UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-Q
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Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended January 31, 1998
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Commission file no: 1-4121
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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 January 31, 1998, 248,061,138 shares of common stock, $1 par
value, of the registrant were outstanding.
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Page 1 of 28 Pages.
Index to Exhibits: Page 24
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DEERE & COMPANY CONSOLIDATED
STATEMENT OF CONSOLIDATED INCOME (Deere & Company and
Consolidated Subsidiaries)
Millions of dollars except per
share amounts Three Months Ended
(Unaudited) January 31
1998 1997
Net Sales and Revenues
Net sales of equipment $2,404.7 $2,002.6
Finance and interest income 233.2 192.5
Insurance and health care premiums 169.0 162.0
Investment income 17.1 15.0
Other income 22.1 23.9
Total 2,846.1 2,396.0
Costs and Expenses
Cost of goods sold 1,866.5 1,529.6
Research and development expenses 94.7 86.5
Selling, administrative and general
expenses 283.1 261.8
Interest expense 114.7 94.9
Insurance and health care claims
and benefits 138.6 123.8
Other operating expenses 27.6 14.1
Total 2,525.2 2,110.7
Income of Consolidated Group
Before Income Taxes 320.9 285.3
Provision for income taxes 117.8 106.1
Income of Consolidated Group 203.1 179.2
Equity in Income (Loss) of Unconsolidated
Subsidiaries and Affiliates
Credit (.2) (.5)
Insurance
Health care
Other .4 (2.0)
Total .2 (2.5)
Net Income $ 203.3 $ 176.7
Per Share:
Net income $ .81 $ .69
Net income - diluted $ .81 $ .68
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.
Page 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DEERE & COMPANY EQUIPMENT OPERATIONS
STATEMENT OF CONSOLIDATED INCOME (Deere & Company with
Financial Services on the
Equity Basis)
Millions of dollars except per
share amounts Three Months Ended
(Unaudited) January 31
1998 1997
Net Sales and Revenues
Net sales of equipment $2,404.7 $2,002.6
Finance and interest income 32.1 29.4
Insurance and health care premiums
Investment income
Other income 10.9 11.9
Total 2,447.7 2,043.9
Costs and Expenses
Cost of goods sold 1,871.0 1,535.7
Research and development expenses 94.7 86.5
Selling, administrative and general
expenses 194.6 183.4
Interest expense 21.7 20.5
Insurance and health care claims
and benefits
Other operating expenses 1.6 .5
Total 2,183.6 1,826.6
Income of Consolidated Group
Before Income Taxes 264.1 217.3
Provision for income taxes 97.2 81.9
Income of Consolidated Group 166.9 135.4
Equity in Income (Loss) of Unconsolidated
Subsidiaries and Affiliates
Credit 32.9 32.9
Insurance 5.5 9.0
Health care (2.4) 1.4
Other .4 (2.0)
Total 36.4 41.3
Net Income $ 203.3 $ 176.7
Page 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DEERE & COMPANY FINANCIAL SERVICES
STATEMENT OF CONSOLIDATED INCOME
Millions of dollars except per
share amounts Three Months Ended
(Unaudited) January 31
1998 1997
Net Sales and Revenues
Net sales of equipment
Finance and interest income $203.2 $164.4
Insurance and health care premiums 175.4 173.0
Investment income 17.1 15.0
Other income 12.5 13.2
Total 408.2 365.6
Costs and Expenses
Cost of goods sold
Research and development expenses
Selling, administrative and general
expenses 90.9 83.1
Interest expense 95.1 75.6
Insurance and health care claims
and benefits 139.4 125.3
Other operating expenses 25.9 13.6
Total 351.3 297.6
Income of Consolidated Group
Before Income Taxes 56.9 68.0
Provision for income taxes 20.7 24.2
Income of Consolidated Group 36.2 43.8
Equity in Income (Loss) of Unconsolidated
Subsidiaries and Affiliates
Credit (.2) (.5)
Insurance
Health care
Other
Total (.2) (.5)
Net Income $ 36.0 $ 43.3
Page 4
DEERE & COMPANY CONSOLIDATED
CONDENSED CONSOLIDATED BALANCE SHEET (Deere & Company and
Consolidated Subsidiaries)
Jan 31 Oct 31 Jan 31
Millions of dollars (Unaudited) 1998 1997 1997
Assets
Cash and short-term investments $ 319.2 $ 330.0 $ 366.1
Cash deposited with
unconsolidated subsidiaries
Cash and cash equivalents 319.2 330.0 366.1
Marketable securities 867.6 819.6 878.1
Receivables from unconsolidated
subsidiaries and affiliates 14.9 14.6 19.6
Trade accounts and notes
receivable - net 3,526.4 3,333.8 3,016.8
Financing receivables - net 6,613.6 6,404.7 6,132.9
Other receivables 395.3 412.7 467.2
Equipment on operating
leases - net 820.8 774.6 481.1
Inventories 1,464.3 1,072.7 1,193.7
Property and equipment - net 1,534.8 1,524.1 1,331.8
Investments in unconsolidated
subsidiaries and affiliates 148.2 149.9 132.4
Intangible assets - net 183.8 157.8 282.5
Prepaid pension costs 574.7 592.9 31.4
Deferred income taxes 528.9 543.6 646.4
Other assets and
deferred charges 194.8 188.8 161.0
Total $17,187.3 $16,319.8 $15,141.0
Liabilities and Stockholders' Equity
Short-term borrowings $4,934.0 $ 3,774.6 $ 3,834.1
Payables to unconsolidated
subsidiaries and affiliates 43.2 48.7 40.2
Accounts payable and
accrued expenses 2,458.1 2,839.7 2,295.6
Insurance and health care
claims and reserves 405.1 414.7 428.1
Accrued taxes 178.3 117.5 201.5
Deferred income taxes 21.3 21.4 9.9
Long-term borrowings 2,642.3 2,622.8 2,478.4
Retirement benefit accruals
and other liabilities 2,359.0 2,333.2 2,279.2
Total liabilities 13,041.3 12,172.6 11,567.0
Common stock, $1 par value
(issued shares at
January 31, 1998 - 263,849,669) 1,778.5 1,778.5 1,766.9
Retained earnings 3,194.3 3,048.4 2,425.2
Minimum pension liability
adjustment (14.0) (14.0) (235.4)
Cumulative translation adjustment (87.5) (57.4) (29.2)
Unrealized gain on
marketable securities 26.6 22.2 15.3
Unamortized restricted
stock compensation (16.1) (17.4) (20.7)
Common stock in treasury,
at cost (735.8) (613.1) (348.1)
Total stockholders' equity 4,146.0 4,147.2 3,574.0
Total $17,187.3 $16,319.8 $15,141.0
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.
Page 5
DEERE & COMPANY EQUIPMENT OPERATIONS
CONDENSED CONSOLIDATED BALANCE SHEET (Deere & Company with
Financial Services on
the Equity Basis)
Jan 31 Oct 31 Jan 31
Millions of dollars (Unaudited) 1998 1997 1997
Assets
Cash and short-term investments $ 73.5 $ 61.2 $ 135.4
Cash deposited with unconsolidated
subsidiaries 180.5 350.0 168.5
Cash and cash equivalents 254.0 411.2 303.9
Marketable securities
Receivables from unconsolidated
subsidiaries and affiliates 107.7 57.3 44.1
Trade accounts and notes
receivable - net 3,526.4 3,333.8 3,016.8
Financing receivables - net 82.7 83.5 82.4
Other receivables 2.1
Equipment on operating
leases - net 186.6 193.9 156.0
Inventories 1,464.3 1,072.7 1,193.7
Property and equipment - net 1,491.0 1,479.1 1,281.5
Investments in unconsolidated
subsidiaries and affiliates 1,510.5 1,494.7 1,475.2
Intangible assets - net 174.4 148.4 273.2
Prepaid pension costs 574.7 592.9 31.4
Deferred income taxes 485.6 490.8 595.8
Other assets and deferred charges 125.9 123.8 93.6
Total $9,983.8 $9,484.2 $8,547.6
Liabilities and Stockholders' Equity
Short-term borrowings $1,036.6 $ 171.1 $ 272.1
Payables to unconsolidated
subsidiaries and affiliates 43.2 54.8 41.5
Accounts payable and accrued
expenses 1,693.1 2,134.1 1,573.1
Insurance and health care
claims and reserves
Accrued taxes 165.9 114.2 197.2
Deferred income taxes 20.8 21.4 9.5
Long-term borrowings 551.9 539.9 625.4
Retirement benefit accruals
and other liabilities 2,326.3 2,301.5 2,254.8
Total liabilities 5,837.8 5,337.0 4,973.6
Common stock, $1 par value
(issued shares at
January 31, 1998 - 263,849,669) 1,778.5 1,778.5 1,766.9
Retained earnings 3,194.3 3,048.4 2,425.2
Minimum pension liability
adjustment (14.0) (14.0) (235.4)
Cumulative translation adjustment (87.5) (57.4) (29.2)
Unrealized gain on marketable
securities 26.6 22.2 15.3
Unamortized restricted stock
compensation (16.1) (17.4) (20.7)
Common stock in treasury, at cost (735.8) (613.1) (348.1)
Total stockholders' equity 4,146.0 4,147.2 3,574.0
Total $9,983.8 $9,484.2 $8,547.6
Page 6
DEERE & COMPANY FINANCIAL SERVICES
CONDENSED CONSOLIDATED BALANCE SHEET
Jan 31 Oct 31 Jan 31
Millions of dollars (Unaudited) 1998 1997 1997
Assets
Cash and short-term investments $ 245.7 $ 268.8 $ 230.8
Cash deposited with
unconsolidated subsidiaries
Cash and cash equivalents 245.7 268.8 230.8
Marketable securities 867.6 819.6 878.1
Receivables from unconsolidated
subsidiaries and affiliates 6.1 1.7
Trade accounts and notes
receivable - net
Financing receivables - net 6,530.9 6,321.2 6,050.5
Other receivables 395.3 410.6 467.2
Equipment on operating leases - net 634.2 580.7 325.1
Inventories
Property and equipment - net 43.8 45.0 50.3
Investments in unconsolidated
subsidiaries and affiliates 12.7 13.0 5.7
Intangible assets - net 9.4 9.4 9.3
Prepaid pension costs
Deferred income taxes 43.4 52.8 50.5
Other assets and deferred charges 68.9 65.0 67.4
Total $8,851.9 $8,592.2 $8,136.6
Liabilities and Stockholders' Equity
Short-term borrowings $3,897.4 $3,603.5 $3,562.0
Payables to unconsolidated
subsidiaries and affiliates 273.3 392.7 193.4
Accounts payable and accrued
expenses 765.0 705.6 722.6
Insurance and health care
claims and reserves 405.1 414.7 428.1
Accrued taxes 12.4 3.2 4.4
Deferred income taxes .5 .3
Long-term borrowings 2,090.4 2,082.9 1,853.0
Retirement benefit accruals
and other liabilities 32.7 31.8 24.3
Total liabilities 7,476.8 7,234.4 6,788.1
Common stock, $1 par value
(issued shares at
January 31, 1998 - 263,849,669) 237.1 238.4 209.4
Retained earnings 1,121.5 1,104.5 1,126.5
Minimum pension liability
adjustment
Cumulative translation
adjustment (10.1) (7.3) (2.7)
Unrealized gain on marketable
securities 26.6 22.2 15.3
Unamortized restricted stock
compensation
Common stock in treasury, at cost
Total stockholders' equity 1,375.1 1,357.8 1,348.5
Total $8,851.9 $8,592.2 $8,136.6
Page 7
DEERE & COMPANY CONSOLIDATED
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS (Deere & Company
and
Consolidated Subsidiaries
Three Months Ended
January 31
Millions of dollars (Unaudited) 1998 1997
Cash Flows from Operating Activities
Net income $ 203.3 $ 176.7
Adjustments to reconcile net income to
net cash provided by (used for)
operating activities (809.0) (374.7)
Net cash provided by (used for)
operating activities (605.7) (198.0)
Cash Flows from Investing Activities
Collections and sales of
financing receivables 1,492.7 1,459.5
Proceeds from maturities and
sales of marketable securities 36.9 25.1
Cost of financing receivables acquired (1,725.7) (1,686.5)
Purchases of marketable securities (76.8) (32.3)
Purchases of property and equipment (73.0) (68.1)
Cost of operating leases acquired (117.9) (89.4)
Acquisitions of businesses (38.5) (6.8)
Other 82.6 72.5
Net cash used for investing activities (419.7) (326.0)
Cash Flows from Financing Activities
Increase in short-term borrowings 979.5 616.7
Change in intercompany receivables/payables
Proceeds from long-term borrowings 306.0 145.0
Principal payments on long-term borrowings (92.6) (10.3)
Proceeds from issuance of common stock 6.6 3.2
Repurchases of common stock (132.8) (100.2)
Dividends paid (50.2) (51.6)
Other (.1)
Net cash provided by (used for)
financing activities 1,016.5 602.7
Effect of Exchange Rate Changes on Cash (1.9) (4.1)
Net Increase (Decrease) in Cash and
Cash Equivalents (10.8) 74.6
Cash and Cash Equivalents at
Beginning of Period 330.0 291.5
Cash and Cash Equivalents at End of Period $ 319.2 $ 366.1
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.
Page 8
DEERE & COMPANY EQUIPMENT OPERATIONS
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS (Deere & Company
Three Months Ended January 31 with Financial
Services on
Millions of dollars (Unaudited) the Equity Basis)
Three Months Ended
January 31
1998 1997
Cash Flows from Operating Activities
Net income $ 203.3 $ 176.7
Adjustments to reconcile net income to
net cash provided by (used for)
operating activities (879.8) (420.5)
Net cash provided by (used for)
operating activities (676.5) (243.8)
Cash Flows from Investing Activities
Collections and sales of financing receivables 10.1 28.1
Proceeds from maturities and sales of
marketable securities
Cost of financing receivables acquired (10.3) (7.4)
Purchases of marketable securities
Purchases of property and equipment (71.2) (65.8)
Cost of operating leases acquired (16.1) (18.4)
Acquisitions of businesses (38.5) (6.8)
Other 10.9 21.7
Net cash used for investing activities (115.1) (48.6)
Cash Flows from Financing Activities
Increase in short-term borrowings 869.9 65.6
Change in intercompany receivables/payables (56.1) 69.0
Proceeds from long-term borrowings
Principal payments on long-term borrowings (1.1) (10.3)
Proceeds from issuance of common stock 6.6 3.2
Repurchases of common stock (132.8) (100.2)
Dividends paid (50.2) (51.6)
Other (.1)
Net cash provided by (used for)
financing activities 636.3 (24.4)
Effect of Exchange Rate Changes on Cash (1.9) (4.1)
Net Increase (Decrease) in Cash and
Cash Equivalents (157.2) (320.9)
Cash and Cash Equivalents at
Beginning of Period 411.2 624.8
Cash and Cash Equivalents at End of Period $ 254.0 $ 303.9
Page 9
DEERE & COMPANY FINANCIAL SERVICES
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
Three Months Ended January 31
Three Months Ended
Millions of dollars (Unaudited January 31
1998 1997
Cash Flows from Operating Activities
Net income $ 36.0 $ 43.3
Adjustments to reconcile net income to
net cash provided by (used for)
operating activities 54.1 22.5
Net cash provided by (used for)
operating activities 90.1 65.8
Cash Flows from Investing Activities
Collections and sales of
financing receivables 1,482.6 1,431.4
Proceeds from maturities and
sales of marketable securities 36.9 25.1
Cost of financing receivables acquired (1,715.4) (1,679.1)
Purchases of marketable securities (76.8) (32.3)
Purchases of property and equipment (1.8) (2.3)
Cost of operating leases acquired (101.8) (71.0)
Acquisitions of businesses
Other 72.9 50.8
Net cash used for investing activities (303.4) (277.4)
Cash Flows from Financing Activities
Increase in short-term borrowings 109.6 551.1
Change in intercompany receivables/payables (113.3) (445.3)
Proceeds from long-term borrowings 306.0 145.0
Principal payments on long-term borrowings (91.5)
Proceeds from issuance of common stock
Repurchases of common stock
Dividends paid (19.3) (20.0)
Other (1.3)
Net cash provided by (used for)
financing activities 190.2 230.8
Effect of Exchange Rate Changes on Cash
Net Increase (Decrease) in Cash and
Cash Equivalents (23.1) 19.2
Cash and Cash Equivalents at
Beginning of Period 268.8 211.6
Cash and Cash Equivalents at End of Period $ 245.7 $ 230.8
Page 10
Notes to Interim Financial Statements
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 generally accepted
accounting principles 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
generally accepted accounting principles 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, construction equipment and commercial and
consumer equipment 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,
insurance and health care subsidiaries.
Consolidated - These data represent the consolidation of the
Equipment Operations and Financial Services in conformity with
Financial Accounting Standards Board (FASB) Statement No. 94.
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
January 31
1998 1997
Balance, beginning of period $3,048.4 $2,299.5
Net income 203.3 176.7
Dividend declared (54.8) (51.0)
Other (2.6)
Balance, end of period $3,194.3 $2,425.2
Page 11
4. An analysis of the cumulative translation adjustment follows
in millions of dollars:
Three Months Ended
January 31
1998 1997
Balance, beginning of period $(57.4) $(14.0)
Translation adjustment (29.9) (12.4)
Income taxes applicable to translation
adjustments (.2) (2.8)
Balance, end of period $(87.5) $(29.2)
5. 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:
January 31 October 31 January 31
1998 1997 1997
Raw materials and supplies $ 259 $ 228 $ 238
Work-in-process 532 427 459
Finished machines and parts 1,686 1,430 1,527
Total FIFO value 2,477 2,085 2,224
Adjustment to LIFO basis 1,013 1,012 1,030
Inventories $1,464 $1,073 $1,194
6. During the first three months of 1998, the Financial Services
subsidiaries received proceeds from the sale of retail notes of
$12 million. At January 31, 1998, the net unpaid balance of all
retail notes previously sold by the Financial Services
subsidiaries was $1,182 million and the Company's maximum exposure
under all related recourse provisions was $171 million.
At January 31, 1998, the Company had commitments of approximately
$112 million for construction and acquisition of property and
equipment.
7. Dividends declared and paid on a per share basis were as
follows:
Three Months Ended
January 31
1998 1997
Dividends declared $.22 $.20
Dividends paid $.20 $.20
Page 12
8. Worldwide net sales and revenues and operating profit in
millions of dollars follow:
Three Months Ended
January 31
%
Change
Net Sales:
Agricultural Equipment $1,451 $1,273 + 14
Construction equipment 578 461 + 25
Commercial and consumer equipment 376 269 + 40
Total net sales 2,405 2,003 + 20
Financial Services revenues 401 354 + 13
Other revenues 40 39 + 3
Total net sales and revenues $2,846 $2,396 + 19
United States and Canada:
Equipment net sales $1,815 $1,415 + 28
Financial Services revenues 401 354 + 13
Total 2,216 1,769 + 25
Overseas Net sales 590 588
Other revenues 40 39 + 3
Total net sales and revenues $2,846 $2,396 + 19
Operating profit**:
Agricultural equipment $ 206 $ 195 + 6
Construction equipment 64 38 + 68
Commercial and consumer equipment 18 4 +350
Equipment Operations* 288 237 + 22
Financial Services 57 68 - 16
Total operating profit 345 305 + 13
Interest and corporate expenses-net (24) (22) + 9
Income taxes (118) (106) + 11
Net income $ 203 $ 177 + 15
* Includes overseas operating profit
as follows: $ 57 $ 69 - 17
** Operating profit is income before interest expense, foreign
exchange gains and losses, income taxes and certain corporate
expenses. However, operating profit of Financial Services
includes the effect of interest expense.
Page 13
9. In the first quarter of 1998, the Company adopted FASB
Statement No. 128, Earnings per Share. This Statement requires
the presentation of basic and diluted net income per share, and a
reconciliation between these two amounts. Diluted net income per
share was restated for the prior period.
A reconciliation of basic and diluted net income per share in
millions, except per share amounts, follows:
Three Months Ended
January 31
1998 1997
Net income $203.3 $176.7
Average shares outstanding 249.5 256.1
Basic net income per share $ .81 $ .69
Average shares outstanding 249.5 256.1
Effect of dilutive securities:
Stock options 2.6 2.4
Other .3 .2
Total potential shares outstanding 252.4 258.7
Diluted net income per share $ .81 $ .68
Stock options to purchase 2.2 million shares during the first
quarter of 1998 and 1.6 million shares during the first quarter of
1997 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 related periods.
10. In December 1997, the Company granted options to employees
for the purchase of 1.7 million shares of common stock at an
exercise price of $56.50 per share and .5 million shares at an
exercise price of $82.19 per share. At January 31, 1998, options
for 8.1 million shares were outstanding at option prices in a
range of $15.60 to $82.19 per share and a weighted-average
exercise price of $39.21 per share. A total of 12.6 million
shares remained available for the granting of future options.
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, retail credit
matters 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.
Page 14
12. In December 1997, the Company announced the extension of its
stock repurchase program and authorized an additional $1 billion
of such repurchases. At the Company's discretion, repurchases of
common stock are being made from time to time in the open market
and through privately negotiated transactions. During the first
quarter of 1998, the Company repurchased $95 million of common
stock related to the extended program and $38 million for ongoing
stock option and restricted stock plans.
13. In December 1997, the Company invested $39 million for a 49
percent interest in Cameco Industries, Inc., primarily a
manufacturer of sugarcane harvesters and forestry equipment
located in Thibodaux, Louisiana. The initial goodwill acquired
was $27 million, which will be amortized to expense over 10 years.
The Company has also agreed to purchase the remaining 51 percent
interest for $40 million within 12 months of the first investment.
Cameco has been consolidated beginning in the first quarter of
1998 and the purchase did not have a material effect on the
Company's operating results.
Page 15
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Deere & Company achieved record first quarter worldwide net income
of $203.3 million, or $.81 per share, for the period ended January
31, an increase of 15 percent compared with $176.7 million, or
$.69 per share, in the first quarter of 1997. Net income per
share rose by 17 percent due to ongoing share repurchases.
Significant revenue growth and continued favorable margins were
the primary reasons for the strong results. Strong customer
response to new products and continuing progress from the
Company's quality improvement initiatives is driving the earnings
performance, even as spending has increased for growth initiatives
and as some global markets have become more challenging.
Worldwide net sales and revenues rose 19 percent to $2,846 million
for the first quarter, compared with $2,396 million last year.
Net sales to dealers of agricultural, construction, and commercial
and consumer equipment were $2,405 million for the quarter,
compared to $2,003 million last year. Export sales from the U.S.
remained robust, totaling $444 million for the quarter, compared
with $392 million last year. Overseas sales were approximately
equal to last year's first quarter total. Overall, the Company's
worldwide physical volume of sales increased 22 percent for the
first quarter of 1998 compared to the same period last year.
The Company's worldwide Equipment Operations, which exclude the
Financial Services subsidiaries and unconsolidated affiliates, had
record income of $166.9 million for the first quarter, compared
with $135.4 million last year. Worldwide equipment operating
profit increased to $288 million in the first quarter, compared
with $237 million a year ago.
- - Worldwide agricultural equipment operating profit was $206
million for the quarter, compared with $195 million last year,
reflecting higher sales and production volumes, partially offset
by higher expenses related to the development of new products and
markets, higher sales incentive costs and a less favorable sales
mix.
- - Worldwide construction equipment operating profit totaled $64
million for the quarter, in comparison with $38 million last year.
The increase reflected higher sales and production volumes and
improved operating efficiencies, partially offset by growth
expenditures and start-up expenses primarily at the new engine
facility in Torreon, Mexico.
- - Worldwide commercial and consumer equipment operating profit was
$18 million for the quarter compared with $4 million last year.
Results benefited from higher sales and production volumes and a
more favorable yen exchange rate, partially offset by start-up
costs at new facilities and growth expenditures.
The ratio of cost of goods sold to net sales of the Equipment
Operations was 77.8 percent in the first quarter of 1998 compared
to 76.7 percent in the same period last year. Additional
information on business segments is presented in Note 8 to the
interim financial statements.
Net income of the Company's credit operations was $32.9 million
for both the first quarter of 1998 and 1997. The higher income
from a larger average receivable and lease portfolio financed was
offset by higher operating expenses, lower securitization and
servicing fee income and narrower financing spreads. Total
revenues of the credit operations increased 21 percent from $178
million in the first quarter of 1997 to $216 million in the first
quarter of 1998.
Page 16
The average balance of receivables and leases financed was 12
percent higher in the first three months of 1998 compared to the
same period last year. Interest expense increased 25 percent
compared with the first quarter of 1997 as a result of an increase
in average borrowings and higher borrowing rates this year. The
credit subsidiaries' consolidated ratio of earnings to fixed
charges was 1.54 to 1 during the first three months this year
compared with 1.69 to 1 in the comparable period of 1997.
Net income from insurance operations was $5.5 million in the first
quarter of 1998 compared with $9.0 million last year, primarily
due to less favorable underwriting results. For the three-month
period, insurance premiums decreased 13 percent in 1998 compared
with the same period last year, while total claims, benefits, and
selling, administrative and general expenses decreased 8 percent
this year.
The health care operations incurred a net loss of $2.4 million in
the first quarter of 1998 compared with net income of $1.4 million
last year. The loss primarily reflected reduced margins caused by
very competitive industry conditions. Health care premiums and
administrative services revenues increased 14 percent in the first
three months of 1998 compared with the same period last year,
while total claims, benefits, and selling, administrative and
general expenses increased 22 percent this year.
Market Conditions and Outlook
Worldwide demand for John Deere agricultural equipment remained
strong for the quarter as a result of favorable fundamentals in
the farm economy and excellent customer response to new products.
With regard to the future, worldwide commodity carryover stocks
should remain relatively low, while grain and soybean prices,
although trending down, are expected to continue at profitable
levels. Near term commodity price volatility could increase until
the full effects of El Nino are known. At the same time, U.S.
farm cash receipts are expected to remain near, or slightly below,
the high levels of the previous two years. U.S. farmers' balance
sheets should remain strong as a result of rising farmland prices
and low interest rates. With regard to the Asian economic
situation, the Company does not have significant sales to the
region, and, according to the U.S. Department of Agriculture, farm
exports to Asia are expected to show only a modest decline for the
year. However, the Asian financial crisis is contributing to
global uncertainty, currency realignments and pricing challenges
in some parts of the world. Concurrently, worldwide commodity
consumption is expected to increase again this year, and overall
fundamentals are expected to remain generally favorable for farm
equipment sales in 1998.
Construction equipment demand is expected to remain strong in
1998, sustained by low interest rates, moderate economic growth
and low inflation. Housing starts are expected to approximate
last year's level, while expenditures on highways and streets are
anticipated to grow in connection with the approval of pending
federal highway legislation.
Sales for commercial and consumer equipment are expected to
benefit from growing incomes, low interest rates, moderate
economic growth, a strong housing market and new product
introductions.
The credit operations' performance is expected to improve this
year as a result of strong demand for John Deere products and
favorable economic conditions. The insurance operations will
continue to face competitive market conditions, with results
expected to fall below last year's levels. Although health care
operations continue to experience margin pressures and a very
competitive environment, significant improvement is expected for
1998 over the previous year.
Page 17
Based on these conditions, the Company's worldwide physical volume
of sales is currently projected to increase by approximately 8
percent in 1998 compared with 1997. Second quarter physical
volumes are projected to be 13 percent higher than comparable
levels for the second quarter of 1997.
Overall, the general fundamentals of the Company's business remain
favorable. With the commitment of the Company's employees and
enthusiastic support of its dealers, the Company is confident the
strong operating performance will continue for the remainder of
1998.
Safe Harbor Statement
Safe Harbor Statement under the Private Securities Litigation
Reform Act of 1995: Statements under the "Market Conditions and
Outlook" heading, which relate to future operating periods, are
subject to important risks and uncertainties that could cause
actual results to differ materially. The Company's businesses
include Equipment Operations (agricultural, construction and
commercial and consumer) and Financial Services (credit, insurance
and health care). Forward-looking statements relating to these
businesses involve certain factors that are subject to change,
including: the many interrelated factors that affect farmers'
confidence, including worldwide demand for agricultural products,
world grain stocks, commodities prices, weather conditions such as
El Nino, animal diseases, crop pests, harvest yields, real estate
values and government farm programs; general economic conditions
and housing starts; legislation, primarily legislation relating to
agriculture, the environment, commerce and government spending on
infrastructure; actions of competitors in the various industries
in which the Company competes; production difficulties, including
capacity and supply constraints; dealer practices; labor
relations; interest and currency exchange rates; accounting
standards; and other risks and uncertainties. Economic
difficulties in Asia could affect North American grain and meat
export prospects and could trigger instability in the world's
financial markets. The Company's outlook is based upon
assumptions relating to the factors described above. 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 as filed 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 quarter of 1998, negative cash flows from operating
activities of $677 million resulted primarily from an increase in
trade receivables and Company-owned inventories, and a decrease in
accounts payable and accrued expenses. Partially offsetting these
operating cash outflows were positive cash flows from net income.
The resulting net cash requirement for operating activities, along
with repurchases of common stock, purchases of property and
equipment, an increase in receivables from Financial Services and
payment of dividends, were provided primarily from an increase in
borrowings and a decrease in cash and cash equivalents.
Page 18
Negative cash flows from operating activities of $244 million in
the first quarter of 1997 resulted primarily from an increase in
Company-owned inventories and a decrease in accounts payable and
accrued expenses. Partially offsetting these operating cash
outflows were positive cash flows from net income and a reduction
in trade and other receivables. The resulting net cash
requirement for operating activities, along with repurchases of
common stock, purchases of property and equipment and payment of
dividends, were provided primarily from a decrease in cash and
cash equivalents and an increase in borrowings.
Equipment Operations' assets at January 31, 1998 were 72.6 percent
of the last 12 months net sales, compared with 72.2 percent a year
ago.
Net trade accounts and notes receivable result mainly from sales
to dealers of equipment that is being carried in their
inventories. Although trade receivables increased $193 million
during the first quarter and $510 million compared to one year
ago, the ratios of worldwide net trade accounts and notes
receivable to the last 12 months' net sales were 31 percent at
January 31, 1998, 30 percent at October 31, 1997 and 31 percent at
January 31, 1997. North American agricultural, construction, and
commercial and consumer equipment trade receivables increased
approximately $250 million, $50 million and $150 million,
respectively, compared with the levels 12 months earlier. Total
overseas trade receivables were approximately $60 million higher
than a year ago. The percentage of total worldwide trade
receivables outstanding for periods exceeding 12 months was 5
percent at January 31, 1998, 5 percent at October 31, 1997 and 8
percent at January 31, 1997.
Company-owned inventories at January 31, 1998 have increased by
$392 million compared with the end of the previous fiscal year and
$271 million compared to one year ago, primarily reflecting a
seasonal increase in the first quarter and increased production
and sales volumes from a year ago. 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 only 11 percent from a year ago, compared to an increase in net
sales of 20 percent during the same periods.
Total interest-bearing debt of the Equipment Operations was $1,588
million at January 31, 1998 compared with $711 million at the end
of fiscal year 1997 and $898 million at January 31, 1997. The
ratio of total debt to total capital (total interest-bearing debt
and stockholders' equity) was 28 percent, 15 percent and 20
percent at January 31, 1998, October 31, 1997 and January 31,
1997, respectively.
Financial Services
The Financial Services' credit subsidiaries 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 subsidiaries periodically sell
substantial amounts of retail notes. The insurance and health
care operations generate their funds through internal operations
and intercompany loans.
During the first quarter of 1998, the aggregate cash provided from
operating and financing activities was used primarily to increase
financing receivables. Cash provided from Financial Services
operating activities was $90 million in the current quarter. Cash
provided by financing activities totaled $190 million in 1998,
primarily resulting from a $211 million increase in total
borrowings, which was partially offset by payment of a $19 million
dividend to the Equipment Operations. Cash used for investing
activities totaled $303 million in the current quarter, primarily
due to the cost of financing receivables and leases acquired
exceeding collections. Cash and cash equivalents decreased $23
million during the first quarter.
Page 19
In the first quarter of 1997, the aggregate cash provided from
operating and financing activities was used primarily to increase
financing receivables. Cash provided from Financial Services
operating activities was $66 million in the first quarter of 1997.
Cash provided by financing activities totaled $231 million in
1997, resulting from a $251 million increase in total borrowings,
which was partially offset by payment of a $20 million dividend to
the Equipment Operations. Cash used for investing activities
totaled $277 million in 1997, primarily due to the cost of
financing receivables and leases acquired exceeding collections.
Cash and cash equivalents increased $19 million during the first
quarter of last year.
Marketable securities consist primarily of debt securities held by
the insurance and health care operations in support of their
obligations to policyholders. During the first quarter and last
12 months, marketable securities have increased $48 million and
decreased $10 million, respectively. The increase in the first
quarter was primarily due to the investment of the insurance
operation's cash and cash equivalents held at the beginning of the
year.
Financing receivables and leases increased by $263 million in the
first quarter of 1998 and $789 million during the past 12 months.
These receivables and leases 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-
related customers, revolving charge accounts, wholesale notes
receivable, and financing and operating leases.
The credit subsidiaries' receivables and leases increased during
the last 12 months due to the cost of financing receivables and
leases acquired exceeding collections, which was partially offset
by the sale of retail notes during the same period. Total
acquisitions of financing receivables and leases were 4 percent
higher in the first quarter of 1998 compared with the same period
last year. At January 31, 1998, the levels of retail notes,
wholesale receivables, leases and revolving charge accounts were
all higher than one year ago. Financing receivables and leases
administered by the credit subsidiaries, which include receivables
previously sold, amounted to $8,347 million at January 31, 1998
compared with $8,416 million at October 31, 1997 and $7,512
million at January 31, 1997. At January 31, 1998, the unpaid
balance of all retail notes previously sold was $1,182 million
compared with $1,515 million at October 31, 1997 and $1,137
million at January 31, 1997.
Total outside interest-bearing debt of the credit subsidiaries was
$5,988 million at January 31, 1998 compared with $5,686 million at
the end of fiscal year 1997 and $5,415 million at January 31,
1997. Total outside borrowings increased during the first quarter
of 1998 and the past 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 subsidiaries' ratio of total
interest-bearing debt to stockholder's equity was 6.7 to 1 at
January 31, 1998 compared with 6.6 to 1 at October 31, 1997 and
6.5 to 1 at January 31, 1997.
During the first three months of 1998, John Deere Capital
Corporation issued $200 million of 5.85% notes due in 2001. The
Capital Corporation also issued $106 million and retired $92
million of medium-term notes during the first quarter of 1998.
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 subsidiaries.
Worldwide lines of credit totaled $4,368 million at January 31,
1998, $705 million of which were unused. For the purpose of
Page 20
computing unused credit lines, total short-term 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
$3,500 million.
Stockholders' equity was $4,146 million at January 31, 1998
compared with $4,147 million at October 31, 1997 and $3,574
million at January 31, 1997. The increase in equity due to net
income of $203 million for the first three months of 1998 was
primarily offset by an increase in common stock in treasury of
$123 million related to the Company's stock repurchase and
employee benefit programs, dividends declared of $55 million and a
$30 million change in the cumulative translation adjustment.
The Board of Directors at its meeting on February 25, 1998
declared a quarterly dividend of 22 cents per share payable May 1,
1998 to stockholders of record on March 31, 1998.
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.
Page 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note (11) to the Interim Financial Statements.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
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 November 25, 1997 (Item 7).
Current Report on Form 8-K dated December 3, 1997 (Items 5 and 7).
Page 22
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: March 6, 1998 By: s/ Nathan J. Jones
------------- ------------------
Nathan J. Jones
Senior Vice President,
Principal Financial Officer
and Principal Accounting
Officer
Page 23
INDEX TO EXHIBITS
Exhibit Page
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 25
15 Not applicable -
18 Not applicable -
19 Not applicable -
22 Not applicable -
23 Not applicable -
24 Not applicable -
27 Financial data schedule 28
99 Not applicable -
Page 24