Deere & Company (John Deere) - 10-Q quarterly report FY

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 30, 2005

Commission file no: 1-4121

DEERE & COMPANY

One John Deere Place

Moline, Illinois 61265

(Address of principal executive offices)

Telephone Number: (309) 765-8000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes   ý   No    o

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

Yes   ý   No    o

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

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

See Notes to Interim Financial Statements.

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

See Notes to Interim Financial Statements.

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Notes to Interim Financial Statements (Unaudited)

(1)        The consolidated financial statements of Deere & Company and consolidated subsidiaries have been prepared by the Company, without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the U.S. have been condensed or omitted as permitted by such rules and regulations. All adjustments, consisting of normal recurring adjustments, have been included. Management believes that the disclosures are adequate to present fairly the financial position, results of operations and cash flows at the dates and for the periods presented. It is suggested that these interim financial statements be read in conjunction with the financial statements and the notes thereto appearing in Part II., Item 5. of the Company’s Form 10-Q for January 31, 2005. Results for interim periods are not necessarily indicative of those to be expected for the fiscal year.

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts and related disclosures. Actual results could differ from those estimates.

Certain amounts for prior years have been reclassified to conform with 2005 financial statement presentations.

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

All cash flows from the changes in trade accounts and notes receivable are classified as operating activities in the Statement of Consolidated Cash Flows as these receivables arise from the sale of equipment to the Company’s customers. Cash flows from financing receivables that are related to the sale of equipment to the Company’s customers are also included in operating activities. The remaining financing receivables are related to the financing of equipment sold by an independent dealer and are included in investing activities.

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

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

(2)          The information in the notes and related commentary are presented in a format which includes data grouped as follows:

Equipment Operations - Includes the Company’s agricultural equipment, commercial and consumer equipment and construction and forestry operations with Financial Services reflected on the equity basis.

Financial Services - Includes the Company’s credit, health care and certain miscellaneous service operations.

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Consolidated - Represents the consolidation of the Equipment Operations and Financial Services. References to “Deere & Company” or “the Company” refer to the entire enterprise.

(3)        An analysis of the Company’s retained earnings in millions of dollars follows:

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

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(5)        Most inventories owned by Deere & Company and its U.S. equipment subsidiaries are valued at cost on the “last-in, first-out” (LIFO) method. If all of the Company’s inventories had been valued on a “first-in, first-out” (FIFO) method, estimated inventories by major classification in millions of dollars would have been as follows:

(6)        Contingencies and restrictions:

The Company generally determines its total warranty liability by applying historical claims rate experience to the estimated amount of equipment that has been sold and still under warranty (based on dealer inventories and retail sales). The historical claims rate is primarily determined by a review of five-year claims costs and current quality developments.

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

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

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

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

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

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

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

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

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banks outside the U.S. related to third-party receivables for the retail financing of John Deere equipment. The Company may recover a portion of any required payments incurred under these agreements from repossession of the equipment collateralizing the receivables. At April 30, 2005, the Company had accrued losses of approximately $1 million under these agreements. The maximum remaining term of the receivables guaranteed at April 30, 2005 was approximately six years.

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

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

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

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

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

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

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

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

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

(10)  Comprehensive income, which includes all changes in the Company’s equity during the period except transactions with stockholders, was as follows in millions of dollars:

(11)  The Company is subject to various unresolved legal actions which arise in the normal course of its business, the most prevalent of which relate to product liability (including asbestos-related liability), retail credit, software licensing, patent and trademark matters. Although it is not possible to predict with certainty the outcome of these unresolved legal actions or the range of possible loss, the Company believes these unresolved legal actions will not have a material effect on its financial statements.

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(12)  The Company has several defined benefit pension plans covering its U.S. employees and employees in certain foreign countries. The Company also has several defined benefit health care and life insurance plans for retired employees in the U.S. and Canada.

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

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

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

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

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

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

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

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