UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THESECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2003
Commission file no: 1-4121
DEERE & COMPANY
Delaware
36-2382580
One John Deere PlaceMoline, 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
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
At July 31, 2003, 240,002,297 shares of common stock, $1 par value, of the registrant were outstanding.
Index to Exhibits: Page 30
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DEERE & COMPANYSTATEMENT OF CONSOLIDATED INCOMEFor the Three Months Ended July 31, 2003 and 2002(In millions of dollars except per share amounts) Unaudited
2003
2002
Net Sales and Revenues
Net sales
$
3,833.0
3,409.6
Finance and interest income
328.6
336.5
Health care premiums and fees
173.6
174.9
Other income
66.4
48.0
Total
4,401.6
3,969.0
Costs and Expenses
Cost of sales
3,065.1
2,746.9
Research and development expenses
143.3
125.2
Selling, administrative and general expenses
447.8
406.3
Interest expense
162.4
158.3
Health care claims and costs
139.2
142.5
Other operating expenses
73.5
101.0
4,031.3
3,680.2
Income of Consolidated Group
Before Income Taxes
370.3
288.8
Provision for income taxes
126.7
134.8
243.6
154.0
Equity in Income (Loss) of Unconsolidated Affiliates
Credit
(.9
)
Other
3.9
(5.5
(6.4
Net Income
247.5
147.6
Per Share:
Net income - basic
1.03
.62
Net income - diluted
1.02
.61
See
Page 2
DEERE & COMPANYSTATEMENT OF CONSOLIDATED INCOMEFor the Nine Months Ended July 31, 2003 and 2002(In millions of dollars except per share amounts) Unaudited
9,974.1
8,756.1
957.4
1,004.3
490.7
506.4
173.0
210.8
11,595.2
10,477.6
7,977.8
7,175.1
405.1
384.5
1,230.5
1,222.3
474.9
476.9
395.5
417.5
237.4
325.8
10,721.2
10,002.1
874.0
475.5
304.6
203.5
569.4
272.0
.2
(3.0
2.8
(17.8
3.0
(20.8
572.4
251.2
2.39
1.06
2.37
1.04
Page 3
DEERE & COMPANYCONDENSED CONSOLIDATED BALANCE SHEET(In millions of dollars) Unaudited
July 31
October 31
Assets
Cash and cash equivalents
3,757.2
2,814.9
2,327.5
Marketable securities
232.7
189.2
211.6
Receivables from unconsolidated
affiliates
333.4
265.8
273.8
Trade accounts and notes
receivable - net
3,355.3
2,733.6
3,302.4
Financing receivables - net
9,522.0
9,067.5
8,351.2
Other receivables
333.5
426.4
273.6
Equipment on operating leases - net
1,384.3
1,609.2
1,663.6
Inventories
1,710.5
1,371.8
1,606.5
Property and equipment - net
2,021.7
1,998.3
2,008.0
Investments in unconsolidated affiliates
181.6
180.6
186.7
Goodwill
859.7
804.0
835.1
Other intangible assets - net
90.0
90.9
25.9
Prepaid pension costs
57.1
49.6
687.6
Other assets
576.4
582.1
610.0
Deferred income taxes
1,479.7
1,490.1
1,030.0
Deferred charges
102.7
94.0
93.3
Total assets
25,997.8
23,768.0
23,486.8
Liabilities and Stockholders' Equity
Short-term borrowings
4,403.0
4,437.3
5,121.6
Payables to unconsolidated
100.5
64.0
51.7
Accounts payable and accrued
expenses
3,169.6
3,142.2
2,957.7
Health care claims and reserves
111.8
92.8
109.2
Accrued taxes
228.3
87.4
126.6
29.0
24.5
19.5
Long-term borrowings
10,544.8
8,950.4
8,163.1
Retirement benefit accruals
and other liabilities
3,618.6
3,806.2
2,753.5
Total liabilities
22,205.6
20,604.8
19,302.9
Common Stock, $1 par value (issued shares at
July 31, 2003 - 268,215,602)
1,957.0
1,947.7
Common stock in treasury
(1,279.3
(1,322.2
(1,334.7
Unamortized restricted stock compensation
(6.8
(16.5
Retained earnings
4,317.3
3,912.6
3,899.5
4,988.2
4,529.6
4,496.0
Accumulated other comprehensive income (loss)
(1,196.0
(1,366.4
(312.1
Stockholders' equity
3,792.2
3,163.2
4,183.9
Total liabilities and stockholders' equity
Page 4
DEERE & COMPANYCONDENSED STATEMENT OF CONSOLIDATED CASH FLOWSFor the Nine Months Ended July 31, 2003 and 2002(In millions of dollars) Unaudited
Cash Flows from Operating Activities
Net income
Adjustments to reconcile net income to net cash
provided by operating activities
(377.4
427.4
Net cash provided by operating activities
195.0
678.6
Cash Flows from Investing Activities
Collections of receivables
6,472.8
5,479.3
Proceeds from sales of financing receivables
1,542.9
2,789.1
Proceeds from maturities and sales of marketable securities
46.4
43.6
Proceeds from sales of equipment on operating leases
398.6
437.7
Proceeds from sales of businesses
22.5
50.1
Cost of receivables acquired
(8,199.0
(7,548.8
Purchases of marketable securities
(88.6
(78.1
Purchases of property and equipment
(185.4
(229.3
Cost of operating leases acquired
(333.6
(430.1
Acquisitions of businesses, net of cash acquired
(10.6
(15.4
Decrease (increase) in receivables with unconsolidated affiliates
(25.7
15.3
(7.9
(80.6
Net cash provided by (used for) investing activities
(367.6
432.8
Cash Flows from Financing Activities
Increase (decrease) in short-term borrowings
503.8
(1,020.0
Proceeds from long-term borrowings
2,857.2
3,592.1
Principal payments on long-term borrowings
(2,171.9
(2,273.6
Proceeds from issuance of common stock
41.5
39.7
Repurchases of common stock
(.4
(1.2
Dividends paid
(157.8
(156.5
(1.4
(1.5
Net cash provided by financing activities
1,071.0
179.0
Effect of Exchange Rate Changes on Cash
43.9
7.1
Net Increase in Cash and Cash Equivalents
942.3
1,297.5
Cash and Cash Equivalents at Beginning of Period
Cash and Cash Equivalents at End of Period
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 tho se 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.
Certain amounts for prior years have been reclassified to conform with 2003 financial statement presentations.
(2)
Certain information in the notes and related commentary are presented in a format which includes data grouped as follows:
Equipment Operations
Consolidated
(3)
An analysis of the Company's retained earnings follows in millions of dollars:
Three Months EndedJuly 31
Nine Months EndedJuly 31
Balance, beginning of period
4,128.4
3,808.6
3,834.8
Dividends declared
(52.6
(52.4
(156.9
(6.0
(4.3
(9.9
(29.6
Balance, end of period
Page 6
(4)
The Company uses the intrinsic value method to account for stock-based employee compensation in its financial statements. The pro forma net income and net income per share according to the fair value method in Financial Accounting Standards Board (FASB) Statement No. 123, Accounting for Stock-Based Compensation, with dollars in millions except per share amounts were as follows:
Net income as reported
Add:
Stock-based employee compensation costs, net of tax, included in net income
.5
..3
1.8
1.3
Less:
Stock-based employee compensation costs, net of tax, as if fair value method had been applied
(7.5
(9.2
(23.6
(27.3
Pro forma net income
240.5
138.7
550.6
225.2
Net income per share:
As reported - basic
Pro forma - basic
1.00
.59
2.30
.95
As reported - diluted
Pro forma - diluted
.58
2.29
.94
(5)
Most inventories owned by Deere & Company and its United States equipment subsidiaries are valued at cost on the "last-in, first-out" (LIFO) method. If all of the Company's inventories had been valued on a "first-in, first-out" (FIFO) method, estimated inventories by major classification in millions of dollars would have been as follows:
July 312003
October 312002
July 312002
Raw materials and supplies
503
515
517
Work-in-process
389
361
374
Finished machines and parts
1,753
1,444
1,713
Total FIFO value
2,645
2,320
2,604
Adjustment to LIFO basis *
934
948
997
1,711
1,372
1,607
*
The inventories at FIFO reflect current costs that are lower than in previous years due to the Company's cost reduction initiatives. However, the inventories at LIFO reflect historical costs that remain constant. These factors have decreased the amount of the adjustment required from FIFO to LIFO.
Page 7
(6)
Contingencies
The Company generally determines its total warranty liability by applying historical claims rate experience to the estimated amount of equipment that has been sold and still under warranty (based on dealer inventories and retail sales). The historical claims rate is primarily determined by a review of five-year claims costs and current quality developments.
A reconciliation of the changes in the warranty liability in millions of dollars follows:
Beginning balance at October 31, 2002
332
Payments
(205
Accruals for warranties
260
Ending balance at July 31, 2003
387
The Company has guaranteed certain recourse obligations on financing receivables and leases that it has sold. If the receivables and leases sold are not collected, the Company would be required to cover those losses up to the amount of its recourse obligation. At July 31, 2003, the maximum amount of exposure to losses under these agreements was $222 million, which is net of accrued losses of $22 million related to these agreements. The Company may recover a portion of any required payments incurred under these agreements from the repossession of the equipment collateralizing the receivables. At July 31, 2003, the maximum remaining term of the receivables guaranteed was approximately six years.
The Company has certain minority ownership interests in unconsolidated affiliates in which the majority owners have put options to require the Company to purchase their interest. These puts could be exercised over a two-year period which begins December 2004 to March 2005 and total approximately $170 million to $250 million, depending on whether they are exercised on the first or last day of the period. If the Company's rating on its senior unsecured debt falls below Baa3 from Moody's Investors Service or BBB- from Standard & Poor's, these puts could be exercised immediately for approximately $150 million. A discussion of the Company's debt ratings is included in Management's Discussion and Analysis under the caption Capital Resources and Liquidity. The Company also has call options to acquire the majority owners' interest. These calls can be exercised over a two-year period beginning December 2003 to March 2004 and total approximately $165 million to $260 million, depending on whether th ey are exercised on the first or last day of the period. At July 31, 2003, the Company had accrued costs of $101 million under these option agreements.
At July 31, 2003, the Company had guaranteed approximately $80 million of residual value for five operating leases related to certain administrative and manufacturing buildings. The Company is obligated at the end of each lease term to pay to the lessor any reduction in market value of the leased property up to the guaranteed residual value. The Company recognizes the expense for these future estimated lease payments over the lives of the operating leases and had accrued expenses of $16 million related to these agreements at July 31, 2003. The leases have terms expiring from 2004 to 2007.
At July 31, 2003, the Company had approximately $65 million of guarantees issued primarily to overseas banks related to third-party receivables for the retail financing of John Deere equipment. The Company may recover a portion of any required payments incurred under these agreements from repossession of the equipment collateralizing the receivables. At July 31, 2003, the Company had accrued losses of approximately $2 million under these agreements. The maximum remaining term of the receivables guaranteed at July 31, 2003 was approximately six years.
Page 8
The Company also had other miscellaneous contingent liabilities totaling approximately $40 million at July 31, 2003, for which it believes the probability for payment is remote.
Commitments
At July 31, 2003, the Company had commitments of approximately $109 million for construction and acquisition of property and equipment. The Company had pledged assets of $13 million, primarily outside the United States, as collateral for borrowings, and $17 million of restricted investments related to conducting the health care business in various states at July 31, 2003.
John Deere B.V., located in the Netherlands, is a consolidated indirect wholly-owned finance subsidiary of the Company. The debt securities of John Deere B.V., including those that are registered with the 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:
.22
.66
Page 9
(8)
Worldwide net sales and revenues, operating profit (loss) and identifiable assets by segment in millions of dollars follow:
Three Months Ended July 31
Nine Months Ended July 31
%Change
Net sales and revenues:
Agricultural equipment **
1,955
1,872
+4
5,392
4,960
+9
Commercial and consumer equipment
1,081
913
+18
2,555
2,154
+19
Construction and forestry
788
612
+29
1,997
1,601
+25
9
13
-31
30
41
-27
Total net sales ***
3,833
3,410
+12
9,974
8,756
+14
Credit revenues **
355
337
+5
1,007
1,086
-7
Other revenues
214
222
-4
614
636
-3
Total net sales and revenues ***
4,402
3,969
+11
11,595
10,478
Operating profit (loss): ****
Agricultural equipment
127
205
-38
329
362
-9
104
61
+70
237
97
+144
59
(10
111
(97
132
88
+50
350
285
+23
7
(1
14
(12
Total operating profit ***
429
343
1,041
635
+64
Interest, corporate expenses - net
and income taxes
(181
(195
(469
(384
+22
248
148
+68
572
251
+128
Identifiable assets:
3,008
3,408
-12
1,452
1,401
1,501
1,472
+2
14,942
13,460
399
386
+3
Corporate
4,696
3,360
+40
25,998
23,487
In the third quarter of 2002, the operating profit (loss) of the agricultural equipment, commercial and consumer equipment, construction and forestry and other segments included pretax goodwill amortization of $3, $4, $4 and $3, respectively, for a total of $14. In the first nine months of 2002, these amounts were $10, $11, $12 and $9, respectively, for a total of $42. In the third quarter of 2002, the operating profit (loss) of the agricultural equipment, commercial and consumer equipment, construction and forestry and other segments also included pretax costs (income) for special items related to restructuring of $1, $24, $(2), and $1, respectively, for a total of $24. In the first nine months of 2002, these amounts were $9, $22, $20 and $7, respectively, for a total of $58. In the first nine months of 2003, there was no goodwill amortization and the costs or income for special items were not material.
**
Additional intersegment sales and revenues:
Agricultural equipment sales
18
16
+13
46
44
Credit revenues
55
45
156
121
***
Includes overseas equipment operations as follows:
1,132
1,034
3,029
2,603
+16
Operating profit
93
108
-14
289
209
+38
****
Operating profit (loss) is income before external interest expense, foreign exchange gains and losses, income taxes and certain corporate expenses. However, operating profit (loss) of the credit segment includes the effect of interest expense and foreign exchange gains or losses.
Page 10
(9)
A reconciliation of basic and diluted net income per share in millions, except per share amounts, follows:
Average shares outstanding
239.4
238.0
Basic net income per share
Effect of dilutive stock options
2.4
2.7
Total potential shares outstanding
241.8
240.7
Diluted net income per share
Stock options to purchase 2.3 million shares during the first nine months of 2003 and 2.8 million during the first nine months of 2002 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)
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:
Other comprehensive income (loss), net of tax:
Change in cumulative translation adjustment
46.3
.3
163.2
32.4
Unrealized gain (loss) on investments
(6.6
1.9
2.3
Unrealized gain (loss) on derivatives
5.8
7.2
22.1
Comprehensive income
293.0
742.8
308.0
(11)
The Company is subject to various unresolved legal actions which arise in the normal course of its business, the most prevalent of which relate to product liability (including asbestos related actions), retail credit, software licensing, patent and trademark matters. Although it is not possible to predict with certainty the outcome of these unresolved legal actions or the range of possible loss, the Company believes these unresolved legal actions will not have a material effect on its financial statements.
Page 11
(12)
In 2002 and the fourth quarter of 2001, the Company announced certain actions aimed at increasing efficiency and reducing costs. The Company established reserves and liabilities to recognize the accruable costs of these actions. The changes in these reserves and liabilities in millions of dollars and the number of employee reductions during the first nine months of 2003 were as follows:
Reserves andLiabilitiesOctober 31, 2002
Accruals andAdjustmentsExpense (Income)
LiquidationsAnd Payments
Reserves andLiabilitiesJuly 31, 2003
Property and equipment reserves
$ 34
$(6
$28
Inventory reserves
2
1
Termination benefits
11
$(1
(8
) **
Contract terminations
(3
(2
Warranties and product returns
Other costs
12
(7
4
$ 78
$(5
) *
$(24
$49
October 31, 2002
Additions
Reductions
July 31, 2003
Employee reductions
200
190
10
In addition to these accrual adjustments, the Company recognized $4 million of other non-accruable restructuring costs related to these actions for a total $1 million of income.
The decrease in the termination benefits liability is not proportional to the reduction in employees since certain benefits related to past services are not paid immediately upon termination.
(13)
In the first quarter of 2003, the Company adopted FASB Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement No. 141 requires the purchase method of accounting for all business combinations and eliminates the pooling of interests method effective June 30, 2001. Statement No. 141 also specifies the types of acquired intangible assets to be included in goodwill and those to be reported separately from goodwill upon adoption of Statement No. 142. No adjustments of goodwill and other intangible assets were required based on these requirements.
In accordance with Statement No. 142, the Company did not amortize goodwill related to acquisitions made after June 30, 2001 and discontinued amortizing goodwill for prior acquisitions upon adoption of the new standard as of November 1, 2002. Based on the new standard, goodwill will be written down only for impairments. The Company was also required to test existing goodwill for impairment on a transitional basis as of November 1, 2002. The Company has completed this test and has determined that its goodwill is not impaired and no write-downs are necessary. A fair value approach was applied to the Company's reporting units to determine if the carrying value of goodwill was impaired. The fair value of the reporting units was established based on discounted cash flows and market multiples. Goodwill will continue to be tested for impairment annually, or more often if events and circumstances change.
Page 12
Pro forma net income and net income per share, excluding goodwill amortization, were as follows with dollars in millions except per share amounts:
Goodwill amortization, net of tax
13.0
38.6
160.6
289.8
Basic net income per share:
.05
.16
.67
1.22
Diluted net income per share:
1.20
In the first quarter of 2003, the Company also adopted the following accounting standards issued by the FASB. Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, requires the guarantor to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing a guarantee. The Interpretation also requires certain disclosures for guarantees, which are included in Note 6 under contingencies. Statement No. 143, Accounting for Asset Retirement Obligations, requires legal obligations associated with the retirement of long-lived assets to be recorded as increases in costs of the related assets. Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, retains the previous cash flow test for impairment and broadens the presentation of discontinued operations. Statement No. 146, Accounting for the Costs Associated with Exit or Disposal Activitie s, requires companies to recognize liabilities and costs associated with exit or disposal activities initiated after December 31, 2002 when they are incurred, rather than when management commits to a plan to exit an activity. Statement No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, requires certain pro forma disclosures, which are included in Note 4. This Statement also amended the transition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation. The adoption of these standards did not have a material effect on the Company's financial position or net income.
Page 13
In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, which addresses the consolidation and related disclosures of these entities by business enterprises. These are entities in which either the equity investment at risk is not sufficient to absorb the probable losses without additional subordinated financial support from other parties, or the equity investors lack certain essential characteristics of control. As disclosed in Note 10 to the Company's 2002 Annual Report filed on Form 10-K, the Company's credit operations hold retained interests in certain variable interest entities related to the securitization and sale of their retail notes. Upon adoption of this Interpretation, the Company will not be required to consolidate any of these entities because it qualifies for the following exceptions. Under the Interpretation, most of the Company's retained interests are not deemed variable interests because they are interests in a variable interest e ntity's specified assets with a fair value that is less than half the fair value of the entity's total assets. The Company's remaining retained interests are with qualified special purpose entities as defined by FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. At July 31, 2003, the assets of these entities related to the Company's securitization and sales of retail notes totaled approximately $2,909 million and the maximum exposure to losses from recourse obligations related to these entities was $222 million. This Interpretation is effective for variable interests created after January 31, 2003 and is effective for preexisting variable interests in the Company's fourth quarter of fiscal year 2003. The Company does not expect the adoption of this standard to have a material effect on the Company's financial position or net income.
In April 2003, the FASB issued Statement No. 149, Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities. The standard is primarily effective for transactions occurring after June 30, 2003. In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. The Statement affects the accounting for certain obligations that a reporting entity can or must settle by issuing its own equity shares. It is effective for financial instruments entered into or modified after May 31, 2003 and is effective for the Company's previously existing financial instruments in the fourth quarter of 2003. The Company does not expect the adoption of these standards to have a material effect on the Company's financial position or net income.
Page 14
(14) SUPPLEMENTAL CONSOLIDATING DATASTATEMENT OF INCOMEFor the Three Months Ended July 31, 2003 and 2002
(In millions of dollars) Unaudited
EQUIPMENT OPERATIONS*
FINANCIAL SERVICES
19.4
27.8
370.2
360.1
178.2
179.5
32.8
34.1
43.5
25.1
3,885.2
3,471.5
591.9
564.7
3,068.8
2,750.6
327.6
282.9
122.0
124.6
55.0
58.1
113.7
109.6
Interest compensation to Financial Services
54.7
42.1
7.0
21.1
75.5
90.6
3,656.4
3,280.0
450.4
467.3
228.8
191.5
141.5
97.4
76.3
100.2
50.4
34.7
152.5
91.3
91.1
62.7
Equity in Income (Loss) of Unconsolidated
Subsidiaries and Affiliates
85.5
56.9
9.5
(.6
.1
95.0
56.3
91.2
61.8
* Deere & Company with Financial Services on the equity basis.
The supplemental consolidating data is presented for informational purposes. Transactions between the "Equipment Operations" and "Financial Services" have been eliminated to arrive at the consolidated financial statements.
Page 15
SUPPLEMENTAL CONSOLIDATING DATA (Continued)STATEMENT OF INCOMEFor the Nine Months Ended July 31, 2003 and 2002
60.0
1,070.2
1,079.8
504.7
519.9
103.3
106.0
103.4
137.8
10,134.3
8,922.1
1,678.3
1,737.5
7,988.9
7,186.0
892.1
834.3
343.5
393.2
163.0
166.1
331.9
330.3
149.6
115.9
33.3
69.2
235.8
287.2
9,632.0
8,756.0
1,306.7
1,428.2
502.3
371.6
309.3
173.3
90.5
131.1
112.9
329.0
75.6
196.4
227.3
180.2
16.1
(4.6
243.4
175.6
240.8
193.4
Page 16
SUPPLEMENTAL CONSOLIDATING DATA (Continued)
CONDENSED BALANCE SHEET(In millions of dollars) Unaudited
EQUIPMENT OPERATIONS *
July 31 2003
3,372.5
2,638.5
1,940.0
384.6
176.3
387.5
Cash equivalents deposited with unconsolidated subsidiaries
790.8
1,074.7
3,576.0
3,429.3
3,014.7
Receivables from unconsolidated subsidiaries and affiliates
253.0
220.1
236.6
300.3
259.8
271.1
Trade accounts and notes receivable - net
891.2
909.4
1,338.5
2,864.6
2,137.7
2,298.2
26.3
60.1
9,495.7
9,007.4
8,322.2
145.3
279.1
121.8
188.3
147.3
151.9
12.5
12.4
12.3
1,596.8
1,651.3
1,988.1
1,963.4
1,971.2
33.7
34.9
36.8
Investments in unconsolidated subsidiaries and affiliates
2,416.2
2,248.5
2,223.4
3.5
7.7
859.6
803.9
834.9
89.6
90.4
25.5
.4
202.5
208.1
205.1
373.9
374.0
404.9
1,565.0
1,576.3
1,077.9
1.4
81.5
73.4
74.1
22.8
20.6
19.2
13,874.4
13,295.8
13,459.1
15,273.8
13,954.1
13,765.0
580.5
398.1
675.9
3,822.5
4,039.2
4,445.7
Payables to unconsolidated subsidiaries and affiliates
111.5
79.4
68.9
412.5
989.7
1,291.4
Accounts payable and accrued expenses
2,867.5
2,800.7
2,737.8
704.3
654.9
554.2
194.4
83.2
115.2
34.0
4.2
11.3
11.4
104.3
102.9
65.5
2,740.0
2,988.8
2,956.9
7,804.7
5,961.5
5,206.2
Retirement benefit accruals and other liabilities
3,576.9
3,772.9
2,718.6
41.7
35.0
10,082.2
10,132.6
9,275.2
13,035.8
11,878.5
11,718.5
968.6
1,312.9
1,195.9
1,163.7
2,281.5
2,164.5
2,132.3
(43.5
(88.9
(85.8
2,238.0
2,075.6
2,046.5
Page 17
SUPPLEMENTAL CONSOLIDATING DATA (Continued)CONDENSED STATEMENT OF CASH FLOWSFor the Nine Months Ended July 31, 2003 and 2002(In millions of dollars) Unaudited
(77.4
330.7
310.7
495.0
581.9
551.5
502.7
45.2
27.6
13,644.9
11,111.5
436.3
(8.0
(8.8
(16,123.3
(13,273.2
(181.0
(225.8
(3.5
(2.8
(4.9
(330.9
(425.2
(7.3
(8.1
(40.4
45.8
4.1
37.3
(10.0
(117.9
(130.5
(964.7
520.3
(113.4
(61.8
617.2
(958.1
Change in intercompany receivables/payables
(13.1
12.7
(574.3
(581.3
7.4
711.4
2,849.7
2,880.7
(12.5
(81.5
(2,159.3
(2,192.1
(123.7
(363.0
(1.6
Net cash provided by (used for) financing activities
(249.7
461.2
609.6
(1,213.8
31.9
11.9
3.6
Net Increase (Decrease) in Cash and Cash Equivalents
146.7
916.1
208.3
(187.2
2,098.6
574.7
Page 18
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Deere & Company's net income for the third quarter was $247.5 million, or $1.02 per share, a 68 percent increase over last year's $147.6 million, or $.61 per share. For the first nine months, net income was $572.4 million, or $2.37 per share, compared with $251.2 million, or $1.04 per share, last year. These results build on the success of prior quarters and reflect strong sales of new products along with the Company's ongoing efforts to hold down costs and operate more efficiently at lower asset levels. The increased profitability in the Company's construction and forestry and commercial and consumer equipment segments more than offset the planned lower production volumes in the agricultural equipment segment.
Worldwide net sales and revenues grew 11 percent to $4,402 million for the third quarter, compared with a year ago, and increased 11 percent to $11,595 million for the first nine months of 2003. Net sales were $3,833 million for the quarter and $9,974 million for the nine months, compared with $3,410 million and $8,756 million, respectively, last year. Net sales for both periods increased primarily due to higher physical volumes of commercial and consumer equipment and construction and forestry equipment. Exchange rates and price realization also had a favorable impact on this year's sales. Overseas net sales increased 9 percent for the quarter and 16 percent for the nine months. Excluding the impact of changes in currency exchange rates, overseas sales decreased 3 percent for the quarter and increased 5 percent year-to-date.
The Company's Equipment Operations reported operating profit of $288 million for the third quarter and $669 million for the first nine months, compared with $247 million and $329 million, respectively, last year. (Operating profit is defined in Note 8). The increases for both periods were primarily due to improved price realization and higher physical volume of sales. Partially offsetting these factors were higher postretirement benefit costs of $68 million for the quarter and $211 million for the nine months. Last year's results for both periods were negatively affected by the costs of closing certain facilities. Both periods last year also were affected by higher costs associated with the Company's minority investment in Nortrax Inc., a venture involved in the ownership and development of several construction equipment dealer locations.
The Company's Equipment Operations had net income of $152.5 million for the quarter and $329.0 million for the nine months, compared with $91.3 million and $75.6 million, respectively, last year. The same operating factors mentioned above affected these results. In addition, last year's quarterly and year-to-date net income was negatively impacted by a higher tax rate.
●
Agricultural Equipment.
Page 19
Commercial and Consumer Equipment.
Construction and Forestry.
Credit.
Additional information on business segments is presented in Note 8.
Page 20
The cost of sales to net sales ratio for both the third quarter and first nine months of 2003 was 80.0 percent, compared to 80.6 percent and 81.9 percent in the same periods last year. The decreases were primarily due to improved price realization, higher sales and production volumes, the discontinuance of the amortization of goodwill, and last year's costs from closing certain facilities and higher costs related to the Nortrax Inc. investment. These improvements were partially offset by higher postretirement benefit costs this year.
Finance and interest income on a consolidated basis decreased in both periods this year primarily due to a decrease in rental income on operating leases related to the lower level of leases. Health care premiums and fees and related health care claims and costs decreased in the current quarter and first nine months, compared to last year, primarily due to a shift by a customer from insured to self-insured status. Other income increased in the third quarter and decreased in the first nine months this year primarily related to the volume of retail notes sold. Other income for the first nine months of last year also included the receipt of a fire insurance settlement. Selling, administrative and general expenses were higher in the third quarter and first nine months this year primarily due to increased promotional and support costs for new products, higher expenses for employee postretirement benefits and exchange rate fluctuations. Other operating expenses decreased in both periods primarily as a result of lower depreciation on operating leases this year due to the lower level of leases, and the absence of last year's losses from the Argentine operations related to the peso devaluation. Equity income (loss) of unconsolidated affiliates improved in the third quarter and first nine months of this year primarily due to the results of the Deere-Hitachi Construction Machinery Corporation and Nortrax Inc. affiliates.
Market Conditions and Outlook
Based on the conditions outlined below, the Company's net equipment sales for the fourth quarter of 2003 are currently forecast to be up approximately 5 percent. Excluding the impact of currency and price, sales are forecast to be slightly lower for the fourth quarter, as previously projected. Also consistent with earlier forecasts, production volumes are expected to be down about 5 percent in the fourth quarter from the low levels of last year. For the full year, net income is now projected in a range of $575 to $625 million.
Page 21
FASB Statement No. 142
In the first quarter of 2003, the Company adopted FASB Statement No. 142, Goodwill and Other Intangible Assets. In accordance with this Statement, the Company did not amortize goodwill related to new acquisitions made after June 30, 2001 and discontinued amortizing goodwill for prior acquisitions as of November 1, 2002. Based on the new standard, goodwill will be written down only for impairments. The Company was also required to test existing goodwill for impairment on a transitional basis as of November 1, 2002. The Company has completed this test and has determined that its goodwill is not impaired and no write-downs are necessary. In the third quarter and first nine months of 2002, the Company had goodwill amortization of $14 million pretax ($13 million after-tax) and $42 million pretax ($39 million after-tax), respectively.
Safe Harbor Statement
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995:
Forward-looking statements involve certain factors that are subject to change, including for the Company's agricultural equipment segment the many interrelated factors that affect farmers' confidence, including worldwide demand for agricultural products, world grain stocks, prices realized for commodities and livestock, crop production expenses (most notably fuel and fertilizer costs), weather and soil conditions, real estate values, available acreage for farming, the level, complexity and distribution of government farm programs, animal diseases (including further outbreaks or the spread of "mad cow" and "foot-and-mouth" diseases), crop pests, harvest yields and the level of farm product exports (including concerns about genetically modified organisms). The outlook for harvest prices and the size and condition of the crop especially affect retail sales of agricultural equipment in the fall.
Factors affecting the outlook for the Company's commercial and consumer equipment segment include general economic conditions in the United States, consumer confidence, consumer borrowing patterns and weather conditions. Another important assumption is continued consumer acceptance of the Company's new products, including the new 100-series lawn tractors.
The number of housing starts is especially important to sales of the Company's construction equipment. The levels of public and non-residential construction also impact the results of the Company's construction and forestry segment. Prices for pulp, lumber and structural panels are important to sales of forestry equipment.
Page 22
All of the Company's businesses are affected by general economic conditions in and the political stability of the global markets in which the Company operates (including Brazil, Argentina and other South American countries), monetary and fiscal policies of various countries, wars and other international conflicts and the threat thereof, actions by the United States Federal Reserve Board and other central banks, actions by the United States Securities and Exchange Commission and other regulatory bodies, actions by rating agencies, capital market disruptions, investor sentiment, inflation and deflation rates, interest rate levels and currency exchange rates; customer borrowing and repayment practices, and the number of customer loan delinquencies and defaults; actions of competitors in the various industries in which the Company competes, particularly price discounting; dealer practices, especially as to levels of new and used field inventories; production and technological difficulties, includ ing capacity and supply constraints; oil and energy prices and supplies; labor relations; changes to accounting standards; the effects of terrorism and the response thereto; and legislation affecting the sectors in which the Company operates. Company results are also affected by significant changes in health care costs and in market values of investment assets, which impact postretirement benefit and pension expenses. In addition, further outbreaks or the spread of severe diseases such as Severe Acute Respiratory Syndrome (SARS) could affect the Company's businesses and results.
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.
The Company's equipment businesses are capital intensive and are subject to large seasonal variations in financing requirements for inventories and certain receivables from dealers. At 2001 fiscal year end, the Equipment Operations began selling most trade receivables to the Company's credit operations. As a result, the seasonal variations in financing requirements of the Equipment Operations have decreased. To the extent necessary, funds provided from operations are supplemented by external financing sources.
In the first nine months of 2003, cash provided from operating activities was $495 million resulting primarily from net income, a decrease in taxes receivable and dividends from Financial Services. Partially offsetting these positive operating cash flows were outflows for contributions to employee postretirement benefit plans of $475 million and an increase in inventories. The positive cash flows from operations were used primarily to purchase property and equipment, pay dividends, decrease borrowings and increase cash and cash equivalents.
Page 23
During the first nine months of 2002, cash provided from operating activities was $582 million resulting primarily from net income and dividends from Financial Services. Partially offsetting these positive operating cash flows were outflows for increases in receivables and inventories. The positive cash flows from operations, borrowings and sales of businesses were used primarily to increase cash and cash equivalents, purchase property and equipment and pay dividends.
Trade receivables held by the Equipment Operations decreased $18 million during the first nine months and $447 million from a year ago. During this time period, the Equipment Operations sold most of its trade receivables to the credit operations. The decrease from a year ago was primarily due to the increased sales of overseas trade receivables to the credit operations. See the following consolidated discussion of trade receivables.
Inventories at July 31, 2003 increased by $339 million during the first nine months, primarily reflecting a seasonal increase and an $87 million increase from exchange rate fluctuations. Inventories increased $104 million, compared to a year ago, primarily due to a $64 million increase from exchange rate fluctuations and higher sales and production volumes. The ratios of inventories at LIFO cost to the last 12 months' cost of sales were 16 percent at July 31, 2003, compared to 14 percent at October 31, 2002 and 17 percent at July 31, 2002.
Total interest-bearing debt of the Equipment Operations was $3,321 million at July 31, 2003, compared with $3,387 million at the end of fiscal year 2002 and $3,633 million at July 31, 2002. The ratios of debt to total capital (total interest-bearing debt and stockholders' equity) were 47 percent, 52 percent and 46 percent at July 31, 2003, October 31, 2002 and July 31, 2002, respectively.
Financial Services
The Financial Services' credit operations rely on their ability to raise substantial amounts of funds to finance their receivable and lease portfolios. Their primary sources of funds for this purpose are a combination of borrowings and equity capital. Additionally, the credit operations periodically sell substantial amounts of retail notes.
During the first nine months of 2003, the aggregate cash provided from operating and financing activities was used primarily to increase receivables. Cash provided from Financial Services operating activities was $552 million in the first nine months. Cash provided by financing activities totaled $610 million in the first nine months, resulting primarily from an increase in total external borrowings of $1,308 million, partially offset by a decrease in payables to the Equipment Operations of $574 million and dividends of $124 million paid to Deere & Company. Cash used by investing activities totaled $965 million in the first nine months of 2003, primarily due to the cost of receivables acquired exceeding collections by $2,478 million, partially offset by the sales of retail notes of $1,543 million. Cash and cash equivalents also increased $208 million during the period.
In the first nine months of 2002, the aggregate cash provided from operating and investing activities was used primarily to decrease borrowings. Cash provided from Financial Services operating activities was $503 million in the first nine months of 2002. Cash provided by investing activities totaled $520 million in the first nine months of 2002, primarily due to the collections and sales of receivables exceeding the cost of receivables acquired by $627 million. Cash used by financing activities totaled $1,214 million in the first nine months, resulting primarily from a decrease in total borrowings of $851 million and the payment of $363 million of dividends. Cash and cash equivalents decreased $187 million during the period.
Page 24
Receivables and leases held by the credit operations consist of retail notes originating in connection with retail sales of new and used equipment by dealers of John Deere products, retail notes from non-Deere equipment customers, trade receivables, wholesale note receivables, revolving charge accounts, operating loans, insured international export financing generally involving John Deere products, and financing and operating leases. During the first nine months of 2003 and the past 12 months, receivables and leases increased $990 million and $1,460 million, respectively, due to the cost of receivables and leases acquired exceeding collections and sales of retail notes. Total acquisitions of receivables and leases were 20 percent higher in the first nine months of 2003, compared with the same period last year, primarily due to higher acquisition volumes of trade receivables. Acquisition volumes of revolving charge accounts and operating loans were also higher in the first nine months of 2003, compared to the same period last year. Total receivables and leases administered by the credit operations, which include receivables previously sold, amounted to $16,619 million at July 31, 2003, compared with $15,363 million at October 31, 2002 and $15,206 million at July 31, 2002. At July 31, 2003, the unpaid balance of all retail notes and leases previously sold was $2,887 million, compared with $2,621 million at October 31, 2002 and $2,934 million at July 31, 2002.
Total external interest-bearing debt of the credit operations was $11,627 million at July 31, 2003, compared with $10,001 million at the end of fiscal year 2002 and $9,652 million at July 31, 2002. Total external borrowings increased during the first nine months of 2003 and the past 12 months, generally corresponding with the level of the receivable and lease portfolio, the level of cash and cash equivalents and the change in payables owed to the Equipment Operations. The credit operations' ratio of interest-bearing debt to stockholder's equity was 5.6 to 1 at July 31, 2003, compared with 5.6 to 1 at October 31, 2002 and 5.3 to 1 at July 31, 2002.
In the first nine months of 2003, the credit operations issued $850 million of 3.90% Global Notes due in January 2008 and entered into interest rate swaps related to $650 million of these notes, which swapped the fixed rate to a variable rate of approximately 1.6% at July 31, 2003. During the first nine months of 2003, the credit operations also issued $650 million of 5.10% Global Debentures due in January 2013 and entered into interest rate swaps related to these notes, which swapped the fixed rate to a variable rate of approximately 1.8% at July 31, 2003. In the first nine months of 2003, the credit operations retired $200 million of floating rate notes. The credit operations also issued $1,350 million and retired $1,959 million of other long-term borrowings during the period, which were primarily medium-term notes.
Sources of liquidity for the Company include cash and short-term investments, funds from operations, the issuance of commercial paper and term debt, the securitization and sale of retail notes, and committed and uncommitted, unsecured, bank lines of credit.
Because of the multiple funding sources that have been and continue to be available to the Company, the Company expects to have sufficient sources of liquidity to meet its ongoing funding needs. The Company's commercial paper outstanding at July 31, 2003, October 31, 2002 and July 31, 2002 was approximately $2.4 billion, $1.8 billion and $2.3 billion, respectively, while the total cash and short-term investment position was approximately $3.8 billion, $2.8 billion and $2.3 billion, respectively. In addition, the Company has for many years accessed diverse funding sources, including short-term and long-term unsecured debt capital markets in the United States, Canada, Europe and Australia, as well as public and private securitization markets in the United States and Canada.
Page 25
To access public debt capital markets, the Company relies on credit rating agencies to assign short-term and long-term credit ratings to the Company's securities as an indicator of credit quality for fixed income investors. A security rating is not a recommendation by the rating agency to buy, sell or hold Company securities. A credit rating agency may change or withdraw Company ratings based on its assessment of the Company's current and future ability to meet interest and principal repayment obligations. Lower credit ratings generally result in higher borrowing costs and reduced access to debt capital markets.
The senior long-term and short-term debt ratings currently assigned to Company securities by the rating agencies listed below are investment grade ratings. Each rating should be evaluated independently of any other rating. The current Company ratings and ratings outlook from each of these agencies are as follows:
SeniorLong-Term
Short-Term
Outlook
Moody's Investors Service, Inc.
A3
Prime-2
Stable
Standard & Poor's
A- *
A-2 *
Negative (long-term only)
Fitch Ratings
A
F1
Negative
Dominion Bond Rating Service
R-1 (low)
On June 24, 2003, Standard & Poor's affirmed its corporate credit ratings on the Company. Long-term corporate ratings were removed from CreditWatch where they were placed on April 14, 2003. At the same time, the short-term corporate ratings, which were not on CreditWatch, were affirmed.
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 $4,106 million at July 31, 2003, $1,356 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 $2,150 million, expiring in February 2006.
Trade accounts and notes receivable result mainly from sales to dealers of equipment that is being carried in their inventories. Trade receivables increased $622 million during the first nine months of 2003 and $53 million, compared to a year ago. Based on constant exchange rates, trade receivables increased $480 million in the first nine months and decreased $67 million, compared to a year ago. The increase in the first nine months was primarily due to a seasonal increase. The ratios of worldwide trade accounts and notes receivable to the last 12 months' net sales were 26 percent at July 31, 2003, compared to 23 percent at October 31, 2002 and 29 percent at July 31, 2002. Agricultural equipment trade receivables increased $54 million, commercial and consumer equipment receivables decreased $52 million, construction and forestry receivables increased $54 million and other equipment receivables decreased $3 million, compared to a year ago. The percentage of total worldwide trade receivables ou tstanding for periods exceeding 12 months was 5 percent, 6 percent and 7 percent at July 31, 2003, October 31, 2002 and July 31, 2002, respectively.
Stockholders' equity was $3,792 million at July 31, 2003, compared with $3,163 million at October 31, 2002 and $4,184 million at July 31, 2002. The increase of $629 million during the first nine months of 2003 resulted primarily from net income of $572 million, a change in the cumulative translation adjustment of $163 million and a decrease in treasury stock of $43 million, which were partially offset by dividends declared of $158 million.
Page 26
The Board of Directors at its meeting on August 27, 2003 declared a quarterly dividend of 22 cents per share payable November 1, 2003 to stockholders of record on September 30, 2003.
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See the Company's most recent annual report filed on Form 10-K (Item 7A). There has been no material change in this information.
Item 4.
CONTROLS AND PROCEDURES
The Company's principal executive officer and its principal financial officer, after an evaluation as of July 31, 2003, have concluded that, as of such date, the Company's disclosure controls and procedures were effective to provide reasonable assurance that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities. "Disclosure controls and procedures" are defined in Exchange Act Rule 13a-15.
Page 27
PART II. OTHER INFORMATION
Item 1
Legal Proceedings
See Note 11 to the Interim Financial Statements.
Changes in Securities and Use of Proceeds
None
Defaults Upon Senior Securities
Submission of Matters to a Vote of Security Holders
Item 5.
Other Information
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
Date of Report
Item
Financial Statements
May 6, 2003
May 13, 2003
5, 7 & 9
Earnings Release of the Company
June 4, 2003
June 25, 2003
5
July 2, 2003
Page 28
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.
Date:
August 29, 2003
By:
/s/ Nathan J. Jones
Nathan J. JonesSenior Vice President,Principal Financial Officerand Principal Accounting Officer
Page 29
INDEX TO EXHIBITS
Number
Not applicable
3
Computation of ratio of earnings to fixed charges
15
19
22
23
24
31.1
Rule 13a-14(a)/15d-14(a) Certification
31.2
32
Section 1350 Certifications
Page 30