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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, 2001
Commission file no: 1-4121
--------------------------
DEERE & COMPANY
Delaware 36-2382580
(State of incorporation) (IRS employer identification no.)
One John Deere Place
Moline, Illinois 61265
(Address of principal executive offices)
Telephone Number: (309) 765-8000
---------------------------------
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
At April 30, 2001, 234,769,633 shares of common stock, $1 par
value, of the registrant were outstanding.
===============================================================
Page 1 of 26 Pages
Index to Exhibits: Page 25
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ------ --------------------
DEERE & COMPANY CONSOLIDATED
STATEMENT OF CONSOLIDATED INCOME (Deere & Company and
Three Months Ended April 30 Consolidated
Subsidiaries)
Millions of dollars except per Three Months Ended
share amounts April 30
(Unaudited) 2001 2000
Net Sales and Revenues
Net sales $3,229.0 $3,324.1
Finance and interest income 356.3 312.2
Health care premiums and fees 143.5 115.8
Investment income 3.0 3.7
Other income 44.3 33.9
Total 3,776.1 3,789.7
Costs and Expenses
Cost of sales 2,595.5 2,605.4
Research and development expenses 153.5 139.7
Selling, administrative and general
expenses 403.0 363.2
Interest expense 201.8 160.1
Health care claims and costs 118.6 94.9
Other operating expenses 89.1 73.2
Total 3,561.5 3,436.5
Income of Consolidated Group
Before Income Taxes 214.6 353.2
Provision for income taxes 81.6 149.5
Income of Consolidated Group 133.0 203.7
Equity in Income (Loss) of Unconsolidated
Subsidiaries and Affiliates
Credit (1.6) .1
Other (3.6) .5
Total (5.2) .6
Net Income $ 127.8 $ 204.3
Per Share:
Net income - basic $ .55 $ .87
Net income - diluted $ .54 $ .87
See Notes to Interim Financial Statements. Supplemental
consolidating data are shown for the "Equipment Operations" and
"Financial Services". Transactions between the "Equipment
Operations" and "Financial Services" have been eliminated to
arrive at the "Consolidated" data.
DEERE & COMPANY EQUIPMENT OPERATIONS
STATEMENT OF CONSOLIDATED INCOME (Deere & Company with
Three Months Ended April 30 Financial Services
on the Equity Basis)
Millions of dollars except per Three Months Ended
share amounts April 30
(Unaudited) 2001 2000
Net Sales and Revenues
Net sales $3,229.0 $3,324.1
Finance and interest income 26.3 21.3
Health care premiums and fees
Investment income 1.1
Other income 29.1 23.4
Total 3,284.4 3,369.9
Costs and Expenses
Cost of sales 2,599.5 2,609.2
Research and development expenses 153.5 139.7
Selling, administrative and general
expenses 301.2 275.1
Interest expense 71.4 44.2
Health care claims and costs
Other operating expenses 14.0 7.9
Total 3,139.6 3,076.1
Income of Consolidated Group
Before Income Taxes 144.8 293.8
Provision for income taxes 55.7 128.4
Income of Consolidated Group 89.1 165.4
Equity in Income (Loss) of Unconsolidated
Subsidiaries and Affiliates
Credit 39.6 36.2
Other (.9) 2.7
Total 38.7 38.9
Net Income $ 127.8 $ 204.3
DEERE & COMPANY FINANCIAL SERVICES
STATEMENT OF CONSOLIDATED INCOME
Three Months Ended April 30
Millions of dollars except per Three Months Ended
share amounts April 30
(Unaudited) 2001 2000
Net Sales and Revenues
Net sales
Finance and interest income $ 338.7 $ 295.8
Health care premiums and fees 148.2 120.4
Investment income 3.0 2.6
Other income 23.7 17.6
Total 513.6 436.4
Costs and Expenses
Cost of sales
Research and development expenses
Selling, administrative and general
expenses 102.4 88.8
Interest expense 139.2 120.8
Health care claims and costs 118.6 94.9
Other operating expenses 83.7 72.5
Total 443.9 377.0
Income of Consolidated Group
Before Income Taxes 69.7 59.4
Provision for income taxes 25.8 21.1
Income of Consolidated Group 43.9 38.3
Equity in Income (Loss) of Unconsolidated
Subsidiaries and Affiliates
Credit (1.6) .1
Other .1
Total (1.6) .2
Net Income $ 42.3 $ 38.5
Page 2
DEERE & COMPANY CONSOLIDATED
STATEMENT OF CONSOLIDATED INCOME (Deere & Company and
Six Months Ended April 30 Consolidated
Subsidiaries)
Millions of dollars except per Six Months Ended
share amounts April 30
(Unaudited) 2001 2000
Net Sales and Revenues
Net sales $5,347.2 $5,204.1
Finance and interest income 718.8 615.6
Health care premiums and fees 278.4 228.4
Investment income 6.0 12.8
Other income 106.0 68.2
Total 6,456.4 6,129.1
Costs and Expenses
Cost of sales 4,291.2 4,157.8
Research and development expenses 287.8 242.3
Selling, administrative and general
expenses 758.7 678.9
Interest expense 401.1 306.9
Health care claims and costs 228.3 185.1
Other operating expenses 182.2 145.1
Total 6,149.3 5,716.1
Income of Consolidated Group
Before Income Taxes 307.1 413.0
Provision for income taxes 114.3 170.3
Income of Consolidated Group 192.8 242.7
Equity in Income (Loss) of Unconsolidated
Subsidiaries and Affiliates
Credit (1.0) .2
Other (7.6) (.9)
Total (8.6) (.7)
Net Income $ 184.2 $ 242.0
Per Share:
Net income - basic $ .79 $ 1.03
Net income - diluted $ .78 $ 1.03
See Notes to Interim Financial Statements. Supplemental
consolidating data are shown for the "Equipment Operations" and
"Financial Services". Transactions between the "Equipment
Operations" and "Financial Services" have been eliminated to
arrive at the "Consolidated" data.
DEERE & COMPANY EQUIPMENT OPERATIONS
STATEMENT OF CONSOLIDATED INCOME (Deere & Company with
Six Months Ended April 30 Financial Services
on the Equity Basis)
Millions of dollars except per Six Months Ended
share amounts April 30
(Unaudited) 2001 2000
Net Sales and Revenues
Net sales $5,347.2 $5,204.1
Finance and interest income 52.9 46.3
Health care premiums and fees
Investment income 7.7
Other income 71.4 45.9
Total 5,471.5 5,304.0
Costs and Expenses
Cost of sales 4,299.0 4,166.0
Research and development expenses 287.8 242.3
Selling, administrative and general
expenses 568.1 514.6
Interest expense 133.2 80.9
Health care claims and costs
Other operating expenses 31.9 15.6
Total 5,320.0 5,019.4
Income of Consolidated Group
Before Income Taxes 151.5 284.6
Provision for income taxes 58.3 124.3
Income of Consolidated Group 93.2 160.3
Equity in Income (Loss) of Unconsolidated
Subsidiaries and Affiliates
Credit 92.1 77.2
Other (1.1) 4.5
Total 91.0 81.7
Net Income $ 184.2 $ 242.0
DEERE & COMPANY FINANCIAL SERVICES
STATEMENT OF CONSOLIDATED INCOME
Six Months Ended April 30
Millions of dollars except per Six Months Ended
share amounts April 30
(Unaudited) 2001 2000
Net Sales and Revenues
Net sales
Finance and interest income $ 682.1 $ 578.7
Health care premiums and fees 287.6 238.0
Investment income 6.0 5.1
Other income 51.4 36.8
Total 1,027.1 858.6
Costs and Expenses
Cost of sales
Research and development expenses
Selling, administrative and general
expenses 192.0 165.8
Interest expense 284.2 235.3
Health care claims and costs 228.3 185.1
Other operating expenses 167.0 144.1
Total 871.5 730.3
Income of Consolidated Group
Before Income Taxes 155.6 128.3
Provision for income taxes 55.9 45.8
Income of Consolidated Group 99.7 82.5
Equity in Income (Loss) of Unconsolidated
Subsidiaries and Affiliates
Credit (1.0) .2
Other .1
Total (1.0) .3
Net Income $ 98.7 $ 82.8
Page 3
DEERE & COMPANY CONSOLIDATED
CONDENSED CONSOLIDATED (Deere & Company and
BALANCE SHEET Consolidated Subsidiaries)
Millions of dollars April 30 October 31 April 30
(Unaudited) 2001 2000 2000
Assets
Cash and short-term
investments $ 484.4 $ 291.7 $ 370.4
Cash deposited with
unconsolidated subsidiaries
Cash and cash equivalents 484.4 291.7 370.4
Marketable securities 137.0 127.4 112.7
Receivables from
unconsolidated subsidiaries
and affiliates 323.1 230.9 155.6
Trade accounts and notes
receivable - net 3,993.9 3,169.2 3,815.2
Financing receivables - net 7,851.0 8,275.7 7,542.3
Other receivables 311.8 395.3 226.0
Equipment on operating
leases - net 1,915.0 1,954.4 1,817.8
Inventories 2,173.2 1,552.9 1,876.9
Property and equipment - net 1,929.2 1,912.4 1,778.2
Investments in unconsolidated
subsidiaries and affiliates 209.3 190.7 165.5
Intangible assets - net 795.6 652.2 713.1
Prepaid pension costs 650.5 635.3 621.8
Other assets 385.6 256.8 215.9
Deferred income taxes 792.5 740.4 686.7
Deferred charges 147.8 84.1 107.1
Total $22,099.9 $20,469.4 $20,205.2
Liabilities and Stockholders'
Equity
Short-term borrowings $ 5,665.1 $ 5,758.5 $ 6,562.7
Payables to unconsolidated
subsidiaries and affiliates 63.7 32.7 65.9
Accounts payable and
accrued expenses 2,972.0 2,976.4 2,717.8
Health care claims and reserves 79.7 63.4 55.2
Accrued taxes 89.1 57.5 76.4
Deferred income taxes 74.6 64.4
Long-term borrowings 6,428.5 4,764.3 3,960.4
Retirement benefit accruals
and other liabilities 2,461.0 2,440.1 2,486.2
Total liabilities 17,759.1 16,167.5 15,989.0
Common stock $1 par value
issued shares at April 30,
2001 - 266,051,855) 1,865.3 1,864.4 1,860.8
Common stock in treasury (1,427.3) (1,439.0) (1,456.4)
Unamortized restricted stock
compensation (10.2) (10.9) (18.2)
Retained earnings 4,196.7 4,117.2 3,990.5
Total 4,624.5 4,531.7 4,376.7
Accumulated other comprehensive
income (loss) (283.7) (229.8) (160.5)
Stockholders' equity 4,340.8 4,301.9 4,216.2
Total $22,099.9 $20,469.4 $20,205.2
See Notes to Interim Financial Statements. Supplemental
consolidating data are shown for the "Equipment Operations" and
"Financial Services". Transactions between the "Equipment
Operations" and "Financial Services" have been eliminated to
arrive at the "Consolidated" data.
DEERE & COMPANY EQUIPMENT OPERATIONS
CONDENSED CONSOLIDATED (Deere & Company with Financial
BALANCE SHEET Services on the Equity Basis)
Millions of dollars April 30 October 31 April 30
(Unaudited) 2001 2000 2000
Assets
Cash and short-term
investments $ 142.0 $ 91.4 $ 144.2
Cash deposited with
unconsolidated subsidiaries 197.3 548.3 131.5
Cash and cash equivalents 339.3 639.7 275.7
Marketable securities
Receivables from
unconsolidated subsidiaries
and affiliates 382.5 408.4 336.5
Trade accounts and notes
receivable - net 3,993.9 3,169.2 3,815.2
Financing receivables - net 94.8 125.0 134.2
Other receivables 169.2 266.4 104.1
Equipment on operating
leases - net 6.2 5.9
Inventories 2,173.2 1,552.9 1,876.9
Property and equipment - net 1,886.6 1,864.6 1,733.4
Investments in unconsolidated
subsidiaries and affiliates 1,640.3 1,561.8 1,462.2
Intangible assets - net 794.7 651.2 712.0
Prepaid pension costs 650.5 635.3 621.8
Other assets 150.7 117.5 91.5
Deferred income taxes 857.1 736.4 680.9
Deferred charges 138.2 78.4 99.2
Total $13,277.2 $11,812.7 $11,943.6
Liabilities and Stockholders'
Equity
Short-term borrowings $ 1,928.1 $ 927.5 $ 2,028.4
Payables to unconsolidated
subsidiaries and affiliates 131.5 41.4 65.9
Accounts payable and
accrued expenses 2,166.3 2,360.8 2,093.8
Health care claims and reserves
Accrued taxes 78.5 45.5 66.4
Deferred income taxes 2.5 6.7
Long-term borrowings 2,196.9 1,717.7 1,004.2
Retirement benefit accruals
and other liabilities 2,435.1 2,415.4 2,462.0
Total liabilities 8,936.4 7,510.8 7,727.4
Common stock $1 par value
issued shares at April 30,
2001 - 266,051,855) 1,865.3 1,864.4 1,860.8
Common stock in treasury (1,427.3) (1,439.0) (1,456.4)
Unamortized restricted stock
compensation (10.2) (10.9) (18.2)
Retained earnings 4,196.7 4,117.2 3,990.5
Total 4,624.5 4,531.7 4,376.7
Accumulated other comprehensive
income (loss) (283.7) (229.8) (160.5)
Stockholders' equity 4,340.8 4,301.9 4,216.2
Total $13,277.2 $11,812.7 $11,943.6
DEERE & COMPANY FINANCIAL SERVICES
CONDENSED CONSOLIDATED
BALANCE SHEET
Millions of dollars April 30 October 31 April 30
(Unaudited) 2001 2000 2000
Assets
Cash and short-term
investments $ 342.4 $ 200.3 $ 226.2
Cash deposited with
unconsolidated subsidiaries
Cash and cash equivalents 342.4 200.3 226.2
Marketable securities 137.0 127.4 112.6
Receivables from
unconsolidated subsidiaries
and affiliates 263.1 140.0 92.6
Trade accounts and notes
receivable - net
Financing receivables - net 7,756.2 8,150.7 7,408.1
Other receivables 142.5 128.9 121.8
Equipment on operating
leases - net 1,908.8 1,948.5 1,817.8
Inventories
Property and equipment - net 42.5 47.7 44.8
Investments in unconsolidated
subsidiaries and affiliates 7.5 10.1 11.7
Intangible assets - net .9 1.1 1.1
Prepaid pension costs
Other assets 235.0 139.3 124.4
Deferred income taxes 2.9 3.9 5.8
Deferred charges 9.5 5.7 7.9
Total $10,848.3 $10,903.6 $ 9,974.8
Liabilities and Stockholders'
Equity
Short-term borrowings $ 3,737.0 $ 4,831.1 $ 4,534.3
Payables to unconsolidated
subsidiaries and affiliates 452.0 856.9 405.2
Accounts payable and
accrued expenses 805.7 615.6 624.0
Health care claims and reserves 79.7 63.4 55.2
Accrued taxes 10.6 11.9 10.0
Deferred income taxes 67.5 72.1 57.7
Long-term borrowings 4,231.6 3,046.7 2,956.2
Retirement benefit accruals
and other liabilities 25.9 24.8 24.0
Total liabilities 9,410.0 9,522.5 8,666.6
Common stock $1 par value
issued shares at April 30,
2001 - 266,051,855) 268.6 258.6 245.4
Common stock in treasury
Unamortized restricted stock
compensation
Retained earnings 1,240.6 1,152.1 1,078.5
Total 1,509.2 1,410.7 1,323.9
Accumulated other comprehensive
income (loss) (70.9) (29.6) (15.7)
Stockholders' equity 1,438.3 1,381.1 1,308.2
Total $10,848.3 $10,903.6 $9,974.8
Page 4
DEERE & COMPANY CONSOLIDATED
CONDENSED STATEMENT OF (Deere & Company and
CONSOLIDATED CASH FLOWS Consolidated Subsidiaries)
Six Months Ended April 30 Six Months Ended
April 30
Millions of dollars (Unaudited) 2001 2000
Cash Flows from Operating Activities
Net income $ 184.2 $ 242.0
Adjustments to reconcile net income
to net cash provided by (used for)
operating activities (1,231.7) (696.7)
Net cash provided by (used for)
operating activities (1,047.5) (454.7)
Cash Flows from Investing Activities
Collections of financing receivables 3,243.0 3,338.6
Proceeds from sales of financing
receivables 1,400.9 154.1
Proceeds from maturities and sales
of marketable securities 21.7 229.7
Proceeds from sales of equipment on
operating leases 203.9 151.4
Cost of financing receivables
acquired (4,291.2) (4,179.3)
Purchases of marketable securities (28.6) (30.7)
Purchases of property and equipment (181.1) (109.1)
Cost of operating leases acquired (349.4) (460.9)
Acquisitions of businesses, net of
cash acquired (250.3) (568.2)
Increase in receivables with
unconsolidated affiliates (55.3) (87.8)
Other 82.9 39.9
Net cash provided by (used for)
investing activities (203.5) (1,522.3)
Cash Flows from Financing Activities
Increase (decrease) in short-term
borrowings (554.3) 2,258.7
Change in intercompany
receivables/payables
Proceeds from long-term borrowings 3,148.9 1,012.0
Principal payments on long-term
borrowings (1,047.4) (1,119.6)
Proceeds from issuance of
common stock 5.9 5.9
Repurchases of common stock (1.3)
Dividends paid (103.2) (102.9)
Other (1.4) (.1)
Net cash provided by (used for)
financing activities 1,447.2 2,054.0
Effect of Exchange Rate
Changes on Cash (3.5) (2.1)
Net Increase (Decrease) in Cash
and Cash Equivalents 192.7 74.9
Cash and Cash Equivalents at
Beginning of Period 291.7 295.5
Cash and Cash Equivalents at
End of Period $ 484.4 $ 370.4
See Notes to Interim Financial Statements. Supplemental
consolidating data are shown for the "Equipment Operations" and
"Financial Services". Transactions between the "Equipment
Operations" and "Financial Services" have been eliminated to
arrive at the "Consolidated" data.
DEERE & COMPANY EQUIPMENT OPERATIONS
CONDENSED STATEMENT OF (Deere & Company with
CONSOLIDATED CASH FLOWS Financial Services on the
Six Months Ended April 30 Equity Basis)
Six Months Ended
April 30
Millions of dollars (Unaudited) 2001 2000
Cash Flows from Operating Activities
Net income $ 184.2 $ 242.0
Adjustments to reconcile net income
to net cash provided by (used for)
operating activities (1,583.1) (995.5)
Net cash provided by (used for)
operating activities (1,398.9) (753.5)
Cash Flows from Investing Activities
Collections of financing receivables 31.1 18.9
Proceeds from sales of financing
receivables
Proceeds from maturities and sales
of marketable securities 202.8
Proceeds from sales of equipment on
operating leases 2.0 1.1
Cost of financing receivables
acquired (1.2) (4.3)
Purchases of marketable securities
Purchases of property and equipment (176.1) (104.1)
Cost of operating leases acquired (3.5) (.3)
Acquisitions of businesses, net of
cash acquired (245.1) (567.2)
Increase in receivables with
unconsolidated affiliates
Other 18.4 (.5)
Net cash provided by (used for)
investing activities (374.4) (453.6)
Cash Flows from Financing Activities
Increase (decrease) in short-term
borrowings 943.0 1,356.3
Change in intercompany
receivables/payables 125.0 (.6)
Proceeds from long-term borrowings 539.4 1.5
Principal payments on long-term
borrowings (32.5) (3.7)
Proceeds from issuance of
common stock 5.9 5.9
Repurchases of common stock (1.3)
Dividends paid (103.2) (102.9)
Other (1.4) (.1)
Net cash provided by (used for)
financing activities 1,474.9 1,256.4
Effect of Exchange Rate
Changes on Cash (2.0) (2.7)
Net Increase (Decrease) in Cash
and Cash Equivalents (300.4) 46.6
Cash and Cash Equivalents at
Beginning of Period 639.7 229.1
Cash and Cash Equivalents at
End of Period $ 339.3 $ 275.7
DEERE & COMPANY FINANCIAL SERVICES
CONDENSED STATEMENT OF
CONSOLIDATED CASH FLOWS Six Months Ended
Six Months Ended April 30 April 30
Millions of dollars (Unaudited) 2001 2000
Cash Flows from Operating Activities
Net income $ 98.7 $ 82.8
Adjustments to reconcile net income
to net cash provided by (used for)
operating activities 262.7 226.0
Net cash provided by (used for)
operating activities 361.4 308.8
Cash Flows from Investing Activities
Collections of financing receivables 3,211.9 3,319.7
Proceeds from sales of financing
receivables 1,400.9 154.1
Proceeds from maturities and sales
of marketable securities 21.7 27.0
Proceeds from sales of equipment on
operating leases 201.8 150.2
Cost of financing receivables
acquired (4,290.0) (4,175.0)
Purchases of marketable securities (28.6) (30.7)
Purchases of property and equipment (5.0) (5.0)
Cost of operating leases acquired (345.9) (460.6)
Acquisitions of businesses, net of
cash acquired (5.1) (1.1)
Increase in receivables with
unconsolidated affiliates (55.3) (87.8)
Other 54.7 36.6
Net cash provided by (used for)
investing activities 161.1 (1,072.6)
Cash Flows from Financing Activities
Increase (decrease) in short-term
borrowings (1,497.3) 902.4
Change in intercompany
receivables/payables (476.0) 14.7
Proceeds from long-term borrowings 2,609.6 1,010.5
Principal payments on long-term
borrowings (1,015.0) (1,115.9)
Proceeds from issuance of
common stock
Repurchases of common stock
Dividends paid (10.0) (10.0)
Other 9.8 4.0
Net cash provided by (used for)
financing activities (378.9) 805.7
Effect of Exchange Rate
Changes on Cash (1.5) .5
Net Increase (Decrease) in Cash
and Cash Equivalents 142.1 42.4
Cash and Cash Equivalents at
Beginning of Period 200.3 183.8
Cash and Cash Equivalents at End
of Period $ 342.4 $ 226.2
Page 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
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 United States of America have been
condensed or omitted as permitted by such rules and regulations.
All adjustments, consisting of normal recurring adjustments, have
been included. Management believes that the disclosures are
adequate to present fairly the financial position, results of
operations and cash flows at the dates and for the periods
presented. It is suggested that these interim financial
statements be read in conjunction with the financial statements
and the notes thereto included in the Company's latest annual
report on Form 10-K. Results for interim periods are not
necessarily indicative of those to be expected for the fiscal
year.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts and related disclosures. Actual
results could differ from those estimates.
(2) The Company's consolidated financial statements and some
information in the notes and related commentary are presented in
a format which includes data grouped as follows:
Equipment Operations - These data include the Company's
agricultural equipment, commercial and consumer equipment,
construction equipment and special technologies operations with
Financial Services reflected on the equity basis. Data relating
to the above equipment operations, including the consolidated
group data in the income statement, are also referred to as
"Equipment Operations" in this report.
Financial Services - These data include the Company's credit
and health care operations.
Consolidated - These data represent 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 follows in
millions of dollars:
Three Months Ended Six Months Ended
April 30 April 30
--------------------------------------
2001 2000 2001 2000
--------------------------------------
Balance, beginning of
period $4,122.3 $3,841.5 $4,117.2 $3,855.3
Net income 127.8 204.3 184.2 242.0
Dividends declared (51.5) (51.3) (103.0) (102.6)
Other (1.9) (4.0) (1.7) (4.2)
--------------------------------------
Balance, end of period $4,196.7 $3,990.5 $4,196.7 $3,990.5
======================================
Page 6
(4) Substantially all inventories owned by Deere & Company and
its United States equipment subsidiaries are valued at cost on
the last-in, first-out (LIFO) basis. If all of the Company's
inventories had been valued on an approximate first-in, first-out
(FIFO) basis, estimated inventories by major classification in
millions of dollars would have been as follows:
April 30 October 31 April 30
2001 2000 2000
--------------------------------
Raw materials and supplies $ 561 $ 460 $ 429
Work-in-process 436 404 425
Finished machines and parts 2,130 1,667 2,081
--------------------------------
Total FIFO value 3,127 2,531 2,935
Adjustment to LIFO basis 954 978 1,058
--------------------------------
Inventories $2,173 $1,553 $1,877
================================
(5) At April 30, 2001, the net unpaid balance of all retail
notes previously sold by the Financial Services subsidiaries was
$2,230 million and the Company's maximum exposure under all
related recourse provisions was $202 million. At April 30, 2001,
the Company had commitments of approximately $195 million for
construction and acquisition of property and equipment.
(6) John Deere B.V., located in the Netherlands, is an indirect
wholly owned finance subsidiary of the Company. The securities of
John Deere B.V. that are registered with the United States
Securities and Exchange Commission are fully and unconditionally
guaranteed by the Company.
(7) Dividends declared and paid on a per share basis were as
follows:
Three Months Ended Six Months Ended
April 30 April 30
----------------------------------------
2001 2000 2001 2000
----------------------------------------
Dividends declared $.22 $.22 $.44 $.44
Dividends paid $.22 $.22 $.44 $.44
Page 7
(8) Worldwide net sales and revenues, operating profit and
identifiable assets by segment in millions of dollars follow:
Three Months Ended
April 30
--------------- %
2001 2000 Change
---------------
Net sales and revenues:
Agricultural equipment* $1,779 $1,675 + 6
Commercial and consumer equipment 873 999 - 13
Construction equipment 561 634 - 12
Other 16 16
---------------
Total net sales 3,229 3,324 - 3
Credit revenues 359 312 + 15
Other revenues 188 154 + 22
---------------
Total net sales and revenues** $3,776 $3,790
===============
Operating profit (loss)***:
Agricultural equipment $ 131 $ 159 - 18
Commercial and consumer equipment 64 115 - 44
Construction equipment 34 81 - 58
Credit 64 56 + 14
Other (10) (11) - 9
---------------
Total operating profit** 283 400 - 29
Interest, corporate expenses-net
and income taxes (155) (196) - 21
---------------
Net income $ 128 $ 204 - 37
===============
Identifiable assets:
Agricultural equipment
Commercial and consumer equipment
Construction equipment
Credit
Other
Corporate
Total assets
* Additional intersegment sales
of agricultural equipment $ 25 $ 26 - 4
** Includes overseas equipment
operations as follows:
Net sales $ 854 $ 816 + 5
Operating profit 73 74 - 1
*** Operating profit is income before interest expense, foreign
exchange gains and losses, income taxes and certain corporate
expenses. However, operating profit of the credit segment
includes the effect of interest expense.
Six Months Ended
April 30 %
----------------
2001 2000 Change
----------------
Net sales and revenues:
Agricultural equipment* $ 3,007 $ 2,709 + 11
Commercial and consumer equipment 1,303 1,492 - 13
Construction equipment 1,008 973 + 4
Other 29 30 - 3
-----------------
Total net sales 5,347 5,204 + 3
Credit revenues 726 613 + 18
Other revenues 383 312 + 23
-----------------
Total net sales and revenues** $ 6,456 $ 6,129 + 5
=================
Operating profit (loss)***:
Agricultural equipment $ 220 $ 173 + 27
Commercial and consumer equipment 65 124 - 48
Construction equipment 31 92 - 66
Credit 144 120 + 20
Other (21) (19) + 11
-----------------
Total operating profit** 439 490 - 10
Interest, corporate expenses-net
and income taxes (255) (248) + 3
-----------------
Net income $ 184 $ 242 - 24
=================
Identifiable assets:
Agricultural equipment $ 4,888 $4,401 + 11
Commercial and consumer equipment 2,918 2,548 + 15
Construction equipment 1,720 1,684 + 2
Credit 10,603 9,759 + 9
Other 361 328 + 10
Corporate 1,610 1,485 + 8
-----------------
Total assets $22,100 $20,205 + 9
=================
* Additional intersegment sales
of agricultural equipment $ 42 $ 47 - 11
** Includes overseas equipment
operations as follows:
Net sales $ 1,434 $ 1,366 + 5
Operating profit 125 107 + 17
*** Operating profit is income before interest expense, foreign
exchange gains and losses, income taxes and certain corporate
expenses. However, operating profit of the credit segment
includes the effect of interest expense.
Page 8
(9) A reconciliation of basic and diluted net income per share
in millions, except per share amounts, follows:
Six Months
Ended
April 30
--------------
2001 2000
--------------
Net income $184.2 $242.0
Average shares outstanding 234.7 234.0
Basic net income per share $ .79 $ 1.03
==============
Average shares outstanding 234.7 234.0
Effect of dilutive stock options 1.8 2.0
--------------
Total potential shares
outstanding 236.5 236.0
==============
Diluted net income per share $ .78 $ 1.03
==============
Stock options to purchase 4.2 million shares during the first six
months of 2001 and 2.9 million during the first six months of
2000 were outstanding, but not included in the above diluted per
share computation because the options' exercise prices were
greater than the average market price of the Company's common
stock during the period.
(10) 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, retail credit
matters, software and 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 position or results of
operations.
(11) In the first quarter of 2001, the Company adopted Financial
Accounting Standards Board (FASB) Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities, as amended by
FASB Statement No. 138. Under the new standards, all derivatives
have been recorded at fair value in the financial statements.
Changes in fair values of the derivatives are recognized
periodically in other comprehensive income (equity) for
derivatives designated as hedges of future cash flows or in net
income for all other derivatives. The after-tax transition
adjustments for adopting the new standards at November 1, 2000
were an unrealized loss of $4 million recorded in "Unrealized
Loss on Derivatives" (other comprehensive income) and a loss of
$.7 million recorded in income. The amount of the transition
adjustment loss which was recorded in other comprehensive income
at November 1, 2000 that will be reclassified to earnings in
fiscal year 2001 is approximately $1 million. The effects of the
adoption of the new standards on the Company's financial position
and net income were not material.
The Company enters into derivative transactions only to manage
exposures arising in the normal course of business and not for
the purpose of creating speculative positions or trading. The
Company's credit operations manage the relationship of the types
and amounts of their funding sources to their receivable and
lease portfolio in an effort to diminish risk due to interest
rate and foreign currency fluctuations, while responding to
favorable financing opportunities. The Company also has foreign
currency exposures at some of its foreign and domestic operations
related to buying, selling and financing in currencies other than
the local currencies.
Interest Rate Swaps
-------------------
The Company's credit operations enter into interest rate swap
agreements related to their borrowings and certain asset backed
securitizations. These swaps are utilized to more closely match
the type of interest
Page 9
rates of the borrowings to those of the assets being funded or to
manage interest rate exposures from securitizations. Certain
interest rate swaps were designated as hedges of future cash
flows from commercial paper and variable interest rate
borrowings. These swaps mature in up to 60 months. The fair value
gains or losses on these swaps are recorded in other
comprehensive income with the effective portion of the gains or
losses subsequently recognized in interest expense, offsetting
the effects of interest rate changes on the related borrowings.
Certain interest rate swaps (including cross currency interest
rate swaps) were designated as fair value hedges of fixed-rate,
long-term borrowings. The effective portion of the fair value
gains or losses on these swaps were offset by fair value
adjustments in the underlying borrowings. The ineffective
portions of the gains or losses on all the cash flow and fair
value interest rate swaps designated as hedges were recognized
immediately in interest expense and were not material in the
first six months of 2001. There were no components of the cash
flow or fair value hedges that were excluded from the assessment
of the hedge's effectiveness. The credit operations also held
interest rate swaps to offset other interest rate swaps written
by the credit operations to securitization trusts related to
retail note sales. These interest rate swaps were not designated
as hedges. The fair value gains or losses on these swaps
generally offset the fair value gains or losses on the swaps
written to the trusts.
Foreign Exchange Forward Contracts, Swaps and Options
-----------------------------------------------------
The Company has entered into foreign exchange forward contracts
and purchased options in order to manage the currency exposure of
certain receivables, liabilities and expected inventory
purchases. These derivatives were not designated as hedges. The
fair value gains or losses from these foreign currency
derivatives are recognized directly in earnings, generally
offsetting the foreign exchange gains or losses on the exposures
being managed. The Company also has cross currency interest rate
swaps designated as fair value hedges of certain long-term
borrowings. The fair value gains or losses on these swaps are
offset by fair value adjustments in the underlying borrowings and
the ineffectiveness was not material. The Company has a currency
swap designated as a cash flow hedge of a long-term borrowing.
The fair value gains or losses on this swap are recorded in other
comprehensive income and subsequently recognized in earnings
offsetting the exchange rate effects on the borrowing being
hedged. The Company has a currency swap related to a long-term
borrowing that was not designated as a hedge and the fair value
gains or losses are recognized directly in earnings.
(12) In 2000, the FASB issued Statement No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. This standard revises FASB Statement No. 125,
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, and requires additional
disclosure as presented below. The Statement was effective for
sales of receivables after March 31, 2001 and will not have a
material impact on the Company's financial position or net
income.
When the Company sells receivables in securitizations of retail
notes, it retains interest-only strips, servicing rights, and in
some cases a cash reserve account, all of which are retained
interests in the securitized receivables. Gains or losses on
sales of the receivables depend in part on the previous carrying
amount of the financial assets involved in the transfer,
allocated between the assets sold and the retained interests
based on their relative fair values at the date of transfer. The
Company generally estimates fair values based on the present
value of future expected cash flows using management's key
assumptions as discussed below. The Company receives annual
servicing fees approximating 1 percent of the outstanding
balance, and rights to future cash flows. The Company's maximum
exposure under recourse provisions related to securitizations was
$202 million at April 30, 2001. Except for this exposure, the
investors and securitization trusts have no recourse to the
Company for failure of debtors to pay when due. The Company's
retained interests, which are included in the recourse
provisions, are subordinate to investor's interests and their
values are subject to certain key assumptions as shown below.
Page 10
The Company recognized a pretax gain of $12 million on retail
notes securitized during the first six months of 2001. Key
assumptions used to initially determine the fair value of the
retained interests included a weighted average maturity of 20
months, average annual prepayment rate of 20 percent, expected
annual credit losses of .30 percent, and a discount rate on
retained interests and subordinate tranches of 13 percent.
Cash flows received from and paid to securitization trusts in
millions of dollars were as follows:
Six Months Ended
April 30, 2001
----------------
Proceeds from new securitizations $996
Servicing fees received $ 10
Other cash flows received $ 31
The total retained interests, weighted-average life, weighted-
average current key economic assumptions and the sensitivity
analysis showing the hypothetical effects on the retained
interests from immediate 10 percent and 20 percent adverse
changes in those assumptions with dollars in millions were as
follows:
Retail Note Securitizations April 30, 2001
- --------------------------- --------------
Carrying amount/fair value of retained interests $117
Weighted-average life (in months) 15
Prepayment speed assumption (annual rate) 19%
Impact on fair value of 10% adverse change $ .6
Impact on fair value of 20% adverse change $1.1
Expected credit losses (annual rate) .38%
Impact on fair value of 10% adverse change $ .9
Impact on fair value of 20% adverse change $1.9
Residual cash flows discount rate (annual) 13%
Impact on fair value of 10% adverse change $2.5
Impact on fair value of 20% adverse change $5.1
These sensitivities are hypothetical changes in fair value and
cannot be extrapolated because the relationship of the changes in
assumption to the changes in fair value may not be linear. Also,
the effect of a variation in a particular assumption is
calculated without changing any other assumption, whereas,
changes in one factor may result in changes in another.
Accordingly, no assurance can be given that actual results would
be consistent with the results of these estimates.
Principal balances of managed and securitized retail notes, past
due amounts and credit losses, net of recoveries, as of and for
the six months ended April 30, 2001 in millions of dollars
follow:
Principal Principal 60 Days Net Credit
Outstanding or More Past Due Losses
----------- ----------------- ----------
Owned $4,749 $19 $16
Securitized 1,962 21 4
------ --- ---
Managed $6,711 $40 $20
====== === ===
The amount of expected static pool losses (actual and projected
future credit losses) for securitizations during the first six
months of 2001 was .51 percent of the amount of retail notes
sold.
Page 11
(13) In 2000, the Emerging Issues Task Force issued EITF Issue
No. 00-10, Accounting for Shipping and Handling Fees and Costs.
The Task Force reached a consensus that all shipping and handling
amounts billed to a customer in a sale transaction should be
classified as revenue. The Task Force also decided that the costs
for shipping and handling should either be classified as cost of
sales or disclosure should be made of significant amounts
included in other categories. The Company currently offsets the
amounts billed to customers for shipping and handling with the
related costs in cost of sales. The Company will adopt the
revised accounting in the fourth quarter of 2001. The change is
expected to increase sales and cost of sales by approximately 2
percent, with no effect on the Company's financial position or
net income.
(14) 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 Six Months Ended
April 30 April 30
------------------------------------
2001 2000 2001 2000
------------------------------------
Net income $127.8 $204.3 $184.2 $242.0
Other comprehensive income
(loss), net of tax:
Change in cumulative
translation adjustment (49.2) (40.0) (16.0) (34.6)
Unrealized gain (loss) on
marketable securities .1 (.3) 1.9 (5.2)
Unrealized loss on
derivatives (11.1) - (39.8) -
------------------------------------
Comprehensive income $ 67.6 $164.0 $130.3 $202.2
====================================
(15) In the first six months of 2001, the Company acquired
McGinnis Farms, Inc., a leading provider of products and services
to landscape and irrigation professionals, for approximately $180
million. The acquisition has been accounted for as a purchase
with the excess of the purchase price over the fair value of the
net assets acquired (goodwill) of approximately $140 million
being amortized over 20 years. McGinnis Farms, Inc. is
headquartered in Alpharetta, Georgia. During the first six
months, the Company also acquired The Vapormatic Company Limited,
an agricultural equipment replacement parts distributor
headquartered in Exeter, England, for $18 million and Great Dane
Power Equipment, Inc., a manufacturer of mowing equipment
headquartered in Jeffersonville, Indiana, for $14 million. The
pro forma results of operations as if these acquisitions had
occurred at the beginning of the fiscal year would not differ
significantly from reported results.
(16) On May 30, 2001, the Company announced that it has entered
into an agreement to acquire Richton International Corporation,
which requires approval by Richton's shareholders. Under the
terms of the agreement, the shareholders of Richton would have
the option to exchange their shares for cash or shares of Deere &
Company totaling approximately $125 million. Richton's businesses
include irrigation and computer related services and products.
Page 12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------ -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
RESULTS OF OPERATIONS
- ---------------------
Deere & Company's worldwide net income was $127.8 million, or
$.54 per share, for the second quarter and $184.2 million, or
$.78 per share, for the first six months of 2001. This is in
comparison with net income of $204.3 million, or $.87 per share,
and $242.0 million, or $1.03 per share, for the same periods last
year. The second-quarter results are a reflection of the general
economic slowdown and continued weakness in the Company's major
markets. In line with the Company's commitment to rigorous asset
management, it has responded quickly to these difficult
conditions by reducing production schedules. These actions are
expected to have a negative impact on earnings for the rest of
the year.
Worldwide net sales and revenues were $3,776 million for the
second quarter and $6,456 million for the first six months of
2001, compared with $3,790 million and $6,129 million,
respectively, last year. Net sales were $3,229 million for the
second quarter and $5,347 million for the first six months,
compared with $3,324 million and $5,204 million, respectively,
last year. Excluding the impact of recent acquisitions, net sales
were down 7 percent for the quarter and 2 percent for the first
six months. The decreases were primarily due to lower sales of
commercial and consumer products and construction equipment, and
the impact of weaker foreign currencies. Partially offsetting
these factors were higher sales of agricultural equipment.
Compared with last year, overseas net sales rose 5 percent for
both the quarter and for the first six months. Excluding the
impact of recent acquisitions and weaker foreign currencies,
overseas net sales for the remaining operations increased 3
percent for both periods. The increases were primarily due to
higher agricultural equipment sales in Latin America, partially
offset by lower sales of commercial and consumer equipment and
construction equipment, and lower six-month agricultural
equipment sales in Europe.
Overall, the Company's physical volume of sales was 1 percent
lower for the quarter and 5 percent higher for the first six
months, compared with last year. Without the impact of recent
acquisitions, physical volume was down 5 percent for the quarter
and up 1 percent year-to-date.
Worldwide Equipment Operations had net income of $89.1 million
for the quarter and $93.2 million for the first six months of
2001, compared with $165.4 million and $160.3 million,
respectively, last year. The decreases were primarily due to
lower production and sales of commercial and consumer products
and construction equipment, as well as related manufacturing
inefficiencies. Also contributing to the lower profits were a
planned increase in research and development expense and higher
selling and administrative expenses related to growth and other
initiatives, as well as higher sales incentive costs and interest
expense. Partially offsetting these factors were lower pension
and postretirement benefit costs. Excluding interest, taxes and
other corporate expenses, operating income was $215 million for
the second quarter and $285 million for the first six months,
compared with respective year-ago totals of $341 million and $361
million. The decreases were primarily due to the same operational
factors mentioned above.
. Despite a 6 percent sales increase, operating profit of the
worldwide agricultural equipment segment declined to $131 million
for the quarter, compared to $159 million last year. The decrease
was primarily due to a planned increase in research and
development expense and higher selling and administrative
expenses related to growth and other initiatives, as well as
manufacturing inefficiencies associated with tractor schedule
reductions initiated during the quarter. Partially offsetting
these factors was the impact of the higher sales. For the first
six
Page 13
months, the segment reported an 11 percent increase in sales and
$220 million of operating profit, compared to $173 million last
year. The profit improvement was primarily due to the higher
sales and production volumes and related manufacturing
efficiencies, as well as lower pension and postretirement benefit
costs. Partially offsetting these factors were the higher planned
research and development costs and increased selling and
administrative expenses related to growth and other initiatives.
. Operating profit of the commercial and consumer equipment
segment was $64 million for the second quarter of 2001 and $65
million for the first six months, compared with $115 million and
$124 million, respectively, last year. Sales for the quarter and
six months declined 13 percent, reflecting the impact of a weaker
economy and unfavorable spring weather conditions. Operating
profit was down for both periods primarily due to the lower sales
and production volumes and related manufacturing inefficiencies,
as well as higher selling and administrative expenses associated
with recent acquisitions. Benefiting results for both periods
were higher prices, partially offset by higher sales incentive
costs during the first six months.
. Operating profit of the worldwide construction equipment
segment was $34 million for the quarter and $31 million for the
first six months, compared with $81 million and $92 million for
the same periods last year. Sales declined 12 percent for the
quarter, but were up 4 percent for the first six months, compared
with last year. Excluding the sales of Timberjack, acquired at
the end of the second quarter of 2000, sales were down 27 percent
and 18 percent for the respective periods. The declines reflected
the impact of a weaker than expected economy as well as very
competitive market conditions, and were marked by a particularly
severe downturn in sales to independent rental companies. The
decreases in operating profit were primarily due to reduced sales
and production volumes, higher sales incentive costs, higher
selling and administrative expenses and increased research and
development costs. The higher selling and administrative expenses
and research and development costs were mainly related to the
acquisition of Timberjack. In addition, manufacturing
inefficiencies associated with lower production volumes
negatively affected this year's results.
. Net income of the Company's credit operations was $39.6
million for the second quarter and $92.1 million for the first
six months of 2001, compared with $36.2 million and $77.2 million
in the same periods last year. The increases were primarily due
to higher income from a higher average portfolio and from
increased retail note sales, partially offset by increased
receivable write-offs primarily related to construction equipment
and higher selling and administrative expenses. Total revenues of
the credit operations increased 16 percent from $312 million in
the second quarter of 2000 to $362 million in the current quarter
and increased 19 percent in the first six months from $614
million last year to $732 million this year. The average balance
of receivables and leases financed was 5 percent higher in the
second quarter and 11 percent higher in the first six months of
2001, compared with the same periods last year. Interest expense
increased 15 percent in the current quarter and 21 percent in the
first six months of 2001, compared with 2000, primarily as a
result of an increase in average borrowings. The credit
operations' consolidated ratio of earnings to fixed charges was
1.46 to 1 for the second quarter this year and last year. This
ratio was 1.50 to 1 for the first six months this year and last
year.
. The Company's other businesses had operating losses of $10
million for the quarter and $21 million for the first six months,
compared with operating losses of $11 million and $19 million
last year. Results for both years reflected costs for the
development of new products and services in addition to goodwill
amortization of the special technologies group. Benefiting this
year's results were higher operating profits of the health care
division.
Page 14
Additional information on business segments is presented in Note
8 to the interim financial statements.
The cost of sales to net sales ratio for the second quarter and
first six months of 2001 were 80.4 percent and 80.3 percent,
respectively, compared to 78.4 percent and 79.9 percent in the
same periods last year. The increases were primarily due to
manufacturing inefficiencies related to lower production and
sales of commercial and consumer products and construction
equipment, and higher sales incentive costs. Health care premiums
and fees and related health care claims and costs increased in
the current quarter and first six months this year, compared to
last year, primarily from increases in volume due to enrollment.
Interest expense increased in the current quarter and first six
months this year, compared to the prior year, due primarily to
higher average borrowings of both the credit and equipment
operations. Other operating expenses increased in both periods
this year, compared to last year, as a result of an increase in
the depreciation of equipment on operating leases due to the
growth in the credit operations' average portfolio and increased
costs of the special technologies group. Other income increased
in the second quarter and first half of this year, compared to
last year, primarily due to increased sales of retail notes in
both periods and gains on the sales of certain property and
equipment during the first six months of 2001.
Market Conditions and Outlook
- -----------------------------
Based on present market conditions, as outlined below, the
Company's physical volume of sales is currently forecast to be
down 11 percent for the third quarter and to be flat for the full
year. Without the effect of acquisitions in either year, physical
volume is projected to decrease 15 percent in the third quarter
and 3 percent for the full year. Operating margins will be under
significant pressure during the third quarter and are expected to
remain below year ago levels in the second half of 2001.
. Agricultural Equipment. Net farm cash income in North America
is expected to approximate last year's levels due to higher
livestock and crop receipts supplemented by continued government
payments. In addition, farmland values are continuing to increase
and farm balance sheets are remaining strong. Concerns over low
prices for grain and other crops, however, have kept demand for
farm machinery at a relatively low level. In this environment,
the Company continues to expect that overall industry retail
sales of farm equipment in North America will be flat to up
slightly compared with last year's modest levels.
In Europe, concern over the outcome of the foot-and-mouth
disease situation has had a negative impact on farm equipment
demand. However, with the outbreak apparently contained on the
Continent and new cases declining rapidly in the United Kingdom,
European industry retail sales of farm equipment are now expected
to decline by only 10 to 15 percent from last year. While farm
equipment demand is anticipated to remain strong in Brazil, the
overall outlook for markets in Latin America, Australia and Asia
is now projected to be flat to down 5 percent in 2001.
In a further sign of the Company's improving competitive
position, retail sales of John Deere farm equipment in North
America were higher for the quarter and the first six months. The
increases reflected continued favorable customer response to
Company products, especially the new STS combines. In conjunction
with this higher level of sales, however, inventories of used
goods are now slightly above last year's levels. Also, sales of
large tractors, while higher than last year, have remained below
expectations. As a result, consistent with the objective of
rigorous asset management, the Company announced a second one-
week shutdown at its Waterloo, Iowa, tractor manufacturing
facility, scheduled during the third quarter and affecting the
production of most large tractors.
. Commercial and Consumer Equipment. Company sales have been
negatively affected by the slow economy and adverse weather
conditions during the prime spring selling period. Given their
Page 15
seasonal nature, such sales are unlikely to be recouped later in
the year even if economic conditions improve. The segment's sales
are also being negatively affected by the transition to a new
order-fulfillment process that allows production to occur in more
direct alignment with customer orders and requires less
inventory. In this environment, the Company now expects its sales
of commercial and consumer equipment to remain well below last
year's levels.
. Construction Equipment. The North American economy continues
to decelerate from the rapid growth of the last five years.
Housing starts are expected to decline during the remainder of
the year despite recent interest rate reductions. Furthermore,
purchases by independent rental companies have been significantly
lower than anticipated during the prime selling season and are
expected to remain weak for the balance of the year. In addition,
both the pulp and lumber markets have continued to soften in
response to slowing economic growth worldwide. In this
environment, the Company now expects industry retail sales of
forestry and construction equipment in 2001 to be 20 to 25
percent below last year's levels and for pricing to remain highly
competitive.
. Credit. The Company's credit operations are expected to
continue benefiting from growth in the receivable portfolio, but
at a slower rate than in the first six months of the year.
In February 2001, the Financial Accounting Standards Board issued
a revised Exposure Draft, Business Combinations and Intangible
Assets - Accounting for Goodwill, proposing that the amortization
of all goodwill be discontinued and only written down for
impairments. In 2000, the Company had goodwill amortization of
$44 million pretax and $40 million after-tax. In the second
quarter and first six months of 2001, the Company had goodwill
amortization of $15 million pretax ($13 million after-tax) and
$27 million pretax ($25 million after-tax), respectively.
Safe Harbor Statement
- ---------------------
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995: Statements under "Market Conditions and
Outlook", "Financial Instrument Risk Information" and other
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 affect particular lines of business, while others
could affect all the Company's businesses.
The results of the Company's agricultural equipment segment are
strongly influenced by the many interrelated factors that affect
farmers' confidence, including worldwide demand for agricultural
products, world grain stocks, prices realized for commodities and
livestock, weather conditions, government farm programs, animal
diseases, crop pests and harvest yields. Factors that are
particularly important to the Company's outlook for this segment
include the prices realized by farmers for their crops and
livestock, which are in turn strongly impacted by summer weather
and soil conditions and the level of farm product exports, as
well as the level of payments under United States government farm
programs. The spread of bovine spongiform encephalopathy (or "mad
cow" disease) outside of Europe, and the spread of "foot-and-
mouth" disease could also adversely affect livestock and feed
prices. Concerns pertaining to genetically modified organisms, or
GMOs, and China's delayed entry into the World Trade Organization
may affect farm exports. In addition, higher fuel and fertilizer
costs could have a negative impact on net farm cash income.
The Company's outlook for its commercial and consumer equipment
sales are affected by general economic conditions in the United
States, consumer and commercial confidence and weather
conditions. Other important assumptions include continued
consumer acceptance of the Company's new products and a
continuation of existing consumer borrowing patterns.
Page 16
The number of housing starts is especially important to sales of
the Company's construction equipment. The results of the
Company's construction equipment segment are also impacted by
levels of public construction and non-residential construction.
Prices for pulp, lumber and structural panels are important to
sales of forestry equipment.
All of the Company's businesses are affected by general economic
conditions in the worldwide markets in which the Company
operates, interest and currency exchange rates, as well as
monetary and fiscal policies (including actions by the Federal
Reserve Board); actions of competitors in the various industries
in which the Company competes, particularly price cutting; dealer
practices, especially as to levels of new and used field
inventories; and legislation affecting the sectors in which the
Company operates. Other risks and uncertainties that, from time
to time, could affect the Company's results include production
difficulties, such as capacity and supply constraints; energy
prices and supplies; labor relations; technological difficulties;
and changes to accounting standards.
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 Securities and Exchange Commission.
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.
Equipment Operations
- --------------------
The Company's equipment businesses are capital intensive and are
subject to large seasonal variations in financing requirements
for trade receivables from dealers and inventories. Accordingly,
to the extent necessary, funds provided from operations are
supplemented from external borrowing sources.
In the first six months of 2001, negative cash flows from
operating activities of $1,399 million resulted primarily from
increases in trade receivables and inventories, and a decrease in
accounts payable and accrued expenses. Partially offsetting these
operating cash outflows were positive cash flows from net income.
The cash requirement for operating activities, along with the
requirements for acquisitions of businesses, purchases of
property and equipment and payment of dividends were provided
primarily from an increase in borrowings. Cash and cash
equivalents decreased during the period.
Negative cash flows from operating activities in the first six
months of 2000 of $754 million resulted primarily from increases
in trade receivables and inventories, and a decrease in accounts
payable and accrued expenses. Partially offsetting these
operating cash outflows were positive cash flows from net income
and dividends received from the Financial Services operations.
The cash requirement for operating activities, along with the
requirements for acquisitions of businesses, purchases of
property and equipment and payment of dividends were provided
primarily from an increase in borrowings and sales of marketable
securities. Cash and cash equivalents increased during the first
six months of 2000.
Trade accounts and notes receivable result mainly from sales to
dealers of equipment that is being carried in their inventories.
Trade receivables increased $825 million during the first six
months of 2001 primarily due to a seasonal increase. Compared to
a year ago when dealers were reducing their inventories, trade
receivables
Page 17
increased $179 million primarily due to the higher level of
agricultural equipment sales and acquisitions. The ratios of
worldwide net trade accounts and notes receivable to the last 12
months' net sales were 35 percent at April 30, 2001, compared to
28 percent at October 31, 2000 and 38 percent at April 30, 2000.
Agricultural equipment receivables increased $210 million and
commercial and consumer equipment receivables increased $24
million, while construction equipment receivables decreased $55
million, compared to a year ago. The percentage of total
worldwide trade receivables outstanding for periods exceeding 12
months was 7 percent, 8 percent and 8 percent at April 30, 2001,
October 31, 2000 and April 30, 2000, respectively.
Inventories at April 30, 2001 increased by $620 million during
the first six months and $296 million compared to one year ago,
reflecting a seasonal increase in the first six months, higher
sales volumes of the agricultural equipment segment, the
introduction of new products, the implementation of the new order
fulfillment process for commercial and consumer equipment
products aimed at reducing dealer inventories, and acquisitions.
Most of the Company's inventories are valued on the last-in,
first-out (LIFO) basis. Inventories valued on an approximate
current cost basis increased by 7 percent from a year ago.
Total interest-bearing debt of the Equipment Operations was
$4,125 million at April 30, 2001, compared with $2,645 million at
the end of fiscal year 2000 and $3,033 million at April 30, 2000.
The ratio of total debt to total capital (total interest-bearing
debt and stockholders' equity) was 49 percent, 38 percent and 42
percent at April 30, 2001, October 31, 2000 and April 30, 2000,
respectively.
During the first six months of 2001, the Equipment Operations
issued $300 million of 7.125% notes due in 2031 and $250 million
of 5-7/8% notes due in 2006. These operations also retired $31
million of medium-term notes.
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 borrowings and equity capital.
Additionally, the credit operations periodically sell substantial
amounts of retail notes.
During the first six months of 2001, the aggregate cash provided
from operating and investing activities was used primarily to
decrease borrowings. Cash provided from Financial Services
operating activities was $361 million in the first six months of
this year. Cash provided by investing activities totaled $161
million in the first six months of 2001, primarily due to the
collections of financing receivables, sales of retail notes and
sales of equipment on operating leases exceeding the cost of
financing receivables and leases acquired. Cash used by financing
activities totaled $379 million in the first six months,
resulting primarily from a decrease in total borrowings,
including payables owed to the Equipment Operations. Cash and
cash equivalents increased $142 million during the period.
During the first six months of 2000, the aggregate cash provided
from operating and financing activities was used primarily to
increase financing receivables and leases. Cash provided from
Financial Services operating activities was $309 million in the
first six months of last year. Cash provided by financing
activities totaled $806 million in the first half of 2000,
resulting from an $812 million increase in total borrowings,
which was partially offset by payment of a $10 million dividend
to the Equipment Operations. Cash used for investing activities
totaled $1,073 million in the first six months of 2000, primarily
due to the cost of financing receivables and leases exceeding
collections by $1,316 million, partially offset by $154 million
of proceeds from the sales of retail notes.
Financing 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-
Page 18
related customers, revolving charge accounts, wholesale notes
receivable, operating loans, and financing and operating leases.
During the past 12 months, these receivables and leases increased
by $439 million due to the cost of receivables and leases
acquired exceeding collections and sales of receivables. These
receivables and leases decreased $434 million in the first six
months of 2001 due to the sale of retail notes. Acquisitions of
financing receivables and leases were approximately the same in
the first six months of 2001, compared with the same period last
year. Acquisition volumes of operating loans, revolving charge
accounts and retail notes were higher in the first six months of
2001, compared to the same period last year. Financing
receivables and leases administered by the credit operations,
which include receivables previously sold, amounted to $11,895
million at April 30, 2001, compared with $12,223 million at
October 31, 2000 and $11,177 million at April 30, 2000. At April
30, 2001, the unpaid balance of all retail notes previously sold
was $2,230 million, compared with $2,123 million at October 31,
2000 and $1,951 million at April 30, 2000.
Total outside interest-bearing debt of the credit subsidiaries
was $7,969 million at April 30, 2001, compared with $7,878
million at the end of fiscal year 2000 and $7,491 million at
April 30, 2000. Total outside borrowings increased during the
first six months of 2001 and the last 12 months, generally
corresponding with the level of the financing 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 total interest-bearing debt to stockholder's
equity was 6.2 to 1 at April 30, 2001, compared with 6.7 to 1 at
October 31, 2000 and 6.4 to 1 at April 30, 2000.
During the first six months of 2001, the credit operations issued
$2,453 million and retired $675 million of medium-term notes and
$200 million of 5.85% notes due in 2001. These operations also
issued $157 million and retired $140 million of other
miscellaneous long-term borrowings.
Consolidated
- ------------
The Company maintains unsecured lines of credit with various
banks in North America and overseas. Some of the lines are
available to both the Equipment Operations and certain credit
operations. Worldwide lines of credit totaled $4,706 million at
April 30, 2001, $1,242 million of which were unused. For the
purpose of computing unused credit lines, commercial paper and
short-term bank borrowings, excluding the current portion of
long-term borrowings, were considered to constitute utilization.
Included in the total credit lines is a long-term credit
agreement commitment totaling $2,113 million.
Stockholders' equity was $4,341 million at April 30, 2001,
compared with $4,302 million at October 31, 2000 and $4,216
million at April 30, 2000. The increase of $39 million in the
first six months of 2001 resulted primarily from net income of
$184 million, partially offset by dividends declared of $103
million and an unrealized loss on derivatives of $40 million.
This loss is primarily due to an unrealized loss on interest rate
swaps (pay fixed rates / receive floating rates) hedging the
interest costs of the credit operations' short-term borrowings
resulting from a decrease in interest rates. If interest rates
remain unchanged, the unrealized loss will be realized in income
and will be offset by lower future interest expense on the credit
operations' short-term borrowings, which will be based on the
lower interest rates.
The Board of Directors at its meeting on May 30, 2001 declared a
quarterly dividend of 22 cents per share payable August 1, 2001
to stockholders of record on June 30, 2001.
Page 19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
- ------ -----------------------------------------------------
RISK
----
FINANCIAL INSTRUMENT RISK INFORMATION
- -------------------------------------
Sensitivity Analysis
- --------------------
The following is a sensitivity analysis for the Company's
derivatives and other financial instruments that have interest
rate risk. These instruments are held for other than trading
purposes. The Company uses a combination of cash flow models to
assess the sensitivity of earnings to changes in market interest
rates. The models calculate the effect of adjusting interest
rates as follows. Cash flows for financing receivables are
discounted at the prevailing rate for each receivable portfolio
in effect at the end of the quarter. Cash flows for borrowings
are discounted at the treasury yield curve plus a market credit
spread for similarly rated borrowers in similar industries. Cash
flows for interest rate swaps are projected and discounted using
forecasted rates from the swap yield curve at the repricing dates
as of the end of the quarter.
The gains or losses in the following table represent the changes
in the financial instruments fair values which would be caused by
instantaneously decreasing the interest rates by 10 percent of
the current market rates at April 30, 2001. The gains or losses
in fair values would have been as follows in millions of dollars:
- -------------------------------------------------------------
Fair Value
Gains (Losses)
April 30, 2001
- -------------------------------------------------------------
Marketable securities $ 1
Financing receivables 44
Long-term interest rate swaps related to
short-term borrowings (12)
Long-term borrowings and related swaps:
Equipment Operations borrowings (112)
Financial Services borrowings (22)
Interest rate and foreign currency swaps 14
-----
Total $(87)
=============================================================
Page 20
Tabular Information
- -------------------
The following foreign exchange forward contracts were held by the
Company at April 30, 2001 related to certain currency exposures.
Substantially all contracts have maturity dates of less than one
year. The notional amounts and fair values in millions of dollars
and maturity dates follow:
- ---------------------------------------------------------------
Fair
Average Value
Contractual Notional Gains
Rate* Amount (Losses)
- ---------------------------------------------------------------
Buy US$ / Sell Euro 1.1107 $324 $(1.3)
Buy US$ / Sell Canadian Dollar 1.5537 255 (1.7)
Buy US$ / Sell Australian Dollar 1.9801 163 (1.8)
Buy Euro / Sell US$ 1.1129 135 .7
Buy Yen / Sell Euro 122.7226 37 (.1)
Buy US$ / Sell Swedish Krona 10.1525 32 (.2)
Buy US$ / Sell British Pound .6939 27 (.1)
Other Contracts 116 .7
------------------
Total $1,089 $(3.8)
==================
* Currency per United States dollar (US$)
- --------------------------------------------------------------
At April 30, 2001, the Company had $147 million of foreign
exchange purchased options with a fair value of $1 million. All
options mature in less than one year.
Page 21
The Company held certain financial instruments in currencies
other than the functional currencies. These amounts and related
currency swaps, excluding short-term receivables and payables, in
millions of dollars at April 30, 2001 by maturity dates and
average interest rates were as follows:
- ----------------------------------------------------------------
Expected Maturity Date
------------------------------
Last
6 Mos.
Functional Currency (FC) 2001 2002 2003 2004
- ----------------------------------------------------------------
Euro (FC)
Short-term borrowings (US$) $374
Average interest rates 5.0%
Short-term borrowings (Yen) $ 37
Average interest rates .11%
Long-term borrowings (US$)
Fixed interest rate
Currency swaps
Notional amount
Buy US$/Sell Euro
Contract rate
Currency swap
Notional amount
Buy Euro/Sell Swedish Krona
Contract rate
Australian Dollar (FC)
Short-term borrowings (US$) $161
Average interest rates 4.9%
Canadian Dollar (FC)
Short-term borrowings (US$) $ 90
Average interest rates 4.9%
Brazilian Real (FC)
Financing receivables (US$) $ 6 $ 16 $ 6 $ 4
Fixed average interest rates 11.7% 10.8% 10.6% 10.6%
Long-term borrowings (US$) $ 4 $ 16 $ 7 $ 5
Fixed average interest rates 6.8% 6.8% 6.8% 7.0%
* These fair values were approximately equal to the values in
total column.
- ----------------------------------------------------------------
- ----------------------------------------------------------------
Expected Maturity Date
------------------------------
Fair
Functional Currency (FC) 2005 2006 Total Values
- ----------------------------------------------------------------
Euro (FC)
Short-term borrowings (US$) $374 *
Average interest rates
Short-term borrowings (Yen) $ 37 *
Average interest rates
Long-term borrowings (US$) $ 250 $250 $ 260
Fixed interest rate 5.9%
Currency swaps
Notional amount $ 170 $170 $ .2
Buy US$/Sell Euro
Contract rate 1.1073
Currency swap
Notional amount $ 102 $102 $(1.4)
Buy Euro/Sell Swedish Krona
Contract rate 9.2300
Australian Dollar (FC)
Short-term borrowings (US$) $161 *
Average interest rates
Canadian Dollar (FC)
Short-term borrowings (US$) $ 90 *
Average interest rates
Brazilian Real (FC)
Financing receivables (US$) $ 2 $ 34 *
Fixed average interest rates 10.5%
Long-term borrowings (US$) $ 4 $ 1 $ 37 *
Fixed average interest rates 7.2% 7.3%
- ----------------------------------------------------------------
Page 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- ------ -----------------
See Note (10) to the Interim Financial Statements.
Item 2. Changes in Securities and Use of Proceeds
- ------ -----------------------------------------
None
Item 3. Defaults Upon Senior Securities
- ------ -------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
See Item 4, Part II of Form 10-Q for the quarterly
period ended January 31, 2001.
Item 5. Other Information
- ------ -----------------
None
Item 6. Exhibits and Reports on Form 8-K
- ------ --------------------------------
(a) 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.
(b) Reports on Form 8-K
Current Report on Form 8-K dated February 6, 2001
(Item 9).
Current Report on Form 8-K dated February 13, 2001
(Item 7).
Current Report on Form 8-K dated March 12, 2001
(Item 9).
Current Report on Form 8-K dated March 15, 2001
(Item 9).
Current Report on Form 8-K dated March 21, 2001
(Item 7).
Current Report on Form 8-K dated March 22, 2001
(Item 7).
Current Report on Form 8-K dated March 30, 2001
(Item 7).
Current Report on Form 8-K dated April 9, 2001
(Item 9).
Page 23
SIGNATURE
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: June 7, 2001 By: s/ Nathan J. Jones
------------- ---------------------------
Nathan J. Jones
Senior Vice President,
Principal Financial Officer
and Principal Accounting Officer
Page 24
INDEX TO EXHIBITS
Exhibit
Number
- ------
2 Not applicable
3 Not applicable
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
23 Not applicable
24 Not applicable
99 Not applicable
Page 25