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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K 405
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 2001
Commission file number 1-4121
DEERE & COMPANY
(Exact name of registrant as specified in its charter)
Delaware 36-2382580
(State of incorporation) (IRS Employer Identification No.)
One John Deere Place, Moline, Illinois 61265 (309) 765-8000
(Address of principal executive offices) (Zip Code) (Telephone Number)
SECURITIES REGISTERED PURSUANT
TO SECTION 12(b) OF THE ACT
Title of each class Name of each exchange on
which registered
Common stock, $1 par value New York Stock Exchange
Chicago Stock Exchange
Frankfurt (Germany)
Stock Exchange
5-7/8% Debentures Due 2006 (issued by John New York Stock Exchange
Deere B.V., a wholly-owned subsidiary, and
guaranteed by Deere & Company)
8.95% Debentures Due 2019 New York Stock Exchange
8-1/2% Debentures Due 2022 New York Stock Exchange
6.55% Debentures Due 2028 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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___
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate quoted market price of voting stock of registrant held by
nonaffiliates at November 30, 2001 was $9,411,956,183. At November 30, 2001,
237,381,340 shares of common stock, $1 par value, of the registrant were
outstanding. Documents Incorporated by Reference. Portions of the proxy
statement for the annual meeting of stockholders to be held on February 27, 2002
are incorporated by reference in Part III.
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PART I
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ITEM 1. BUSINESS.
Products
Deere & Company (Company) and its subsidiaries (collectively called John Deere)
have operations which are categorized into four major business segments.
The agricultural equipment segment manufactures and distributes a full
line of farm equipment -- including tractors; combine, cotton and
sugarcane harvesters; tillage, seeding and soil preparation machinery;
sprayers; hay and forage equipment; materials handling equipment; and
integrated agricultural management systems technology.
The commercial and consumer equipment segment manufactures and
distributes equipment for commercial and residential uses -- including
small tractors for lawn, garden, commercial and utility purposes;
riding and walk-behind mowers; golf course equipment; snowblowers;
utility vehicles; landscape and irrigation equipment; and other outdoor
power products.
The construction and forestry segment manufactures and distributes a
broad range of machines used in construction, earthmoving, material
handling and timber harvesting--including backhoe loaders; crawler
dozers and loaders; four-wheel-drive loaders; excavators; motor
graders; articulated dump trucks; forklifts; landscape loaders;
skid-steer loaders; and log skidders, feller bunchers, loaders,
forwarders, harvesters and related attachments.
The products and services produced by the segments above are marketed
primarily through independent retail dealer networks and major retail
outlets.
The credit segment primarily finances sales and leases by John Deere
dealers of new and used agricultural, commercial and consumer, and
construction and forestry equipment. In addition, it provides
wholesale financing to dealers of the foregoing equipment, provides
operating loans and finances retail revolving charge accounts.
John Deere's worldwide agricultural equipment; commercial and consumer
equipment; construction and forestry and special technologies operations are
sometimes referred to as the "Equipment Operations." The credit and health care
operations are sometimes referred to as "Financial Services."
Additional information is presented in the discussion of business segment and
geographic area results on pages 23-25, 27, and 40-42. The John Deere enterprise
has manufactured agricultural machinery since 1837. The present Company was
incorporated under the laws of Delaware in 1958.
Market Conditions and Outlook
In these economically uncertain times, the Company is reinforcing its efforts to
maintain lean asset levels and to make a substantial improvement in its cost
structure. At the same time, the Company is continuing to move ahead
aggressively with the introduction of advanced new products and technologies,
helping to set the stage for a strong recovery in the Company's results when its
key markets resume their growth.
Based on the market conditions outlined below, net sales are currently forecast
to be down 3 to 7 percent for the first quarter of 2002 compared to the same
period in 2001. Operating profit (income before
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interest expense, foreign exchange gains and losses, income taxes and corporate
expenses) in the equipment divisions will be under significant pressure due in
part to reduced production levels and are expected to range from a negative 7
percent to negative 9 percent of sales. For the full year, equipment sales are
expected to be flat to up slightly from 2001 levels with operating profit
margins projected to be from a positive 1 percent to negative 1 percent of
sales. The projected annual operating margin includes an anticipated two
percentage-point reduction associated with the carrying costs of equipment trade
receivables sold to the credit operations. Consolidated results, however, will
not be affected by such sales.
Agricultural Equipment. Despite a continuation of relatively low grain prices,
retail sales of farm machinery experienced growth in 2001, particularly in the
area of smaller equipment. Farm income was helped by strength in the livestock
and dairy sectors and by a continuation of substantial government payments. Farm
fundamentals are not expected to change significantly in 2002, although the
global supply and demand situation for key commodities should keep prices in
check and prevent any improvement in U.S. grain exports. In this environment,
the Company expects overall industry retail sales of farm equipment in the
United States and Canada to be flat to down about 5 percent in 2002.
In Europe, the farm outlook is slightly better due to somewhat stronger
livestock and dairy markets as well as generally higher crop prices than in the
U.S. and Canada. At the same time, the concerns over foot and mouth disease that
affected European farm machinery sales in 2001 have largely abated. As a result,
industry retail sales in Europe are expected to be flat to up slightly for 2002.
John Deere is targeting improved sales in Europe this year due in large part to
a record number of new products being introduced to the region's agricultural
markets.
In Latin America, farm machinery sales are expected to be slightly higher next
year due mainly to improvement in Mexico and further growth in Brazil.
Last year, Company factories produced large tractors and combines at high rates
in the first quarter. However, in the interest of operating with lower asset
levels, Deere is making substantial production cutbacks of these products in the
first quarter of fiscal 2002. In all, production tonnage at company agricultural
equipment factories in U.S./Canada is expected to be down about 20 percent in
relation to the first quarter of last year.
Commercial & Consumer Equipment. Excluding the impact of acquisitions and
divestitures, shipments of the Company's commercial and consumer equipment are
projected to be down 5 to 10 percent in 2002. The expected decline will result
from low levels of consumer confidence and a weakening economy, coupled with
further steps to reduce asset levels. Segment results are expected to benefit
from a number of new and innovative products that are coming to market during
the year as well as from growth in new businesses.
Construction & Forestry. With economic weakness expected to spread, residential
and non-residential construction activity is projected to be significantly lower
in 2002. At the same time, purchases by independent rental companies are
expected to experience further severe weakness leaving them as much as 90
percent below their year-2000 highs. Global sales of forestry products are
forecast to continue running lower than year-earlier levels in response to soft
economic conditions. In light of these circumstances, the Company believes that
industry retail sales of construction and forestry equipment for 2002 will be 10
to 15 percent lower than the prior year and that pricing will remain under
pressure. Production tonnage at the Company's construction equipment factories
is expected to be about 36 percent lower than prior year levels in the first
quarter. Despite continued weakness in core markets, the Company's construction
and forestry operations are expected to benefit from aggressive restructuring
actions and new products.
Credit Operations. Company credit operations are expected to benefit from
continued growth in the receivable portfolio and additional note sales. The
segment's net income for 2002 will benefit by about $80 million from
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servicing fees associated with last year's transfer and the ongoing purchase of
John Deere equipment trade receivables.
2001 Consolidated Results Compared with 2000
The Company had a net loss of $64 million, or $.27 per share diluted ($.27 per
share basic), for 2001. Affecting this year's results were charges of $217
million, or $.91 per share, related to early retirement programs, the decision
to exit the hand-held consumer products business and the restructuring of
certain construction and forestry manufacturing and marketing operations.
Excluding these special items, income for the year was $153 million, or $.64 per
share compared with net income of $486 million, or $2.06 per share diluted
($2.07 per share basic), last year. In addition, results for the year were
negatively affected by weakness in the Company's major markets and by deep
production cutbacks, particularly during the fourth quarter, aimed at achieving
more efficient asset levels. Net sales and revenues were $13,293 million in
2001, compared with $13,137 million in 2000. Net sales of the equipment
operations were $11,077 million this year, compared to $11,169 million last
year.
The Company's Equipment Operations, which exclude the Financial Services
operations and unconsolidated affiliates, had a net loss of $238 million in
2001. Excluding the costs of the Equipment Operations' special items noted
above, these operations had a loss of $23 million for the year, compared with
income of $311 million last year. Results without special items were adversely
affected by the manufacturing inefficiencies resulting from lower production
volumes of commercial and consumer equipment and the construction and forestry
segments, as well as the fourth quarter production cutbacks in the agricultural
equipment segment. In addition, higher research and development costs and
start-up costs associated with new products had a negative impact on the
results. Also having an adverse effect were the stronger U.S. dollar, higher
interest costs and a less favorable tax rate. Partially offsetting these items
were lower pension and postretirement benefit costs. Trade receivables and
inventories were also reduced by approximately $400 million in 2001, excluding
acquisitions, with the bulk of the decline in the fourth quarter.
Net income of the Company's Financial Services operations in 2001 was $192
million, compared with $173 million in 2000. Additional credit operations
information is presented on pages 24, 27 and 28. Health care premiums and fees,
and related health care claims and costs increased this year primarily from
increases in enrollment.
EQUIPMENT OPERATIONS
Agricultural Equipment
Sales of agricultural equipment, particularly in the United States and Canada,
are affected by total farm cash receipts, which reflect levels of farm commodity
prices, acreage planted, crop yields and government payments. Sales are also
influenced by general economic conditions, farm land prices, farmers' debt
levels, interest rates, agricultural trends and the levels of costs associated
with farming. Weather and climatic conditions can also affect buying decisions
of equipment purchasers.
Innovations to machinery and technology also influence buying. Alternative
tillage practices have been adopted by many farmers to control soil erosion and
lower production costs. John Deere has responded to this shift by delivering
leading edge planters, drills and tillage equipment. Additionally, the Company
has developed a comprehensive agricultural management systems approach using
advanced technology and global satellite positioning that should enable farmers
to better control input costs and yields and to improve environmental
management.
Large, cost-efficient, highly-mechanized agricultural operations account for an
important share of worldwide farm output. The large-size agricultural equipment
used on such farms has been particularly important to
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John Deere. A large proportion of the Equipment Operations' total agricultural
equipment sales in the United States is comprised of tractors over 100
horsepower, self- propelled combines and self-propelled cotton pickers.
Seasonality. Seasonal patterns in retail demand for agricultural equipment
result in substantial variations in the volume and mix of products sold to
retail customers during various times of the year. Seasonal demand must be
estimated in advance, and equipment must be manufactured in anticipation of such
demand in order to achieve efficient utilization of manpower and facilities
throughout the year. For certain equipment, the Company offers early order
discounts to retail customers. Production schedules are based, in part, on these
early order programs. The Equipment Operations incur substantial seasonal
indebtedness with related interest expense to finance production and inventory
of equipment. The Equipment Operations also incur costs to finance sales to
dealers in advance of seasonal demand. The Equipment Operations often encourage
early retail sales decisions for both new and used equipment, by waiving retail
finance charges or offering low-rate financing, during off-season periods and in
early order promotions.
An important part of the competition within the agricultural equipment industry
during the past decade has come from a diverse variety of short-line and
specialty manufacturers with differing manufacturing and marketing methods.
Because of industry conditions, especially the merger of certain large
integrated competitors, the competitive environment is undergoing significant
change.
Commercial and Consumer Equipment
John Deere commercial and consumer equipment includes rear-engine riding mowers,
front-engine lawn tractors, lawn and garden tractors, compact utility tractors,
utility tractors, front mowers and small utility vehicles. A broad line of
associated implements for mowing, tilling, snow and debris handling, aerating,
and many other residential, commercial, golf and sports turf care applications
are also included. The product line also includes walk-behind mowers, snow
throwers and other outdoor power products. (As of November 1, 2001, design,
manufacture and distribution of skid-steer loaders and related attachments were
transferred to the construction and forestry segment from the commercial and
consumer equipment segment.) Retail sales of commercial and consumer equipment
products are influenced by weather conditions, consumer spending patterns and
general economic conditions.
The division sells entry-level lawn, yard and garden tractors and walk-behind
mowers under the name "Sabre by John Deere" in North America. The division also
sells walk-behind mowers in Europe under the SABO brand name and commercial
mowing equipment under the Roberine brand name. The division also builds
products for sale by others. Beginning in 1999, the Company has built products
under the Scott'sTM brand for sale through Home Depot stores.
In 2001, the Company announced plans to exit the consumer hand-held products
business. These products had been sold primarily under the Homelite brand.
Also in 2001, the Company acquired the businesses of Richton International
Corporation, McGinnis Farms, Inc. and Great Dane Power Equipment, Inc. The
primary business of Richton is the distribution of its Century Rain Aid
irrigation equipment through 210 locations in North America. The principal
business of McGinnis Farms, with 50 locations in the southeastern and
south-central United States, is the distribution of nursery products, landscape
supplies and irrigation equipment to landscape service professionals. The
Company will combine the Century Rain Aid distribution business with the
McGinnis Farms business into John Deere Landscapes, Inc. Great Dane is a
manufacturer of commercial mowing equipment.
In addition to the equipment manufactured by the commercial and consumer
division, John Deere purchases certain products from other manufacturers for
resale.
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Construction and Forestry
John Deere construction, earthmoving, material handling and forestry equipment
includes a broad range of backhoe loaders, crawler dozers and loaders,
four-wheel-drive loaders, excavators, motor graders and articulated dump trucks,
forklifts, landscape loaders, log skidders, wheel and track log feller bunchers,
trailer mounted log loaders, log forwarders, wheel and track log harvesters,
track log loaders and a variety of attachments. (As of November 1, 2001, design,
manufacture and distribution of skid-steer loaders and related attachments were
transferred to the construction and forestry segment from the commercial and
consumer equipment segment.)
Today, this segment provides sizes of equipment that compete in over 90 percent
of the estimated total North American market for those categories of
construction, earthmoving and material handling equipment in which it competes.
These construction, earthmoving and material handling machines are distributed
under the Deere brand name. This segment also provides the most complete line of
forestry machines and attachments available in the world. These forestry
machines and attachments are distributed under both the Deere and Timberjack
brand names. In addition to the equipment manufactured by the construction
equipment division, John Deere purchases certain products from other
manufacturers for resale.
The prevailing levels of residential, commercial and public construction and the
condition of the forest products industry influence retail sales of John Deere
construction, earthmoving, material handling and forestry equipment. General
economic conditions, the level of interest rates and certain commodity prices
such as those applicable to pulp, paper and saw logs also influence sales.
The Company and Hitachi Construction Machinery Co., Inc. of Japan ("Hitachi")
have a joint venture for the manufacture of hydraulic excavators in the United
States and Mexico. Beginning in November, 2001, the Company began distributing
Hitachi brands of construction and mining equipment in North, Central and South
America. The Company also has supply agreements with Hitachi under which a range
of construction, earthmoving and material handling products manufactured by John
Deere in the United States are distributed by Hitachi in Japan and other Far
East markets.
The division has a number of initiatives in the rent-to-rent market for
construction, earthmoving and material handling equipment. These include
specially designed rental programs for John Deere dealers, expanded cooperation
with major national equipment rental companies and direct participation in the
rent-to-rent market through the Company's minority ownership in Sunstate
Equipment Co., LLC.
The Company also has minority ownership interests in Nortrax Inc. and Nortrax
II, Inc., companies involved in the distribution and service of construction
equipment. Nortrax Inc. and Nortrax II, Inc. are, among other things, authorized
John Deere dealers for construction, earthmoving, material handling and forestry
equipment in a variety of markets in North America.
In the year 2002, the Company will complete the transfer of the engineering,
production, and marketing of its skid-steer loader product line from Loudon,
Tennessee, to the Company's factory in Dubuque, Iowa. In connection with the
transfer, the construction and forestry segment will incur charges of
approximately $30 million, primarily in the first quarter.
Engineering and Research
John Deere makes large expenditures for engineering and research to improve the
quality and performance of its products, and to develop new products. Such
expenditures were $590 million, or 5.3 percent of net sales of equipment in
2001, and $542 million, or 4.9 percent in 2000.
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Manufacturing
Manufacturing Plants. In the United States and Canada, the Equipment Operations
own and operate 27 factory locations and lease and operate three factory
locations, which contain approximately 30.7 million square feet of floor space.
Of these 30 factories, ten are devoted primarily to agricultural equipment,
eight to commercial and consumer equipment, three to non-forestry construction
equipment, one to engines, one to hydraulic and power train components, two to
special technology equipment and five to forestry equipment. Overseas, the
Equipment Operations own and operate: agricultural equipment factories in
Argentina, France, Germany, Mexico, The Netherlands, Brazil and South Africa;
engine factories in Argentina, France and Mexico; a component factory in Spain;
commercial and consumer equipment factories in Germany, Mexico and The
Netherlands; and forestry equipment factories in Finland, Sweden and New
Zealand. These overseas factories contain approximately 10.1 million square feet
of floor space. The Equipment Operations also have financial interests in other
manufacturing organizations, which include agricultural equipment manufacturers
in China, India and the United States, an industrial truck manufacturer in South
Africa and a joint venture that builds construction excavators in the United
States.
John Deere's facilities are well maintained, in good operating condition and are
suitable for their present purposes. These facilities, together with planned
capital expenditures, are expected to meet John Deere's manufacturing needs in
the foreseeable future.
Capacity is adequate to satisfy anticipated retail demand. The Equipment
Operations' manufacturing strategy involves the implementation of appropriate
levels of technology and automation to allow manufacturing processes to remain
viable at varying production levels. Operations are also designed to be flexible
enough to accommodate the product design changes required to meet market
requirements. Common manufacturing facilities and techniques are employed in the
production of components for agricultural, commercial and consumer and
construction and forestry equipment.
In order to utilize manufacturing facilities and technology more effectively,
the Equipment Operations pursue continuous improvements in manufacturing
processes. These include steps to streamline manufacturing processes and
enhance customer responsiveness. The Company has implemented flexible assembly
lines that can handle a wider product mix and deliver products at the times when
dealers and customers require them. Additionally, considerable effort is being
directed to manufacturing cost reduction through process improvement, product
design, advanced manufacturing technology, enhanced environmental management
systems, supply management and compensation incentives related to productivity
and organizational structure. The Equipment Operations also pursue external
sales of selected parts and components that can be manufactured and supplied to
third parties on a competitive basis.
Capital Expenditures. The agricultural equipment, commercial and consumer
equipment and construction and forestry operations' capital expenditures totaled
$480 million in 2001 compared with $399 million in 2000 and $291 million in
1999. Provisions for depreciation applicable to these operations' property,
plant and equipment during these years were $295 million, $280 million and $268
million, respectively. Capital expenditures for these operations in 2002 are
currently estimated to approximate $400 million. The 2002 expenditures will be
associated with new products, factory and operations improvement programs and
the manufacture and marketing of products in new markets such as Mexico, India,
China and Brazil. Future levels of capital expenditures will depend on business
conditions.
Patents and Trademarks
John Deere owns a significant number of patents, licenses and trademarks which
have been obtained over a period of years. The Company believes that, in the
aggregate, the rights under these patents, licenses and trademarks are generally
important to its operations, but does not consider that any patent, license,
trademark
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or related group of them (other than its house trademarks) is of material
importance in relation to John Deere's business.
Marketing
In the United States and Canada, the Equipment Operations, excluding certain
consumer product lines, distribute equipment and service parts through the
following facilities (collectively called sales branches): one agricultural
equipment sales and administration office supported by seven agricultural
equipment sales branches; one construction, earthmoving, material handling and
forestry equipment sales and administration office; and one commercial and
consumer equipment sales and administration office.
In addition, the Equipment Operations operate a centralized parts distribution
warehouse in coordination with several regional parts depots in the United
States and Canada and have an agreement with a third party to operate a
high-volume parts warehouse in Indiana.
The sales branches in the United States and Canada market John Deere products at
approximately 3323 dealer locations, most of which are independently owned. Of
these, 1600 sell agricultural equipment, while 489 sell construction,
earthmoving, material handling and/or forestry equipment. Some of these are
owned by Nortrax Inc. and Nortrax II, Inc., entities in which the Company has
minority interests. Commercial and consumer equipment is sold by most John Deere
agricultural equipment dealers, a few construction, earthmoving, material
handling and forestry equipment dealers, and about 1234 commercial and consumer
equipment dealers, many of whom also handle competitive brands and dissimilar
lines of products. In addition, the Sabre and Scott'sTM product lines are sold
through independent dealers and various general and mass merchandisers.
Outside North America, John Deere agricultural equipment is sold to distributors
and dealers for resale in over 160 countries by sales branches located in five
European countries, South Africa, Mexico, Brazil, Argentina, Uruguay and
Australia, by export sales branches in Europe and the United States, and by
associated companies doing business in the former Soviet Union and China.
Commercial and consumer equipment sales overseas occur primarily in Europe and
Australia. Outside North America, construction, earthmoving, material handling
and forestry equipment is sold primarily by export sales offices located in the
United States, Brazil, Singapore and Sweden.
Trade Accounts and Notes Receivable
Trade accounts and notes receivable arise from sales of goods to dealers. In
October 2001, the Equipment Operations sold $2.2 billion of trade receivables to
Financial Services. A significant portion of newly originated United States
trade receivables will be sold to Financial Services on an ongoing basis. Total
trade accounts and notes receivable were $2.9 billion at October 31, 2001
compared with $3.2 billion at October 31, 2000 and $3.3 billion at October 31,
1999. At those dates, the ratios of worldwide trade accounts and notes
receivable to fiscal year net sales, were 26 percent, 28 percent and 34 percent,
respectively. The highest month-end balance of such receivables during each of
the past two fiscal years was $4.0 billion at April 30, 2001 and $3.9 billion at
March 31, 2000. Additional information appears in Notes 1 and 7 to the
Consolidated Financial Statements.
Special Technologies Group
The Special Technologies Group (STG) consists of four operating units that offer
a range of electronic, wireless-communication, information-system and
Internet-related products and services to the Company and outside customers.
STG's purpose is to integrate advanced technology into John Deere equipment and
to make such advancements directly available to customers through a variety of
business relationships and ventures. One STG unit, Phoenix International, makes
electronic devices that control and monitor a
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variety of mobile-equipment functions. Another, AGRIS Corporation, is the
world's leading supplier of information-management systems for agribusinesses.
NavCom develops systems for tracking the exact position of vehicles, and for
transmitting data to and from vehicles on the move. John Deere Information
Systems provides information-technology products and services to John Deere
dealers.
FINANCIAL SERVICES
Credit Operations
United States and Canada. The Company's credit subsidiaries (collectively
referred to as the Credit Companies) provide and administer financing for retail
purchases of new and used equipment manufactured by the Company's agricultural
equipment, commercial and consumer equipment, and construction and forestry
divisions. Deere & Company and John Deere Construction & Forestry Company are
referred to as the "sales companies." John Deere Capital Corporation (Capital
Corporation), a United States credit subsidiary, purchases retail installment
sales and loan contracts (retail notes) from the sales companies. These retail
notes are acquired by the sales companies through John Deere retail dealers in
the United States. John Deere Credit Inc., a Canadian credit subsidiary,
purchases and finances retail notes acquired by John Deere Limited, the
Company's Canadian sales branch. The terms of retail notes and the basis on
which the Credit Companies acquire retail notes from the sales companies are
governed by agreements with the sales companies. The Credit Companies also
finance and service revolving charge accounts and operating loans through
merchants or farm input providers in the agricultural, construction and
forestry, and lawn and grounds care markets as well as insured international
export financing products (revolving charge accounts and operating loans) and,
additionally, provide wholesale financing for inventories of John Deere engines
and John Deere agricultural and construction and forestry equipment owned by
dealers of those products (wholesale notes).
Retail notes acquired by the sales companies are immediately sold to the Credit
Companies. The Equipment Operations are the Credit Companies' major source of
business, but in some cases, retail purchasers of John Deere products finance
their purchases outside the John Deere organization.
The Credit Companies offer retail leases to equipment users in the United
States. A small number of leases are executed with units of local government.
Leases are usually written for periods of two to five years, and frequently
contain an option permitting the customer to purchase the equipment at the end
of the lease term. Retail leases are also offered in a generally similar manner
to customers in Canada through John Deere Credit Inc. and John Deere Limited.
The Credit Companies' terms for financing equipment retail sales (other than
smaller items purchased through unsecured revolving charge accounts) provide for
retention of a security interest in the equipment financed. The Credit
Companies' guidelines for minimum down payments, which vary with the types of
equipment and repayment provisions, are generally not less than 20 percent on
agricultural and construction and forestry equipment and 10 percent on lawn and
grounds care equipment used for personal use. Finance charges are sometimes
waived for specified periods or reduced on certain John Deere products sold or
leased in advance of the season of use or in other sales promotions. The Credit
Companies generally receive compensation from the sales companies equal to a
competitive interest rate for periods during which finance charges are waived or
reduced on the retail notes or leases. The cost is accounted for as a deduction
in arriving at net sales by the Equipment Operations.
The Company has an agreement with the Capital Corporation to make income
maintenance payments to the Capital Corporation such that its ratio of earnings
before fixed charges to fixed charges is not less than 1.05 to 1 for any fiscal
quarter. For 2001 and 2000, the Capital Corporation's ratios were 1.53 to 1 and
1.48 to 1, respectively. The Company has also committed to continue to own at
least 51 percent of the voting shares of capital stock of the Capital
Corporation and to maintain the Capital Corporation's consolidated tangible net
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worth at not less than $50 million. These arrangements are not intended to make
the Company responsible for the payment of any indebtedness, obligation or
liability of the Capital Corporation or any of its direct or indirect
subsidiaries. No payments were necessary under this agreement in 2000 or 2001.
Additional information on the Credit Companies appears on pages 24, 27 and 28.
Overseas. The Credit Companies offer equipment financing products in Argentina,
Australia, Brazil, Finland, France (through a joint venture), Germany,
Luxembourg, Mexico, New Zealand, Sweden and the United Kingdom. Retail sales
financing outside of the United States and Canada is affected by a diversity of
customs and regulations.
Health Care
In 1985, the Company formed John Deere Health Care, Inc. to commercialize the
Company's expertise in the field of health care, which had been developed from
efforts to control its own health care costs. John Deere Health currently
provides health management programs and related administrative services, through
its health maintenance organization subsidiary, John Deere Health Plan, Inc.,
for companies located in Illinois, Iowa, Tennessee and Virginia. At October 31,
2001, approximately 506,000 individuals were enrolled in these programs, of
which approximately 72,800 were John Deere employees, retirees and their
dependents.
ENVIRONMENTAL MATTERS
The Company is subject to a wide variety of state, federal and international
environmental laws, rules and regulations. These laws, rules and regulations may
affect the way the Company conducts its operations, and failure to comply with
these regulations could lead to fines and other penalties. The Company is also
involved in the evaluation and clean-up of a limited number of sites currently
owned. Management does not expect that these matters will have a material
adverse effect on the consolidated financial position or results of operations
of the Company. With respect to recently acquired properties, the Company cannot
be certain that it has identified all adverse environmental conditions. The
Company expects that it will acquire additional properties in the future.
EMPLOYEES
At October 31, 2001, John Deere had approximately 45,100 full-time employees,
including approximately 28,400 employees in the United States and Canada. From
time to time, John Deere also retains consultants, independent contractors, and
temporary and part-time workers. Unions are certified as bargaining agents for
approximately 35% percent of John Deere's United States employees. Most of the
Company's United States production and maintenance workers are covered by a
collective bargaining agreement with the United Auto Workers (UAW), with an
expiration date of September 30, 2003.
The majority of employees at John Deere manufacturing facilities in Canada and
overseas are also represented by unions.
EXECUTIVE OFFICERS OF THE REGISTRANT
Following are the names and ages of the executive officers of the Company, their
positions with the Company and summaries of their backgrounds and business
experience. All executive officers are elected or appointed by the Board of
Directors and hold office until the annual meeting of the Board of Directors
following the annual meeting of stockholders in each year.
9
=========================================================================================================================
Name, age and office (at December 31, 2001), Principal occupation during last five years other
and year elected to office than office of the Company currently held
-------------------------------------------------------------------------------------------------------------------------
Robert W. Lane 52 Chairman, President 2000 2000 President and Chief Executive Officer; 1999-2000
and Chief Executive Division President; 1998-99 Senior Vice President, Ag
Officer Division, and Managing Director, Region II (Europe, Africa
and the Middle East); 1996-98 Senior Vice President and
Chief Financial Officer; 1995-96 Senior Vice President, Ag
Division
-------------------------------------------------------------------------------------------------------------------------
Samuel R. Allen 48 Senior Vice President 2001 1999-2001 Vice President Region I (Latin America, the Far
East, Australia and South Africa); 1998 Manager, Worldwide
Engine Manufacturing Operations; 1995-98 Manager, Engine
Manufacturing Operations
-------------------------------------------------------------------------------------------------------------------------
David C. Everitt 49 Division President 2001 1999-2000 Senior Vice President, Region II (Europe, Africa and
the Middle East); 1996-99 Vice President, Region I (Latin
America, the Far East, Australia and South Africa);
-------------------------------------------------------------------------------------------------------------------------
James R. Jenkins 56 Senior Vice President 2000 1999 and prior, Vice President, Secretary and General
and General Counsel Counsel, Dow Corning
-------------------------------------------------------------------------------------------------------------------------
John J. Jenkins 56 Division President 2000 1997-2000 President, John Deere Health Care; 1999-2000 also
Executive Sponsor, SAP*; 1995-97, Vice President &
Comptroller
-------------------------------------------------------------------------------------------------------------------------
Nathan J. Jones 45 Senior Vice President 1998 1995-98 Vice President and Treasurer
and Chief Financial
Officer
-------------------------------------------------------------------------------------------------------------------------
John K. Lawson 61 Senior Vice President 1996 1995-96 Division President
-------------------------------------------------------------------------------------------------------------------------
Pierre E. Leroy 53 Division President 1996 1994-96 Senior Vice President and Chief Financial Officer
-------------------------------------------------------------------------------------------------------------------------
H. J. Markley 51 Division President 2001 2000-01 Senior Vice President, Worldwide Human Resources;
1996-2000 Senior Vice President, Construction Division;
1996 and prior General Manager John Deere Waterloo Works
-------------------------------------------------------------------------------------------------------------------------
Michael P. Orr 54 Division President 1997 1997 and prior, President, John Deere Credit
-------------------------------------------------------------------------------------------------------------------------
David M. Purvis 50 Senior Vice President 2001 2000 and prior Vice President, Technology and Engineering,
and Chief Technology Allied Signal/Honeywell
Officer
=========================================================================================================================
*SAP is a supplier of enterprise resource planning software
ITEM 2. PROPERTIES.
See "Manufacturing" in Item 1.
The Equipment Operations own 15 facilities housing sales branches, one
centralized parts depot, regional parts depots, transfer houses and warehouses
throughout the United States and Canada. These facilities contain approximately
4.8 million square feet of floor space. The Equipment Operations also own and
occupy buildings housing sales branches, one centralized parts depot and
regional parts depots in Australia, Brazil, Europe and New Zealand. These
facilities contain approximately 1.2 million square feet of floor space.
Deere & Company administrative offices, research facilities and certain
facilities for health care activities, all of which are owned by John Deere,
together contain about 2.4 million square feet of floor space and miscellaneous
other facilities total .6 million square feet.
10
Overall, the Company owns approximately 49.3 million square feet of facilities
and leases additional square footage in various locations.
ITEM 3. LEGAL PROCEEDINGS.
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.
In previously reported patent litigation (Caterpillar Inc. v. Deere & Company,
which had been filed in the Federal District Court in Chicago), Caterpillar sued
the Company for alleged infringement of patents related to rubber tracked
tractors. On October 21, 2001, the litigation was settled. The amount paid was
not material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
--------------------------------------------------------------------------------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is listed on the New York Stock Exchange, the Chicago
Stock Exchange and the Frankfurt (Germany) Stock Exchange. See the information
concerning quoted prices of the Company's common stock and the number of
stockholders in the second table and the third paragraph, and the data on
dividends declared and paid per share in the first table, under the caption
"Supplemental Information (Unaudited)" in Note 26 to the Consolidated Financial
Statements.
ITEM 6. SELECTED FINANCIAL DATA.
Financial Summary
=======================================================================================
(Millions of dollars except per share amounts) 2001* 2000 1999 1998 1997
---------------------------------------------------------------------------------------
For the Year Ended October 31:
Total net sales and revenues $13,292 $13,137 $11,751 $13,822 $12,791
Net income (loss) $ (64) $ 486 $ 239 $ 1,021 $ 960
Net income (loss) per share - basic $ (.27) $ 2.07 $ 1.03 $ 4.20 $ 3.78
Net income (loss) per share - diluted $ (.27) $ 2.06 $ 1.02 $ 4.16 $ 3.74
Dividends declared per share $ .88 $ .88 $ .88 $ .88 $ .80
At October 31:
Total assets $22,663 $20,469 $17,578 $18,002 $16,320
Long-term borrowings $ 6,561 $ 4,764 $ 3,806 $ 2,792 $ 2,623
=======================================================================================
*In 2001, the Company had charges of $217 million, or $.91 per share, related to
early-retirement programs, the decision to exit the hand-held consumer products
business and the restructuring of certain construction and forestry
manufacturing and marketing operations.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
See the information under the caption "Management's Discussion and Analysis" on
pages 23 through 29.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to a variety of market risks, including interest rates
and currency exchange rates. The Company attempts to actively manage these
risks. See the information under "Management's Discussion and Analysis" on page
28, Note 23, "Financial Instruments," and the supplementary data under
"Financial Instrument Risk Information" on pages 43 and 44.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the consolidated financial statements and notes thereto and supplementary
data on pages 16 through 22 and 29 through 44.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
--------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information regarding directors in the proxy statement dated January 18,
2002 (the "proxy statement"), under the captions "Election of Directors" and
"Directors Continuing in Office" is incorporated herein by reference.
Information regarding executive officers is presented in Item 1 of this report
under the caption "Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION.
The information in the proxy statement under the captions "Compensation of
Executive Officers" and "Compensation of Directors" is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
(a) Security ownership of certain beneficial owners.
The information on the security ownership of certain beneficial owners
in the proxy statement under the caption "Principal Holders of Voting
Securities" is incorporated herein by reference.
(b) Security ownership of management.
The information on shares of common stock of the Company beneficially
owned by, and under option to (i) each director, (ii) certain named
executive officers and (iii) the directors and officers as a group,
contained in the proxy statement under the captions "Election of
Directors", "Directors Continuing in Office," "Named Executive Officers
Who Are Not Directors", "Summary
12
Compensation Table" and "Aggregated Option/SAR Exercises in Last Fiscal
Year and Fiscal Year-End Option/SAR Values" is incorporated herein by
reference.
(c) Change in control.
None.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information in the proxy statement under the caption "Certain Business
Relationships" is incorporated herein by reference.
PART IV
-------------------------------------------------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
Page
(a) (1) Financial Statements
Statement of Consolidated Income for the years ended
October 31, 2001, 2000 and 1999 16
Consolidated Balance Sheet, October 31, 2001 and 2000 18
Statement of Consolidated Cash Flows for the years ended
October 31, 2001, 2000 and 1999 20
Statement of Changes in Consolidated Stockholders' Equity
for the years ended October 31, 2001, 2000 and 1999 22
Notes to Consolidated Financial Statements 29
(a) (2) Schedule to Consolidated Financial Statements
Schedule II - Valuation and Qualifying Accounts for the years ended
October 31, 2001, 2000 and 1999 49
(a) (3) Exhibits
See the "Index to Exhibits" on pages 48 and 49 of this report.
Certain instruments relating to long-term borrowings, constituting less
than 10 percent of registrant's total assets, are not filed as exhibits
herewith pursuant to Item 601(b)4(iii)(A) of Regulation S-K. Registrant
agrees to file copies of such instruments upon request of the
Commission.
(b) Reports on Form 8-K.
Current reports on Form 8-K dated August 7, 2001 (Item 9), August 14,
2001 (Item 7), August 27, 2001 (Item 7), September 7, 2001 (Item 9),
September 13, 2001 (Item 7), October 3, 2001 (Item 7) and October 3,
2001 (Item 9).
Financial Statement Schedules Omitted
13
The following schedules for the Company and consolidated subsidiaries
are omitted because of the absence of the conditions under which they
are required: I, III, IV and V.
14
(THIS PAGE INTENTIONALLY LEFT BLANK.)
15
DEERE & COMPANY
STATEMENT OF CONSOLIDATED INCOME
-----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED
(Deere & Company and Consolidated Subsidiaries)
------------------------------------------------------------------------------------------------------------------------
Year Ended October 31
(In millions of dollars except per share amounts) 2001 2000 1999
--------------------------------------------------------------------------------------------------------------------
Net Sales and Revenues
Net sales............................................................... $11,077.4 $ 11,168.6 $ 9,701.2
Finance and interest income............................................. 1,445.2 1,321.3 1,104.4
Health care premiums and fees........................................... 585.0 473.7 716.1
Investment income....................................................... 11.8 18.6 61.4
Other income............................................................ 173.5 154.6 167.8
--------- ---------- ----------
Total.......................................................... 13,292.9 13,136.8 11,750.9
--------- ---------- ----------
--------------------------------------------------------------------------------------------------------------------
Costs and Expenses
Cost of sales........................................................... 9,376.4 8,936.1 8,177.5
Research and development expenses....................................... 590.1 542.1 458.4
Selling, administrative and general expenses............................ 1,716.8 1,504.9 1,362.1
Interest expense........................................................ 765.7 676.5 556.6
Health care claims and costs............................................ 476.0 380.5 594.9
Other operating expenses................................................ 392.7 319.2 236.3
--------- ---------- ----------
Total.......................................................... 13,317.7 12,359.3 11,385.8
--------- ---------- ----------
--------------------------------------------------------------------------------------------------------------------
Income (Loss) of Consolidated Group before Income Taxes................. (24.8) 777.5 365.1
Provision (credit) for income taxes..................................... 17.7 293.8 134.7
Income (Loss) of Consolidated Group..................................... ---------- ---------- ----------
(42.5) 483.7 230.4
---------- ---------- ----------
--------------------------------------------------------------------------------------------------------------------
Equity in Income (Loss) of Unconsolidated Subsidiaries and Affiliates
Credit......................................................... (3.3) .6 (.3)
Other.......................................................... (18.2) 1.2 9.1
--------- ---------- ----------
Total.......................................................... (21.5) 1.8 8.8
--------- ---------- ----------
--------------------------------------------------------------------------------------------------------------------
Net Income (Loss)....................................................... $ (64.0) $ 485.5 $ 239.2
========= ========== ==========
--------------------------------------------------------------------------------------------------------------------
Per Share Data
Net income (loss) - basic............................................... $ (.27) $ 2.07 $ 1.03
Net income (loss) - diluted............................................. $ (.27) $ 2.06 $ 1.02
Dividends declared...................................................... $ .88 $ .88 $ .88
====================================================================================================================
The "Consolidated" (Deere & Company and Consolidated Subsidiaries) data in this
statement conform with the requirements of FASB Statement No. 94. In the
supplemental consolidating data in this statement, "Equipment Operations" (Deere
& Company with Financial Services on the Equity Basis) reflect the basis of
consolidation described in Note 1 to the consolidated financial statements. The
consolidated group data in the "Equipment Operations" income statement reflect
primarily the results of the agricultural equipment, commercial and consumer
equipment, and construction and forestry operations. The supplemental "Financial
Services" consolidating data in this statement includes primarily Deere &
Company's credit operations. Transactions between the "Equipment Operations" and
"Financial Services" have been eliminated to arrive at the "Consolidated" data.
The notes to consolidated financial statements are an integral part of this
statement.
16
---------------------------------------------------------------------------------------------------
EQUIPMENT OPERATIONS FINANCIAL SERVICES
(Deere & Company with Financial Services on the Equity Basis)
---------------------------------------------------------------------------------------------------
Year Ended October 31 Year Ended October 31
2001 2000 1999 2001 2000 1999
---------------------------------------------------------------------------------------------------
$ 11,077.4 $ 11,168.6 $ 9,701.2
95.9 99.1 92.5 $ 1,383.5 $ 1,245.4 $ 1,027.1
603.6 493.0 741.9
.1 7.7 1.1 11.7 10.9 60.3
129.3 101.5 86.1 79.7 83.9 110.2
----------- ----------- ---------- ---------- ---------- ----------
11,302.7 11,376.9 9,880.9 2,078.5 1,833.2 1,939.5
----------- ----------- ---------- ---------- ---------- ----------
----------------------------------------------------------------------------------------------------
9,391.9 8,952.2 8,193.1
590.1 542.1 458.4
1,295.3 1,149.4 953.6 424.6 357.9 411.4
268.9 183.1 161.9 530.8 516.5 409.9
476.0 380.5 602.8
82.2 44.3 28.6 346.2 306.6 235.6
----------- ----------- ---------- ---------- ---------- ----------
11,628.4 10,871.1 9,795.6 1,777.6 1,561.5 1,659.7
----------- ----------- ---------- ---------- ---------- ----------
----------------------------------------------------------------------------------------------------
(325.7) 505.8 85.3 300.9 271.7 279.8
(87.9) 194.7 42.1 105.6 99.1 92.6
----------- ----------- ---------- ---------- ---------- ----------
(237.8) 311.1 43.2 195.3 172.6 187.2
----------- ----------- ---------- ---------- ---------- ----------
----------------------------------------------------------------------------------------------------
176.8 161.5 174.9 (3.3) .6 (.3)
(3.0) 12.9 21.1 .1 .1
----------- ----------- ---------- ---------- ---------- ----------
173.8 174.4 196.0 (3.2) 6 (.2)
----------- ----------- ---------- ---------- ---------- ----------
----------------------------------------------------------------------------------------------------
$ (64.0) $ 485.5 $ 239.2 $ 192.1 $ 173.2 $ 187.0
=========== =========== ========== ========== ========== ==========
====================================================================================================
17
Deere & Company
CONSOLIDATED BALANCE SHEET
------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED
(Deere & Company and Consolidated Subsidiaries)
------------------------------------------------------------------------------------------------------------------------------------
(In millions of dollars except per share amounts) October 31
ASSETS 2001 2000
------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents .................................................................... $ 1,030.0 $ 291.7
Cash equivalents deposited with unconsolidated subsidiaries ..................................
---------- ----------
Cash and cash equivalents ................................................................. 1,030.0 291.7
Marketable securities ........................................................................ 176.2 127.4
Receivables from unconsolidated subsidiaries and affiliates .................................. 316.6 230.9
Trade accounts and notes receivable - net .................................................... 2,922.5 3,169.2
Financing receivables - net .................................................................. 9,198.9 8,275.7
Other receivables ............................................................................ 388.9 395.3
Equipment on operating leases - net .......................................................... 1,939.3 1,954.4
Inventories .................................................................................. 1,505.7 1,552.9
Property and equipment - net ................................................................. 2,052.3 1,912.4
Investments in unconsolidated subsidiaries and affiliates .................................... 198.4 190.7
Intangible assets - net ...................................................................... 874.0 652.2
Prepaid pension costs ........................................................................ 652.0 635.3
Other assets ................................................................................. 420.8 256.8
Deferred income taxes ........................................................................ 883.1 740.4
Deferred charges ............................................................................. 104.4 84.1
---------- ----------
------------------------------------------------------------------------------------------------------------------------------------
Total ........................................................................................ $ 22,663.1 $ 20,469.4
========== ==========
------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Short-term borrowings ........................................................................ $ 6,198.5 $ 5,758.5
Payables to unconsolidated subsidiaries and affiliates ....................................... 16.6 32.7
Accounts payable and accrued expenses ........................................................ 3,097.1 2,976.4
Health care claims and reserves .............................................................. 100.3 63.4
Accrued taxes ................................................................................ 44.1 57.5
Deferred income taxes ........................................................................ 12.9 74.6
Long-term borrowings ......................................................................... 6,560.7 4,764.3
Retirement benefit accruals and other liabilities ............................................ 2,640.7 2,440.1
---------- ----------
Total liabilities .......................................................................... 18,670.9 16,167.5
---------- ----------
------------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, $1 par value (authorized - 600,000,000 shares;
Issued - 268,215,602 shares in 2001 and 266,042,070 shares in 2000, at stated value ........ 1,948.6 1,864.4
Common stock in treasury, 30,883,879 shares in 2001 and 31,486,348 shares in 2000, at cost ... (1,405.5) (1,439.0)
Unamortized restricted stock compensation .................................................... (16.8) (10.9)
Retained earnings ............................................................................ 3,834.8 4,117.2
---------- ----------
Total ...................................................................................... 4,361.1 4,531.7
---------- ----------
Minimum pension liability adjustment ......................................................... (16.2) (8.5)
Cumulative translation adjustment ............................................................ (285.5) (222.4)
Unrealized loss on derivatives ............................................................... (72.0)
Unrealized gain on marketable securities ..................................................... 4.8 1.1
---------- ----------
Accumulated other comprehensive income (loss) .............................................. (368.9) (229.8)
---------- ----------
Total stockholders' equity ................................................................. 3,992.2 4,301.9
---------- ----------
------------------------------------------------------------------------------------------------------------------------------------
Total ........................................................................................ $ 22,663.1 $ 20,469.4
========== ==========
------------------------------------------------------------------------------------------------------------------------------------
The "Consolidated" (Deere & Company and Consolidated Subsidiaries) data in this
statement conform with the requirements of FASB Statement No. 94. In the
supplemental consolidating data in this statement, "Equipment Operations" (Deere
& Company with Financial Services on the Equity Basis) reflect the basis of
consolidation described in Note 1 to the consolidated financial statements. The
supplemental "Financial Services" consolidating data in this statement includes
primarily Deere & Company's credit operations. Transactions between the
"Equipment Operations" and "Financial Services" have been eliminated to arrive
at the "Consolidated" data.
The notes to consolidated financial statements are an integral part of this
statement.
18
====================================================================================================
EQUIPMENT OPERATIONS FINANCIAL SERVICES
(Deere & Company with Financial
Services on the Equity Basis)
----------------------------------------------------------------------------------------------------
October 31 October 31
2001 2000 2001 2000
----------------------------------------------------------------------------------------------------
$ 455.4 $ 91.4 $ 574.7 $ 200.3
1,643.2 548.3
---------- ---------- ---------- ----------
2,098.6 639.7 574.7 200.3
176.2 127.4
271.8 408.4 333.0 140.0
1,050.7 3,169.2 2,225.6
49.7 125.0 9,149.2 8,150.7
260.8 266.4 128.1 128.9
10.6 5.9 1,928.6 1,948.5
1,505.7 1,552.9
2,012.8 1,864.6 39.5 47.7
2,383.8 1,561.8 6.6 10.1
873.1 651.2 .8 1.1
652.0 635.3
151.4 117.5 269.4 139.3
944.3 736.4 .3 3.9
90.6 78.4 13.9 5.7
---------- ---------- ---------- ----------
----------------------------------------------------------------------------------------------------
$ 12,355.9 $ 11,812.7 $ 14,845.9 $ 10,903.6
========== ========== ========== ==========
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
$ 773.4 $ 927.5 $ 5,425.1 $ 4,831.1
52.2 41.4 1,895.8 856.9
2,676.4 2,360.8 774.5 615.6
100.3 63.4
36.5 45.5 7.6 11.9
4.5 2.5 69.9 72.1
2,210.2 1,717.7 4,350.5 3,046.7
2,610.5 2,415.4 30.2 24.8
---------- ---------- ---------- ----------
8,363.7 7,510.8 12,653.9 9,522.5
---------- ---------- ---------- ----------
----------------------------------------------------------------------------------------------------
1,948.6 1,864.4 968.6 258.6
(1,405.5) (1,439.0)
(16.8) (10.9)
3,834.8 4,117.2 1,333.2 1,152.1
---------- ---------- ---------- ----------
4,361.1 4,531.7 2,301.8 1,410.7
---------- ---------- ---------- ----------
(16.2) (8.5)
(285.5) (222.4) (46.8) (30.7)
(72.0) (67.8)
4.8 1.1 4.8 1.1
---------- ---------- ---------- ----------
(368.9) (229.8) (109.8) (29.6)
---------- ---------- ---------- ----------
3,992.2 4,301.9 2,192.0 1,381.1
---------- ---------- ---------- ----------
----------------------------------------------------------------------------------------------------
$ 12,355.9 $ 11,812.7 $ 14,845.9 $ 10,903.6
========== ========== ========== ==========
====================================================================================================
19
Deere & Company
STATEMENT OF CONSOLIDATED CASH FLOWS
-----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED
(Deere & Company and Consolidated Subsidiaries)
-----------------------------------------------------------------------------------------------------------------------------------
Year Ended October 31
(In millions of dollars) 2001 2000 1999
-----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income (loss) ............................................................. $ (64.0) $ 485.5 $ 239.2
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Provision for doubtful receivables ......................................... 113.0 75.0 73.5
Provision for depreciation and amortization ................................ 718.3 647.9 542.4
Undistributed earnings of unconsolidated subsidiaries and affiliates ....... 19.5 (1.2) (5.8)
Provision (credit) for deferred income taxes ............................... (230.3) (132.9) (162.4)
Changes in assets and liabilities:
Receivables .............................................................. 316.9 (53.8) 802.3
Inventories .............................................................. 136.5 (184.0) 50.7
Accounts payable and accrued expenses .................................... 40.7 540.0 (170.8)
Other .................................................................... 62.8 (296.5) 65.4
--------- -------- --------
Net cash provided by operating activities .............................. 1,113.4 1,080.0 1,434.5
--------- -------- --------
-----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Collections of receivables .................................................... 6,966.3 6,655.1 6,017.1
Proceeds from sales of financing receivables .................................. 1,728.0 978.3 2,481.6
Proceeds from maturities and sales of marketable securities ................... 32.4 247.8 115.4
Proceeds from sales of equipment on operating leases .......................... 391.7 334.6 191.3
Proceeds from sale of a business .............................................. 179.1
Cost of receivables acquired .................................................. (9,795.7) (9,126.5) (8,186.2)
Purchases of marketable securities ............................................ (75.7) (61.9) (92.9)
Purchases of property and equipment ........................................... (491.0) (426.7) (315.5)
Cost of operating leases acquired ............................................. (775.2) (939.9) (833.5)
Increase in investment in Financial Services ..................................
Acquisitions of businesses, net of cash acquired .............................. (315.2) (643.3) (215.8)
Increase in receivables from unconsolidated affiliates ........................ (112.0) (135.2) (4.8)
Other ......................................................................... 81.5 7.4 12.4
--------- -------- --------
Net cash used for investing activities ................................. (2,364.9) (3,110.3) (651.8)
--------- -------- --------
-----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Increase (decrease) in short-term borrowings .................................. (506.6) 1,785.8 (1,650.7)
Change in intercompany receivables/payables ...................................
Proceeds from long-term borrowings ............................................ 4,818.3 2,814.0 2,902.1
Principal payments on long-term borrowings .................................... (2,118.5) (2,377.4) (1,796.2)
Proceeds from issuance of common stock ........................................ 17.8 15.9 4.2
Repurchases of common stock ................................................... (1.3) (.6) (49.0)
Capital investment from Equipment Operations ..................................
Dividends paid ................................................................ (206.5) (206.0) (205.4)
Other ......................................................................... (2.8) (1.3) (.1)
--------- -------- --------
Net cash provided by (used for) financing activities ................... 2,000.4 2,030.4 (795.1)
--------- -------- --------
-----------------------------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash ....................................... (10.6) (3.9) (1.8)
--------- -------- --------
-----------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents .......................... 738.3 (3.8) (14.2)
Cash and Cash Equivalents at Beginning of Year ................................ 291.7 295.5 309.7
--------- -------- --------
Cash and Cash Equivalents at End of Year ...................................... $ 1,030.0 $ 291.7 $ 295.5
========= ======== ========
-----------------------------------------------------------------------------------------------------------------------------------
The "Consolidated" (Deere & Company and Consolidated Subsidiaries) data in this
statement conform with the requirements of FASB Statement No. 94. In the
supplemental consolidating data in this statement, "Equipment Operations" (Deere
& Company with Financial Services on the Equity Basis) reflect the basis of
consolidation described in Note 1 to the consolidated financial statements. The
supplemental "Financial Services" consolidating data in this statement includes
primarily Deere & Company's credit operations. Transactions between the
"Equipment Operations" and "Financial Services" have been eliminated to arrive
at the "Consolidated" data.
The notes to consolidated financial statements are an integral part of this
statement.
20
====================================================================================================
EQUIPMENT OPERATIONS FINANCIAL SERVICES
(Deere & Company with Financial
Services on the Equity Basis)
----------------------------------------------------------------------------------------------------
Year Ended October 31 Year Ended October 31
2001 2000 1999 2001 2000 1999
----------------------------------------------------------------------------------------------------
$ (64.0) $ 485.5 $ 239.2 $ 192.1 $ 173.2 $ 187.0
10.4 11.2 5.6 102.6 63.8 67.9
389.5 359.0 326.4 359.7 318.5 245.0
(165.1) (147.0) (117.5) 3.2 (.6) (.4)
(229.4) (152.3) (203.2) (.9) 19.5 40.8
2,198.0 (70.6) 802.4 (9.3) 16.8
136.5 (184.0) 50.7
225.0 460.8 (172.1) 169.5 79.2 1.3
200.4 (295.1) 143.6 (104.2) (31.1) (107.1)
---------- ---------- ---------- ---------- ---------- ----------
2,701.3 467.5 1,075.1 712.7 639.3 434.5
---------- ---------- ---------- ---------- ---------- ----------
----------------------------------------------------------------------------------------------------
69.5 13.6 23.0 7,068.2 6,641.5 5,994.1
30.6 1,728.0 978.3 2,481.6
202.8 32.4 45.0 115.4
2.1 1.4 389.6 333.2 191.3
179.1
(2.6) (20.1) (50.8) (12,196.9) (9,137.0) (8,135.4)
(75.7) (61.9) (92.9)
(485.6) (414.1) (304.4) (5.4) (12.6) (11.1)
(9.1) (4.7) (2.7) (766.2) (935.2) (830.8)
(700.0)
(308.0) (641.8) (151.9) (7.2) (1.5) (63.9)
(173.9) (135.2) (4.8)
66.7 (5.1) 19.7 5.7 (4.5) (7.4)
---------- ---------- ---------- ---------- ---------- ----------
(1,367.0) (837.4) (288.0) (4,001.4) (2,289.9) (363.9)
---------- ---------- ---------- ---------- ---------- ----------
----------------------------------------------------------------------------------------------------
(225.2) 459.7 (961.9) (281.3) 1,326.1 (688.8)
62.8 (26.7) (32.5) 1,037.0 457.6 10.2
558.8 752.1 499.8 4,259.5 2,061.8 2,402.3
(73.3) (208.7) (19.1) (2,045.2) (2,168.7) (1,777.0)
17.8 15.9 4.2
(1.3) (.6) (49.0)
700.0
(206.5) (206.0) (205.4) (10.7) (26.8) (75.0)
(2.9) (1.3) (.2) 8.7 17.1
---------- ---------- ---------- ---------- ---------- ----------
130.2 784.4 (764.1) 3,668.0 1,667.1 (128.3)
---------- ---------- ---------- ---------- ---------- ----------
----------------------------------------------------------------------------------------------------
(5.6) (3.9) (1.8) (4.9)
---------- ---------- ---------- ---------- ---------- ----------
----------------------------------------------------------------------------------------------------
1,458.9 410.6 21.2 374.4 16.5 (57.7)
639.7 229.1 207.9 200.3 183.8 241.5
---------- ---------- ---------- ---------- ---------- ----------
$ 2,098.6 $ 639.7 $ 229.1 $ 574.7 $ 200.3 $ 183.8
========== ========== ========== ========== ========== ==========
====================================================================================================
21
Deere & Company
STATEMENT OF CHANGES IN CONSOLIDATED STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------------------------------------------------------
Unamortized Other
Total Common Treasury Restricted Retained Comprehensive
(In millions of dollars) Equity Stock Stock Stock* Earnings Income (Loss)
--------------------------------------------------------------------------------------------------------------------------------
Balance October 31, 1998 .......................... $ 4,079.8 $ 1,789.8 $(1,467.6) $ (7.2) $ 3,839.5 $ (74.7)
---------
Comprehensive income (loss)
Net income ...................................... 239.2 239.2
Other comprehensive income (loss)
Minimum pension liability adjustment ......... (.2) (.2)
Cumulative translation adjustment ............ (26.9) (26.9)
Unrealized loss on marketable securities ..... (18.9) (18.9)
---------
Total comprehensive income ...................... 193.2
---------
Repurchases of common stock ....................... (49.0) (49.0)
Treasury shares reissued .......................... 47.2 47.2
Dividends declared ................................ (204.2) (204.2)
Other stockholder transactions .................... 27.3 60.6 (14.1) (19.2)
--------- --------- --------- --------- --------- ---------
Balance October 31, 1999 .......................... 4,094.3 1,850.4 (1,469.4) (21.3) 3,855.3 (120.7)
---------
Comprehensive income (loss)
Net income ...................................... 485.5 485.5
Other comprehensive income (loss)
Minimum pension liability adjustment ......... 10.4 10.4
Cumulative translation adjustment ............ (115.0) (115.0)
Unrealized loss on marketable securities ..... (4.5) (4.5)
---------
Total comprehensive income ...................... 376.4
---------
Repurchases of common stock ....................... (.6) (.6)
Treasury shares reissued .......................... 31.0 31.0
Dividends declared ................................ (205.4) (205.4)
Other stockholder transactions .................... 6.2 14.0 10.4 (18.2)
--------- --------- --------- --------- --------- ---------
Balance October 31, 2000 .......................... 4,301.9 1,864.4 (1,439.0) (10.9) 4,117.2 (229.8)
---------
Comprehensive income (loss)
Net income (loss) ............................... (64.0) (64.0)
Other comprehensive income (loss)
Minimum pension liability adjustment ......... (7.7) (7.7)
Cumulative translation adjustment ............ (63.1) (63.1)
Unrealized loss on derivatives ............... (72.0) (72.0)
Unrealized gain on marketable securities ..... 3.7 3.7
---------
Total comprehensive income (loss) ............... (203.1)
---------
Repurchases of common stock ....................... (1.3) (1.3)
Treasury shares reissued .......................... 34.8 34.8
Dividends declared ................................ (206.1) (206.1)
Acquisition of a business ......................... 80.5 80.5
Other stockholder transactions .................... (14.5) 3.7 (5.9) (12.3)
--------- --------- --------- --------- --------- ---------
Balance October 31, 2001 .......................... $ 3,992.2 $ 1,948.6 $(1,405.5) $ (16.8) $ 3,834.8 $ (368.9)
========= ========= ========= ========= ========= =========
--------------------------------------------------------------------------------------------------------------------------------
The notes to consolidated financial statements are an integral part of this
statement.
*Unamortized restricted stock includes restricted stock issued at market price
net of amortization to compensation expense.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS (Unaudited)
-------------------------------------------------------------------------------
RESULTS OF OPERATIONS FOR THE YEARS ENDED OCTOBER 31, 2001, 2000 AND 1999
-------------------------------------------------------------------------------
Deere & Company and its subsidiaries manufacture, distribute and finance a full
line of agricultural equipment; a variety of commercial and consumer equipment;
a broad range of equipment for construction and forestry; and other
technological products and services. The company also provides credit services
and managed health care plans. Additional information on these business segments
is presented in Note 25 to the consolidated financial statements.
2001 COMPARED WITH 2000
-------------------------------------------------------------------------------
CONSOLIDATED RESULTS
-------------------------------------------------------------------------------
The company had a net loss in 2001 of $64 million, or $.27 per share diluted
($.27 basic). Affecting this year's results were charges of $217 million, or
$.91 per share, related to early-retirement programs, the decision to exit the
hand-held consumer products business and the restructuring of certain
construction and forestry manufacturing and marketing operations (see Note 2).
Excluding these special items, income for the year was $153 million, or $.64 per
share, compared with net income of $486 million, or $2.06 per share diluted
($2.07 basic), in 2000. In addition, results for the year were negatively
affected by weakness in the company's major markets and by deep production
cutbacks, particularly during the fourth quarter, aimed at achieving more
efficient asset levels.
Net sales and revenues increased 1 percent to $13,293 million in 2001,
compared with $13,137 million in 2000, due to higher Financial Services
revenues. Net sales of the Equipment Operations decreased 1 percent in 2001 to
$11,077 million from $11,169 million last year. Sales decreased primarily due to
lower shipments of commercial and consumer equipment and construction and
forestry equipment, as well as the impact of a stronger U.S. dollar. Partially
offsetting these factors were higher sales of agricultural equipment and the
inclusion of recent acquisitions. Compared with last year, overseas sales
increased by 2 percent for the year, primarily due to higher agricultural
equipment sales and the full-year inclusion of Timberjack, acquired in April
2000. Partially offsetting these factors were the impact of the stronger U.S.
dollar and lower sales of commercial and consumer equipment and construction and
forestry equipment (excluding Timberjack).
Worldwide Equipment Operations, which exclude the Financial Services
operations and unconsolidated affiliates, had a net loss of $238 million in
2001. Excluding costs of the special items noted above, the Equipment Operations
had a loss of $23 million, compared with net income of $311 million in 2000.
Results without special items were adversely affected by the manufacturing
inefficiencies resulting from lower production volumes of the commercial and
consumer equipment and the construction and forestry segments, as well as
fourth-quarter production cutbacks in the agricultural equipment segment. In
addition, higher research and development costs and start-up costs associated
with new products had a negative impact on the results. Also having an adverse
effect were the stronger U.S. dollar, higher interest costs and a less favorable
tax rate. Partially offsetting these items were lower pension and postretirement
benefit costs. Trade receivables and inventories were also reduced by
approximately $400 million in 2001, excluding acquisitions, with the bulk of the
decline in the fourth quarter. The operating loss from Equipment Operations was
$46 million in 2001. Before special items, the operating profit for the year was
$295 million, compared to $693 million in 2000.
Net income of the company's Financial Services operations in 2001 was $192
million, compared with $173 million in 2000. Finance and interest income
increased this year, compared to last year, due to a larger average receivable
and lease portfolio. Additional information is presented in the discussion of
the credit operations. Health care premiums and fees and related health care
claims and costs increased this year, compared to last year, primarily from
increases in enrollment.
Interest expense increased this year, compared to last year, due primarily
to higher average borrowings. Other operating expenses increased this year,
primarily as a result of an increase in the depreciation of equipment on
operating leases, write-offs of certain investments in 2001 and increased cost
of services. Other income increased, compared to last year, primarily due to
increased sales of retail notes, increased service revenues and gains on the
sales of certain property and equipment.
BUSINESS SEGMENT AND GEOGRAPHIC AREA RESULTS
The following discussion of operating results by reportable segment and
geographic area relates to information in Note 25. Operating profit is income
before interest expense, foreign exchange gains and losses, income taxes and
corporate expenses. However, operating profit of the credit segment includes the
effect of interest expense.
2001 NET SALES AND REVENUES
BY BUSINESS SEGMENT
-------------------------------------------------------------------------------
[GRAPH APPEARS HERE]
Agricultural Equipment 47%
Commercial & Consumer Equipment 20%
Construction & Forestry 16%
Credit 11%
Other 6%
WORLDWIDE AGRICULTURAL EQUIPMENT
-------------------------------------------------------------------------------
[GRAPH APPEARS HERE]
Net Sales 1999 2000 2001
(in billions) $5.1 $5.9 $6.3
Operating Profit 1999 2000 2001
(in millions) $17* $400 $354*
*Excludes special items
The agricultural equipment segment had an operating profit of $257 million
in 2001. Excluding the costs of the early-retirement programs, the operating
profit was $354 million, compared with $400 million in 2000. Net sales were 6
percent higher for the year. As planned, this segment implemented deep
production cutbacks during the fourth quarter to achieve more efficient asset
levels. Production of large tractors at the Waterloo manufacturing complex
23
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was shut down for six weeks in the quarter, while the output of combines, cotton
pickers and other products were reduced as well. Factories in North America were
idled more than one fourth of the available days in the quarter. Excluding the
special items noted above, the decrease in operating profit for the year was
primarily due to the lower sales and production volumes and related
manufacturing inefficiencies during the fourth quarter, as well as start-up and
other costs associated with the introduction of a record number of new products.
Higher planned research and development costs and the stronger U.S. dollar also
had a negative impact on the results. Partially offsetting these items were
lower pension and other postretirement benefit costs, as well as higher sales.
WORLDWIDE COMMERCIAL AND CONSUMER EQUIPMENT
-------------------------------------------------------------------------------
[GRAPH APPEARS HERE]
[GRAPH]
Net Sales Operating Profit (Loss)
(in billions) (in millions)
1999 2000 2001 1999 2000 2001
$2.6 $3.0 $2.7 $213 $159 $(31)*
*Excludes special items
The commercial and consumer equipment segment had an operating loss of $194
million in 2001. Excluding the costs related to the decision to exit the
hand-held consumer products business and the early-retirement programs, the
operating loss was $31 million, compared to an operating profit of $159 million
in 2000. Net sales declined 10 percent for the year or 15 percent without
acquisitions. The decreases were due to lower retail sales and further dealer
inventory reductions facilitated by planned, deep production cuts. Overall
production volumes were approximately 40 percent lower in the fourth quarter of
2001 than a year earlier. Before the previously mentioned special items,
operating results declined due mainly to the impact of lower sales and
production volumes and related manufacturing inefficiencies, in addition to
start-up costs for new products and facilities.
WORLDWIDE CONSTRUCTION AND FORESTRY
-------------------------------------------------------------------------------
[GRAPH APPEARS HERE]
[GRAPH]
Net Sales Operating Profit
(in billions) (in millions)
1999 2000 2001 1999 2000 2001
$1.9 $2.2 $2.1 $149 $191 $26*
*Excludes special items
The construction and forestry segment had an operating loss of $54 million
in 2001. Excluding costs related to the restructuring of the marketing and
manufacturing operations and the early-retirement programs, the operating profit
was $26 million, compared to $191 million in 2000. Sales decreased 5 percent for
the year. Excluding Timberjack, sales declined 16 percent, due to the difficult
retail sales environment. Sales to independent rental companies were down
significantly due to extreme weakness in the rental sector. Operating results
deteriorated primarily due to the lower production volumes and related
manufacturing inefficiencies, higher sales incentive costs and higher losses
from unconsolidated subsidiaries.
WORLDWIDE CREDIT OPERATIONS
-------------------------------------------------------------------------------
[GRAPH APPEARS HERE]
[GRAPH]
Revenues Operating Profit
(in billions) (in millions)
1999 2000 2001 1999 2000 2001
$1.1 $1.3 $1.4 $274 $254 $277*
*Excludes special items
The operating profit of the credit operations was $274 million in 2001.
Excluding early-retirement costs, operating profit was $277 million, compared
with $254 million in 2000. Operating profit in 2001 was higher than in 2000 due
primarily to higher earnings from a larger receivable and lease portfolio and
improved interest rate spreads, partially offset by an increase in the provision
for credit losses. Total revenues of the credit operations increased 9 percent
in 2001, reflecting the larger average portfolio, compared with 2000. The
average balance of receivables and leases financed was 12 percent higher in
2001, compared with 2000. An increase in average borrowings in 2001 resulted in
a 3 percent increase in interest expense, compared with 2000. The credit
operations' ratio of earnings to fixed charges was 1.51 to 1 in 2001, compared
to 1.49 to 1 in 2000. Depreciation expense on operating leases also increased
this year.
The company's other operations had an operating loss of $31 million for the
year. Excluding early-retirement costs, the operating loss was $30 million,
compared with an operating loss of $39 million in 2000. Results for both years
were adversely affected by costs related to the development of new products and
goodwill amortization of the special technologies operations. The decreased loss
in 2001 was primarily due to lower costs for the development of new products in
special technologies and improved results of the health care operations.
UNITED STATES AND CANADA EQUIPMENT OPERATIONS
-------------------------------------------------------------------------------
[GRAPH APPEARS HERE]
[GRAPH]
Net Sales Operating Profit
(in billions) (in millions)
1999 2000 2001 1999 2000 2001
$7.0 $8.3 $8.1 $116* $529 $168*
*Excludes special items
The United States and Canada equipment operations had an operating loss of
$164 million in 2001. Excluding the previously mentioned special items, the
operating profit was $168 million, compared with $529 million last year. The
decrease was primarily due to the previously-mentioned lower sales and
production
24
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volumes, and the related inefficiencies of the commercial and consumer equipment
and the construction and forestry operations. In addition, higher start-up and
other costs for the introduction of new products, higher planned research and
development costs, increased sales incentive costs and higher losses from
unconsolidated subsidiaries affected the operations. Partially offsetting these
items were lower pension and other postretirement benefit costs for the current
year. Sales and physical volume of sales both declined 2 percent in 2001,
compared to 2000.
OVERSEAS EQUIPMENT OPERATIONS
-------------------------------------------------------------------------------
[GRAPH APPEARS HERE]
Net Sales 1999 2000 2001
(in billions) $2.7 $2.9 $3.0
Operating Profit 1999 2000 2001
(in millions) $224 $164 $127*
*Excludes special items
The overseas equipment operations had an operating profit of $118 million
in 2001. Excluding special items, the operating profit was $127 million,
compared with $164 million last year. The decline was primarily due to higher
research and development costs and the stronger U.S. dollar. Overseas sales were
2 percent higher than last year, while the physical volume of sales increased 7
percent in 2001, compared with 2000.
MARKET CONDITIONS AND OUTLOOK
In these economically uncertain times, the company is reinforcing its efforts to
maintain lean asset levels and to make a substantial improvement in its cost
structure. At the same time, the company is continuing to move ahead
aggressively with the introduction of advanced new products and technologies,
while helping to set the stage for a strong recovery in the company's results
when its key markets resume their growth.
Based on the market conditions outlined below, net sales are forecast to be
down 3 to 7 percent for the first quarter of 2002, compared to the same period
in 2001. Operating profit in the Equipment Operations will be under significant
pressure due in part to reduced production levels and is expected to range from
a negative 7 percent to negative 9 percent of sales. For the full year, net
sales are expected to be flat to up slightly from 2001 levels with operating
profit margins projected to be from a positive 1 percent to negative 1 percent
of sales. The projected annual operating margin includes an anticipated two
percentage-point reduction associated with the carrying costs of the equipment
trade receivables sold to the company's credit operations. Consolidated results,
however, will not be affected by such sales. See Note 1.
Agricultural Equipment. Despite a continuation of relatively low grain prices,
retail sales of farm machinery experienced growth in 2001, particularly in the
area of smaller equipment. Farm income was helped by strength in the livestock
and dairy sectors and by a continuation of substantial government payments. Farm
fundamentals are not expected to change significantly in 2002, although the
global supply and demand situation for key commodities should keep prices in
check and prevent an improvement in United States grain exports. In this
environment, the company expects overall industry retail sales of farm equipment
in the United States and Canada to be flat to down approximately 5 percent in
2002.
In Europe, the farm outlook is slightly better due to somewhat stronger
livestock and dairy markets as well as generally higher crop prices than in the
United States and Canada. At the same time, the concerns over "foot-and-mouth"
disease that affected farm machinery sales in 2001 have largely abated. As a
result, industry retail sales in Europe are expected to be flat to up slightly
for 2002. The company is targeting improved sales in Europe this year due in
large part to a record number of new products being introduced to the region's
agricultural markets. In Latin America, farm machinery sales are expected to be
slightly higher next year due mainly to improvement in Mexico and further growth
in Brazil.
Last year, the company's factories produced large tractors and combines at
high rates in the first quarter. However, in the interest of operating with
lower asset levels, the company is making substantial production cutbacks of
these products in the first quarter of fiscal 2002. Production tonnage at the
company's agricultural equipment factories in North America is expected to be
down about 20 percent from the first quarter of last year.
Commercial & Consumer Equipment. Excluding the impact of acquisitions and
divestitures, shipments of the company's commercial and consumer equipment are
projected to be down 5 to 10 percent in 2002. The decline is expected to result
from low levels of consumer confidence and a weakening economy, coupled with
further steps to reduce asset levels. Segment results are expected to benefit
from a number of new and innovative products that are coming to market during
the year as well as from growth in new businesses.
Construction & Forestry. With economic weakness expected to spread, residential
and non-residential construction activity is projected to be significantly lower
in 2002. At the same time, purchases by independent rental companies are
expected to experience further severe weakness leaving them as much as 90
percent below their year-2000 highs. Global sales of forestry products are
forecast to continue running lower than year-earlier levels in response to soft
economic conditions. In light of these circumstances, the company believes that
industry retail sales of construction and forestry equipment for 2002 will be 10
to 15 percent lower than the prior year and that pricing will remain under
pressure. Production tonnage at the company's construction equipment factories
is expected to be about 36 percent lower than prior year levels in the first
quarter of 2002. Despite continued weakness in core markets, the company's
construction and forestry operations are expected to benefit from aggressive
restructuring actions and new products.
Credit Operations. Company credit operations are expected to benefit from
continued growth in the receivable portfolio and additional retail note sales.
The segment's net income for 2002 will benefit by about $80 million from
servicing fees associated with the purchase of trade receivables from the
Equipment Operations. As previously mentioned, this will have no impact on
consolidated results.
25
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FASB STATEMENT NO. 142
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
No. 142, Goodwill and Other Intangible Assets, which requires goodwill related
to acquisitions after June 30, 2001 to not be amortized and only written down
for impairments. Upon adoption of Statement No. 142, the same accounting
requirements will apply to goodwill related to acquisitions prior to June 30,
2001. The Company must adopt this Statement by the first quarter of fiscal 2003.
In 2001, the Company had goodwill amortization of $55 million pretax and $51
million after-tax.
See Note 1.
SAFE HARBOR STATEMENT
Safe Harbor Statement under the Private Securities Litigation Reform
Act of 1995: Statements under "Market Conditions and Outlook," and the
"Supplemental Information (Unaudited)" in Note 26 and other statements herein
that relate to future operating periods are subject to important risks and
uncertainties that could cause actual results to differ materially. Some of
these risks and uncertainties could affect particular lines of business, while
others could affect all of the company's businesses.
The results of the company's agricultural equipment segment are strongly
influenced by the many interrelated factors that affect farmers' confidence,
including worldwide demand for agricultural products, world grain stocks, prices
realized for commodities and livestock, weather and soil conditions, real estate
values, the level of government farm programs, animal diseases, crop pests and
harvest yields. Factors that are particularly important to the company's outlook
for this segment include the prices realized by farmers for their crops and
livestock, weather and soil conditions and the level of farm product exports, as
well as the level of payments under United States government farm programs.
Further outbreaks of "mad cow" or "foot-and-mouth" disease could also adversely
affect livestock and feed prices. Concerns pertaining to genetically modified
organisms, or GMOs, may affect farm exports. The success of the fall harvest and
the prices realized by farmers for their crops especially affect retail sales of
agricultural equipment in the winter.
The company's outlook for its commercial and consumer equipment sales is
affected by general economic conditions in the United States, consumer
confidence and weather conditions. Other important assumptions include continued
consumer acceptance of the company's new products and a continuation of existing
consumer borrowing patterns. The financial impact resulting from exiting the
hand-held consumer products business and other restructuring costs are subject
to various uncertainties. Sales of commercial and consumer equipment during the
winter are affected by the amount and timing of snowfall.
The number of housing starts is especially important to sales of the
company's construction equipment. The results of the company's construction and
forestry segment are also impacted by levels of public construction and
non-residential construction. Prices for pulp, lumber and structural panels are
important to sales of forestry equipment.
All of the company's businesses are affected by general economic conditions
in the global markets in which the company operates, interest and currency
exchange rates, as well as monetary and fiscal policies (including actions by
the Federal Reserve Board); actions of competitors in the various industries in
which the company competes, particularly price cutting; dealer practices,
especially as to levels of new and used field inventories; production and
technological difficulties, including capacity and supply constraints; 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.
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 other filings with the
Securities and Exchange Commission.
ACCOUNTING POLICIES
In preparing the consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America, management must
make a variety of decisions which impact the reported amounts and the related
disclosures. Such decisions include the selection of the appropriate accounting
principles to be applied and the assumptions on which to base accounting
estimates. In reaching such decisions, management applies judgment based on its
understanding and analysis of the relevant circumstances. Note 1 to the
consolidated financial statements provides a summary of the significant
accounting policies followed in the preparation of the financial statements;
other footnotes describe various elements of the financial statements and the
assumptions on which specific amounts were determined. While actual results
could, in fact, differ from those estimated at the time of preparation of the
financial statements, management is committed to preparing financial statements
which incorporate accounting principles, assumptions, and estimates which
promote the representational faithfulness, verifiability, neutrality, and
transparency of the accounting information included in the financial statements.
2000 COMPARED WITH 1999
-------------------------------------------------------------------------------
CONSOLIDATED RESULTS
Net income in 2000 totaled $486 million, or $2.06 per share diluted ($2.07
basic), compared with $239 million, or $1.02 per share diluted ($1.03 basic), in
1999. The earnings more than doubled in 2000 primarily due to improved
manufacturing efficiencies associated with higher sales and production volumes.
Net sales and revenues increased 12 percent to $13,137 million in 2000,
compared with $11,751 million in 1999. Net sales of the Equipment Operations
increased 15 percent in 2000 to $11,169 million from $9,701 million in 1999.
Despite weakness in the company's major markets, sales rose due to production
and shipments to dealers being better aligned with retail demand in 2000, market
share gains and the inclusion of Timberjack sales, partially offset by the
impact of weaker European currencies. Overseas net sales increased 8 percent and
excluding the impact of weaker foreign currencies were up 17 percent in 2000.
26
-------------------------------------------------------------------------------
Overall, the company's worldwide physical volume of sales increased 18 percent
in 2000.
Worldwide Equipment Operations, which exclude the Financial Services
operations and unconsolidated affiliates, had net income of $311 million in
2000, compared with $43 million in 1999. The operating profit from equipment
operations also increased significantly to $693 million in 2000, compared to
$272 million in 1999. The increases were primarily due to manufacturing
efficiencies associated with higher sales and production volumes, in addition to
lower pension and postretirement health care costs, and the impact of quality
and efficiency improvement initiatives. Partially offsetting these factors were
increases in the cost of promotional programs related to used farm equipment
held by dealers and higher expenses regarding the development of new products
and growth initiatives. The results in 1999 included a charge for early
retirement programs.
Net income of the company's Financial Services operations in 2000 was $173
million, compared with $187 million in 1999. Additional information is presented
in the following discussion of the credit operations. Insurance and health care
premiums, claims and benefits expenses, and investment income all decreased in
2000 due to the sale of the insurance subsidiaries in the fourth quarter of
1999.
BUSINESS SEGMENT RESULTS
Sales of the worldwide agricultural equipment segment increased 15 percent in
2000. Operating profit increased to $400 million in 2000, compared with an
operating loss of $51 million in 1999. Results in 1999 were affected by $68
million pretax cost of early-retirement programs. Despite continued market
weakness, operating profit rose due to improved manufacturing efficiencies
associated with higher sales and production volumes, as the segment was able to
better align production schedules with retail sales. In addition, the segment
benefited from positive customer response to its products, resulting in
increased market share for John Deere farm machinery. Also aiding results were
lower pension and postretirement health care costs and the impact of initiatives
aimed at quality and efficiency improvement. Selling and administrative expenses
and research and development expenses were higher due to growth and other
initiatives. These increases, however, were proportional to the rise in sales in
2000. In addition, promotional expenses increased as part of a program that
significantly reduced inventories of used equipment held by John Deere dealers
in order to better position the segment for increased sales volumes in the
future. Overseas operations had lower profit due to the impact of weaker
European currencies, higher sales incentive costs and increased expenses for the
development of new products and for growth initiatives. In addition, average
assets of the agricultural equipment segment declined in 2000, compared to 1999.
The commercial and consumer equipment segment had an operating profit of
$159 million in 2000, compared to $213 million in 1999. Although retail demand
for most products in this segment remained strong as sales rose 12 percent,
results were negatively affected by higher expenses related to growth, new
products and other initiatives, higher sales incentive costs, and by costs and
inefficiencies associated with the hand-held product and generator operations,
which are experiencing weaker market conditions. A stronger Japanese yen also
had an adverse effect on the results in 2000.
The construction and forestry segment had an operating profit of $191
million in 2000, compared to $149 million in 1999. The increase was primarily
due to higher sales and improved efficiencies, partially offset by higher growth
expenditures. Sales increased 17 percent due to the impact of the acquisition of
Timberjack, an expanded product line and market share gains. Sales in 1999 were
adversely affected by implementation of the estimate-to-cash order fulfillment
initiative, which has reduced asset levels and cut product delivery times.
Results in 2000 also were negatively affected by a reversal of sales and cost of
sales related to company equipment held in inventory by dealers acquired by
Nortrax, a venture established in 2000 in which the company has a minority
interest.
The operating profit of the credit operations was $254 million in 2000,
compared with $274 million in 1999. Operating profit in 2000 was lower than in
1999 due primarily to a reduced level of receivable sales, resulting in lower
gains, and by higher operating expenses, partially offset by higher earnings
from growth in the receivable and lease portfolio. Total revenues of the credit
operations increased 17 percent in 2000, reflecting the larger average
portfolio, compared with 1999. The average balance of receivables and leases
financed was 11 percent higher in 2000, compared with 1999. An increase in
average borrowings and higher borrowing rates in 2000 resulted in a 26 percent
increase in interest expense, compared with 1999. The credit operations' ratio
of earnings to fixed charges was 1.49 to 1 for 2000, compared to 1.66 to 1 in
1999. Depreciation expense increased in 2000 due to the increase in the
equipment on operating leases.
The company's other operations had an aggregate operating loss of $39
million in 2000, compared with an operating loss of $33 million in 1999. Results
for both years were adversely affected by costs related to the development of
new products, e-business initiatives and goodwill amortization of the special
technologies group. Health care operations continued to generate improved
results. The 1999 results included the underwriting losses of the insurance
operations, which were sold in that 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 by
operations are supplemented with external borrowing sources.
In October 2001, the Equipment Operations sold $2.2 billion of trade
receivables to Deere Capital, Inc. (DCI), a wholly-owned subsidiary included in
the credit operations. A significant portion of newly-originated United States
trade receivables will be sold to DCI on an ongoing basis. See Note 1.
27
================================================================================
Cash provided by operating activities during 2001 was $2,701 million,
primarily resulting from the sale of trade receivables to the credit operations.
See Note 24. The operating cash flows and a $260 million increase in borrowings
were used primarily to fund an increase in investment in Financial Services of
$700 million, purchases of property and equipment of $486 million, acquisitions
of businesses of $308 million and the payment of dividends to stockholders of
$207 million. Cash and cash equivalents also increased $1,459 million.
Over the last three years, operating activities have provided an aggregate
of $4,244 million in cash. In addition, borrowings increased $782 million. The
aggregate amount of these cash flows was used mainly to fund purchases of
property and equipment of $1,204 million, acquisitions of businesses for $1,102
million, an increase in investment in Financial Services of $700 million and
stockholders' dividends of $618 million. Cash and cash equivalents also
increased $1,891 million over the three-year period.
Trade receivables held by the Equipment Operations decreased by $2,119
million during 2001, primarily due to the sale of trade receivables to the
credit operations. See following consolidated discussion.
Inventories decreased by $47 million in 2001. Since most of these
inventories are valued on the last-in, first-out (LIFO) method, lower prevailing
costs from prior years are assigned to beginning inventories. Inventories valued
on an approximate current cost basis decreased by 1 percent during 2001,
compared to a decrease in net sales of 1 percent during the same period.
Total interest-bearing debt of the Equipment Operations was $2,984 million
at the end of 2001, compared with $2,645 million at the end of 2000 and $1,678
million at the end of 1999. The ratio of total debt to total capital (total
interest-bearing debt and stockholders' equity) at the end of 2001, 2000 and
1999 was 42.8 percent, 38.1 percent and 29.1 percent, respectively.
During 2001, the Equipment Operations issued $300 million of 7.125% notes
due in 2031 and $250 million of 5-7/8% notes due in 2006. These operations also
retired $66 million of medium-term notes.
FINANCIAL SERVICES
The Financial Services' credit operations rely on their ability to raise
substantial amounts of funds to finance their receivable and lease portfolios.
Their primary sources of funds for this purpose are a combination of borrowings
and equity capital. Additionally, the credit operations periodically sell
substantial amounts of retail notes.
Cash flows from the company's Financial Services operating activities were
$713 million in 2001. Cash provided by financing activities totaled $3,668
million in 2001, representing mainly an increase in total borrowings of $2,970
million and a capital investment from the Equipment Operations of $700 million.
The cash provided by operating and financing activities was used primarily to
increase total receivables and leases. Cash used for investing activities
totaled $4,001 million in 2001, primarily due to acquisitions of receivables and
leases exceeding collections by $5,895 million, which was partially offset by
proceeds of $1,728 million from the sale of receivables. See Note 24.
================================================================================
Over the past three years, the Financial Services operating activities have
provided $1,787 million in cash. In addition, the sale of receivables, an
increase in borrowings and a capital investment from the Equipment Operations
have provided $5,188 million, $4,594 million and $700 million, respectively.
These amounts have been used mainly to fund receivable and lease acquisitions,
which exceeded collections by $12,298 million.
Financing receivables and leases increased by $979 million in 2001,
compared with 2000. Acquisition volumes of financing receivables and leases
increased 7 percent in 2001, compared with 2000, excluding the acquisition of
$2.2 billion of trade receivables from the Equipment Operations in October 2001.
The volumes of operating loans, revolving charge accounts and retail notes
increased 45 percent, 15 percent and 7 percent, respectively. The credit
operations also sold retail notes receiving proceeds of $1,728 million during
2001, compared with $978 million in 2000. At October 31, 2001 and 2000, net
financing receivables and leases administered, which include receivables
previously sold but still administered, were $12,725 million and $12,223
million, respectively.
Trade receivables held by the credit operations increased by $2,226 million
in 2001 due to purchasing these receivables from the Equipment Operations. See
following consolidated discussion.
Total outside interest-bearing debt of the credit operations was $9,776
million at the end of 2001, compared with $7,878 million at the end of 2000 and
$6,616 million at the end of 1999. Total outside borrowings have increased
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 subsidiaries' ratio of total interest-bearing
debt to total stockholder's equity was 5.6 to 1 at the end of 2001, compared
with 6.7 to 1 at the end of 2000 and 6.0 to 1 at the end of 1999. The lower
ratio in 2001 was due to an additional capital investment of $700 million from
the Equipment Operations.
During 2001, the credit operations issued $600 million of 5.125% debentures
due in 2006 and $200 million of floating rate notes due in 2003, and retired
$200 million of 5.85% notes due in 2001 and $200 million of 5.35% notes due in
2001. These operations also issued $3,171 million and retired $1,352 million of
medium-term notes.
CONSOLIDATED
The company maintains unsecured lines of credit with various United States
and foreign banks. The discussion in Note 14 provides further information.
The company is naturally exposed to various interest rate and foreign
currency risks. As a result, the company enters into derivative transactions to
manage certain of these exposures that arise in the normal course of business,
and not for the purpose of creating speculative positions or trading. The
company's credit operations manage the relationship of the types and amounts of
their funding sources to their receivable and lease portfolio in an effort to
diminish risk due to interest rate fluctuations, while responding to favorable
financing opportunities. Accordingly, from time to time, these operations enter
into interest rate swap
28
================================================================================
agreements to manage their interest rate exposure. The company also has foreign
currency exposures at some of its foreign and domestic operations related to
buying, selling and financing in currencies other than the local currencies. The
company has entered into agreements related to the management of these currency
transaction risks. The credit risk under these interest rate and foreign
currency agreements is not considered to be significant. Additional detailed
financial instrument information is included in Notes 23 and 26.
Trade accounts and notes receivable arise from sales of goods to dealers.
Trade receivables decreased by $247 million in 2001. Total worldwide
agricultural equipment trade receivables decreased $52 million, commercial and
consumer equipment receivables decreased $163 million, construction and forestry
receivables decreased $28 million and other equipment receivables decreased $4
million. The ratios of trade accounts and notes receivable at October 31 to
fiscal year net sales were 26 percent in 2001, compared with 28 percent in 2000
and 34 percent in 1999. The collection period for trade receivables averages
less than 12 months. The percentage of receivables outstanding for a period
exceeding 12 months was 11 percent at October 31, 2001, compared with 8 percent
at October 31, 2000 and 12 percent at October 31, 1999.
Stockholders' equity was $3,992 million at October 31, 2001, compared with
$4,302 million and $4,094 million at October 31, 2000 and 1999, respectively.
The decrease in 2001 was caused primarily by cash dividends declared of $206
million, an unrealized loss on derivatives of $72 million, a net loss of $64
million and a change in the cumulative translation adjustment of $63 million,
partially offset by an increase in common stock of $84 million. As a result of
the credit operations' match-funding policy described in Note 23, the company
has entered into interest rate swaps (pay fixed/receive floating rates) hedging
the interest costs of the credit operations' floating rate borrowings. The
impact of decreasing interest rates on these swaps is the primary component of
the unrealized loss on derivatives. If interest rates remain unchanged, the
unrealized loss will be realized in income and will be offset by the lower
interest expense on the floating rate borrowings, effectively providing fixed
rate funding.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
================================================================================
The consolidated financial statements represent the consolidation of all
companies in which Deere & Company has a controlling interest. Deere & Company
records its investment in each unconsolidated affiliated company (generally 20
to 50 percent ownership) at its related equity in the net assets of such
affiliate. Other investments (less than 20 percent ownership) are recorded at
cost. Consolidated retained earnings at October 31, 2001 include undistributed
earnings of the unconsolidated affiliates of $38 million. Dividends from
unconsolidated affiliates were $2 million in 2001, $3 million in 2000 and $6
million in 1999.
The company's consolidated financial statements and some information in the
notes and related commentary are presented in a format which includes data
grouped as follows: Equipment Operations -- These data include the company's
agricultural equipment, commercial and consumer equipment, construction and
forestry, and special technologies operations with Financial Services reflected
on the equity basis. Data relating to the above equipment operations, including
the consolidated group data in the income statement, are also referred to as
"Equipment Operations" in this report.
Financial Services -- These data include the company's credit, health care and
insurance operations. The insurance operations were sold in the fourth quarter
of 1999.
Consolidated -- These data represent the consolidation of the Equipment
Operations and Financial Services. References to "Deere & Company" or "the
company" refer to the entire enterprise.
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.
Sales of equipment and service parts are recorded when title and all risk
of ownership are transferred to the independent dealer based on the agreement in
effect with the dealer. In the United States and most international locations,
this transfer occurs when goods are shipped to the dealer. In Canada and some
other international locations, certain goods are shipped to dealers on a
consignment basis under which title and risk of ownership are not transferred to
the dealer. Accordingly, sales are not recorded until a retail customer has
purchased the goods. In all cases, when a sale is recorded by the company, no
significant uncertainty exists surrounding the purchaser's obligation to pay and
no right of return exists. The company makes appropriate provisions based on
experience for costs such as doubtful receivables, sales incentives and product
warranty.
The functional currencies for most of the company's foreign operations are
their respective local currencies. The assets and liabilities of these
operations are translated into U.S. dollars at the end of the period exchange
rates, and the revenues and expenses are translated at weighted-average rates
for the period. The gains or losses from these translations are included in
other comprehensive income, which is part of stockholders' equity. Gains or
losses from transactions denominated in a currency other than the functional
currency of the subsidiary involved are included in net income.
29
================================================================================
In 2001, the company adopted Financial Accounting Standards Board (FASB)
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities,
as amended by FASB Statement No. 138. Under the new standards, all derivatives
have been recorded at fair value in the financial statements. Changes in fair
values of the derivatives are recognized periodically in other comprehensive
income (equity) for derivatives designated as hedges of future cash flows or in
net income for all other derivatives. The after-tax transition adjustments for
adopting the new standards at November 1, 2000 were an unrealized loss of $4
million recorded in "Unrealized Loss on Derivatives" (other comprehensive
income) and a loss of $.7 million recorded in income. Additional information is
presented in Note 23. In 2001, the company also adopted FASB Statement No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. This standard revises FASB Statement No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
and requires additional disclosure as presented in Note 8. The Statement was
effective for sales of receivables after March 31, 2001. The effects of the
adoption of the new standards on the company's financial position and net income
were not material.
In 2001, the company adopted Emerging Issues Task Force (EITF) Issue No.
00-10, Accounting for Shipping and Handling Fees and Costs. The Task Force
reached a consensus that all shipping and handling amounts billed to a customer
in a sale transaction should be classified as revenue. Prior to adoption, the
company offset the amounts billed to customers for shipping and handling with
the related costs in cost of sales. The change increased sales and cost of sales
by $123 million, or 1 percent, with no effect on the company's financial
position or net income. It was not considered practical to reclassify prior
years since this information is captured by many different computer systems
around the world. The increase in sales and cost of sales by quarter for 2001
are included in Note 26.
In 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires
the purchase method of accounting for all business combinations and eliminates
the pooling of interests method effective June 30, 2001. Statement 142 requires
goodwill related to acquisitions after June 30, 2001 not to be amortized and
written down only for impairments. Upon adoption of this Statement, the same
accounting will apply to goodwill related to acquisitions prior to June 30,
2001. The company must adopt Statement 142 by the first quarter of fiscal 2003.
The company's amortization of goodwill during fiscal year 2001 was $55 million
pretax and $51 million after-tax. In 2001, the FASB also issued Statement No.
143, Accounting for Asset Retirement Obligations, which requires legal
obligations associated with the retirement of long-lived assets to be recorded
as increases in costs of the related assets. In 2001, the FASB issued Statement
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This
Statement retains the previous cash flow test for impairment and broadens the
presentation of discontinued operations. Except for the discontinuance of the
amortization of goodwill, the company does not expect the adoption of these
Statements to have a material effect on the company's financial position or net
income.
In October 2001, the Equipment Operations sold $2.2 billion of trade
receivables to Deere Capital, Inc. (DCI), a wholly-owned Financial Services
subsidiary. In the future, it is expected that a significant portion of newly
originated trade receivables will be sold to DCI on an ongoing basis, and the
Equipment Operations will compensate DCI for the carrying costs. Although this
arrangement is expected to have no effect on consolidated net income, it will
shift net income and operating profit from the Equipment Operations to the
credit operations due to the compensation beginning in 2002. Responsibility for
servicing these receivables was transferred to the credit operations.
In the first quarter of 2001, the company acquired McGinnis Farms, Inc., a
provider of products and services to landscape and irrigation professionals, for
$181 million. The acquisition has been accounted for as a purchase with the
goodwill of $143 million being amortized over 20 years, pending adoption of FASB
Statement No. 142. McGinnis Farms, Inc. is headquartered in Alpharetta, Georgia.
During the first quarter of 2001, the company also acquired The Vapormatic
Company Limited, an agricultural equipment replacement parts distributor
headquartered in Exeter, England, for $18 million and Great Dane Power
Equipment, Inc., a manufacturer of mowing equipment headquartered in
Jeffersonville, Indiana, for $14 million. In the fourth quarter of 2001, the
company acquired Richton International Corporation, a provider of irrigation and
computer related services and products, for $126 million. Under the terms of the
agreement, the shareholders of Richton exchanged their shares for 2.2 million
shares of Deere & Company common stock with a total value of $81 million and for
$45 million of cash. This acquisition has been accounted for as a purchase with
goodwill of $110 million, which will not be amortized in accordance with FASB
Statement No. 142. The results of operations for all acquisitions have been
included in the income statement since the date of acquisition. The pro forma
results of operations as if all these acquisitions had occurred at the beginning
of the fiscal year would not differ significantly from reported results.
Certain amounts for prior years have been reclassified to conform with 2001
financial statement presentations.
2. SPECIAL ITEMS
================================================================================
In the fourth quarter of 2001, the company announced it would take several value
improvement actions aimed at increasing efficiency and reducing costs. Following
is a table of the costs recognized during the quarter and a description of these
actions.
Components of the expenses for special items in 2001 and the remaining
liabilities at October 31, 2001 in millions of dollars were as follows:
--------------------------------------------------------------------------------
Selling,
Cost Administrative
of and General Total
Sales Expenses Expenses Liabilities
--------------------------------------------------------------------------------
Early-retirement
benefits .............. $ 132 $ 57 $ 189 $ 189
Termination benefits ........... 16 10 26 24
Property and equipment
write-downs ........... 37 1 38
Inventory write-downs .......... 33 33
Contract terminations .......... 27 27 27
Warranties and
product returns 16 16 16
Goodwill write-off ............. 5 5
Other costs .................... 5 5 10 7
----- ----- ----- -----
Total .......................... $ 255 $ 89 $ 344 $ 263
===== ===== ===== =====
--------------------------------------------------------------------------------
30
================================================================================
During the fourth quarter of 2001, the company offered voluntary
early-retirement programs primarily to certain United States employees whose age
plus years of service equaled 80 or more by October 31, 2001. Based on
acceptances received, the company recorded an expense of $189 million pretax for
the cost of the special retirement benefits and related curtailment costs. In
1999, the company also recorded an expense of $68 million pretax for voluntary
early-retirement programs primarily in cost of sales.
Also in the fourth quarter of 2001, the company announced plans to exit the
hand-held consumer products business included in the commercial and consumer
equipment segment. Affected by this decision are consumer products operations
and employees primarily in the southeastern United States and Mexico.
The company is selling its hand-held consumer products operations in Chihuahua,
Mexico and other United States facilities related to this business. These
actions are expected to be completed during 2002. As a result, a cost of $15
million for termination benefits related to approximately 700 employees was
accrued. In addition, contract terminations of $27 million, product warranties
and returns of $16 million and other costs of $6 million were accrued. As a
result of these plans, impairment write-downs of $33 million for inventory and
$35 million for property and equipment also were recognized. The hand-held
consumer products operations had revenues of $240 million, $235 million and $317
million during 2001, 2000 and 1999, respectively. During the same periods,
pretax operating losses were $72 million, $70 million and $13 million, excluding
the restructuring costs as discussed above.
In the fourth quarter of 2001, the company also announced plans to reduce
manufacturing and marketing costs in the construction and forestry segment.
These plans included employee separations, the closing of a forestry equipment
factory in Bessemer, Alabama, and an office in Atlanta, Georgia, as well as the
sale of a fabrication operation in Woodstock, Ontario. These actions are
expected to be completed during 2002. As a result, a cost of $11 million for
termination benefits related to approximately 300 employees was accrued. In
addition, a write-off of goodwill of $5 million, impairment write-downs of
property and equipment of $3 million and other costs of $4 million were
recognized.
The liabilities from exiting these operations and related impairment
reserves are expected to be substantially paid or liquidated in 2002. The
voluntary early-retirement liability will be paid from the pension assets over
the remaining lives of the retirees and dependents as pension payments are made.
See Note 3.
3. PENSION AND OTHER POSTRETIREMENT BENEFITS
================================================================================
The company has several defined benefit pension plans covering its United States
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 United States and Canada.
The worldwide components of net periodic pension cost and the significant
assumptions consisted of the following in millions of dollars and in percents:
--------------------------------------------------------------------------------
2001 2000 1999
--------------------------------------------------------------------------------
Pensions
Service cost ................................... $ 113 $ 106 $ 117
Interest cost .................................. 424 414 396
Expected return on assets ...................... (603) (543) (497)
Amortization of actuarial (gain) loss .......... (9) 1 33
Amortization of prior service cost ............. 34 36 44
Amortization of net transition asset ........... (9) (8) (8)
Special early-retirement benefits .............. 135 29
Settlements/curtailments ....................... 7 (2)
----- ----- -----
Net cost ....................................... $ 85 $ 13 $ 112
===== ===== =====
Weighted-average Assumptions
Discount rates for obligations ................. 7.2% 7.4% 7.4%
Discount rates for expenses .................... 7.4% 7.4% 7.0%
Assumed rates of compensation increases ........ 4.8% 4.8% 4.9%
Expected long-term rates of return ............. 9.7% 9.7% 9.7%
--------------------------------------------------------------------------------
The worldwide components of net periodic postretirement benefits cost and the
significant assumptions consisted of the following in millions of dollars and in
percents:
--------------------------------------------------------------------------------
2001 2000 1999
--------------------------------------------------------------------------------
Health Care and Life Insurance
Service cost ................................... $ 69 $ 70 $ 85
Interest cost .................................. 192 189 188
Expected return on assets ...................... (54) (43) (35)
Amortization of actuarial loss ................. 1 23
Amortization of prior service cost ............. 2 (3) (4)
Special early-retirement benefits .............. 1 5
Settlements/curtailments ....................... 53 3
----- ----- -----
Net cost ....................................... $ 263 $ 214 $ 265
===== ===== =====
Weighted-average Assumptions
Discount rates for obligations ................. 7.25% 7.74% 7.75%
Discount rates for expenses .................... 7.74% 7.75% 7.26%
Expected long-term rates of return ............. 9.7% 9.7% 9.7%
--------------------------------------------------------------------------------
In addition to the early-retirement benefits included in the plans shown
above, the company provided $34 million in 1999 of other special
early-retirement benefits. The total special early-retirement benefits were $189
million in 2001, including curtailments, and $68 million in 1999. See Note 2.
The annual rates of increase in the per capita cost of covered health care
benefits (the health care cost trend rates) used to determine 2001, 2000 and
1999 costs were assumed to be 4.5 percent in 2002 and all future years, 4.5
percent for 2001 and all future years, and 6.0 percent for 2000 and 4.5 percent
for 2001 and all future years, respectively. The annual rates of increase in the
per capita cost for the October 31, 2001 health care obligations was 5.0 percent
for 2002 and all future years. An increase of one percentage point in the
assumed health care cost trend rate would increase the accumulated
postretirement benefit obligations
31
===============================================================================
at October 31, 2001 by $309 million and the aggregate of service and interest
cost component of net periodic postretirement benefits cost for that year by
$29 million. A decrease of one percentage point would decrease the obligations
by $279 million and the cost by $25 million.
A worldwide reconciliation of the funded status of the benefit plans at
October 3l in millions of dollars follows:
-------------------------------------------------------------------------------
Health Care
and
Pensions Life Insurance
-------------- --------------
2001 2000 2001 2000
-------------------------------------------------------------------------------
Change in benefit obligations
Beginning of year balance ................. $(5,873) $(5,795) $(2,612) $(2,667)
Service cost .............................. (113) (106) (69) (70)
Interest cost ............................. (424) (414) (192) (189)
Actuarial gain (loss) ..................... (274) (3) (361) 148
Benefits paid ............................. 391 405 173 170
Settlements/curtailments .................. 3 (7) (53)
Special early-retirement benefits ......... (135) (1)
Acquisition of business ................... (25) (6)
Foreign exchange and other ................ (15) 72 1 2
------- ------- ------- -------
End of year balance ....................... (6,440) (5,873) (3,114) (2,612)
------- ------- ------- -------
Change in plan assets (fair value)
Beginning of year balance ................. 7,646 6,472 552 445
Actual return on plan assets .............. (1,318) 1,510 (101) 107
Employer contribution ..................... 21 42 173 170
Benefits paid ............................. (391) (405) (173) (170)
Acquisition of business ................... 33
Foreign exchange and other ................ (7) (6)
------- ------- ------- -------
End of year balance ....................... 5,951 7,646 451 552
------- ------- ------- -------
Plan obligation (more than)
less than plan assets ............ (489) 1,773 (2,663) (2,060)
Unrecognized actuarial (gain) loss ........ 593 (1,609) 598 82
Unrecognized prior service (credit) cost .. 118 151 (8) (6)
Remaining unrecognized
transition asset ................. (1) (10)
------- ------- ------- -------
Net amount recognized
in the balance sheet ............. $ 221 $ 305 $(2,073) $(1,984)
======= ======= ======= =======
Amounts recognized in
balance sheet
Prepaid benefit cost ...................... $ 652 $ 635
Accrued benefit liability ................. (473) (362) $(2,073) $(1,984)
Intangible asset .......................... 20 21
Accumulated pretax charge to
other comprehensive income ....... 22 11
------- ------- ------- -------
Net amount recognized ..................... $ 221 $ 305 $(2,073) $(1,984)
======= ======= ======= =======
--------------------------------------------------------------------------------
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for pension plans with the accumulated benefit
obligations greater than plan assets at October 31, 2001 were $407 million,
$366 million and $29 million, respectively, and at October 31, 2000 were $333
million, $299 million and none, respectively.
4. INCOME TAXES
================================================================================
The provision for income taxes by taxing jurisdiction and by significant
component consisted of the following in millions of dollars:
================================================================================
2001 2000 1999
--------------------------------------------------------------------------------
Current:
United States:
Federal....................... $ 96 $ 264 $ 115
State ........................ 8 26 13
Foreign ............................... 112 142 166
----- ----- -----
Total current ....... 216 432 294
===== ===== =====
Deferred:
United States:
Federal ...................... (171) (118) (143)
State ........................ (17) (14) (13)
Foreign ............................... (10) (6) (3)
===== ===== =====
Total deferred ...... (198) (138) (159)
----- ----- -----
Provision for income taxes ..................... $ 18 $ 294 $ 135
===== ===== =====
--------------------------------------------------------------------------------
Based upon location of the company's operations, the consolidated income
(loss) before income taxes in the United States in 2001, 2000 and 1999 was
$(227) million, $504 million and $21 million, respectively, and in foreign
countries was $202 million, $274 million and $344 million, respectively. Certain
foreign operations are branches of Deere & Company and are, therefore, subject
to United States as well as foreign income tax regulations. The pretax income by
location and the preceding analysis of the income tax provision by taxing
jurisdiction are, therefore, not directly related.
A comparison of the statutory and effective income tax provision and
reasons for related differences in millions of dollars follow:
================================================================================
2001 2000 1999
--------------------------------------------------------------------------------
United States federal income tax provision
(credit) at a statutory rate of 35 percent ..... $ (9) $ 272 $ 128
Increase (decrease) resulting from:
State and local income taxes, net of
federal income tax benefit ............ (6) 8
Taxes on foreign activities .................... 28 13 22
Benefit of Foreign Sales Corporation ........... (6) (8) (11)
Other adjustments - net ........................ 11 9 (4)
----- ----- -----
Provision for income taxes ..................... $ 18 $ 294 $ 135
===== ===== =====
--------------------------------------------------------------------------------
At October 31, 2001, accumulated earnings in certain overseas subsidiaries
totaled $563 million for which no provision for United States income taxes or
foreign withholding taxes has been made, because it is expected that such
earnings will be reinvested overseas indefinitely. Determination of the amount
of unrecognized deferred tax liability on these unremitted earnings is not
practical.
32
--------------------------------------------------------------------------------
Deferred income taxes arise because there are certain items that are treated
differently for financial accounting than for income tax reporting purposes. An
analysis of the deferred income tax assets and liabilities at October 31 in
millions of dollars follows:
--------------------------------------------------------------------------------
2001 2000
-------------------- --------------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liabilities Assets Liabilities
--------------------------------------------------------------------------------------------------------
Tax over book depreciation ............................. $ 170 $ 158
Deferred lease income .................................. 145 101
Deferred installment sales income ...................... 106 211
Accrual for retirement and postemployment benefits ..... $ 692 $ 631
Accrual for sales allowances ........................... 285 283
Allowance for doubtful receivables ..................... 63 55
Special items accruals and reserves (Note 2) ........... 57
Accrual for vacation pay ............................... 51 51
Tax loss and tax credit carryforwards .................. 47 45
Unrealized loss on derivatives ......................... 39
Minimum pension liability adjustment ................... 8 5
Other items ............................................ 104 55 114 44
Less valuation allowance ............................... (4)
------- -------- -------- -------
Deferred income tax assets and liabilities ............. $ 1,346 $ 476 $ 1,180 $ 514
======= ======== ======== =======
--------------------------------------------------------------------------------
Deere & Company files a consolidated federal income tax return in the
United States, which includes the wholly-owned Financial Services subsidiaries.
These subsidiaries account for income taxes generally as if they filed separate
income tax returns.
At October 31, 2001, certain tax loss and tax credit carryforwards for $47
million were available with $21 million expiring from 2006 through 2020 and $26
million with an unlimited expiration date.
5. OTHER INCOME AND OTHER OPERATING EXPENSES
================================================================================
The major components of other income and other operating expenses consisted of
the following in millions of dollars:
--------------------------------------------------------------------------------
2001 2000 1999
--------------------------------------------------------------------------------
Other income
Gains from sales of retail notes* .................... $ 32 $ 24 $ 45
Securitization and servicing fee income .............. 30 31 38
Revenues from services ............................... 52 40 25
Other ................................................ 59 60 60
---- ---- ----
Total .............................................. $173 $155 $168
==== ==== ====
Other operating expenses
Depreciation on equipment on operating leases ........ $317 $280 $205
Cost of services ..................................... 40 36 23
Other ................................................ 36 3 8
---- ---- ----
Total .............................................. $393 $319 $236
==== ==== ====
* Includes securitizations and other sales of retail notes.
--------------------------------------------------------------------------------
6. MARKETABLE SECURITIES
================================================================================
Marketable securities are currently held by the health care subsidiaries. All
marketable securities are classified as available-for-sale under FASB Statement
No. 115, with unrealized gains and losses shown as a component of stockholders'
equity. Realized gains or losses from the sales of marketable securities are
based on the specific identification method.
The amortized cost and fair value of marketable securities in millions of
dollars follow:
--------------------------------------------------------------------------------
Amortized Gross Gross
Cost Unrealized Unrealized Fair
or Cost Gains Losses Value
--------------------------------------------------------------------------------
October 31, 2001
Equity securities .................... $ 12 $ 1 $ 1 $ 12
U.S. government and agencies ......... 26 1 27
Corporate ............................ 81 4 85
Mortgage-backed securities ........... 50 2 52
---- ---- ---- ----
Marketable securities ................ $169 $ 8 $ 1 $176
==== ==== ==== ====
October 31, 2000
Equity securities .................... $ 8 $ 1 $ 9
U.S. government and agencies ......... 23 23
Corporate ............................ 62 1 $ 1 62
Mortgage-backed securities ........... 33 33
---- ---- ---- ----
Marketable securities ................ $126 $ 2 $ 1 $127
==== ==== ==== ====
--------------------------------------------------------------------------------
The contractual maturities of debt securities at October 31, 2001 in
millions of dollars follow:
--------------------------------------------------------------------------------
Amortized Fair
Cost Value
--------------------------------------------------------------------------------
Due in one year or less ..................................... $ 16 $ 16
Due after one through five years ............................ 71 74
Due after five through 10 years ............................. 56 59
Due after 10 years .......................................... 14 15
---- ----
Debt securities ............................................. $157 $164
==== ====
--------------------------------------------------------------------------------
Actual maturities may differ from contractual maturities because some
securities may be called or prepaid. Proceeds from the sales of
available-for-sale securities were $7 million in 2001, $205 million in 2000 and
$19 million in 1999. In 2001 and 1999, realized gains and losses were not
significant. In 2000, realized gains were $20 million and realized losses were
$13 million. Proceeds in 2000 include the sale of securities that were
previously transferred to Deere & Company from John Deere Insurance Group, Inc.
prior to the sale of this subsidiary in 1999. The increase (decrease) in the net
unrealized holding gain after income taxes was $4 million, $(5) million and
$(19) million during 2001, 2000 and 1999, respectively.
7. TRADE ACCOUNTS AND NOTES RECEIVABLE
================================================================================
Trade accounts and notes receivable at October 31 consisted of the following in
millions of dollars:
--------------------------------------------------------------------------------
2001 2000
--------------------------------------------------------------------------------
Trade accounts and notes:
Agricultural .............................................. $1,767 $1,819
Commercial and consumer ................................... 957 1,120
Construction and forestry ................................. 187 215
Other ..................................................... 12 15
------ ------
Trade accounts and notes receivable-net ..................... $2,923 $3,169
====== ======
--------------------------------------------------------------------------------
In October 2001, the Equipment Operations sold $2.2 billion of United
States trade receivables to the credit operations. See Note 1.
At October 31, 2001 and 2000, dealer notes included in the previous table
were $583 million and $622 million, and the allowance for doubtful trade
receivables was $51 million and $34 million, respectively.
33
--------------------------------------------------------------------------------
Trade accounts and notes receivable arise from sales of goods to dealers.
Under the terms of the sales to dealers, interest is charged to dealers on
outstanding balances, from the earlier of the date when goods are sold to retail
customers by the dealer or the expiration of certain interest-free periods
granted at the time of the sale to the dealer, until payment is received by the
company. Dealers cannot cancel purchases after goods are shipped and are
responsible for payment even if the equipment is not sold to retail customers.
The interest-free periods are determined based on the type of equipment sold and
the time of year of the sale. These periods range from one to 12 months for
agricultural tractors, from one to eight months for most construction equipment,
and from two to 24 months for most other equipment. Interest-free periods may
not be extended. Interest charged may not be forgiven and interest rates, which
exceed the prime rate, are set based on market factors. The company evaluates
and assesses dealers on an ongoing basis as to their credit worthiness and
generally retains a security interest in the goods associated with these trade
receivables. The company is obligated to repurchase goods sold to a dealer upon
cancellation or termination of the dealer's contract for such causes as change
in ownership, closeout of the business or default. The company may also in
certain circumstances repurchase goods sold to a dealer in order to satisfy a
request for goods from another dealer.
Trade accounts and notes receivable have significant concentrations of
credit risk in the agricultural, commercial and consumer, and construction and
forestry sectors as shown in the previous table. On a geographic basis, there is
not a disproportionate concentration of credit risk in any area.
8. FINANCING RECEIVABLES
================================================================================
Financing receivables at October 31 consisted of the following in millions of
dollars:
--------------------------------------------------------------------------------
2001 2000
--------------------------------------------------------------------------------
Retail notes:
Equipment:
Agricultural ........................................... $ 4,711 $ 4,342
Commercial and consumer ................................ 786 611
Construction and forestry .............................. 1,686 1,419
Recreational products .................................... 245 327
------- -------
Total .................................................. 7,428 6,699
Wholesale notes ............................................ 927 1,068
Revolving charge accounts .................................. 845 710
Financing leases ........................................... 774 728
Operating loans ............................................ 502 423
------- -------
Total financing receivables .............................. 10,476 9,628
------- -------
Less:
Unearned finance income:
Equipment notes ........................................ 950 1,020
Recreational product notes ............................. 81 110
Financing leases ....................................... 120 116
------- -------
Total ................................................ 1,151 1,246
------- -------
Allowance for doubtful receivables ....................... 126 106
------- -------
Financing receivables - net ................................ $ 9,199 $ 8,276
======= =======
--------------------------------------------------------------------------------
Financing receivables have significant concentrations of credit risk in the
agricultural, commercial and consumer, construction and forestry and
recreational product business sectors as shown in the previous table. In 2001,
the credit operations discontinued the financing of new recreational products
retail notes. On a geographic basis, there is not a disproportionate
concentration of credit risk in any area. The company retains as collateral a
security interest in the equipment associated with retail notes, wholesale notes
and financing leases.
Financing receivable installments, including unearned finance income, at
October 31 are scheduled as follows in millions of dollars:
--------------------------------------------------------------------------------
2001 2000
--------------------------------------------------------------------------------
Due in months:
0 - 12 ................................................ $ 4,474 $ 4,013
13 - 24 ................................................ 2,531 2,193
25 - 36 ................................................ 1,615 1,466
37 - 48 ................................................ 1,053 1,016
49 - 60 ................................................ 567 648
Thereafter ............................................. 236 292
------- -------
Total ...................................................... $10,476 $ 9,628
======= =======
--------------------------------------------------------------------------------
The maximum terms for retail notes are generally eight years for
agricultural equipment, six years for commercial and consumer equipment, five
years for construction and forestry equipment, and 15 years for recreational
products. The maximum term for financing leases is generally five years, while
the maximum term for wholesale notes is generally 12 months.
At October 31, 2001 and 2000, the unpaid balances of retail notes
previously sold by the credit operations were $1,647 million and $2,123 million,
respectively. The retail notes sold are collateralized by security interests in
the related equipment sold to customers. At October 31, 2001 and 2000, worldwide
financing receivables administered, which include financing receivables
previously sold but still administered, totaled $10,846 million and $10,399
million, respectively.
Total financing receivable amounts 60 days or more past due were $61
million at October 31, 2001, compared with $44 million at October 31, 2000.
These past-due amounts represented .66 percent of the receivables financed at
October 31, 2001 and .53 percent at October 31, 2000. The allowance for doubtful
financing receivables represented 1.35 percent and 1.26 percent of financing
receivables outstanding at October 31, 2001 and 2000, respectively. In addition,
at October 31, 2001 and 2000, the company's credit operations had $148 million
and $147 million, respectively, of deposits withheld from dealers and merchants
available for potential credit losses. An analysis of the allowance for doubtful
financing receivables follows in millions of dollars:
--------------------------------------------------------------------------------
2001 2000 1999
--------------------------------------------------------------------------------
Balance, beginning of the year ........................ $ 106 $ 93 $ 90
Provision charged to operations ....................... 103 64 68
Amounts written off ................................... (73) (44) (44)
Transfers primarily related to retail note sales ...... (10) (7) (21)
----- ----- -----
Balance, end of the year............................... $ 126 $ 106 $ 93
===== ===== =====
--------------------------------------------------------------------------------
The company periodically sells receivables in securitizations of retail
notes. It retains interest-only strips, servicing rights, and in some cases cash
reserve accounts, all of which are retained interests in the securitized
receivables. Gains or losses on sales of the receivables depend in part on the
previous carrying amount of the financial assets involved in the transfer,
allocated between the assets sold and the retained interests based on their
relative fair values
34
-------------------------------------------------------------------------------
at the date of transfer. The company generally estimates fair values based on
the present value of future expected cash flows using management's key
assumptions as discussed below. The company receives annual servicing fees
approximating 1 percent of the outstanding balance, and rights to future cash
flows. The company's maximum exposure under recourse provisions related to
securitizations at October 31, 2001 and 2000 was $176 million and $174 million,
respectively. Except for this exposure, the investors and securitization trusts
have no recourse to the company for failure of debtors to pay when due. The
company's retained interests, which are included in the recourse provisions, are
subordinate to investor's interests and their values are subject to certain key
assumptions as shown below.
The company recognized a pretax gain of $12 million on retail notes
securitized during 2001. Key assumptions used to initially determine the fair
value of the retained interests included a weighted average maturity of 20
months, average annual prepayment rate of 20 percent, expected annual credit
losses of .30 percent, and a discount rate on retained interests and subordinate
tranches of 13 percent.
Cash flows received from and paid to securitization trusts in millions of
dollars were as follows:
------------------------------------------------------------------------------
2001
------------------------------------------------------------------------------
Proceeds from new securitizations ............................. $995
Servicing fees received ....................................... 19
Other cash flows received ..................................... 53
------------------------------------------------------------------------------
The total retained interests, weighted-average life, weighted-average
current key economic assumptions and the sensitivity analysis showing the
hypothetical effects on the retained interests from immediate 10 percent and 20
percent adverse changes in those assumptions with dollars in millions were as
follows:
------------------------------------------------------------------------------
2001
------------------------------------------------------------------------------
Retail Note Securitizations
Carrying amount/fair value of retained interests ...................... $ 92
Weighted-average life (in months) ..................................... 13
Prepayment speed assumption (annual rate) ............................. 19%
Impact on fair value of 10% adverse change ................... $ .3
Impact on fair value of 20% adverse change ................... $ .6
Expected credit losses (annual rate) .................................. .39%
Impact on fair value of 10% adverse change ................... $ .6
Impact on fair value of 20% adverse change ................... $1.2
Residual cash flows discount rate (annual) ............................ 13%
Impact on fair value of 10% adverse change ................... $2.2
Impact on fair value of 20% adverse change ................... $4.2
-----------------------------------------------------------------------------
These sensitivities are hypothetical changes in fair value and cannot be
extrapolated because the relationship of the changes in assumption to the
changes in fair value may not be linear. Also, the effect of a variation in a
particular assumption is calculated without changing any other assumption,
whereas, changes in one factor may result in changes in another. Accordingly, no
assurance can be given that actual results would be consistent with the results
of these estimates.
Principal balances of managed and securitized retail notes, past due
amounts and credit losses, net of recoveries, as of and for the year ended
October 31, 2001 in millions of dollars follow:
-------------------------------------------------------------------------------
Principal Principal 60 Days or Net Credit
Outstanding More Past Due Losses
-------------------------------------------------------------------------------
Owned ...................... $6,122 $ 23 $ 32
Securitized ................ 1,494 13 10
------ ------ ------
Managed .................... $7,616 $ 36 $ 42
====== ====== ======
-------------------------------------------------------------------------------
The amount of actual and projected future credit losses (expected static
pool losses) for securitizations during 2001 was .61 percent of the amount of
retail notes sold. In November 2001, the company securitized and sold
approximately $930 million of retail notes, which were included in financing
receivables at year end. The company recognized a pretax gain on the sale of $23
million.
9. OTHER RECEIVABLES
-------------------------------------------------------------------------------
Other receivables at October 31 consisted of the following in millions of
dollars:
------------------------------------------------------------------------------
2001 2000
------------------------------------------------------------------------------
Taxes receivable ..................................... $206 $206
Receivables relating to securitizations .............. 81 89
Health care premiums receivable ...................... 13 22
Other ................................................ 89 78
---- ----
Other receivables .................................... $389 $395
==== ====
-------------------------------------------------------------------------------
The credit operations' receivables related to securitizations are equal to
the present value of payments to be received for certain retained interests and
deposits made with other entities for recourse provisions under the retail note
sales agreements.
10. EQUIPMENT ON OPERATING LEASES
-------------------------------------------------------------------------------
Operating leases arise primarily from the leasing of John Deere equipment to
retail customers. Initial lease terms generally range from 36 to 60 months. Net
equipment on operating leases totaled $1,939 million and $1,954 million at
October 31, 2001 and 2000, respectively. The equipment is depreciated on a
straight-line basis over the terms of the leases. The accumulated depreciation
on this equipment was $577 million and $480 million at October 31, 2001 and
2000, respectively. The corresponding depreciation expense was $318 million in
2001, $280 million in 2000 and $205 million in 1999.
Future payments to be received on operating leases totaled $741 million at
October 31, 2001 and are scheduled as follows in millions of dollars: 2002 -
$324, 2003 - $225, 2004 - $115, 2005 - $54 and 2006 - $23.
11. INVENTORIES
-------------------------------------------------------------------------------
Most inventories owned by Deere & Company and its United States equipment
subsidiaries are valued at cost, on the "last-in, first-out" (LIFO) basis.
Remaining inventories are generally valued at the lower of cost, on the
"first-in, first-out" (FIFO) basis, or market. The value of gross inventories on
the LIFO basis represented 70 percent and 74 percent of worldwide gross
inventories at FIFO value on October 31, 2001 and 2000, respectively. If all
inventories had been valued on a FIFO basis,
35
-------------------------------------------------------------------------------
estimated inventories by major classification at October 31 in millions of
dollars would have been as follows:
-------------------------------------------------------------------------------
2001 2000
-------------------------------------------------------------------------------
Raw materials and supplies ..................... $ 516 $ 460
Work-in-process ................................ 376 404
Finished machines and parts .................... 1,618 1,667
------ ------
Total FIFO value ...................... 2,510 2,531
Adjustment to LIFO value ....................... 1,004 978
------ ------
Inventories .................................... $1,506 $1,553
====== ======
12. PROPERTY AND DEPRECIATION
-------------------------------------------------------------------------------
A summary of property and equipment at October 31 in millions of dollars
follows:
-------------------------------------------------------------------------------
2001 2000
-------------------------------------------------------------------------------
Land ............................................. $ 59 $ 58
Buildings and building equipment ................. 1,238 1,166
Machinery and equipment .......................... 2,458 2,315
Dies, patterns, tools, etc ....................... 765 678
All other ........................................ 686 658
Construction in progress ......................... 182 180
------ ------
Total at cost ........................... 5,388 5,055
Less accumulated depreciation .................... 3,336 3,143
------ ------
Property and equipment - net ..................... $2,052 $1,912
====== ======
-------------------------------------------------------------------------------
Leased property under capital leases amounting to $15 million and $11
million at October 31, 2001 and 2000, respectively, is included in property and
equipment.
Property and equipment additions in 2001, 2000 and 1999 were $500 million,
$422 million and $309 million and depreciation was $308 million, $292 million
and $281 million, respectively. Property and equipment expenditures for new and
revised products, increased capacity and the replacement or major renewal of
significant items of property and equipment are capitalized. Expenditures for
maintenance, repairs and minor renewals are generally charged to expense as
incurred. Most of the company's property and equipment is depreciated using the
straight-line method for financial accounting purposes. Depreciation for United
States federal income tax purposes is computed using accelerated depreciation
methods.
The amount of total capitalized software costs, including purchased and
internally developed software, classified as "Other Assets" at October 31, 2001
and 2000 was $218 million and $174 million, less accumulated amortization of
$138 million and $113 million, respectively. Amortization of these software
costs was $31 million and $29 million in 2001 and 2000, respectively.
The cost of compliance with foreseeable environmental requirements has been
accrued and did not have a material effect on the company's financial position
or results of operations.
13. INTANGIBLE ASSETS
-------------------------------------------------------------------------------
Net intangible assets totaled $874 million and $652 million at October 31, 2001
and 2000, respectively. The balance at October 31, 2001 consisted of unamortized
goodwill of $846 million, an intangible asset of $20 million related to the
additional minimum pension liability required by FASB Statement No. 87 and other
intangible assets of $8 million. At October 31, 2000, the corresponding amounts
were $620 million, $21 million and $11 million, respectively.
Intangible assets, excluding the intangible pension asset, are being
amortized over 30 years or less on the straight-line basis, and the accumulated
amortization was $183 million and $125 million at October 31, 2001 and 2000,
respectively. The intangible pension asset is remeasured and adjusted annually.
The unamortized goodwill is reviewed periodically for potential impairment.
14. SHORT-TERM BORROWINGS
-------------------------------------------------------------------------------
Short-term borrowings at October 31 consisted of the following in millions of
dollars:
-------------------------------------------------------------------------------
2001 2000
-------------------------------------------------------------------------------
Equipment Operations
Commercial paper ..................................... $ 557 $ 712
Notes payable to banks ............................... 143 143
Long-term borrowings due within one year ............. 73 73
------ ------
Total ....................................... 773 928
------ ------
Financial Services
Commercial paper ..................................... 2,672 3,016
Notes payable to banks ............................... 24 7
Long-term borrowings due within one year ............. 2,729 1,808
------ ------
Total ....................................... 5,425 4,831
------ ------
Short-term borrowings ................................ $6,198 $5,759
====== ======
-------------------------------------------------------------------------------
The weighted-average interest rates on total short-term borrowings,
excluding current maturities of long-term borrowings, at October 31, 2001 and
2000 were 3.3 percent and 6.2 percent, respectively. All of the Financial
Services' short-term borrowings represent obligations of the credit
subsidiaries.
Unsecured lines of credit available from United States and foreign banks
were $4,718 million at October 31, 2001. Some of these credit lines are
available to both Deere & Company and John Deere Capital Corporation. At October
31, 2001, $1,314 million of these worldwide lines of credit were unused. For the
purpose of computing the unused credit lines, commercial paper and short-term
bank borrowings, excluding the current maturities of long-term borrowings, were
considered to constitute utilization.
Included in the above lines of credit is a long-term committed credit
agreement expiring in February 2006 for $2,113 million. The agreement is
mutually extendable and the annual facility fee is not significant. The credit
agreement has various requirements of John Deere Capital Corporation, including
the maintenance of its consolidated ratio of earnings to fixed charges at not
less than 1.05 to 1 for each fiscal quarter and the ratio of senior debt to
total stockholder's equity plus subordinated debt at not more than 8 to 1 at the
end of any fiscal quarter. The credit agreement also contains a provision
requiring Deere & Company to maintain consolidated tangible net worth of $500
million according to accounting principles generally accepted in the United
States of America in effect at October 31, 1998. Under this provision, $2,618
million of the company's retained earnings balance was free of restriction at
October 31, 2001.
Deere & Company has a contractual agreement to conduct business with John
Deere Capital Corporation on such terms that the Capital Corporation will
continue to satisfy the ratio requirement discussed above for earnings to fixed
charges, Capital Corporation's tangible net worth will be maintained at not less
than $50 million and Deere & Company will continue to own at
36
--------------------------------------------------------------------------------
least 51 percent of Capital Corporation's voting capital stock. These
arrangements are not intended to make Deere & Company responsible for the
payment of obligations of this credit subsidiary.
15. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
--------------------------------------------------------------------------------
Accounts payable and accrued expenses at October 31 consisted of the following
in millions of dollars:
--------------------------------------------------------------------------------
2001 2000
--------------------------------------------------------------------------------
Equipment Operations
Accounts payable:
Trade payables ....................................... $ 955 $ 1,061
Dividends payable .................................... 52 52
Other ................................................ 53 46
Accrued expenses:
Employee benefits .................................... 241 306
Dealer commissions ................................... 221 202
Special items (Note 2) ............................... 74
Other ................................................ 1,080* 694
------- --------
Total ............................................. 2,676 2,361
------- --------
Financial Services
Accounts payable:
Deposits withheld from dealers and merchants ......... 148 147
Other ................................................ 357 234
Accrued expenses:
Interest payable ..................................... 49 61
Other ................................................ 221 173
------- --------
Total ............................................. 775 615
------- --------
Eliminations ........................................... 354*
------- --------
Accounts payable and accrued expenses .................. $ 3,097 $ 2,976
======= ========
* Includes trade receivable valuation accounts of $354 million reclassified as
accrued expenses by the Equipment Operations as a result of trade receivables
sold to Financial Services. See Note 1.
--------------------------------------------------------------------------------
16. LONG-TERM BORROWINGS
--------------------------------------------------------------------------------
Long-term borrowings at October 31 consisted of the following in millions of
dollars:
--------------------------------------------------------------------------------
2001 2000
--------------------------------------------------------------------------------
Equipment Operations
Notes and debentures:
Medium-term notes due 2005 - 2006:
Average interest rate of 9.6% as of year end
2001 and 7.5% as of year end 2000 ................. $ 45 $ 115
6.55% notes due 2004 ................................. 250 250
5-7/8% U.S. dollar notes due 2006: ($250 principal)
$170 swapped to Euro and Swedish Krona and
an average variable interest rate of 4.2% as of
year end 2001 ..................................... 256*
7.85% debentures due 2010 ............................ 500 500
8.95% debentures due 2019 ............................ 200 200
8-1/2% debentures due 2022 ........................... 200 200
6.55% debentures due 2028 ............................ 200 200
8.10% debentures due 2030 ............................ 250 250
7.125% notes due 2031 ................................ 300
Other notes .......................................... 9 2
------- --------
Total ............................................. $ 2,210 $ 1,717
------- --------
--------------------------------------------------------------------------------
(continued)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
2001 2000
--------------------------------------------------------------------------------
Financial Services
Notes and debentures:
Medium-term notes due 2003 - 2007:
($2,778 principal) Average interest rate
of 4.6% as of year end 2001 and 7.4%
as of year end 2000 ............................... $ 2,796* $ 1,992
7% notes due 2002:
Swapped to variable interest rate of 7.1%
as of year end 2000 ............................... 300
Floating rate notes due 2003:
Interest rate of 2.7% as of year end 2001 ......... 200
6.125% U.S. dollar notes due 2003: ($150 principal)
Swapped to Canadian dollars and a variable
interest rate of 4.2% as of year end 2001 and
6.1% as of year end 2000 .......................... 157* 142
5.125% debentures due in 2006
($600 principal) Swapped to variable interest rate
of 3.0% as of year end 2001 ....................... 601*
6% notes due 2009: ($300 principal) Swapped to
variable interest rate of 3.8% as of year end 2001
and 6.9% as of year end 2000 ...................... 316* 300
Other notes .......................................... 131 163
------- --------
Total notes and debentures ........................ 4,201 2,897
Subordinated debt:
8-5/8% subordinated debentures due 2019 .............. 150 150
------- --------
Total ............................................. 4,351 3,047
------- --------
Long-term borrowings ................................... $ 6,561 $ 4,764
======= ========
* These carrying values include fair value adjustments related to interest rate
swaps designated as fair value hedges under FASB Statement No. 133 adopted in
2001. See Notes 1 and 23.
--------------------------------------------------------------------------------
All of the Financial Services' long-term borrowings represent obligations
of the credit subsidiaries.
The approximate amounts of the Equipment Operations' long-term borrowings
maturing and sinking fund payments required in each of the next five years in
millions of dollars are as follows: 2002 - $73, 2003 - $7, 2004 - $251, 2005 -
$26 and 2006 - $270. The approximate amounts of the credit subsidiaries'
long-term borrowings maturing and sinking fund payments required in each of the
next five years in millions of dollars are as follows: 2002 - $2,729, 2003 -
$2,019, 2004 - $879, 2005 - $20 and 2006 - $838.
17. LEASES
--------------------------------------------------------------------------------
At October 31, 2001, future minimum lease payments under capital leases totaled
$14 million. Total rental expense for operating leases was $90 million in 2001
and $73 million in 2000 and 1999. At October 31, 2001, future minimum lease
payments under operating leases amounted to $261 million as follows: 2002 - $55,
2003 - $38, 2004 - $66, 2005 - $28, 2006 - $20 and later years $54.
18. COMMITMENTS AND CONTINGENT LIABILITIES
--------------------------------------------------------------------------------
On October 31, 2001, the company's maximum exposure under all credit receivable
recourse provisions was $176 million for retail notes sold by the Financial
Services subsidiaries. Also, at October 31, 2001, the company had commitments of
approximately $162 million for construction and acquisition of property and
equipment.
37
--------------------------------------------------------------------------------
John Deere B.V., located in the Netherlands, is an indirect wholly-owned
finance subsidiary of the company. The securities of John Deere B.V. that are
registered with the United States Securities and Exchange Commission are fully
and unconditionally guaranteed by the company.
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.
19. CAPITAL STOCK
--------------------------------------------------------------------------------
Changes in the common stock account in 1999, 2000 and 2001 in millions were as
follows:
--------------------------------------------------------------------------------
Number of
Shares Issued Amount
--------------------------------------------------------------------------------
Balance at October 31, 1998 ............................ 263.9 $1,790
Acquisition of a business .............................. 1.5 49
Other .................................................. .4 11
------- -------
Balance at October 31, 1999 ............................ 265.8 1,850
Acquisition of a business .............................. .2 10
Other .................................................. 4
------- -------
Balance at October 31, 2000 ............................ 266.0 1,864
Acquisition of business ................................ 2.2 81
Other .................................................. 4
------- -------
Balance at October 31, 2001 ............................ 268.2 $1,949
======= =======
--------------------------------------------------------------------------------
The number of common shares the company is authorized to issue is 600
million and the number of authorized preferred shares, none of which has been
issued, is 9 million.
A reconciliation of basic and diluted net income per share follows in
millions, except per share amounts:
--------------------------------------------------------------------------------
2001 2000 1999
--------------------------------------------------------------------------------
Net income (loss) ................................ $ (64.0) $ 485.5 $ 239.2
Average shares outstanding ....................... 235.0 234.3 232.9
Basic net income (loss) per share ................ $ (.27) $ 2.07 $ 1.03
======= ======= =========
Average shares outstanding ....................... 235.0 234.3 232.9
Effect of dilutive stock options ................. 1.8 1.7 1.5
------- ------- -------
Total potential shares outstanding ...... 236.8 236.0 234.4
======= ======= =======
Diluted net income (loss) per share .............. $ (.27) $ 2.06 $ 1.02
======= ======= =======
--------------------------------------------------------------------------------
Stock options to purchase 3.0 million shares, 2.9 million shares and 4.2
million shares during 2001, 2000 and 1999, respectively, were outstanding, but
not included in the preceding diluted per share computation because the options'
exercise prices were greater than the average market price of the company's
common stock during the related periods.
20. STOCK OPTION AND RESTRICTED STOCK AWARDS
--------------------------------------------------------------------------------
The company issues stock options and restricted stock to key employees under
plans approved by stockholders. Restricted stock is also issued to nonemployee
directors under a plan approved by stockholders. Options are generally awarded
with the exercise price equal to the market price and become exercisable in one
to three years after grant. Certain other options have been awarded with the
exercise prices greater than the market price and become exercisable in one year
or longer after grant, depending on the achievement of company performance
goals. Options generally expire 10 years after the date of grant. According to
these plans at October 31, 2001, the company is authorized to grant an
additional 10.0 million shares related to stock options or restricted stock.
The company has retained the intrinsic value method of accounting for its
plans in accordance with APB Opinion No. 25, and no compensation expense for
stock options was recognized under this method. For disclosure purposes only
under FASB Statement No. 123, Accounting for Stock Based Compensation, the
Black-Scholes option pricing model was used to calculate the "fair values" of
stock options on the date the options were awarded. Based on this model, the
weighted-average fair values of stock options awarded during 2001, 2000 and 1999
with the exercise price equal to the market price were $12.06, $12.06 and $7.96
per option, respectively. Those awarded during 1999 with the exercise price
greater than the market price had a fair value of $4.26 per option.
Pro forma net income and earnings per share, as if the fair value method in
FASB Statement No. 123 had been used to account for stock-based compensation,
and the assumptions used are as follow:
--------------------------------------------------------------------------------
2001 2000 1999
--------------------------------------------------------------------------------
Net income (loss) (in millions)
As reported ................. $ (64) $ 486 $ 239
Pro forma ................... $ (96) $ 446 $ 216
Net income (loss) per share
As reported - basic ......... $ (.27) $ 2.07 $ 1.03
Pro forma - basic ........... $ (.41) $ 1.91 $ .93
As reported - diluted ....... $ (.27) $ 2.06 $ 1.02
Pro forma - diluted ......... $ (.41) $ 1.89 $ .92
Black-Scholes assumptions*
Risk-free interest rate ..... 5.4% 6.2% 4.6%
Dividend yield .............. 2.1% 2.1% 2.7%
Stock volatility ............ 33.2% 30.4% 27.9%
Expected option life ........ 4.1 years 4.5 years 5.0 years
*Weighted-averages
--------------------------------------------------------------------------------
During the last three fiscal years, shares under option in millions were as
follows:
--------------------------------------------------------------------------------
2001 2000 1999
---------------- ------------------- --------------
Exercise Exercise Exercise
Shares Price* Shares Price* Shares Price*
--------------------------------------------------------------------------------
Outstanding at
beginning of year ..... 16.7 $ 39.77 11.9 $ 38.59 7.6 $ 39.95
Granted - at market ..... 4.5 41.98 5.5 41.29 3.9 32.75
Granted - at premium .... .7 50.97
Exercised ............... (.6) 28.94 (.6) 28.75 (.2) 21.35
Expired or forfeited .... (.1) 42.80 (.1) 42.50 (.1) 40.62
------ ------ ------
Outstanding at
end of year ........... 20.5 40.56 16.7 39.77 11.9 38.59
Exercisable at
end of year ........... 14.8 38.28 10.1 36.14 6.8 37.36
*Weighted-averages
--------------------------------------------------------------------------------
38
--------------------------------------------------------------------------------
Options outstanding and exercisable in millions at October 31, 2001 were as
follows:
--------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------- --------------------
Remaining
Range of Contractual Exercise Exercise
Exercise Prices Shares Life (yrs)* Price* Shares Price*
------------------ ---------------------------------------------------------
$13.63 - $23.56 ...... 1.2 2.42 $20.16 1.2 $20.16
$28.39 - $34.19 ...... 5.2 5.80 32.55 5.2 32.55
$35.00 - $41.47 ...... 5.6 8.08 41.16 5.5 41.21
$42.07 - $47.36 ...... 5.6 8.16 42.27 1.3 42.92
$50.97 - $56.50 ...... 2.4 6.39 54.78 1.6 56.50
$82.19 ............... .5 6.08 82.19
---- ----
Total ............... 20.5 14.8
*Weighted-averages
--------------------------------------------------------------------------------
In 2001, 2000, and 1999, the company granted 44,001, 53,956 and 703,914
shares of restricted stock with weighted- average fair values of $41.96, $37.55
and $32.85 per share, respectively. The total compensation expense for the
restricted stock plans, which are being amortized over the restricted periods,
was none, $9 million and $10 million in 2001, 2000 and 1999, respectively. The
amortization in 2001 was offset by decreases in estimates of restricted stock to
be issued.
21. EMPLOYEE STOCK PURCHASE AND SAVINGS PLANS
--------------------------------------------------------------------------------
The company maintains the following significant plans for eligible United States
employees:
John Deere Savings and Investment Plan, for salaried employees
John Deere Stock Purchase Plan, for salaried employees
John Deere Tax Deferred Savings Plan, for wage employees
Company contributions under these plans were $34 million in 2001, $27
million in 2000 and $51 million in 1999.
22. OTHER COMPREHENSIVE INCOME ITEMS
--------------------------------------------------------------------------------
Other comprehensive income items under FASB Statement No. 130 are transactions
recorded in stockholders' equity during the year, excluding net income and
transactions with stockholders. Following are the items included in other
comprehensive income (loss) and the related tax effects in millions of dollars:
--------------------------------------------------------------------------------
Before Tax After
Tax (Expense) Tax
Amount Credit Amount
--------------------------------------------------------------------------------
1999
Cumulative translation adjustment .............. $(24) $ (3) $(27)
---- ---- ----
Unrealized loss on marketable securities:
Holding loss .......................... (28) 10 (18)
Reclassification of realized gain
to net income ................ (1) (1)
---- ---- ----
Net unrealized loss ................... (29) 10 (19)
---- ---- ----
Total other comprehensive loss ................. $(53) $ 7 $(46)
==== ==== ====
--------------------------------------------------------------------------------
(continued)
--------------------------------------------------------------------------------
Before Tax After
Tax (Expense) Tax
Amount Credit Amount
2000
--------------------------------------------------------------------------------
Minimum pension liability adjustment ........... $ 16 $ (5) $ 11
----- ---- -----
Cumulative translation adjustment .............. (108) (7) (115)
----- ---- -----
Unrealized loss on marketable securities:
Holding loss .......................... (1) (1)
Reclassification of realized gain
to net income ................ (7) 3 (4)
----- ---- -----
Net unrealized loss ................... (8) 3 (5)
----- ---- -----
Total other comprehensive loss ................. $(100) $ (9) $(109)
===== ==== =====
----------------------------------------------------------- -------------------
2001
Minimum pension liability adjustment ........... $ (11) $ 3 $ (8)
----- ---- -----
Cumulative translation adjustment .............. (63) (63)
----- ---- -----
Unrealized holding gain and net gain on
marketable securities ................. 6 (2) 4
----- ---- -----
Unrealized loss on derivatives:
Hedging loss .......................... (155) 55 (100)
Reclassification of realized
loss to net income ........... 43 (15) 28
----- ---- -----
Net unrealized loss ................... (112) 40 (72)
----- ---- -----
Total other comprehensive loss ................. $(180) $ 41 $(139)
===== ==== =====
--------------------------------------------------------------------------------
23. FINANCIAL INSTRUMENTS
--------------------------------------------------------------------------------
The fair values of financial instruments which do not approximate the carrying
values in the financial statements at October 31 in millions of dollars follow:
--------------------------------------------------------------------------------
2001 2000
---------------- ------------------
Carrying Fair Carrying Fair
Value Value Value Value
--------------------------------------------------------------------------------
Financing receivables ................. $ 9,199 $ 9,226 $ 8,276 $ 8,254
======= ======= ======= =======
Long-term borrowings
Equipment Operations ................ $ 2,210 $ 2,404 $ 1,717 $ 1,722
Financial Services .................. 4,351 4,355 3,047 3,036
------- ------- ------- -------
Total ............................ $ 6,561 $ 6,759 $ 4,764 $ 4,758
======= ======= ======= =======
--------------------------------------------------------------------------------
Fair Value Estimates
Fair values of the long-term financing receivables with fixed rates were based
on the discounted values of their related cash flows at current market interest
rates. The fair values of the remaining financing receivables approximated the
carrying amounts.
Fair values of long-term borrowings with fixed rates were based on the
discounted values of their related cash flows at current market interest rates.
Certain long-term borrowings have been swapped to current variable interest
rates. The carrying values of these long-term borrowings include adjustments
related to fair value hedges under FASB Statement No. 133, which was adopted in
2001. See Notes 1 and 16.
39
--------------------------------------------------------------------------------
Derivatives
It is the company's policy that derivative transactions are executed only to
manage exposures arising in the normal course of business and not for the
purpose of creating speculative positions or trading. The company's credit
operations manage the relationship of the types and amounts of their funding
sources to their receivable and lease portfolio in an effort to diminish risk
due to interest rate and foreign currency fluctuations, while responding to
favorable financing opportunities. The company also has foreign currency
exposures at some of its foreign and domestic operations related to buying,
selling and financing in currencies other than the local currencies.
Interest Rate Swaps
The company enters into interest rate swap agreements primarily to more closely
match the fixed or floating interest rates of the credit operations' borrowings
to those of the assets being funded.
Certain interest rate swaps were designated as hedges of future cash flows
from commercial paper and variable interest rate borrowings. The effective
portion of the fair value gains or losses on these cash flow hedges are recorded
in other comprehensive income and subsequently reclassified into interest
expense as payments become due and the swaps approach maturity. These amounts
offset the effects of interest rate changes on the related borrowings. The
amount of the loss recorded in other comprehensive income at October 31, 2001
that is expected to be reclassified to earnings in the next 12 months if
interest rates remain unchanged is approximately $43 million after-tax. These
swaps mature in up to 57 months.
Certain interest rate swaps were designated as fair value hedges of
fixed-rate, long-term borrowings. The effective portion of the fair value gains
or losses on these swaps were offset by fair value adjustments in the underlying
borrowings. See Note 16.
Any ineffective portions of the gains or losses on all cash flow and fair
value interest rate swaps designated as hedges were recognized immediately in
interest expense and were not material in 2001. There were no components of cash
flow or fair value hedges that were excluded from the assessment of
effectiveness.
The company has certain interest rate swap agreements that are not
designated as hedges under FASB Statement No. 133 and the fair value gains or
losses are recognized directly in earnings. These instruments relate primarily
to swaps that are used to facilitate securitization transactions.
Foreign Exchange Forward Contracts, Swaps and Options
The company has entered into foreign exchange forward contracts, swaps and
purchased options in order to manage the currency exposure of certain
receivables, liabilities and expected inventory purchases. These derivatives
were not designated as hedges under FASB Statement No. 133. The fair value gains
or losses from these foreign currency derivatives are recognized directly in
earnings, generally offsetting the foreign exchange gains or losses on the
exposures being managed.
The company has designated cross currency interest rate swaps as fair value
hedges of certain long-term borrowings. The effective portion of the fair value
gains or losses on these swaps are offset by fair value adjustments in the
underlying borrowings and the ineffectiveness was not material. The company has
also designated currency swaps as cash flow hedges of a long-term borrowing.
The effective portion of the fair value gains or losses on these swaps are
recorded in other comprehensive income and subsequently reclassified into
earnings as payments become due and the swaps approach maturity. This will
offset the exchange rate effects on the borrowing being hedged and the
ineffectiveness was not material.
24. CASH FLOW INFORMATION
--------------------------------------------------------------------------------
For purposes of the statement of consolidated cash flows, the company considers
investments with original maturities of three months or less to be cash
equivalents. Substantially all of the company's short-term borrowings mature
within three months or less.
In 2001, net income included in the cash flows from operations has a
non-cash expense of $339 million pretax related to the special items (See Note
2). These non-cash accruals and write-downs have been added back as adjustments
to income in the changes in assets and liabilities related to operations. In
2001, the Equipment Operations cash flows from operations has a positive cash
flow of $2.2 billion included in their decrease in receivables related to the
sale of trade receivables to Financial Services. The Financial Services cash
flows from investing activities has an offsetting cash outflow included in their
cost of receivables acquired. These intercompany cash flows have been eliminated
in the consolidated cash flows.
Cash payments for interest and income taxes consisted of the following in
millions of dollars:
--------------------------------------------------------------------------------
2001 2000 1999
--------------------------------------------------------------------------------
Interest:
Equipment Operations ........................ $ 220 $ 152 $ 151
Financial Services .......................... 540 489 428
Intercompany eliminations.................... (34) (23) (15)
------ ------ ------
Consolidated ................................... $ 726 $ 618 $ 564
====== ====== ======
Income taxes:
Equipment Operations .................. 119 $ 393 $ 135
Financial Services .................... 61 77 55
Intercompany eliminations ............. (48) (57) (43)
------ ------ ------
Consolidated ................................... $ 132 $ 413 $ 147
====== ====== ======
--------------------------------------------------------------------------------
25. SEGMENT AND GEOGRAPHIC AREA DATA FOR THE YEARS ENDED OCTOBER 31, 2001,
2000 AND 1999
--------------------------------------------------------------------------------
The company's operations are organized and reported in four major business
segments described as follows (Also see Part I, Item 1, of the company's Form
10-K):
The agricultural equipment segment manufactures and distributes a full line
of farm equipment - including tractors; combine, cotton and sugarcane
harvesters; tillage, seeding and soil preparation machinery; sprayers; hay and
forage equipment; materials handling equipment; and integrated agricultural
managment systems technology.
The commercial and consumer equipment segment manufactures and distributes
equipment for commercial and residential uses - including small tractors for
lawn, garden, commercial and utility purposes; riding and walk-behind mowers;
golf course equipment; snowblowers; skid-steer loaders; utility vehicles;
landscape and irrigation equipment; and other outdoor power products. As of
November 1, 2001, the design, manufacture and distribution of skid steer loaders
were transferred from the commercial and consumer equipment segment to the
construction and forestry segment.
40
--------------------------------------------------------------------------------
The construction and forestry segment manufactures and distributes a broad
range of machines used in construction, earthmoving, material handling and
timber harvesting - including backhoe loaders; crawler dozers and loaders;
four-wheel-drive loaders; excavators; motor graders; articulated dump trucks;
forklifts; landscape loaders; and log skidders, feller bunchers, loaders,
forwarders, harvesters and related attachments.
The products and services produced by the equipment segments are marketed
primarily through independent retail dealer networks and major retail outlets.
The credit segment primarily finances sales and leases by John Deere
dealers of new and used agricultural, commercial and consumer, and construction
and forestry equipment. In addition, it provides wholesale financing to dealers
of the foregoing equipment, provides operating loans and finances retail
revolving charge accounts.
Certain operations do not meet the materiality threshold of FASB Statement
No. 131 and have been grouped together as "Other" segments. These include the
special technologies group, health care and the insurance operations which were
sold in 1999.
Corporate assets are primarily the Equipment Operations' prepaid pension
costs, deferred income tax assets, other receivables and cash and cash
equivalents as disclosed in the financial statements, net of certain
intercompany eliminations.
Because of integrated manufacturing operations and common administrative
and marketing support, a substantial number of allocations must be made to
determine operating segment and geographic area data. Intersegment sales and
revenues represent sales of components and finance charges which are generally
based on market prices. Overseas operations are defined to include all
activities of divisions, subsidiaries and affiliated companies conducted outside
the United States and Canada.
Information relating to operations by operating segment in millions of
dollars follows with related comments included in Management's Discussion and
Analysis. In addition to the following unaffiliated sales and revenues by
segment, intersegment sales and revenues in 2001, 2000, and 1999 were as
follows: agricultural equipment net sales of $76 million, $94 million and $106
million and credit revenues of $22 million, $4 million and $1 million,
respectively.
--------------------------------------------------------------------------------
OPERATING SEGMENTS 2001 2000 1999
--------------------------------------------------------------------------------
Net sales and revenues
Unaffiliated customers:
Agricultural equipment net sales ....... $ 6,269 $ 5,934 $ 5,138
Commercial and consumer equipment
net sales ............................ 2,667 2,966 2,648
Construction and forestry
net sales ............................ 2,086 2,203 1,880
Other net sales ........................ 55 66 35
------- ------- -------
Total net sales ...................... 11,077 11,169 9,701
Credit revenues ............................ 1,439 1,323 1,136
Other revenues ............................. 777 645 914
------- ------- -------
Total ...................................... $13,293 $13,137 $11,751
======= ======= =======
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
OPERATING SEGMENTS 2001 2000 1999
--------------------------------------------------------------------------------
Operating profit (loss)
Agricultural equipment .................. $ 257* $ 400 $ (51)**
Commercial and consumer equipment ....... (194)* 159 213
Construction and forestry ............... (54)* 191 149
Credit*** ............................... 274* 254 274
Other*** ................................ (31)* (39) (33)
----- ----- -----
Total operating profit ............ 252 965 552
===== ===== =====
Interest income ......................... 39 40 24
Investment income ....................... 8 1
Interest expense ........................ (268) (182) (161)
Foreign exchange loss ................... (15) (8) (7)
Corporate expenses - net ................ (54) (43) (35)
Income taxes ............................ (18) (294) (135)
----- ----- -----
Total ............................. (316) (479) (313)
----- ----- -----
Net income (loss) ....................... $ (64) $ 486 $ 239
===== ===== =====
* In 2001, operating profit (loss) of the agricultural equipment, commercial
and consumer equipment, construction and forestry, credit and other
segments includes expense of special items of $97 million, $163 million,
$80 million, $3 million and $1 million, respectively. See Note 2.
** In 1999, operating profit of the agricultural equipment segment includes
$68 million of early-retirement costs.
*** Operating profit of the credit business segment includes the effect of
interest expense, which is the largest element of its operating costs.
Operating profit of the "other" category includes health care and insurance
investment income.
--------------------------------------------------------------------------------
Interest income
Agricultural equipment ..................... $ 26 $ 39 $ 51
Commercial and consumer equipment .......... 17 11 8
Construction and forestry .................. 13 8 9
Credit ..................................... 869 791 685
Corporate .................................. 39 40 24
Intercompany ............................... (34) (23) (15)
----- ----- -----
Total ................................ $ 930 $ 866 $ 762
===== ===== =====
--------------------------------------------------------------------------------
Interest expense
Agricultural equipment ..................... $ 1 $ 1 $ 1
Credit ..................................... 530 515 408
Other ...................................... 1 2 2
Corporate .................................. 268 182 161
Intercompany ............................... (34) (23) (15)
----- ----- -----
Total ................................ $ 766 $ 677 $ 557
===== ===== =====
--------------------------------------------------------------------------------
Depreciation* and amortization
expense
Agricultural equipment ..................... $ 204 $ 199 $ 193
Commercial and consumer equipment .......... 93 75 71
Construction and forestry .................. 72 60 46
Credit ..................................... 321 283 208
Other ...................................... 28 31 24
----- ----- -----
Total ................................ $ 718 $ 648 $ 542
===== ===== =====
* Includes depreciation for equipment on operating leases .
--------------------------------------------------------------------------------
41
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
OPERATING SEGMENTS 2001 2000 1999
--------------------------------------------------------------------------------
Equity in income (loss) of
unconsolidated affiliates
Agricultural equipment .................. $ (7) $ (5) $ 2
Construction and forestry ............... (10) 6 10
Credit .................................. (3) 1
Other ................................... (2) (3)
------- ------- -------
Total ............................. $ (22) $ 2 $ 9
======= ======= =======
--------------------------------------------------------------------------------
Identifiable assets
Agricultural equipment .................. $ 2,975 $ 4,082 $ 4,244
Commercial and consumer equipment ....... 1,605 2,216 1,948
Construction and forestry ............... 1,363 1,522 757
Credit .................................. 14,559 10,675 8,658
Other ................................... 385 338 327
Corporate ............................... 1,776 1,636 1,644
------- ------- -------
Total ............................. $22,663 $20,469 $17,578
======= ======= =======
--------------------------------------------------------------------------------
Capital additions
Agricultural equipment .................. $ 266 $ 214 $ 170
Commercial and consumer equipment ....... 164 135 80
Construction and forestry ............... 55 53 42
Credit .................................. 3 10 5
Other ................................... 12 10 12
------- ------- -------
Total ............................. $ 500 $ 422 $ 309
======= ======= =======
--------------------------------------------------------------------------------
Investment in unconsolidated
affiliates
Agricultural equipment .................. $ 29 $ 26 $ 23
Commercial and consumer equipment ....... 3 2 2
Construction and forestry ............... 156 153 116
Credit .................................. 6 10 9
Other ................................... 4 2
------- ------- -------
Total ............................. $ 198 $ 191 $ 152
======= ======= =======
--------------------------------------------------------------------------------
The company views and has historically disclosed its operations as
consisting of two geographic areas, the United States and Canada, and overseas,
shown below in millions of dollars. Operating income for these areas has been
disclosed in addition to the requirements under FASB Statement No. 131. No
individual foreign country's net sales and revenues were material for disclosure
purposes. The percentages shown in the captions for net sales and revenues
indicate the approximate proportion of each amount that relates to the United
States only. The percentages are based upon a three-year average for 2001, 2000
and 1999.
--------------------------------------------------------------------------------
GEOGRAPHIC AREAS 2001 2000 1999
--------------------------------------------------------------------------------
Net sales and revenues
Unaffiliated customers:
United States and Canada:
Equipment operations net sales (92%) .... $ 8,124 $ 8,272 $ 7,023
Financial Services revenues (89%) ....... 1,937 1,731 1,873
------- ------- -------
Total ................................... 10,061 10,003 8,896
------- ------- -------
Overseas:
Equipment operations net sales .......... 2,954 2,897 2,678
Financial Services revenues ............. 100 79 40
------- ------- -------
Total ................................. 3,054 2,976 2,718
------- ------- -------
Other revenues ................................ 178 158 137
------- ------- -------
Total ......................................... $13,293 $13,137 $11,751
======= ======= =======
--------------------------------------------------------------------------------
Operating profit (loss)
United States and Canada:
Equipment operations .................... $ (164) $ 529 $ 48
Financial Services ...................... 283 265 277
------- ------- -------
Total ................................. 119 794 325
------- ------- -------
Overseas:
Equipment operations .................... 118 164 224
Financial Services ...................... 15 7 3
------- ------- -------
Total ................................. 133 171 227
------- ------- -------
Total ......................................... $ 252 $ 965 $ 552
======= ======= =======
--------------------------------------------------------------------------------
Property and equipment
United States ................................. $ 1,407 $ 1,322 $ 1,267
Mexico ........................................ 189 197 194
Germany ....................................... 155 121 137
Other countries ............................... 301 272 184
------- ------- -------
Total ................................... $ 2,052 $ 1,912 $ 1,782
======= ======= =======
--------------------------------------------------------------------------------
26. SUPPLEMENTAL INFORMATION (UNAUDITED)
================================================================================
Quarterly information with respect to net sales and revenues and earnings is
shown in the following schedule. Such information is shown in millions of
dollars except for per share amounts.
--------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------------------------------------------------------------------------
2001
Net sales and revenues* ............... $ 2,705 $ 3,809 $ 3,618 $ 3,161
Income (loss) before income taxes ..... 92 215 137 (469)
Net income (loss) ..................... 56 128 72 (320)
Net income (loss) per share
- basic ............................ .24 .55 .30 (1.36)
Net income (loss) per share
- diluted .......................... .24 .54 .30 (1.36)
Dividends declared per share .......... .22 .22 .22 .22
Dividends paid per share .............. .22 .22 .22 .22
* In the fourth quarter of 2001, the company adopted EITF Issue No. 00-10,
Accounting for Shipping and Handling Fees and Costs. The increases in net
sales and cost of sales in 2001 from the adoption of the new standard were
$25 million in the first quarter, $33 million in the second quarter, $34
million in the third quarter, $31 million in the fourth quarter and $123
million for the year. See Note 1.
--------------------------------------------------------------------------------
(continued)
42
================================================================================
--------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------------------------------------------------------------------------
2000
Net sales and revenues ................ $ 2,339 $ 3,790 $ 3,632 $ 3,376
Income before income taxes ............ 60 353 270 95
Net income ............................ 38 204 173 71
Net income per share - basic .......... .16 .87 .74 .30
Net income per share - diluted ........ .16 .87 .72 .30
Dividends declared per share .......... .22 .22 .22 .22
Dividends paid per share .............. .22 .22 .22 .22
--------------------------------------------------------------------------------
Common stock per share sales prices from New York Stock Exchange composite
transactions quotations follow:
--------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------------------------------------------------------------------------
2001 Market price
High .................................. $ 47.13 $ 45.96 $ 42.80 $ 45.00
Low ................................... $ 34.63 $ 34.45 $ 36.04 $ 33.50
2000 Market price
High .................................. $ 48.31 $ 44.63 $ 49.63 $ 38.94
Low ................................... $ 35.38 $ 30.31 $ 36.31 $ 30.69
--------------------------------------------------------------------------------
At October 31, 2001, there were 32,400 holders of record of the company's
$1 par value common stock.
Dividend
A quarterly cash dividend of $.22 per share was declared at the board of
directors' meeting held on December 5, 2001, payable on February 1, 2002.
FINANCIAL INSTRUMENT RISK INFORMATION (UNAUDITED)
Sensitivity Analysis
The following table includes a sensitivity analysis for the company's
derivatives and other financial instruments which have interest rate risk. These
instruments are held for other than trading purposes. Quarterly, the company
uses a combination of cash flow models to assess the sensitivity of earnings to
changes in market interest rates. The models calculate the effect of adjusting
interest rates as follows. Cash flows for financing receivables are discounted
at the current prevailing rate for each receivable portfolio. Cash flows for
borrowings are discounted at the treasury yield curve plus a market credit
spread for similarly rated borrowers. Cash flows for interest rate swaps are
projected and discounted using forecasted rates from the swap yield curve at the
repricing dates.
The gains or losses in the following table represent the changes in the
financial instruments' fair values which would be caused by decreasing the
interest rates by 10 percent from the market rates at October 31, 2001 and 2000.
The gains or losses in fair values would have been as follows in millions of
dollars:
--------------------------------------------------------------------------------
Fair Value
Gains (Losses)
-------------------
2001 2000
--------------------------------------------------------------------------------
Marketable securities ............................... $ 2 $ 2
Financing receivables ............................... 48 52
Interest rate swaps related to
short-term borrowings ............................ (12) (12)
Long-term borrowings and related swaps:
Equipment Operations borrowings .................. (88) (79)
Interest rate and
foreign currency swaps .......................... 2
Financial Services borrowings .................... (26) (32)
Interest rate and
foreign currency swaps .......................... 21 14
------ ------
Total ........................................... $ (53) $ (55)
====== ======
--------------------------------------------------------------------------------
Tabular Information
The following foreign exchange forward contracts were held by the company
related to certain currency exposures. Substantially all contracts have maturity
dates of less than one year. The notional amounts and fair values in millions of
dollars follow:
--------------------------------------------------------------------------------
Average Fair Value
Contractual Notional Gains
Rate* Amount (Losses)
-------------------------------------------------------------------------------
October 31, 2001
Buy US$ / Sell Euro ............................ 1.1062 $ 279 $ .1
Buy US$ / Sell Australian dollar ............... 1.9933 236 (.5)
Buy Euro / Sell US$ ............................ 1.1212 155
Buy US$ / Sell Canadian dollar ................. 1.5727 144 .1
Other contracts ................................ 172 .9
------ ------
Total ..................................... $ 986 $ .6
====== ======
October 31, 2000
Buy US$ / Sell Canadian dollar ................. 1.5011 $ 153 $ 2.4
Buy Deutsche Mark / Sell US$ ................... 2.3367 145 (.9)
Buy US$ / Sell Euro ............................ 1.1651 137 4.1
Buy US$ / Sell Swedish Krona ................... 9.6095 123 7.4
Buy US$ / Sell British Pound ................... .6873 119 1.5
Buy US$ / Sell Australian dollar ............... 1.8043 118 6.8
Buy US$ / Sell Deutsche Mark ................... 2.3394 87 .5
Other contracts 142 (.4)
------ ------
Total ........................ $1,024 $ 21.4
====== ======
*Currency per United States dollar (US$)
-------------------------------------------------------------------------------
At October 31, 2001 and 2000, the company had $31 million and $202 million
of foreign exchange purchased options with a fair value of $.6 million and $3.2
million, respectively. All options mature in less than one year.
43
--------------------------------------------------------------------------------
The Company held certain financial instruments in currencies other than the
functional currencies. The significant carrying values and related currency
swaps in millions of dollars at October 31, 2001 were as follows:
--------------------------------------------------------------------------------------------------------
Expected Maturity Date
--------------------------------------------------------------------------------------------------------
Functional Currency (FC) 2002 2003 2004 2005 2006 Total Fair Values
--------------------------------------------------------------------------------------------------------
Euro (FC)
Short-term borrowings (US$) ........ $ 308 $ 308 *
Average interest rates .......... 2.7%
Long-term borrowings (US$) ......... $ 256 $ 256 *
Fixed interest rate ............. 5.9%
Currency swaps
Notional amount ................. $ 170 $ 170 $ 9
Buy US$/Sell Euro
Contract rate ................... 1.1073
Currency swap
Notional amount ................. $ 97 $ 97 $ 2
Buy Euro/Sell Swedish Krona
Contract rate ................... 9.23
Australian Dollar (FC)
Short-term borrowings (US$) ........ $ 295 $ 295 *
Average interest rates .......... 2.6%
Canadian Dollar (FC)
Short-term borrowings (US$) ........ $ 30 $ 30 *
Average interest rates .......... 2.6%
Brazilian Real (FC)
Financing receivables (US$) ........ $ 19 $ 7 $ 5 $ 3 $ 1 $ 35 *
Fixed average interest rates .... 10.8% 10.6% 10.6% 10.5% 10.5%
Long-term borrowings (US$) ......... $ 17 $ 8 $ 7 $ 6 $ 3 $ 41 *
Fixed average interest rates .... 6.8% 6.9% 6.9% 7.1% 7.0%
*These fair values were approximately equal to the values in the total column.
--------------------------------------------------------------------------------
Additional information on financial instruments including derivatives is
presented in Note 23.
44
Deere & Company
SELECTED FINANCIAL DATA
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions
except per share amounts) 2001 2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------------------
Net sales and revenues ........................... $ 13,293 $ 13,137 $ 11,751 $ 13,822 $ 12,791 $ 11,229
Net sales ........................................ 11,077 11,169 9,701 11,926 11,082 9,640
Finance and interest income ...................... 1,445 1,321 1,104 1,007 867 763
Research and development expenses ................ 590 542 458 445 412 370
Interest expense ................................. 766 677 557 519 422 402
Income (loss) before changes in accounting ....... (64) 486 239 1,021 960 817
Net income (loss) ................................ (64) 486 239 1,021 960 817
------------------------------------------------------------------------------------------------------------------------------------
Income (loss) per share before changes
in accounting ................................. $ (.27) $ 2.07 $ 1.03 $ 4.20 $ 3.78 $ 3.14
Net income (loss) per share - basic .............. (.27) 2.07 1.03 4.20 3.78 3.14
Net income (loss) per share - diluted ............ (.27) 2.06 1.02 4.16 3.74 3.11
Dividends declared per share ..................... .88 .88 .88 .88 .80 .80
Dividends paid per share ......................... .88 .88 .88 .86 .80 .80
Average number of common
shares outstanding (in thousands) ............. 234,980 234,276 232,874 243,315 253,723 260,547
------------------------------------------------------------------------------------------------------------------------------------
Total assets ..................................... $ 22,663 $ 20,469 $ 17,578 $ 18,002 $ 16,320 $ 14,653
Trade accounts and notes receivable - net ........ 2,923 3,169 3,251 4,059 3,334 3,153
Financing receivables - net ...................... 9,199 8,276 6,743 6,333 6,405 5,912
Equipment on operating leases - net .............. 1,939 1,954 1,655 1,209 775 430
Inventories ...................................... 1,506 1,553 1,294 1,287 1,073 829
Property and equipment - net ..................... 2,052 1,912 1,782 1,700 1,524 1,352
Short-term borrowings:
Equipment Operations .......................... 773 928 642 1,512 171 223
Financial Services ............................ 5,425 4,831 3,846 3,810 3,604 2,921
----- ----- ----- ----- ----- -----
Total ..................................... 6,198 5,759 4,488 5,322 3,775 3,144
Long-term borrowings:
Equipment Operations .......................... 2,210 1,718 1,036 553 540 626
Financial Services ............................ 4,351 3,046 2,770 2,239 2,083 1,799
----- ----- ----- ----- ----- -----
Total ..................................... 6,561 4,764 3,806 2,792 2,623 2,425
Total stockholders' equity ....................... 3,992 4,302 4,094 4,080 4,147 3,557
------------------------------------------------------------------------------------------------------------------------------------
Book value per share ............................. $ 16.82 $ 18.34 $ 17.51 $ 17.56 $ 16.57 $ 13.83
Number of employees (at year end) ................ 45,069 43,670 38,726 37,002 34,420 33,919
------------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
(Dollars in millions
except per share amounts) 1995 1994 1993 1992
---------------------------------------------------------------------------------------------------------
Net sales and revenues ........................... $ 10,291 $ 8,977 $ 7,696 $ 6,930
Net sales ........................................ 8,830 7,663 6,479 5,723
Finance and interest income ...................... 660 548 563 616
Research and development expenses ................ 327 276 270 288
Interest expense ................................. 393 303 369 413
Income (loss) before changes in accounting ....... 706 604 184 37
Net income (loss) ................................ 706 604 (921) 37
--------------------------------------------------------------------------------------------------------
Income (loss) per share before changes
in accounting ................................. $ 2.71 $ 2.34 $ .80 $ .16
Net income (loss) per share - basic .............. 2.71 2.34 (3.97) .16
Net income (loss) per share - diluted ............ 2.69 2.32 (3.97) .16
Dividends declared per share ..................... .75 .68 1/3 .66 2/3 .66 2/3
Dividends paid per share ......................... .73 1/3 .66 2/3 .66 2/3 .66 2/3
Average number of common
shares outstanding (in thousands) ............. 260,494 258,438 231,874 228,822
--------------------------------------------------------------------------------------------------------
Total assets ..................................... $ 13,847 $ 12,781 $ 11,467 $ 11,446
Trade accounts and notes receivable - net ........ 3,260 2,939 2,794 2,946
Financing receivables - net ...................... 5,345 4,502 3,755 4,395
Equipment on operating leases - net .............. 259 219 195 168
Inventories ...................................... 721 698 464 525
Property and equipment - net ..................... 1,336 1,314 1,240 1,308
Short-term borrowings:
Equipment Operations .......................... 396 54 476 856
Financial Services ............................ 2,744 2,583 1,125 2,224
----- ----- ----- -----
Total ..................................... 3,140 2,637 1,601 3,080
Long-term borrowings:
Equipment Operations .......................... 703 1,019 1,070 1,234
Financial Services ............................ 1,473 1,035 1,478 1,239
----- ----- ----- -----
Total ..................................... 2,176 2,054 2,548 2,473
Total stockholders' equity ....................... 3,085 2,558 2,085 2,650
--------------------------------------------------------------------------------------------------------
Book value per share ............................. $ 11.78 $ 9.87 $ 8.13 $ 11.58
Number of employees (at year end) ................ 33,375 34,252 33,070 34,852
--------------------------------------------------------------------------------------------------------
45
[Letterhead]
Deloitte & Touche LLP
Two Prudential Plaza
180 North Stetson Avenue
Chicago, Illinois 60601
INDEPENDENT AUDITORS' REPORT
----------------------------
Deere & Company:
We have audited the accompanying consolidated balance sheets of Deere & Company
and subsidiaries as of October 31, 2001 and 2000 and the related statements of
consolidated income, changes in consolidated stockholders' equity and
consolidated cash flows for each of the three years in the period ended October
31, 2001. Our audits also included the financial statement schedule listed in
the Index under Part IV, Item 14(a)(2). These financial statements and the
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Deere & Company and subsidiaries at
October 31, 2001 and 2000 and the results of their operations and their cash
flows for each of the three years in the period ended October 31, 2001 in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
Chicago, Illinois
November 20, 2001
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Each person signing below also hereby appoints Robert W. Lane, Nathan J.
Jones and Michael A. Harring, and each of them singly, his or her lawful
attorney-in-fact with full power to execute and file any and all amendments to
this report together with exhibits thereto and generally to do all such things
as such attorney-in-fact may deem appropriate to enable Deere & Company to
comply with the provisions of the Securities Exchange Act of 1934 and all
requirements of the Securities and Exchange Commission.
DEERE & COMPANY
By: /s/ R. W. Lane
----------------------------------------
R. W. Lane
Chairman and Chief Executive Officer
Date: 21 December 2001
-----------------------
Pursuant to the requirements of Section 13 or 15(d) 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.
Signature Title Date
--------- ----- ----
/s/ John R. Block Director ) 21 December 2001
--------------------------------------- )
John R. Block )
)
)
/s/ C. C. Bowles Director )
--------------------------------------- )
C. C. Bowles )
)
)
/s/ T. Kevin Dunnigan Director )
--------------------------------------- )
T. Kevin Dunnigan )
)
)
/s/ Leonard A. Hadley Director )
--------------------------------------- )
Leonard A. Hadley )
47
Signature Title Date
--------- ----- ----
/s/ Regina E. Herzlinger Director )
------------------------------- )
Regina E. Herzlinger )
)
Senior Vice President, )
/s/ Nathan J. Jones Principal Financial Officer and)
------------------------------- )
Nathan J. Jones Principal Accounting Officer )
)
)
/s/ Arthur L. Kelly Director ) 21 December 2001
------------------------------- )
Arthur L. Kelly )
)
)
/s/ R. W. Lane Chairman, Director and )
------------------------------- )
R. W. Lane Chief Executive Officer )
)
)
/s/ Antonio Madero B. Director )
------------------------------- )
Antonio Madero B. )
)
)
/s/ Thomas H. Patrick Director )
------------------------------- )
Thomas H. Patrick )
)
)
/s/ John R. Stafford Director )
------------------------------- )
John R. Stafford )
)
)
/s/ John R. Walter Director )
------------------------------- )
John R. Walter )
)
)
/s/ Arnold R. Weber Director )
------------------------------- )
Arnold R. Weber )
48
SCHEDULE II
DEERE & COMPANY AND CONSOLIDATED SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended October 31, 2001, 2000 and 1999
(in thousands of dollars)
=========================================================================================================
Column A Column B Column C
----------------------------------------- ------------ -------------------------------------------------
Additions
-------------------------------------------------
Balance at Charged to
beginning costs and Charged to other accounts
-------------------------------
Description of period expenses Description Amount
----------------------------------------- ----------- ---------------- --------------------- --------
YEAR ENDED OCTOBER 31, 2001
Allowance for doubtful receivables:
Equipment Operations
--------------------
Trade receivable allowances $ 34,447 $ 11,342 Bad debt recoveries $ 4,125
Acquisition 6,872
Financial Services
------------------
Trade receivable allowances 76 Acquisition 7,163
Financing receivable allowances 106,370 102,533
------------ ----------------- --------
Consolidated receivable allowances $ 140,817 $ 113,951 $18,160
============ ================= ========
YEAR ENDED OCTOBER 31, 2000
Allowance for doubtful receivables:
Equipment Operations
--------------------
Trade receivable allowances $ 34,027 $ 11,177 Bad debt recoveries $ 1,940
Acquisition 408
Financial Services
------------------
Financing receivable allowances 93,219 63,813
------------ ----------------- --------
Consolidated receivable allowances $ 127,246 $ 74,990 $ 2,348
============ ================= ========
YEAR ENDED OCTOBER 31, 1999
Allowance for doubtful receivables:
Equipment Operations
--------------------
Trade receivable allowances $ 31,339 $ 5,604 Bad debt recoveries $ 3,149
Financial Services
------------------
Financing receivable allowances 89,800 67,947
------------ ----------------- --------
Consolidated receivable allowances $ 121,139 $ 73,551 $ 3,149
============ ================= ========
=========================================================================================================
================================================================================================================
Column D Column E
---------------------------------------- ----------------------------------------------------------------------
Balance
Deductions at end
-------------------------------------------------------
Description Amount of period
---------------------------------------- ------------------------------------------------------- ------------
YEAR ENDED OCTOBER 31, 2001
Allowance for doubtful receivables:
Equipment Operations
--------------------
Trade receivable allowances Trade receivable write-offs $ 6,282 $ 43,341
Transfer related to trade
Financial Services receivable sale 7,163
------------------
Trade receivable allowances 7,239
Financing receivable allowances Transfers related to retail note sales 9,566
Financing receivable write-offs 73,350 125,987
-------------- ----------
Consolidated receivable allowances $ 96,361 $ 176,567
============== ==========
YEAR ENDED OCTOBER 31, 2000
Allowance for doubtful receivables:
Equipment Operations
--------------------
Trade receivable allowances Trade receivable write-offs $ 13,105 $ 34,447
Financial Services Transfers related to retail note sales 6,734
------------------
Financing receivable allowances Financing receivable write-offs 43,928 106,370
-------------- ----------
Consolidated receivable allowances $ 63,767 $ 140,817
============== ==========
YEAR ENDED OCTOBER 31, 1999
Allowance for doubtful receivables:
Equipment Operations
--------------------
Trade receivable allowances Trade receivable write-offs $ 6,065 $ 34,027
Financial Services Transfers related to retail note sales 20,901
------------------
Financing receivable allowances Financing receivable write-offs 43,627 93,219
-------------- ----------
Consolidated receivable allowances $ 70,593 $ 127,246
============== ==========
================================================================================================================
49
INDEX TO EXHIBITS
2. Not applicable
3.1 Certificate of incorporation, as amended (Exhibit 3.1 to Form 10-K of
registrant for the year ended October 31, 1999*)
3.2 Certificate of Designation Preferences and Rights of Series A
Participating Preferred Stock (Exhibit 3.2 to Form 10-K of registrant for
the year ended October 31, 1998*)
3.3 By-laws, as amended (Exhibit 3.3 to Form 10-K of registrant for the year
ended October 31, 1999*)
4.1 Credit agreements among registrant, John Deere Capital Corporation,
various financial institutions, The Chase Manhattan Bank as administrative
agent, Bank of America National, N.A. and Bank One, N.A. as documentation
agents, and Deutsche Bank AG, New York Branch as syndication agent, et al,
dated as of February 22, 2001 (Exhibit 4.1 and 4.2 to Form 10-Q of
registrant for the quarter ended January 31, 2001*)
4.2 Form of common stock certificate (Exhibit 4.6 to Form 10-K of registrant
for the year ended October 31, 1998*)
4.3 Rights Agreement dated as of December 3, 1997 between registrant and The
Bank of New York (Exhibit 1 to Form 8-A of registrant filed December 10,
1997*)
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.
9. Not applicable
10.1 Agreement as amended November 1, 1994 between registrant and John Deere
Capital Corporation concerning agricultural retail notes (Exhibit 10.1 to
Form 10-K of registrant for the year ended October 31, 1998*)
10.2 Agreement as amended November 1, 1994 between registrant and John Deere
Capital Corporation relating to lawn and grounds care retail notes
(Exhibit 10.2 to Form 10-K of registrant for the year ended October 31,
1998*)
10.3 Agreement as amended November 1, 1994 between John Deere Construction
Equipment Company, a wholly-owned subsidiary of registrant and John Deere
Capital Corporation concerning construction retail notes (Exhibit 10.3 to
Form 10-K of registrant for the year ended October 31, 1998*)
10.4 Agreement dated July 14, 1997 between the John Deere Construction
Equipment Company and John Deere Capital Corporation concerning
construction retail notes (Exhibit 10.8 to John Deere Capital Corporation
Form 10-K for the year ended October 31, 1997 Securities and Exchange
Commission file number 1-6458*)
10.5 Agreement dated October 15, 1996 between registrant and John Deere Capital
Corporation relating to fixed charges ratio, ownership and minimum net
worth of John Deere Capital Corporation. (Exhibit 10.7 to John Deere
Capital Corporation Form 10-K for the year ended October 31, 1996
Securities and Exchange Commission file number 1-6458*)
10.6 Deere & Company Voluntary Deferred Compensation Plan (Exhibit 10.9 to Form
10-K of registrant for the year ended October 31, 1998*) **
50
10.7 John Deere Performance Bonus Plan as amended December 6, 2000 (Exhibit
10.7 to Form 10-K of registrant for the year ended October 31, 2000*) **
10.8 1986 John Deere Stock Option Plan (Exhibit 10.7 to Form 10-K of
registrant for the year ended October 31, 1998*) **
10.9 1991 John Deere Stock Option Plan (Exhibit 10.9 to Form 10-K of
registrant for the year ended October 31, 1999*) **
10.10 John Deere Restricted Stock Plan (Appendix to Notice and Proxy Statement
of registrant for the annual shareholder meeting on February 28, 1996*)
**
10.11 John Deere Equity Incentive Plan (Exhibit C to Notice and Proxy Statement
of registrant for the annual shareholder meeting on February 23, 2000*)
**
10.12 John Deere Omnibus Equity and Incentive Plan (Exhibit A to Notice and
Proxy Statement of registrant for the annual shareholder meeting on
February 23, 2000*) **
10.13 John Deere Defined Contribution Restoration Plan as amended January 1,
2000 (Exhibit 10.13 to Form 10-K of registrant for the year ended October
31, 2000*) **
10.14 John Deere Supplemental Pension Benefit Plan, as amended July 31, 2000
(Exhibit 10.14 to Form 10-K of registrant for the year ended October 31,
2000*)**
10.15 1993 Nonemployee Director Stock Ownership Plan as amended August 25, 1999
(Exhibit 10.15 to Form 10-K of registrant for the year ended October 31,
1999*)**
10.16 Deere & Company Nonemployee Director Deferred Compensation Plan as
amended May 26, 1999 (Exhibit 10.16 to Form 10-K of registrant for the
year ended October 31, 1999*)**
10.17 Form of Severance Protection Agreement between registrant and the
executive officers (Exhibit 10.1 to Form 10-Q of registrant for the
quarter ended April 30, 2000*)**
10.18 Early Retirement Agreement dated August 10, 2001 between registrant and
Ferdinand F. Korndorf**
10.19 Asset Purchase Agreement dated October 29, 2001 between registrant and
Deere Capital, Inc. concerning the sale of trade receivables
10.20 Asset Purchase Agreement dated October 29, 2001 between John Deere
Construction & Forestry Company and Deere Capital, Inc. concerning the
sale of trade receivables
12. Computation of ratio of earnings to fixed charges
13. Not applicable
16. Not applicable
18. Not applicable
21. Subsidiaries
22. Not applicable
23. Consent of Deloitte & Touche LLP
24. Power of Attorney (included on signature page)
__________________________________________________
* Incorporated by reference. Copies of these exhibits are available from
the Company upon request.
** Compensatory plan or arrangement filed as an exhibit pursuant to Item
14(c) of Form 10-K.
51