

 

 

 

 

 

 

Date:

May 27, 2005

 

By:

/s/ Nathan J. Jones

 

 

Nathan J. Jones

 

 

Senior Vice President,

 

 

Principal Financial Officer

 

 

and Principal Accounting Officer

 

33



 

INDEX TO EXHIBITS

 

Number

 

 

 

2

Not applicable

 

 

3.1

Certificate of Incorporation, as amended (Exhibit 3.2 to Form 10-K of registrant for the year ended October 31, 1999, Securities and Exchange Commission File Number 1-4121*)

 

 

3.2

Bylaws, as amended (Exhibit 3 to Form 8-K of registrant dated February 23, 2005*)

 

 

4

Not applicable

 

 

10

Not applicable

 

 

11

Not applicable

 

 

12

Computation of ratio of earnings to fixed charges

 

 

15

Not applicable

 

 

18

Not applicable

 

 

19

Not applicable

 

 

22

Not applicable

 

 

24

Not applicable

 

 

31.1

Rule 13a-14(a)/15d-14(a) Certification

 

 

31.2

Rule 13a-14(a)/15d-14(a) Certification

 

 

32

Section 1350 Certifications

 

 

*

Incorporated by reference. Copies of these exhibits are available from the Company upon request.

 

34