SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 ___________________ FORM 10-Q ___________________ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended January 31, 1996 ______________________________ Commission file no: 1-4121 ______________________________ DEERE & COMPANY Delaware 36-2382580 (State of incorporation) (IRS employer identification no.) John Deere Road 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, 1996, 262,587,284 shares of common stock, $1 par value, of the registrant were outstanding. _________________________________________________________________ Page 1 of 21 Pages. Index to Exhibits: Page 18.
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DEERE & COMPANY CONSOLIDATED STATEMENT OF CONSOLIDATED INCOME (Deere & Company and Consolidated Subsidiaries) Three Months Ended January 31 Millions of dollars except per share amounts (Unaudited) 1996 1995 Net Sales and Revenues Net sales of equipment $1,936.6 $1,730.5 Finance and interest income 180.2 153.6 Insurance and health care premiums 163.4 161.8 Investment income 16.5 25.9 Other income 20.8 15.8 Total 2,317.5 2,087.6 Costs and Expenses Cost of goods sold 1,501.2 1,349.8 Research and development expenses 80.0 67.0 Selling, administrative and general expenses 238.4 221.6 Interest expense 98.7 88.4 Insurance and health care claims and benefits 127.3 128.5 Other operating expenses 13.6 10.9 Total 2,059.2 1,866.2 Income of Consolidated Group Before Income Taxes 258.3 221.4 Provision for income taxes 93.5 83.5 Income of Consolidated Group 164.8 137.9 Equity in Income of Unconsolidated Subsidiaries and Affiliates Credit Insurance .7 Health care Other 1.4 (.2) Total 1.4 .5 Net Income $ 166.2 $ 138.4 Net income per share, primary and fully diluted $ .63 $ .53
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.
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) Three Months Ended January 31 Millions of dollars except per share amounts (Unaudited) 1996 1995 Net Sales and Revenues Net sales of equipment $1,936.6 $1,730.5 Finance and interest income 30.5 23.8 Insurance and health care premiums Investment income Other income 5.8 6.1 Total 1,972.9 1,760.4 Costs and Expenses Cost of goods sold 1,507.7 1,353.2 Research and development expenses 80.0 67.0 Selling, administrative and general expenses 167.5 154.5 Interest expense 27.0 27.8 Insurance and health care claims and benefits Other operating expenses 6.9 5.7 Total 1,789.1 1,608.2 Income of Consolidated Group Before Income Taxes 183.8 152.2 Provision for income taxes 67.7 56.4 Income of Consolidated Group 116.1 95.8 Equity in Income of Unconsolidated Subsidiaries and Affiliates Credit 34.5 29.7 Insurance 9.6 8.2 Health care 4.6 4.9 Other 1.4 (.2) Total 50.1 42.6 Net Income $ 166.2 $ 138.4
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DEERE & COMPANY FINANCIAL SERVICES STATEMENT OF CONSOLIDATED INCOME Three Months Ended January 31 Millions of dollars except per share amounts (Unaudited) 1996 1995 Net Sales and Revenues Net sales of equipment Finance and interest income $151.4 $131.2 Insurance and health care premiums 173.5 171.6 Investment income 16.5 25.9 Other income 16.2 10.5 Total 357.6 339.2 Costs and Expenses Cost of goods sold Research and development expenses Selling, administrative and general expenses 75.3 70.6 Interest expense 73.4 62.0 Insurance and health care claims and benefits 127.9 132.2 Other operating expenses 6.5 5.2 Total 283.1 270.0 Income of Consolidated Group Before Income Taxes 74.5 69.2 Provision for income taxes 25.8 27.1 Income of Consolidated Group 48.7 42.1 Equity in Income of Unconsolidated Subsidiaries and Affiliates Credit Insurance .7 Health care Other Total .7 Net Income $ 48.7 $ 42.8
DEERE & COMPANY CONSOLIDATED CONDENSED CONSOLIDATED (Deere & Company and Consolidated Subsidiaries) Jan 31 Oct 31 Jan 31 Millions of dollars (Unaudited) 1996 1995 1995 Assets Cash and short-term investments $364.2 $363.7 $518.1 Cash deposited with unconsolidated subsidiaries Cash and cash equivalents 364.2 363.7 518.1 Marketable securities 855.7 829.7 1,103.3 Receivables from unconsolidated subsidiaries and affiliates 4.6 2.3 .9 Dealer accounts and notes receivable - net 3,377.6 3,259.7 3,015.6 Credit receivables - net 5,502.3 5,345.2 4,662.2 Other receivables 488.5 492.4 420.0 Equipment on operating leases - net 271.6 258.8 215.6 Inventories 979.8 720.8 942.6 Property and equipment - net 1,294.0 1,335.6 1,282.6 Investments in unconsolidated subsidiaries and affiliates 172.8 115.2 152.0 Intangible assets - net 315.9 305.0 282.4 Deferred income taxes 625.1 639.8 684.1 Other assets and deferred charges 194.8 179.2 191.3 Total $14,446.9 $13,847.4 $13,470.7 Liabilities and Stockholders' Equity Short-term borrowings $3,774.4 $3,139.8 $3,329.4 Payables to unconsolidated subsidiaries and affiliates 24.1 27.5 35.9 Accounts payable and accrued expenses 2,234.8 2,533.0 2,123.0 Insurance and health care claims and reserves 462.0 470.3 774.2 Accrued taxes 149.1 72.8 132.0 Deferred income taxes 16.9 15.6 12.9 Long-term borrowings 2,215.4 2,175.8 2,101.9 Retirement benefit accruals and other liabilities 2,343.2 2,327.2 2,337.4 Total liabilities 11,219.9 10,762.0 10,846.7 Common stock, $1 par value (issued shares at January 31, 1996 - 263,195,184) 1,743.5 1,728.7 1,493.5 Retained earnings 1,804.2 1,690.3 1,444.9 Minimum pension liability adjustment (300.4) (300.4) (248.4) Cumulative translation adjustment (23.5) (11.6) (33.9) Unrealized gain (loss) on marketable securities 29.9 3.6 (10.9) Unamortized restricted stock compensation (11.6) (12.1) (11.1) Common stock in treasury, at cost (15.1) (13.1) (10.1) Stockholders' equity 3,227.0 3,085.4 2,624.0 Total $14,446.9 $13,847.4 $13,470.7 See Notes to Interim Financial Statements. Supplemental consolidating data are shown for the "Equipment Operations" and "Financial Services". Transactions between the "Equipment Operations" and "Financial Services" have been eliminated to arrive at the "Consolidated" data.
DEERE & COMPANY EQUIPMENT OPERATIONS CONDENSED CONSOLIDATED (Deere & Company with Financial BALANCE SHEET Services on the Equity Basis) January 31 October 31 January 31 Millions of dollars (Unaudited) 1996 1995 1995 Assets Cash and short-term investments $ 97.3 $71.0 $ 144.5 Cash deposited with unconsolidated subsidiaries 118.9 460.1 65.0 Cash and cash equivalents 216.2 531.1 209.5 Marketable securities Receivables from unconsolidated subsidiaries and affiliates 49.7 55.5 58.6 Dealer accounts and notes receivable - net 3,377.6 3,259.7 3,015.6 Credit receivables - net 105.0 118.3 109.2 Other receivables 4.3 3.2 Equipment on operating leases - net 120.3 119.3 94.9 Inventories 979.8 720.8 942.6 Property and equipment - net 1,249.0 1,295.0 1,249.1 Investments in unconsolidated subsidiaries and affiliates 1,467.4 1,378.4 1,286.4 Intangible assets - net 306.6 295.4 266.4 Deferred income taxes 576.8 578.9 619.7 Other assets and deferred charges 122.9 108.5 101.5 Total $8,575.6 $8,464.1 $7,953.5 Liabilities and Stockholders' Equity Short-term borrowings $ 615.2 $ 395.7 $403.5 Payables to unconsolidated subsidiaries and affiliates 24.1 27.5 35.9 Accounts payable and accrued expenses 1,531.6 1,859.9 1,414.1 Insurance and health care claims and reserves Accrued taxes 149.2 72.4 130.7 Deferred income taxes 15.7 15.6 12.9 Long-term borrowings 692.4 702.9 1,018.2 Retirement benefit accruals and other liabilities 2,320.4 2,304.7 2,314.2 Total liabilities 5,348.6 5,378.7 5,329.5
Common stock, $1 par value (issued shares at January 31, 1996 - 263,195,184) 1,743.5 1,728.7 1,493.5 Retained earnings 1,804.2 1,690.3 1,444.9 Minimum pension liability adjustment (300.4) (300.4) (248.4) Cumulative translation adjustment (23.5) (11.6) (33.9) Unrealized gain (loss) on marketable securities 29.9 3.6 (10.9) Unamortized restricted stock compensation (11.6) (12.1) (11.1) Common stock in treasury, at cost (15.1) (13.1) (10.1) Stockholders' equity 3,227.0 3,085.4 2,624.0 Total $8,575.6 $8,464.1 $7,953.5
DEERE & COMPANY FINANCIAL SERVICES CONDENSED CONSOLIDATED BALANCE SHEET Jan Oct Jan 31 31 31 Millions of dollars (Unaudited) 1996 1995 1995 Assets Cash and short-term investments $267.0 $292.7 $373.6 Cash deposited with unconsolidated subsidiaries Cash and cash equivalents 267.0 292.7 373.6 Marketable securities 855.7 829.7 1,103.3 Receivables from unconsolidated subsidiaries and affiliates Dealer accounts and notes receivable - net Credit receivables - net 5,397.3 5,226.9 4,553.1 Other receivables 485.2 490.2 420.9 Equipment on operating leases - net 151.3 139.5 120.6 Inventories Property and equipment - net 45.1 40.6 33.5 Investments in unconsolidated subsidiaries and affiliates 53.2 Intangible assets - net 9.3 9.6 16.0 Deferred income taxes 48.3 61.0 64.4 Other assets and deferred charges 71.8 70.6 89.8 Total $7,331.0 $7,160.8 $6,828.4 Liabilities and Stockholders' Equity Short-term borrowings $3,159.3 $2,744.1 $2,925.8 Payables to unconsolidated subsidiaries and affiliates 164.0 513.3 122.6 Accounts payable and accrued expenses 704.2 674.1 709.8 Insurance and health care claims and reserves 462.0 470.3 774.2 Accrued taxes .3 1.4 Deferred income taxes 1.2 .1 Long-term borrowings 1,523.0 1,472.9 1,083.6 Retirement benefit accruals and other liabilities 22.7 22.6 23.2 Total liabilities 6,036.4 5,897.6 5,640.7
Common stock, $1 par value (issued shares at January 31, 1996 - 263,195,184) 209.4 209.4 209.4 Retained earnings 1,060.2 1,054.3 995.8 Minimum pension liability adjustment Cumulative translation adjustment (4.9) (4.1) (6.6) Unrealized gain (loss) on marketable securities 29.9 3.6 (10.9) Unamortized restricted stock compensation Common stock in treasury, at cost Stockholders' equity 1,294.6 1,263.2 1,187.7 Total $7,331.0 $7,160.8 $6,828.4
DEERE & COMPANY CONSOLIDATED CONDENSED STATEMENT OF (Deere & Company and CONSOLIDATED CASH FLOWS Consolidated Subsidiaries) Three Months Ended Millions of dollars (Unaudited) 1996 1995 Cash Flows from Operating Activities Net income $166.2 $138.4 Adjustments to reconcile net income to net cash provided by (used for) operating activities (551.3) (383.7) Net cash provided by (used for) operating activities (385.1) (245.3) Cash Flows from Investing Activities Collections and sales of credit receivables 1,154.1 884.3 Proceeds from maturities and sales of marketable securities 26.1 35.4 Cost of credit receivables acquired (1,318.9) (1,072.1) Purchases of marketable securities (12.2) (26.0) Purchases of property and equipment (39.4) (34.7) Cost of operating leases acquired (48.5) (23.7) Acquisitions of businesses (32.4) Other 19.0 45.2 Net cash used for investing activities (252.2) (191.6) Cash Flows from Financing Activities Increase in short-term borrowings 681.1 889.0 Change in intercompany receivables/payables Proceeds from long-term borrowings 50.0 90.0 Principal payments on long-term borrowings (49.3) (219.2) Proceeds from issuance of common stock 11.9 .9 Dividends paid (52.4) (47.5) Other (2.1) (1.1) Net cash provided by financing activities 639.2 712.1 Effect of Exchange Rate Changes on Cash (1.4) (2.5) Net Increase (Decrease) in Cash and Cash Equivalents .5 272.7 Cash and Cash Equivalents at Beginning of Period 363.7 245.4 Cash and Cash Equivalents at End of Period $364.2 $518.1
DEERE & COMPANY EQUIPMENT OPERATIONS CONDENSED STATEMENT OF (Deere & Company CONSOLIDATED CASH FLOWS with Financial Services on the Equity Basis) Three Months Ended Millions of dollars (Unaudited) 1996 1995 Cash Flows from Operating Activities Net income $ 166.2 $ 138.4 Adjustments to reconcile net income to net cash provided by (used for) operating activities (560.6) (434.4) Net cash provided by (used for) operating activities (394.4) (296.0) Cash Flows from Investing Activities Collections and sales of credit receivables 18.8 16.3 Proceeds from maturities and sales of marketable securities Cost of credit receivables acquired (4.5) (8.2) Purchases of marketable securities Purchases of property and equipment (33.2) (31.9) Cost of operating leases acquired (16.0) (17.9) Acquisitions of businesses (32.4) Other (29.8) 12.1 Net cash used for investing activities (97.1) (29.6) Cash Flows from Financing Activities Increase in short-term borrowings 213.8 353.3 Change in intercompany receivables/payables 8.1 130.2 Proceeds from long-term borrowings Principal payments on long-term borrowings (1.3) (2.2) Proceeds from issuance of common stock 11.9 .9 Dividends paid (52.4) (47.5) Other (2.1) (1.1) Net cash provided by financing activities 178.0 433.6 Effect of Exchange Rate Changes on Cash (1.4) (2.5) Net Increase (Decrease) in Cash and Cash Equivalents (314.9) 105.5 Cash and Cash Equivalents at Beginning of Period 531.1 104.0 Cash and Cash Equivalents at End of Period $ 216.2 $ 209.5
DEERE & COMPANY FINANCIAL SERVICES CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS Three Months Ended Millions of dollars (Unaudited) 1996 1995 Cash Flows from Operating Activities Net income $48.7 $42.8 Adjustments to reconcile net income to net cash provided by (used for) operating activities 3.4 35.3 Net cash provided by (used for) operating activities 52.1 78.1 Cash Flows from Investing Activities Collections and sales of credit receivables 1,135.4 868.0 Proceeds from maturities and sales of marketable securities 26.1 35.4 Cost of credit receivables acquired (1,314.4) 1,064.0) Purchases of marketable securities (12.2) (26.0) Purchases of property and equipment (6.1) (2.8) Cost of operating leases acquired (32.5) (5.8) Acquisitions of businesses Other 48.7 33.2 Net cash used for investing activities (155.0) (162.0) Cash Flows from Financing Activities Increase in short-term borrowings 467.3 535.7 Change in intercompany receivables/payables (349.3) (65.3) Proceeds from long-term borrowings 50.0 90.0 Principal payments on long-term borrowings (48.0) (217.0) Proceeds from issuance of common stock Dividends paid (42.8) (27.3) Other Net cash provided by financing activities 77.2 316.1 Effect of Exchange Rate Changes on Cash Net Increase (Decrease) in Cash and Cash Equivalents (25.7) 232.2 Cash and Cash Equivalents at Beginning of Period 292.7 141.4 Cash and Cash Equivalents at End of Period $ 267.0 $373.6
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. (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, industrial equipment and lawn and grounds care 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 operations. 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 1996 1995 Balance, beginning of period......... $1,690.3 $1,353.9 Net income........................... 166.2 138.4 Dividends declared................... (52.3) (47.4) Balance, end of period............... $1,804.2 $1,444.9
(4) An analysis of the cumulative translation adjustment follows in millions of dollars: Three Months Ended January 31 1996 1995 Balance, beginning of period......... $11.6 $17.9 Translation adjustment............... 11.4 16.0 Income taxes applicable to translation adjustments .5 Balance, end of period............... $23.5 $33.9 (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) method. If all of the Company's inventories had been valued on an approximate first-in, first-out (FIFO) value, estimated inventories by major classification in millions of dollars would have been as follows: January 31 October 31 January 31 1996 1995 1995 Raw materials and supplies.............. $ 234 $ 223 $ 224 Work-in-process......... 412 343 432 Finished machines and parts................. 1,342 1,100 1,247 Total FIFO value........ 1,988 1,666 1,903 Adjustment to LIFO basis................. 1,008 945 960 Inventories............. $ 980 $ 721 $ 943 (6) At January 31, 1996, the net unpaid balance of all retail notes previously sold by the Financial Services subsidiaries and the Equipment Operations was $1,051 million. At January 31, 1996, the Company's maximum exposure under all credit receivable recourse provisions was $186 million for all retail notes sold. Certain foreign subsidiaries have pledged assets with a balance sheet value of $37 million as collateral for bank advances of $1 million as of January 31, 1996. At January 31, 1996, the Company had commitments of approximately $64 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 1996 1995 Dividends declared................... $.20 $.18-1/3 Dividends paid....................... $.20 $.18-1/3
(8) Worldwide net sales and revenues and operating profit in millions of dollars follow: Three Months Ended January 31 % 1996 1995 Change Net sales: Agricultural equipment $1,186 $1,022 +16 Industrial equipment 443 408 + 9 Lawn and grounds care equipment 308 301 + 2 Total net sales 1,937 1,731 +12 Financial Services revenues 347 329 + 5 Other revenues 34 28 +21 Total net sales and revenues $2,318 $2,088 +11 United States and Canada: Equipment net sales $1,397 $1,326 + 5 Financial Services revenues 347 329 + 5 Total 1,744 1,655 + 5 Overseas net sales 540 405 +33 Other revenues 34 28 +21 Total net sales and revenues $2,318 $2,088 +11 Operating profit: Agricultural equipment $ 148 $ 115 Industrial equipment 52 45 Lawn and grounds care equipment 21 28 Financial Services* 75 70 Total operating profit 296 258 Interest and corporate expenses-net (37) (36) Income taxes (93) (84) Net income $ 166 $ 138 * Operating profit of Financial Services includes the effect of interest expense. (9) The calculation of primary net income per share is based on the average number of shares outstanding during the three months ended January 31, 1996 and 1995 of 262,229,000 and 259,457,000, respectively, on a post-split basis. On November 15, 1995, the Company declared a three-for-one stock split in the form of a 200 percent stock dividend effective November 17, 1995. The calculation of fully diluted net income per share recognizes the dilutive effect of the assumed exercise of stock options, stock appreciation rights and conversion of convertible debentures. The effect of the fully diluted calculation was immaterial.
(10) In December 1995, the Company granted options to employees for the purchase of 1,676,953 shares of common stock at an exercise price of $34.13 per share. At January 31, 1996, options for 7,723,823 shares were outstanding at option prices in a range of $7.77 to $34.13 per share and a total of 5,717,270 shares remained available for the granting of future options. (11) On February 28, 1996, the stockholders approved an amendment to the 1991 John Deere Stock Option Plan which extends the period for grants to eligible employees under the stock option plan to December 31, 2000 and increased by 10,500,000 on a post-split basis the number of shares for which stock options and stock appreciation rights may be granted under this plan. The stockholders also approved an amendment to the 1989 John Deere Restricted Stock Plan, which extends the period for grants under this restricted stock plan for up to an additional 10 years by extending the allowable ending date for restriction periods to October 31, 2009. (12) 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 and retail credit 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. (13) During the second quarter of 1993, the Company initiated plans to downsize and rationalize its European operations. This resulted in a restructuring charge of $80 million after income taxes or $.34 per share ($107 million before income taxes). The charge mainly represents the cost of employment reductions to be implemented during 1993 and the next few years. As of January 31, 1996, the expected employment reductions and the disbursement of the $107 million accrual were both approximately 85 percent complete. (14) During November 1995, in concurrence with the adoption of "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities - Questions and Answers," the Company transferred all its held-to-maturity debt securities to the available-for-sale category. Held-to- maturity debt securities are carried at amortized cost. Available-for-sale securities are carried at fair value with unrealized gains and losses after income taxes shown as a separate component of stockholders' equity. The amortized cost of these debt securities at the time of transfer was $484 million and the unrealized gain was $29 million ($19 million after income taxes). Although the Company's intention to hold a majority of its debt securities to maturity has not changed, the transfer was made to increase flexibility in responding to future changes.
(15) In the first quarter of 1996, Deere & Company purchased 40 percent of Sunstate Equipment Company, which is a regional rental equipment company based in Phoenix, Arizona. Deere & Company also made an additional investment in its unconsolidated affiliate in Brazil. (16) On February 28, 1996, the Company announced its intention to repurchase up to $500 million of Deere & Company common stock. At the Company's discretion, repurchases of common stock will be made from time to time in the open market and through privately negotiated transactions. The purpose of the stock repurchase program is to enhance shareholder value. (17) On February 29, 1996, the Company announced that it will build a new facility for the production of off-highway diesel engines in Torreon, State of Coahuila, Mexico. The factory is being built to expand production capacity for the Company's 300-series diesel engines to meet future growth opportunities. The size of the new facility is estimated to be approximately 400,000 to 500,000 square feet and construction will begin in April 1996, with initial engine production scheduled for late 1997.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Deere & Company achieved record first quarter net income of $166.2 million or $.63 per share, an increase of 20 percent compared with 1995 first quarter net income of $138.4 million or $.53 per share. Results of both the Equipment and Financial Services Operations improved compared with a year ago, reflecting the continued strong retail demand in most of the Company's major markets. Worldwide net sales and revenues increased 11 percent to $2,318 million in the first quarter of 1996 compared with $2,088 million last year. Net sales to dealers of agricultural, industrial and lawn and grounds care equipment totaled $1,937 million in the first quarter of 1996, an increase of 12 percent from sales of $1,731 million last year. All of the equipment businesses reported higher net sales during the quarter compared with last year. Export sales from the United States continued to strengthen and totaled $308 million, a gain of 19 percent over last year's export sales of $259 million. Additionally, overseas net sales and physical volume of sales were 33 percent and 24 percent higher, respectively, in the first quarter of 1996 compared with the same period a year ago. Overall, the Company's worldwide physical volume of net sales to dealers increased eight percent in the first quarter compared with last year, an increase which was slightly lower than anticipated due to shipping delays related to the extreme winter weather conditions in North America. The Company's worldwide Equipment Operations, which exclude the Financial Services subsidiaries and unconsolidated affiliates, had income of $116.1 million in the first quarter of 1996 compared with $95.8 million last year. Worldwide agricultural and industrial equipment operating profits for the quarter were higher compared with last year, primarily due to increased production and sales volumes. Overseas results continued to improve significantly, reflecting higher sales and production volumes as well as continued cost improvements. Operating profits for the lawn and grounds care equipment operations declined compared with last year, reflecting higher selling and promotional expenses associated with new products, coupled with increased returns and allowances for hand- held products. The ratio of cost of goods sold to net sales of the Equipment Operations decreased from 78.2 percent in the first quarter of 1995 to 77.8 percent in the same period this year. Operating profit is defined as income before interest expense, foreign exchange gains and losses, income taxes and certain corporate expenses, except for the operating profit of the credit segment, which includes the effect of interest expense. Additional information on business segments is presented in Note 8 to the interim financial statements. Net income of the Company's credit operations was $34.5 million for the first quarter of 1996 compared to $29.7 million last year. The increase in income resulted primarily from a larger average receivable and lease portfolio financed, slightly offset by lower financing spreads. Total revenues of the credit operations increased 17 percent from $142 million in the first quarter of 1995 to $166 million in the first quarter of 1996. The average balance of receivables and leases financed was 19 percent higher than in the first three months of last year. Interest expense increased 19 percent compared with the first quarter of 1995 primarily as a result of an increase in average borrowings. The credit subsidiaries' consolidated ratio of earnings to fixed charges was 1.73 to 1 during the first three months this year compared with 1.75 to 1 in the comparable period of 1995. Net income from insurance operations was $9.6 million in the first quarter of 1996 compared with $8.2 million last year, reflecting improved underwriting results and a lower effective tax rate, partially offset by lower investment income. For the three-month period, insurance premiums increased five percent in 1996 compared with the same period last year, while total claims, benefits, and selling, administrative and general expenses increased one percent this year. Net income from health care operations was $4.6 million in the first quarter of 1996 compared with $4.9 million last year. Although managed care membership grew by 15 percent from a year ago, health care premiums and administrative services revenues decreased four percent in the first three months of 1996 compared with the same period last year due to a shift from insured to self-insured accounts. Total claims, benefits, and selling, administrative and general expenses decreased four percent this year also due to the shift from insured to self-insured business. The high level of worldwide retail sales of John Deere agricultural equipment in the first quarter provides a solid base for operations during the remainder of the year. The continued strong worldwide demand for agricultural commodities, coupled with lower than anticipated harvest yields, have resulted in substantial increases in commodity prices. Additionally, world grain stocks, relative to use, are currently at the lowest levels in more than 35 years. The Company believes these positive conditions are maintaining farmers' confidence at very high levels, which should result in continued strong demand for new and used agricultural equipment. North American demand for John Deere industrial and lawn and grounds care equipment and Financial Services products also remained strong during the first quarter of 1996. The markets for these products are benefiting from the positive effects of lower interest rates and the solid economic fundamentals of most of the markets in which the Company competes. In response to these positive market conditions and based on current 1996 production schedules, the Company's worldwide physical volume of sales to dealers for 1996 is expected to increase by approximately five percent compared with 1995. During the second quarter, the worldwide physical volume of sales is expected to increase approximately 11 percent compared with last year.
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 receivables from dealers and inventories. Accordingly, to the extent necessary, funds provided from operations are supplemented from external borrowing sources. Negative cash flows from operating activities of $394 million in the first quarter of 1996 resulted from the normal seasonal increases in Company-owned inventories and dealer receivables, and annual volume discount program payments made to dealers. Partially offsetting these operating cash outflows were positive cash flows from net income and dividends received from the Financial Services operations. The resulting net cash requirement for operating activities, along with payment of dividends, purchases of property and equipment, and acquisitions of businesses were provided primarily from an increase in borrowings and a decrease in cash and cash equivalents. In the first quarter of 1995, the negative cash flows from operating activities of $296 million resulted from the normal seasonal increases in Company-owned inventories and dealer receivables, and annual volume discount program payments made to dealers. Partially offsetting these operating cash outflows were positive cash flows from net income and dividends received from the Financial Services operations. The resulting net cash requirements for operating activities, along with cash required for increases in cash and cash equivalents, payment of dividends and purchases of property and equipment were provided primarily from an increase in borrowings and a decrease in receivables from the Financial Services operations. Net dealer accounts and notes receivable, which largely represent dealers' inventories financed by the Company, increased $118 million during the first quarter reflecting the normal seasonal increase. Dealer receivables were $362 million higher than one year ago primarily due to a higher level of retail demand and higher dealer inventories of used equipment. The ratios of worldwide net dealer accounts and notes receivable to the last 12 months' net sales were 37 percent at January 31, 1996, 37 percent at October 31, 1995 and 38 percent at January 31, 1995. North American agricultural equipment and lawn and grounds care equipment dealer receivables increased approximately $210 million and $65 million, respectively, compared with the levels 12 months earlier, while industrial equipment dealer receivables were approximately equal to one year ago. Total overseas dealer receivables were approximately $85 million higher than a year ago. The percentage of total worldwide dealer receivables outstanding for periods exceeding 12 months was nine percent at January 31, 1996, eight percent at October 31, 1995 and seven percent at January 31, 1995. Company-owned inventories at January 31, 1996 have increased by $259 million compared with the end of the previous fiscal year and $37 million compared to January 31, 1995, reflecting a normal seasonal increase in the first quarter and increased sales and production volumes from a year ago. Total interest-bearing debt of the Equipment Operations was $1,308 million at January 31, 1996 compared with $1,099 million at the end of fiscal year 1995 and $1,422 million at January 31, 1995. The ratio of total debt to total capital (total interest-bearing debt and stockholders' equity) was 29 percent, 26 percent and 35 percent at January 31, 1996, October 31, 1995 and January 31, 1995, 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 in the public market. The insurance and health care operations generate their funds through internal operations and have no external borrowings. During the first quarter of 1996, the aggregate cash provided from operating and financing activities was used primarily to increase credit receivables. Cash provided from Financial Services operating activities was $52 million in the current quarter. Cash provided by financing activities totaled $77 million in 1996, resulting from a $120 million increase in total borrowings, which was partially offset by payment of a $43 million dividend to the Equipment Operations. Cash used for investing activities totaled $155 million in the current quarter, primarily due to the cost of credit receivables acquired exceeding collections. Cash and cash equivalents decreased $26 million during the first quarter. In the first quarter of last year, the aggregate cash provided from operating and financing activities was used primarily to increase credit receivables and cash and cash equivalents. Cash provided from Financial Services operating activities was $78 million in the first quarter of 1995. Cash provided by financing activities totaled $316 million in 1995, resulting from a $343 million increase in total borrowings, which was partially offset by a $27 million dividend to the Equipment Operations. Cash used for investing activities totaled $162 million in 1995, primarily due to the cost of credit receivables acquired exceeding collections. Cash and cash equivalents increased $232 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 of 1996, marketable securities increased $26 million due to the transfer of debt securities from the held-to-maturity category to the available- for-sale category in November 1995 (see note 14) and an increase in the unrealized gain associated with all marketable securities. During the past 12 months, marketable securities have decreased $248 million primarily from the sale of the John Deere Life Insurance Company in 1995. Credit receivables increased by $170 million in the first quarter of 1996 and $844 million during the past 12 months. These receivables 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, financing leases and wholesale notes receivable. The credit subsidiaries' receivables increased during the last 12 months due to the cost of credit receivables acquired exceeding collections, which was partially offset by the sale of retail notes during the same period. Total acquisitions of credit receivables were 24 percent higher in the first quarter of 1996 compared with the same period last year. This significant increase resulted from increased acquisitions of retail notes, revolving charge accounts, leases and wholesale receivables. At January 31, 1996, the levels of retail notes, revolving charge accounts, leases and wholesale receivables were all higher than one year ago. Credit receivables administered by the credit subsidiaries, which include receivables previously sold, amounted to $6,466 million at January 31, 1996 compared with $6,526 million at October 31, 1995 and $5,540 million at January 31, 1995. At January 31, 1996, the unpaid balance of all retail notes previously sold was $1,051 million compared with $1,278 million at October 31, 1995 and $952 million at January 31, 1995. Additional sales of retail notes are expected to be made in the future. Total outside interest-bearing debt of the credit subsidiaries was $4,682 million at January 31, 1996 compared with $4,217 million at the end of fiscal year 1995 and $4,009 million at January 31, 1995. Total outside borrowings increased during the first quarter of 1996 and the past 12 months, generally corresponding with the level of the credit receivable and lease portfolio financed, 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 6.2 to 1 at January 31, 1996 compared with 6.1 to 1 at October 31, 1995 and 5.7 to 1 at January 31, 1995. The Capital Corporation issued $50 million and retired $48 million of medium-term notes during the current quarter. 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 $4,138 million at January 31, 1996, $988 million of which were unused. For the purpose of 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 $3,227 million at January 31, 1996 compared with $3,085 million at October 31, 1995 and $2,624 million at January 31, 1995. The increase of $142 million in the first three months of 1996 resulted primarily from net income of $166 million and an increase in the unrealized gain on marketable securities of $26 million (see note 14), partially offset by dividends declared of $52 million. In February 1996, the Company announced its intention to repurchase $500 million of Deere & Company common stock (see note 16). The Company also announced that it will build a new 400,000 to 500,000 square foot engine production facility in Mexico (see note 17). The Board of Directors at its meeting on February 28, 1996 declared a quarterly dividend of 20 cents per share payable May 1, 1996 to stockholders of record on March 31, 1996.
PART II. OTHER INFORMATION Item 1. Legal Proceedings See Note (12) to the Interim Financial Statements. Item 2. Changes in Securities On November 15, 1995, the Company declared a three-for- one stock split in the form of a 200 percent stock dividend to stockholders of record on November 17, 1995. Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders A special meeting of stockholders was held on November 15, 1995. The purpose of the meeting was to approve an amendment to Article Four of the Company's restated Certificate of Incorporation increasing the number of shares of stock the Company is authorized to issue from 203 million (200 million in common stock and 3 million in preferred stock) to 609 million (600 million in common stock and 9 million in preferred stock). The increase in authorized shares was necessary to provide the Company with authority to issue a sufficient number of shares to effect a three-for-one stock split. There were 71,753,934 votes cast for the proposal, 1,544,947 votes against the proposal and 82,905 abstentions. 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 15, 1995 (Item 5). Current Report on Form 8-K dated November 30, 1995 (Item 7).
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, 1996 By /s//Robert W. Lane Robert W. Lane Senior Vice President, Principal Financial Officer and Principal Accounting Officer
INDEX TO EXHIBITS Number Page 2 Not applicable - 3 Not applicable - 4 Not applicable - 10 Not applicable - 11 Computation of net income per share 19 12 Computation of ratio of earnings to fixed charges 20 15 Not applicable - 18 Not applicable - 19 Not applicable - 22 Not applicable - 23 Not applicable - 24 Not applicable - 27 Financial data schedule 21 99 Not applicable -