UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
or
For the transition period from ____ to ____
Commission file no:
(Exact name of registrant as specified in its charter)
|
|
(Address of principal executive offices)
Telephone Number: (
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol | Name of each exchange on which registered | ||
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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
☒ | Accelerated filer | ☐ | |
Non-accelerated filer | ☐ | Smaller reporting company | |
Emerging growth company | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
At February 2, 2020,
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS | |||||||
DEERE & COMPANY | |||||||
STATEMENT OF CONSOLIDATED INCOME | |||||||
For the Three Months Ended February 2, 2020 and January 27, 2019 | |||||||
(In millions of dollars and shares except per share amounts) Unaudited | |||||||
2020 | 2019 |
| |||||
Net Sales and Revenues | |||||||
Net sales | $ | $ | |||||
Finance and interest income |
| ||||||
Other income |
| ||||||
Total |
| ||||||
Costs and Expenses | |||||||
Cost of sales |
| ||||||
Research and development expenses |
| ||||||
Selling, administrative and general expenses |
| ||||||
Interest expense |
| ||||||
Other operating expenses |
| ||||||
Total |
| ||||||
Income of Consolidated Group before Income Taxes |
| ||||||
Provision for income taxes |
| ||||||
Income of Consolidated Group |
| ||||||
Equity in income (loss) of unconsolidated affiliates | ( |
| |||||
Net Income |
| ||||||
Less: Net income attributable to noncontrolling interests |
| ||||||
Net Income Attributable to Deere & Company | $ | $ | |||||
Per Share Data | |||||||
Basic | $ | $ | |||||
Diluted | $ | $ | |||||
Average Shares Outstanding | |||||||
Basic | |||||||
Diluted | |||||||
See Condensed Notes to Interim Consolidated Financial Statements.
2
DEERE & COMPANY | |||||||
STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME | |||||||
For the Three Months Ended February 2, 2020 and January 27, 2019 | |||||||
(In millions of dollars) Unaudited | |||||||
| 2020 |
| 2019 |
| |||
| |||||||
Net Income |
| $ | $ | ||||
Other Comprehensive Income (Loss), Net of Income Taxes | |||||||
Retirement benefits adjustment |
| ||||||
Cumulative translation adjustment |
| ( | |||||
Unrealized loss on derivatives |
|
| ( | ||||
Unrealized gain on debt securities |
| ||||||
Other Comprehensive Income (Loss), Net of Income Taxes |
| ( | |||||
Comprehensive Income of Consolidated Group |
| ||||||
Less: Comprehensive income attributable to noncontrolling interests |
| ||||||
Comprehensive Income Attributable to Deere & Company |
| $ | $ | ||||
See Condensed Notes to Interim Consolidated Financial Statements.
3
DEERE & COMPANY | ||||||||||
CONDENSED CONSOLIDATED BALANCE SHEET | ||||||||||
(In millions of dollars) Unaudited | ||||||||||
| February 2 |
| November 3 |
| January 27 |
| ||||
2020 | 2019 | 2019 |
| |||||||
Assets | ||||||||||
Cash and cash equivalents |
| $ | $ | $ | ||||||
Marketable securities |
|
| ||||||||
Receivables from unconsolidated affiliates |
|
| ||||||||
Trade accounts and notes receivable – net |
|
| ||||||||
Financing receivables – net |
|
| ||||||||
Financing receivables securitized – net |
|
| ||||||||
Other receivables |
|
| ||||||||
Equipment on operating leases – net |
|
| ||||||||
Inventories |
|
| ||||||||
Property and equipment – net |
|
| ||||||||
Investments in unconsolidated affiliates |
|
| ||||||||
Goodwill |
|
| ||||||||
Other intangible assets – net |
|
| ||||||||
Retirement benefits |
|
| ||||||||
Deferred income taxes |
|
| ||||||||
Other assets |
|
| ||||||||
Total Assets |
| $ | $ | $ | ||||||
Liabilities and Stockholders’ Equity | ||||||||||
Liabilities | ||||||||||
Short-term borrowings | $ | $ | $ | |||||||
Short-term securitization borrowings |
|
| ||||||||
Payables to unconsolidated affiliates |
|
| ||||||||
Accounts payable and accrued expenses |
|
| ||||||||
Deferred income taxes |
|
| ||||||||
Long-term borrowings |
|
| ||||||||
Retirement benefits and other liabilities |
|
| ||||||||
Total liabilities |
|
| ||||||||
Commitments and contingencies (Note 16) | ||||||||||
Redeemable noncontrolling interest | ||||||||||
Stockholders’ Equity | ||||||||||
Common stock, $ |
|
| ||||||||
Common stock in treasury | ( |
| ( |
| ( | |||||
Retained earnings |
|
| ||||||||
Accumulated other comprehensive income (loss) | ( |
| ( |
| ( | |||||
Total Deere & Company stockholders’ equity |
|
| ||||||||
Noncontrolling interests |
|
| ||||||||
Total stockholders’ equity |
|
| ||||||||
Total Liabilities and Stockholders’ Equity | $ | $ | $ | |||||||
See Condensed Notes to Interim Consolidated Financial Statements.
4
DEERE & COMPANY | |||||||
STATEMENT OF CONSOLIDATED CASH FLOWS | |||||||
For the Three Months Ended February 2, 2020 and January 27, 2019 | |||||||
(In millions of dollars) Unaudited | |||||||
| 2020 |
| 2019 |
| |||
Cash Flows from Operating Activities | |||||||
Net income |
| $ | $ | ||||
Adjustments to reconcile net income to net cash used for operating activities: | |||||||
Provision for credit losses |
| ||||||
Provision for depreciation and amortization |
| ||||||
Share-based compensation expense |
| ||||||
Undistributed earnings of unconsolidated affiliates |
| ( | |||||
Credit for deferred income taxes | ( |
| ( | ||||
Changes in assets and liabilities: | |||||||
Trade, notes, and financing receivables related to sales |
| ( | |||||
Inventories | ( |
| ( | ||||
Accounts payable and accrued expenses | ( |
| ( | ||||
Accrued income taxes payable/receivable | ( |
| |||||
Retirement benefits |
| ( | |||||
Other |
| ( | |||||
Net cash used for operating activities | ( |
| ( | ||||
Cash Flows from Investing Activities | |||||||
Collections of receivables (excluding receivables related to sales) |
| ||||||
Proceeds from maturities and sales of marketable securities |
| ||||||
Proceeds from sales of equipment on operating leases |
| ||||||
Cost of receivables acquired (excluding receivables related to sales) | ( |
| ( | ||||
Purchases of marketable securities | ( |
| ( | ||||
Purchases of property and equipment | ( |
| ( | ||||
Cost of equipment on operating leases acquired | ( |
| ( | ||||
Other |
| ( | |||||
Net cash provided by investing activities |
| ||||||
Cash Flows from Financing Activities | |||||||
Increase (decrease) in total short-term borrowings | ( |
| |||||
Proceeds from long-term borrowings |
| ||||||
Payments of long-term borrowings | ( |
| ( | ||||
Proceeds from issuance of common stock |
| ||||||
Repurchases of common stock | ( |
| ( | ||||
Dividends paid | ( |
| ( | ||||
Other | ( |
| ( | ||||
Net cash provided by (used for) financing activities | ( |
| |||||
Effect of Exchange Rate Changes on Cash, Cash Equivalents, and Restricted Cash | ( |
| ( | ||||
Net Decrease in Cash, Cash Equivalents, and Restricted Cash | ( | ( | |||||
Cash, Cash Equivalents, and Restricted Cash at Beginning of Period |
| ||||||
Cash, Cash Equivalents, and Restricted Cash at End of Period | $ | $ | |||||
See Condensed Notes to Interim Consolidated Financial Statements.
5
DEERE & COMPANY | |||||||||||||||||||||||
STATEMENT OF CHANGES IN CONSOLIDATED STOCKHOLDERS’ EQUITY | |||||||||||||||||||||||
For the Three Months Ended February 2, 2020 and January 27, 2019 | |||||||||||||||||||||||
(In millions of dollars) Unaudited | |||||||||||||||||||||||
Total Stockholders’ Equity | |||||||||||||||||||||||
Deere & Company Stockholders |
|
| |||||||||||||||||||||
Accumulated | |||||||||||||||||||||||
Total | Other | Redeemable | |||||||||||||||||||||
Stockholders’ | Common | Treasury | Retained | Comprehensive | Noncontrolling | Noncontrolling | |||||||||||||||||
| Equity |
| Stock |
| Stock |
| Earnings |
| Income (Loss) |
| Interests |
|
| Interest | |||||||||
| |||||||||||||||||||||||
Balance October 28, 2018 | $ | $ | $ | ( | $ | $ | ( | $ | $ |
| |||||||||||||
ASU No. 2016-01 adoption | ( | ||||||||||||||||||||||
Net income |
|
| |||||||||||||||||||||
Other comprehensive loss |
| ( | ( |
|
| ||||||||||||||||||
Repurchases of common stock |
| ( | ( | ||||||||||||||||||||
Treasury shares reissued |
| ||||||||||||||||||||||
Dividends declared |
| ( | ( |
|
| ||||||||||||||||||
Stock options and other |
|
| |||||||||||||||||||||
Balance January 27, 2019 | $ | $ | $ | ( | $ | $ | ( | $ | $ | ||||||||||||||
|
| ||||||||||||||||||||||
Balance November 3, 2019 | $ | $ | $ | ( | $ | $ | ( | $ | $ | ||||||||||||||
Net income |
| ||||||||||||||||||||||
Other comprehensive income |
|
| |||||||||||||||||||||
Repurchases of common stock | ( | ( | |||||||||||||||||||||
Treasury shares reissued | |||||||||||||||||||||||
Dividends declared | ( | ( |
| ( | |||||||||||||||||||
Stock options and other | ( |
|
| ||||||||||||||||||||
Balance February 2, 2020 | $ | $ | $ | ( | $ | $ | ( | $ | $ | ||||||||||||||
See Condensed Notes to Interim Consolidated Financial Statements.
6
Condensed Notes to Interim Consolidated Financial Statements (Unaudited)
(1) Organization and Consolidation
The information in the notes and related commentary are presented in a format which includes data grouped as follows:
Equipment Operations – Includes the Company’s agriculture and turf operations and construction and forestry operations with financial services reflected on the equity basis.
Financial Services – Includes primarily the Company’s financing operations.
Consolidated – Represents the consolidation of the equipment operations and financial services. References to "Deere & Company" or "the Company" refer to the entire enterprise.
The Company uses a 52/53 week fiscal year with quarters ending on the last Sunday in the reporting period. The first quarter ends for fiscal year 2020 and 2019 were February 2, 2020 and January 27, 2019, respectively. Both periods contained
Variable Interest Entities
The Company consolidates certain Variable Interest Entities (VIEs) related to retail note securitizations (see Note 12).
The Company also has an interest in a joint venture that manufactures construction equipment in Brazil for local and overseas markets. The joint venture is a VIE; however, the Company is not the primary beneficiary. Therefore, the entity’s financial results are not fully consolidated in the Company’s consolidated financial statements, but are included on the equity basis. The maximum exposure to loss was $
(2) Summary of Significant Accounting Policies and Cash Flow Information
The interim consolidated financial statements of Deere & Company have been prepared by the Company, without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the U.S. have been condensed or omitted as permitted by such rules and regulations. All adjustments, consisting of normal recurring adjustments, have been included. Management believes that the disclosures are adequate to present fairly the financial position, results of operations, and cash flows at the dates and for the periods presented. It is suggested that these interim consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto appearing in the Company’s latest annual report on Form 10-K. Results for interim periods are not necessarily indicative of those to be expected for the fiscal year.
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts and related disclosures. Actual results could differ from those estimates.
Cash Flow Information
All cash flows from the changes in trade accounts and notes receivable are classified as operating activities in the statement of consolidated cash flows as these receivables arise from sales to the Company’s customers. Cash flows from financing receivables that are related to sales to the Company’s customers are also included in operating activities. The remaining financing receivables are related to the financing of equipment sold by independent dealers and are included in investing activities.
The Company had the following non-cash operating and investing activities that were not included in the statement of consolidated cash flows. The Company transferred inventory to equipment on operating leases of approximately $
7
The Company’s restricted cash held at February 2, 2020, November 3, 2019, January 27, 2019, and October 28, 2018 was as follows in millions of dollars:
February 2 | November 3 | January 27 | October 28 | ||||||||||
2020 | 2019 | 2019 | 2018 | ||||||||||
Equipment operations | $ | $ | $ | $ | |||||||||
Financial services | |||||||||||||
Total | $ | $ | $ | $ | |||||||||
The equipment operations’ restricted cash relates to miscellaneous operational activities. The financial services restricted cash primarily relates to securitization of financing receivables (see Note 12). The restricted cash is recorded in “Other assets” in the consolidated balance sheet.
(3) New Accounting Standards
New Accounting Standards Adopted
In the first quarter of 2020, the Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU)
The operating lease liabilities are recorded in “Accounts payable and accrued expenses” and the operating lease right of use assets are recorded in “Other assets.” The finance lease liabilities are recorded in “Short-term borrowings” or “Long-term borrowings” based on the remaining lease term, and the finance lease right of use assets are recorded in “Property and equipment - net.”
November 3, 2019 | Cumulative Effect | November 4, 2019 | ||||||||
Assets | ||||||||||
Other intangible assets - net | $ | $ | ( | $ | ||||||
Other assets | ||||||||||
Liabilities | ||||||||||
Short-term borrowings | $ | $ | $ | |||||||
Accounts payable and accrued expenses | ||||||||||
Long-term borrowings | ||||||||||
The Company implemented a new system for lessee accounting with new processes and controls at the time of adopting the ASU. The adoption did not have a material effect on the Company’s operating results or cash flows. See Note 15 for additional information.
8
The Company also adopted the following standards in the first quarter of 2020, none of which had a material effect on the Company’s consolidated financial statements:
Accounting Standards Updates
Premium Amortization on Purchased Callable Debt Securities, which amends ASC 310-20, Receivables – Nonrefundable Fees and Other Costs | ||
Improvements to Nonemployee Share-Based Payment Accounting, which amends ASC 718, Compensation – Stock Compensation | ||
2019-04 | Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The adoption was for clarifications to ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities |
New Accounting Standards to be Adopted
In June 2016, the FASB issued ASU
In August 2018, the FASB issued ASU
In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The effective dates for the separate portions of the ASU and the expected effect on the consolidated financial statements are as follows for the portions that have not yet been adopted: (1) clarifications to ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, is the first quarter of fiscal year 2021, which is under evaluation, and (2) clarifications to ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities is the first quarter of fiscal year 2021, which will not have a material effect on the Company’s consolidated financial statements.
In December 2019, the FASB issued ASU
9
(4) Revenue Recognition
The Company’s revenue by primary geographical market, major product line, and timing of revenue recognition in millions of dollars follow:
Three Months Ended February 2, 2020 | |||||||||||||
Agriculture and Turf | Construction and Forestry | Financial Services | Total | ||||||||||
Primary geographical markets: |
|
|
|
|
| ||||||||
United States | $ | $ | $ | $ | |||||||||
Canada |
|
| |||||||||||
Western Europe |
|
| |||||||||||
Central Europe and CIS |
|
| |||||||||||
Latin America |
|
| |||||||||||
Asia, Africa, Australia, New Zealand, and Middle East | |||||||||||||
Total | $ | $ | $ | $ | |||||||||
Major product lines: |
|
| |||||||||||
Large Agriculture | $ |
|
| $ | |||||||||
Small Agriculture |
|
|
|
| |||||||||
Turf |
|
|
|
| |||||||||
Construction |
| $ |
|
|
| ||||||||
Compact Construction |
|
| |||||||||||
Roadbuilding |
|
|
|
| |||||||||
Forestry |
|
|
|
| |||||||||
Financial Products | $ |
| |||||||||||
Other |
|
|
| ||||||||||
Total | $ | $ | $ | $ | |||||||||
Timing of revenue recognition: |
|
| |||||||||||
Revenue recognized at a point in time | $ | $ | $ | $ | |||||||||
Revenue recognized over time | |||||||||||||
Total | $ | $ | $ | $ | |||||||||
Three Months Ended January 27, 2019 | |||||||||||||
Agriculture and Turf | Construction and Forestry | Financial Services | Total | ||||||||||
Primary geographical markets: |
|
|
|
|
| ||||||||
United States | $ | $ | $ | $ | |||||||||
Canada |
|
| |||||||||||
Western Europe |
|
| |||||||||||
Central Europe and CIS |
|
| |||||||||||
Latin America |
|
| |||||||||||
Asia, Africa, Australia, New Zealand, and Middle East | |||||||||||||
Total | $ | $ | $ | $ | |||||||||
Major product lines: |
|
| |||||||||||
Large Agriculture | $ |
|
| $ | |||||||||
Small Agriculture |
|
|
|
| |||||||||
Turf |
|
|
|
| |||||||||
Construction |
| $ |
|
|
| ||||||||
Compact Construction |
|
| |||||||||||
Roadbuilding |
|
|
|
| |||||||||
Forestry |
|
|
|
| |||||||||
Financial Products | $ |
| |||||||||||
Other |
|
|
| ||||||||||
Total | $ | $ | $ | $ | |||||||||
Timing of revenue recognition: |
|
| |||||||||||
Revenue recognized at a point in time | $ | $ | $ | ||||||||||
Revenue recognized over time | $ | ||||||||||||
Total | $ | $ | $ | $ | |||||||||
10
Following is a description of the Company’s major product lines:
Large Agriculture – Includes net sales of tractors with more than approximately 200 horsepower and associated attachments, combines, cotton pickers, cotton strippers, self-propelled forage harvesters and related attachments, and sugarcane harvesters, harvesting front-end equipment, sugarcane loaders and pull behind scrapers, tillage, seeding, and application equipment, including sprayers, nutrient management and soil preparation machinery, and related attachments and service parts.
Small Agriculture – Includes net sales of medium and utility tractors with less than approximately 200 horsepower, hay and forage equipment, balers, mowers, and related attachments and service parts.
Turf – Includes net sales of turf and utility equipment, including riding lawn equipment and walk-behind mowers, golf course equipment, utility vehicles, and commercial mowing equipment, along with a broad line of associated implements, other outdoor power products, and related attachments and service parts.
Construction – Includes net sales of a broad range of machines used in construction, earthmoving, and material handling, including backhoe loaders, crawler dozers and loaders, four-wheel-drive loaders, excavators, motor graders, articulated dump trucks, and related attachments and service parts.
Compact Construction – Includes net sales of smaller construction equipment, including compact excavators, compact track loaders, compact wheel loaders, skid steers, landscape loaders, and related attachments and service parts.
Roadbuilding – Includes net sales of equipment used in roadbuilding and renovation, including milling machines, recyclers, slipform pavers, surface miners, asphalt pavers, compactors, tandem and static rollers, mobile crushers and screens, mobile and stationary asphalt plants, and related attachments and service parts.
Forestry – Includes net sales of equipment used in timber harvesting, including log skidders, feller bunchers, log loaders, log forwarders, log harvesters, and related attachments and service parts.
Financial Products – Includes finance and interest income primarily from retail notes related to sales of John Deere equipment to end customers, wholesale financing to dealers of John Deere equipment, and revolving charge accounts; lease income from retail leases of John Deere equipment; and revenue from extended warranties.
Other – Includes sales of certain components to other equipment manufacturers, revenue earned over time from precision guidance, telematics, and other information enabled solutions, revenue from service performed at company owned dealerships and service centers, gains on disposition of property and businesses, trademark licensing revenue, and other miscellaneous revenue items.
The Company invoices in advance of recognizing the sale of certain products and the revenue for certain services. These items are primarily for premiums for extended warranties, advance payments for future equipment sales, and subscription and service revenue related to precision guidance and telematic services. These advanced customer payments are presented as deferred revenue, a contract liability, in “Accounts payable and accrued expenses” in the consolidated balance sheet. The deferred revenue received, but not recognized in revenue, including extended warranty premiums also shown in Note 16, was $
The Company entered into contracts with customers to deliver equipment and services that have not been recognized at February 2, 2020 because the equipment or services have not been provided. These contracts primarily relate to extended warranty and certain precision guidance and telematic services. The amount of unsatisfied performance obligations for contracts with an original duration greater than one year is $
11
(5) Other Comprehensive Income Items
The after-tax changes in accumulated other comprehensive income (loss) in millions of dollars follow:
|
|
|
|
| Total |
| ||||||||||
Unrealized | Unrealized | Accumulated | ||||||||||||||
Retirement | Cumulative | Gain (Loss) | Gain (Loss) | Other | ||||||||||||
Benefits | Translation | on | on | Comprehensive | ||||||||||||
Adjustment | Adjustment | Derivatives | Debt Securities | Income (Loss) | ||||||||||||
Balance October 28, 2018 | $ | ( | $ | ( |
| $ | $ | ( | $ | ( | ||||||
ASU No. 2016-01 adoption | ( | ( | ||||||||||||||
Other comprehensive income (loss) items before reclassification |
| ( | ( | ( | ||||||||||||
Amounts reclassified from accumulated other comprehensive income |
| ( | ||||||||||||||
Net current period other comprehensive income (loss) |
|
| ( |
| ( |
|
| ( | ||||||||
Balance January 27, 2019 | $ | ( | $ | ( | $ | $ | ( | $ | ( | |||||||
Balance November 3, 2019 | $ | ( | $ | ( |
| $ | ( | $ | $ | ( | ||||||
Other comprehensive income (loss) items before reclassification | ( | |||||||||||||||
Amounts reclassified from accumulated other comprehensive income | ||||||||||||||||
Net current period other comprehensive income (loss) |
| |||||||||||||||
Balance February 2, 2020 | $ | ( |
| $ | ( |
| $ | ( |
| $ |
| $ | ( | |||
Following are amounts recorded in and reclassifications out of other comprehensive income (loss), and the income tax effects, in millions of dollars:
| Before |
| Tax |
| After |
| ||||
Tax | (Expense) | Tax |
| |||||||
Three Months Ended February 2, 2020 | Amount | Credit | Amount |
| ||||||
Cumulative translation adjustment |
| $ | $ | |||||||
Unrealized gain (loss) on derivatives: | ||||||||||
Unrealized hedging gain (loss) | ( | $ | ( | |||||||
Reclassification of realized (gain) loss to: | ||||||||||
Interest rate contracts – Interest expense | ( | |||||||||
Net unrealized gain (loss) on derivatives |
|
|
| |||||||
Unrealized gain (loss) on debt securities: | ||||||||||
Unrealized holding gain (loss) | ( | |||||||||
Net unrealized gain (loss) on debt securities | ( | |||||||||
Retirement benefits adjustment: | ||||||||||
Pensions | ||||||||||
Net actuarial gain (loss) |
| |||||||||
Reclassification to other operating expenses through amortization of: * | ||||||||||
Actuarial (gain) loss | ( | |||||||||
Prior service (credit) cost | ( | |||||||||
Settlements | ( | |||||||||
OPEB | ||||||||||
Net actuarial gain (loss) | ( | |||||||||
Reclassification to other operating expenses through amortization of: * | ||||||||||
Actuarial (gain) loss | ( | |||||||||
Prior service (credit) cost | ( |
| ( | |||||||
Net unrealized gain (loss) on retirement benefits adjustment | ( | |||||||||
Total other comprehensive income (loss) |
| $ | $ | ( | $ | |||||
(continued)
12
| Before |
| Tax |
| After |
| ||||
Tax | (Expense) | Tax |
| |||||||
Three Months Ended January 27, 2019 | Amount | Credit | Amount |
| ||||||
Cumulative translation adjustment |
| $ | ( |
| $ | ( | ||||
Unrealized gain (loss) on derivatives: | ||||||||||
Unrealized hedging gain (loss) | ( | $ | ( | |||||||
Reclassification of realized (gain) loss to: |
| |||||||||
Interest rate contracts – Interest expense | ( |
| ( | |||||||
Net unrealized gain (loss) on derivatives | ( | ( | ||||||||
Unrealized gain (loss) on debt securities: | ||||||||||
Unrealized holding gain (loss) | ( | |||||||||
Net unrealized gain (loss) on debt securities | ( | |||||||||
Retirement benefits adjustment: | ||||||||||
Pensions | ||||||||||
Net actuarial gain (loss) |
| |||||||||
Reclassification to other operating expenses through amortization of: * |
| |||||||||
Actuarial (gain) loss | ( | |||||||||
Prior service (credit) cost | ( | |||||||||
OPEB |
| |||||||||
Reclassification to other operating expense through amortization of: * |
| |||||||||
Actuarial (gain) loss | ( | |||||||||
Prior service (credit) cost | ( | ( | ||||||||
Net unrealized gain (loss) on retirement benefits adjustment | ( | |||||||||
Total other comprehensive income (loss) |
| $ | ( | $ | ( | $ | ( | |||
* These accumulated other comprehensive income amounts are included in net periodic pension and OPEB costs. See Note 8 for additional detail.
In the first quarter of and , the noncontrolling interests’ comprehensive income was $
(6) Dividends Declared and Paid
Dividends declared and paid on a per share basis were as follows:
Three Months Ended |
| ||||||
February 2 | January 27 |
| |||||
2020 | 2019 |
| |||||
Dividends declared |
| $ |
| $ | |||
Dividends paid | $ | $ | |||||
(7) Earnings Per Share
A reconciliation of basic and diluted net income per share attributable to Deere & Company follows in millions, except per share amounts:
| Three Months Ended |
| |||||
February 2 | January 27 | ||||||
2020 | 2019 | ||||||
Net income attributable to Deere & Company |
| $ |
| $ | |||
Average shares outstanding |
| ||||||
Basic per share | $ | $ | |||||
Average shares outstanding |
| ||||||
Effect of dilutive share-based compensation |
| ||||||
Total potential shares outstanding |
| ||||||
Diluted per share | $ | $ | |||||
During the first quarter of 2020 and 2019,
13
(8) Pension and Other Postretirement Benefits
The Company has several defined benefit pension plans and postretirement benefit (OPEB) plans, primarily health care and life insurance plans, covering its U.S. employees and employees in certain foreign countries.
The worldwide components of net periodic pension cost consisted of the following in millions of dollars:
Three Months Ended |
| ||||||
February 2 | January 27 |
| |||||
2020 | 2019 |
| |||||
Service cost |
| $ |
| $ | |||
Interest cost |
| ||||||
Expected return on plan assets | ( |
| ( | ||||
Amortization of actuarial loss |
| ||||||
Amortization of prior service cost |
| ||||||
Settlements |
|
| |||||
Net cost | $ | $ | |||||
The worldwide components of net periodic OPEB cost consisted of the following in millions of dollars:
Three Months Ended |
| ||||||
February 2 | January 27 |
| |||||
2020 | 2019 |
| |||||
Service cost |
| $ |
| $ | |||
Interest cost |
| ||||||
Expected return on plan assets | ( |
| ( | ||||
Amortization of actuarial loss |
| ||||||
Amortization of prior service credit | ( |
| ( | ||||
Curtailments | |||||||
Net cost | $ | $ | |||||
The components of net periodic pension and OPEB costs excluding the service cost component are included in the line item “” in the statement of consolidated income.
In the first quarter of 2020, the Company remeasured the U.S. OPEB health care plans. The wage plan was remeasured due to the U.S. enactment of the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) that repealed the health insurance provider fee effective in 2021. The salary plans were remeasured due to the U.S. voluntary employee-separation program (see Note 20), which resulted in a $
During the first three months of 2020, the Company contributed approximately $
(9) Income Taxes
The lower effective tax rate in the first quarter of 2020 primarily resulted from two discrete items. In January 2020, the Company changed the corporate structure of two foreign holding subsidiaries to be indirect branches of Deere & Company. The change in tax status generated a capital loss that will be carried back in the Company’s U.S. income tax return resulting in a $
The Company’s unrecognized tax benefits at February 2, 2020 were $
14
unrecognized tax benefits for the first three months of 2020 were not significant. The Company expects that any reasonably possible change in the amounts of unrecognized tax benefits in the next 12 months would not be significant.
(10) Segment Reporting
Worldwide net sales and revenues, operating profit, and identifiable assets by segment in millions of dollars follow:
Three Months Ended |
| ||||||||
| February 2 | January 27 | % |
| |||||
2020 | 2019 | Change |
| ||||||
Net sales and revenues: |
|
|
|
|
|
| |||
Agriculture and turf |
| $ | $ | - | |||||
Construction and forestry |
| - | |||||||
Total net sales |
| - | |||||||
Financial services |
| + | |||||||
Other revenues |
| - | |||||||
Total net sales and revenues |
| $ | $ | - | |||||
Operating profit: * | |||||||||
Agriculture and turf |
| $ | $ | + | |||||
Construction and forestry |
| - | |||||||
Financial services |
| - | |||||||
Total operating profit |
| - | |||||||
Reconciling items ** | ( |
| ( | - | |||||
Income taxes | ( |
| ( | - | |||||
Net income attributable to Deere & Company |
| $ | $ | + | |||||
Intersegment sales and revenues: | |||||||||
Agriculture and turf net sales |
| $ | $ | - | |||||
Construction and forestry net sales |
| ||||||||
Financial services |
| - | |||||||
Equipment operations outside the U.S. and Canada: | |||||||||
Net sales |
| $ | $ | - | |||||
Operating profit |
| + | |||||||
| February 2 |
| November 3 |
| |||||
2020 | 2019 |
|
| ||||||
Identifiable assets: | |||||||||
Agriculture and turf |
| $ | $ |
| + | ||||
Construction and forestry |
| ||||||||
Financial services |
| - | |||||||
Corporate |
| - | |||||||
Total assets |
| $ | $ | - | |||||
* Operating profit is income from continuing operations before corporate expenses, certain external interest expense, certain foreign exchange gains and losses, and income taxes. Operating profit of the financial services segment includes the effect of interest expense and foreign exchange gains and losses.
** Reconciling items are primarily corporate expenses, certain external interest expense, certain foreign exchange gains and losses, pension and postretirement benefit costs excluding the service cost component, and net income attributable to noncontrolling interests.
15
(11) Financing Receivables
An age analysis of past due financing receivables that are still accruing interest and non-performing financing receivables in millions of dollars follows:
February 2, 2020 | |||||||||||||
|
|
| 90 Days |
|
| ||||||||
30-59 Days | 60-89 Days | or Greater | Total | ||||||||||
Past Due | Past Due | Past Due | Past Due | ||||||||||
Retail Notes: | |||||||||||||
Agriculture and turf |
| $ |
| $ |
| $ |
| $ | |||||
Construction and forestry | |||||||||||||
Other: | |||||||||||||
Agriculture and turf | |||||||||||||
Construction and forestry |
| ||||||||||||
Total |
| $ |
| $ |
| $ |
| $ | |||||
|
| Total | |||||||||||
Total | Total | Financing | |||||||||||
Past Due | Non-Performing | Current | Receivables | ||||||||||
Retail Notes: | |||||||||||||
Agriculture and turf |
| $ |
| $ |
| $ |
| $ | |||||
Construction and forestry | |||||||||||||
Other: | |||||||||||||
Agriculture and turf | |||||||||||||
Construction and forestry | |||||||||||||
Total |
| $ |
| $ |
| $ | |||||||
Less allowance for credit losses | |||||||||||||
Total financing receivables – net |
| $ | |||||||||||
16
November 3, 2019 | |||||||||||||
|
|
| 90 Days |
|
| ||||||||
30-59 Days | 60-89 Days | or Greater | Total | ||||||||||
Past Due | Past Due | Past Due | Past Due |
| |||||||||
Retail Notes: | |||||||||||||
Agriculture and turf | $ | | $ | | $ | | $ | ||||||
Construction and forestry |
| | |
| |
|
| ||||||
Other: | |||||||||||||
Agriculture and turf |
| | |
| |
|
| ||||||
Construction and forestry |
| | |
|
|
| |||||||
Total | $ | $ | $ | $ | |||||||||
|
| Total |
| ||||||||||
Total | Total |
| Financing |
| |||||||||
Past Due | Non-Performing | Current | Receivables |
| |||||||||
Retail Notes: | |||||||||||||
Agriculture and turf | $ | $ | | $ | | $ | |||||||
Construction and forestry |
| |
| |
|
| |||||||
Other: | |||||||||||||
Agriculture and turf |
| |
| |
|
| |||||||
Construction and forestry |
| |
| |
|
| |||||||
Total | $ | $ | $ |
| |||||||||
Less allowance for credit losses | |
| |||||||||||
Total financing receivables – net | $ | ||||||||||||
January 27, 2019 | |||||||||||||
|
|
| 90 Days |
|
| ||||||||
30-59 Days | 60-89 Days | or Greater | Total | ||||||||||
Past Due | Past Due | Past Due | Past Due | ||||||||||
Retail Notes: | |||||||||||||
Agriculture and turf |
| $ | | $ | |
| $ | |
| $ |
| ||
Construction and forestry | | |
| | |||||||||
Other: | |||||||||||||
Agriculture and turf | | |
| | |||||||||
Construction and forestry | | |
|
| |||||||||
Total | $ | $ | $ | $ | |||||||||
Total | |||||||||||||
Total | Total | Financing | |||||||||||
Past Due | Non-Performing | Current | Receivables | ||||||||||
Retail Notes: | |||||||||||||
Agriculture and turf | $ | $ | | $ | | $ | |||||||
Construction and forestry |
| |
| | |||||||||
Other: | |||||||||||||
Agriculture and turf |
| |
| | |||||||||
Construction and forestry |
| |
| | |||||||||
Total | $ | $ | $ | ||||||||||
Less allowance for credit losses | | ||||||||||||
Total financing receivables – net | $ | ||||||||||||
17
An analysis of the allowance for credit losses and investment in financing receivables in millions of dollars during the periods follows:
Three Months Ended February 2, 2020 | |||||||||||||
Revolving | |||||||||||||
Retail | Charge | ||||||||||||
Notes | Accounts | Other | Total | ||||||||||
Allowance: |
|
|
|
|
|
|
|
|
|
|
| ||
Beginning of period balance |
| $ |
| $ | $ | $ | |||||||
Provision (credit) | ( | ||||||||||||
Write-offs | ( | ( | ( | ( | |||||||||
Recoveries |
| ||||||||||||
Translation adjustments | ( |
| |||||||||||
End of period balance * |
| $ | |
| $ | | $ | | $ | ||||
Financing receivables: | |||||||||||||
End of period balance |
| $ |
| $ | $ | $ | |||||||
Balance individually evaluated ** |
| $ |
|
| $ | $ | |||||||
Three Months Ended January 27, 2019 |
| ||||||||||||
Revolving |
| ||||||||||||
Retail | Charge |
| |||||||||||
Notes | Accounts | Other | Total | ||||||||||
Allowance: |
|
|
|
|
|
|
|
| |||||
Beginning of period balance | $ |
| $ | $ | $ | ||||||||
Provision (credit) |
| ( |
| ||||||||||
Write-offs |
| ( | ( | ( |
| ( | |||||||
Recoveries |
|
|
| ||||||||||
Translation adjustments |
| ( |
|
|
| ( | |||||||
End of period balance * | $ | | $ | | $ | | $ | ||||||
Financing receivables: | |||||||||||||
End of period balance | $ | |
| $ | | $ | | $ | |||||
Balance individually evaluated ** | $ | |
| $ | | $ | | $ | |||||
* Individual allowances were not significant.
** Remainder is collectively evaluated.
18
An analysis of the impaired financing receivables in millions of dollars follows:
|
| Unpaid |
|
| Average |
| |||||||
Recorded | Principal | Specific | Recorded | ||||||||||
Investment | Balance | Allowance | Investment | ||||||||||
February 2, 2020* | |||||||||||||
Receivables with specific allowance *** |
| $ |
| $ |
| $ | $ | ||||||
Receivables without a specific allowance ** |
| ||||||||||||
Total |
| $ |
| $ |
| $ | $ | ||||||
Agriculture and turf |
| $ |
| $ |
| $ | $ | ||||||
Construction and forestry |
| $ |
| $ | $ |
| $ | ||||||
November 3, 2019* | |||||||||||||
Receivables with specific allowance ** | $ | $ | $ | $ | |||||||||
Receivables without a specific allowance ** |
|
|
|
| |||||||||
Total | $ |
| $ |
| $ | $ | |||||||
Agriculture and turf | $ | $ | $ | $ | |||||||||
Construction and forestry | $ | $ | $ | $ | |||||||||
January 27, 2019* | |||||||||||||
Receivables with specific allowance ** | $ | $ | $ | $ | |||||||||
Receivables without a specific allowance ** |
|
|
|
| |||||||||
Total | $ |
| $ |
| $ | $ | |||||||
Agriculture and turf | $ | $ | $ | $ | |||||||||
Construction and forestry | $ | $ | $ | $ | |||||||||
* Finance income recognized was not material.
** Primarily retail notes.
*** Primarily retail notes and wholesale receivables.
19
(12) Securitization of Financing Receivables
The Company, as a part of its overall funding strategy, periodically transfers certain financing receivables (retail notes) into variable interest entities (VIEs) that are special purpose entities (SPEs), or non-VIE banking operations, as part of its asset-backed securities programs (securitizations). The structure of these transactions is such that the transfer of the retail notes did not meet the accounting criteria for sales of receivables, and is, therefore, accounted for as a secured borrowing. SPEs utilized in securitizations of retail notes differ from other entities included in the Company’s consolidated statements because the assets they hold are legally isolated. Use of the assets held by the SPEs or the non-VIEs is restricted by terms of the documents governing the securitization transactions.
In these securitizations, the retail notes are transferred to certain SPEs or to non-VIE banking operations, which in turn issue debt to investors. The debt securities issued to the third party investors resulted in secured borrowings, which are recorded as “Short-term securitization borrowings” on the balance sheet. The securitized retail notes are recorded as “Financing receivables securitized – net” on the balance sheet. The total restricted assets on the consolidated balance sheet related to these securitizations include the financing receivables securitized less an allowance for credit losses, and other assets primarily representing restricted cash. Restricted cash results from contractual requirements in securitized borrowing arrangements and serves as a credit enhancement. The restricted cash is used to satisfy payment deficiencies, if any, in the required payments on secured borrowings. The balance of restricted cash is contractually stipulated and is either a fixed amount as determined by the initial balance of the financing receivables securitized or a fixed percentage of the outstanding balance of the securitized financing receivables. The restriction is removed either after all secured borrowing payments are made or proportionally as these receivables are collected and borrowing obligations reduced. For those securitizations in which retail notes are transferred into SPEs, the SPEs supporting the secured borrowings are consolidated unless the Company does not have both the power to direct the activities that most significantly impact the SPEs’ economic performance and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the SPEs. No additional support to these SPEs beyond what was previously contractually required has been provided during the reporting periods.
In certain securitizations, the Company consolidates the SPEs since it has both the power to direct the activities that most significantly impact the SPEs’ economic performance through its role as servicer of all the receivables held by the SPEs and the obligation through variable interests in the SPEs to absorb losses or receive benefits that could potentially be significant to the SPEs. The restricted assets (retail notes securitized, allowance for credit losses, and other assets) of the consolidated SPEs totaled $
In certain securitizations, the Company transfers retail notes to non-VIE banking operations, which are not consolidated since the Company does not have a controlling interest in the entities. The Company’s carrying values and interests related to the securitizations with the unconsolidated non-VIEs were restricted assets (retail notes securitized, allowance for credit losses, and other assets) of $
In certain securitizations, the Company transfers retail notes into bank-sponsored, multi-seller, commercial paper conduits, which are SPEs that are not consolidated. The Company does not service a significant portion of the conduits’ receivables, and therefore, does not have the power to direct the activities that most significantly impact the conduits’ economic performance. These conduits provide a funding source to the Company (as well as other transferors into the conduit) as they fund the retail notes through the issuance of commercial paper. The Company’s carrying values and variable interest related to these conduits were restricted assets (retail notes securitized, allowance for credit losses, and other assets) of $
20
The Company’s carrying amount of the liabilities to the unconsolidated conduits, compared to the maximum exposure to loss related to these conduits, which would only be incurred in the event of a complete loss on the restricted assets, was as follows in millions of dollars:
| February 2, 2020 |
| ||
Carrying value of liabilities |
| $ | ||
Maximum exposure to loss | ||||
The total assets of unconsolidated VIEs related to securitizations were approximately $
The components of consolidated restricted assets related to secured borrowings in securitization transactions follow in millions of dollars:
| February 2 |
| November 3 |
| January 27 |
| ||||
2020 | 2019 | 2019 |
| |||||||
Financing receivables securitized (retail notes) |
| $ | $ | $ | ||||||
Allowance for credit losses | ( |
| ( |
| ( | |||||
Other assets |
|
| ||||||||
Total restricted securitized assets |
| $ | $ | $ | ||||||
The components of consolidated secured borrowings and other liabilities related to securitizations follow in millions of dollars:
| February 2 |
| November 3 |
| January 27 |
| ||||
2020 | 2019 | 2019 |
| |||||||
Short-term securitization borrowings |
| $ | $ | $ | ||||||
Accrued interest on borrowings |
|
| ||||||||
Total liabilities related to restricted securitized assets |
| $ | $ | $ | ||||||
The secured borrowings related to these restricted securitized retail notes are obligations that are payable as the retail notes are liquidated. Repayment of the secured borrowings depends primarily on cash flows generated by the restricted assets. Due to the Company’s short-term credit rating, cash collections from these restricted assets are not required to be placed into a segregated collection account until immediately prior to the time payment is required to the secured creditors. At February 2, 2020, the maximum remaining term of all securitized retail notes was approximately
(13) Inventories
| February 2 |
| November 3 |
| January 27 |
| ||||
2020 | 2019 | 2019 |
| |||||||
Raw materials and supplies |
| $ | $ | $ | ||||||
Work-in-process |
|
| ||||||||
Finished goods and parts |
|
| ||||||||
Total FIFO value |
|
| ||||||||
Less adjustment to LIFO value |
|
| ||||||||
Inventories |
| $ | $ | $ | ||||||
21
(14) Goodwill and Other Intangible Assets-Net
The changes in amounts of goodwill by operating segments were as follows in millions of dollars:
| Agriculture |
| Construction |
|
| |||||
and Turf | and Forestry | Total |
| |||||||
Goodwill at October 28, 2018 | $ | $ | $ | |||||||
Translation adjustments and other |
| ( |
| ( | ||||||
Goodwill at January 27, 2019 | $ | $ | $ | |||||||
Goodwill at November 3, 2019 | $ | $ | $ | |||||||
Translation adjustments and other | ( | |||||||||
Goodwill at February 2, 2020 | $ | $ | $ | |||||||
There were
The components of other intangible assets were as follows in millions of dollars:
| February 2 |
| November 3 |
| January 27 |
| ||||
2020 | 2019 | 2019 |
| |||||||
Amortized intangible assets: | ||||||||||
Customer lists and relationships |
| $ | $ | $ | ||||||
Technology, patents, trademarks, and other |
|
| ||||||||
Total at cost |
|
| ||||||||
Less accumulated amortization * |
|
| ||||||||
Total | ||||||||||
Unamortized intangible assets: | ||||||||||
In-process research and development | ||||||||||
Other intangible assets – net |
| $ | $ | $ | ||||||
* Accumulated amortization at February 2, 2020, November 3, 2019, and January 27, 2019 for customer lists and relationships totaled $
The amortization of other intangible assets in the first quarter of 2020 and 2019 was $
(15) Leases
The Company is both a lessee and a lessor. The Company leases for its own use, under leases with expected use periods generally ranging from less than
The Company determines if an arrangement is or contains a lease at the contract inception.
Lessee
The Company recognizes on the balance sheet a lease liability and a right of use asset for leases with a term greater than 12 months for both operating and finance leases.
The amounts of the lease liability and right of use asset are determined at lease commencement and are based on the present value of the lease payments over the lease term. The lease payments are discounted using the Company’s incremental borrowing rate since the rate implicit in the lease is generally not readily determinable. The Company determines the incremental borrowing rate for each lease based primarily on the lease term and the economic environment of the country where the asset will be used, adjusted as if the borrowings were collateralized. Leases with contractual periods greater than 12 months and that do not meet the finance lease criteria are classified as operating leases.
22
Certain real estate leases contain one or more to or , that can generally extend the lease term from to
The lease expense by type consisted of the following in millions of dollars:
Three Months Ended | ||||
February 2, 2020 | ||||
Operating lease expense | $ | |||
Short-term lease expense | ||||
Variable lease expense | ||||
Finance lease depreciation expense | ||||
Total lease expense | $ | |||
Operating and finance lease right of use assets and liabilities follow in millions of dollars:
February 2, 2020 | ||||
Operating leases | ||||
$ | ||||
Finance leases | ||||
$ | ||||
Total finance lease liabilities | $ | |||
The weighted-average remaining lease term in years and discount rates follows:
February 2, 2020 | |||
Weighted-average remaining lease terms | |||
Operating leases | |||
Finance leases | |||
Weighted-average discount rate | |||
Operating leases | |||
Finance leases |
Lease payment amounts in each of the next five years at February 2, 2020 follow in millions of dollars:
Operating | Finance | ||||||
February 2, 2020 | Leases | Leases | |||||
Remainder of 2020 | $ | $ | |||||
2021 | |||||||
2022 | |||||||
2023 | |||||||
2024 | |||||||
2025 |
| ||||||
Later years | |||||||
Total lease payments | |||||||
Less imputed interest | |||||||
Total lease liabilities | $ | $ | |||||
23
Future minimum lease payments under the previous lease standard for operating and finance leases at November 3, 2019 follow in millions of dollars:
Operating | Capital | ||||||
November 3, 2019 | Leases | Leases | |||||
2020 | $ | $ | |||||
2021 | |||||||
2022 | |||||||
2023 | |||||||
2024 | |||||||
Later years | |||||||
Total minimum lease payments | $ | $ | |||||
Cash paid for amounts included in the measurement of lease liabilities:
Three Months Ended | ||||
February 2, 2020 | ||||
Operating cash flows from operating leases | $ | |||
Financing cash flows from finance leases | ||||
Right of use assets obtained in exchange for lease liabilities:
Three Months Ended | ||||
February 2, 2020 | ||||
Operating leases | $ | |||
Finance leases | ||||
Lessor
The Company leases equipment manufactured or sold by the Company and a limited amount of non-Deere equipment to retail customers through sales-type, direct financing, and operating leases. Sales-type and direct financing leases are reported in “Financing receivables - net” on the consolidated balance sheet. Operating leases are reported in “Equipment on operating leases - net” on the consolidated balance sheet.
The Company estimates the residual values for operating leases at lease inception based on several factors, including lease term, expected hours of usage, historical wholesale sale prices, return experience, intended use of the equipment, market dynamics and trends, and dealer residual guarantees. The Company reviews residual value estimates during the lease term and tests the carrying value of its operating lease assets for impairment when events or circumstances necessitate. The depreciation is adjusted on a straight-line basis over the remaining lease term if residual value estimates decline. Lease agreements include usage limits and specifications on machine condition, which allow the Company to assess lessees for excess use or damages to the underlying equipment.
The Company has elected to
24
Lease revenues earned by the Company were as follows in millions of dollars:
Three Months Ended | ||||
February 2, 2020 | ||||
Sales-type and direct finance lease revenues | $ | |||
Operating lease revenues | ||||
Variable lease revenues | ||||
Total lease revenues | $ | |||
At the time of accepting a lease that qualifies as a sales-type or direct financing lease, the Company records the gross amount of lease payments receivable, estimated residual value of the leased equipment, and unearned finance income. The unearned finance income is recognized as revenue over the lease term using the interest method.
Sales-type and direct financing lease receivables by product category were as follows in millions of dollars:
February 2 | November 3 | ||||||
2020 | 2019 | ||||||
Agriculture and turf | $ | $ | |||||
Construction and forestry | |||||||
Total | |||||||
Guaranteed residual values | |||||||
Unguaranteed residual values | |||||||
Less unearned finance income | |||||||
Financing leases receivables | $ | $ | |||||
Scheduled payments, including guaranteed residual values, on sales-type and direct financing lease receivables at February 2, 2020 follow in millions of dollars:
February 2 | ||||
2020 | ||||
Due in: | ||||
Remainder of 2020 | $ | |||
2021 | ||||
2022 | ||||
2023 | ||||
2024 | ||||
2025 | ||||
Later years | ||||
Total | $ | |||
Scheduled payments on financing lease receivables under the previous lease standard at November 3, 2019 follow in millions of dollars:
November 3 | ||||
2019 | ||||
Due in: | ||||
2020 | $ | |||
2021 | ||||
2022 | ||||
2023 | ||||
2024 | ||||
Later years | ||||
Total | $ | |||
Lease payments from operating leases are recorded as income on a straight-line method over the lease terms. Operating lease assets are recorded at cost and depreciated to their estimated residual value on a straight-line method over the terms of the leases.
25
The cost of equipment on operating leases by product category was as follows in millions of dollars:
February 2 | November 3 | ||||||
2020 | 2019 | ||||||
Agriculture and turf | $ | $ | |||||
Construction and forestry | |||||||
Total | |||||||
Less accumulated depreciation | |||||||
Equipment on operating leases - net | $ | $ | |||||
The total operating lease residual values at February 2, 2020 and November 3, 2019 were $
Lease payments for equipment on operating leases at February 2, 2020 were scheduled as follows in millions of dollars:
February 2 | ||||
2020 | ||||
Due in: | ||||
Remainder of 2020 | $ | |||
2021 | ||||
2022 | ||||
2023 | ||||
2024 | ||||
2025 | ||||
Total | $ | |||
Rental payments for equipment on operating leases under the previous lease standard at November 3, 2019 were scheduled as follows in millions of dollars:
November 3 | ||||
2019 | ||||
Due in: | ||||
2020 | $ | |||
2021 | ||||
2022 | ||||
2023 | ||||
2024 | ||||
Total | $ | |||
The Company discusses with lessees and dealers options to purchase the equipment or extend the lease prior to lease maturity. Equipment returned to the Company upon termination of leases is remarketed by the Company. The matured operating lease inventory balances at February 2, 2020 and November 3, 2019 were $
(16) Commitments and Contingencies
The Company generally determines its total warranty liability by applying historical claims rate experience to the estimated amount of equipment that has been sold and is still under warranty based on dealer inventories and retail sales. The historical claims rate is primarily determined by a review of
26
A reconciliation of the changes in the warranty liability and unearned premiums in millions of dollars follows:
Three Months Ended |
| ||||||
February 2 | January 27 |
| |||||
2020 | 2019 |
| |||||
Beginning of period balance |
| $ |
| $ | |||
Payments | ( |
| ( | ||||
Amortization of premiums received | ( |
| ( | ||||
Accruals for warranties |
| ||||||
Premiums received |
| ||||||
Foreign exchange | ( |
| ( | ||||
End of period balance | $ | $ | |||||
At February 2, 2020, the Company had approximately $
At February 2, 2020, the Company had commitments of approximately $
The Company also had other miscellaneous contingent liabilities totaling approximately $
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, employment, patent, and trademark matters. The Company believes the reasonably possible range of losses for these unresolved legal actions would not have a material effect on its consolidated financial statements.
(17) Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To determine fair value, the Company uses various methods including market and income approaches. The Company utilizes valuation models and techniques that maximize the use of observable inputs. The models are industry-standard models that consider various assumptions including time values and yield curves as well as other economic measures. These valuation techniques are consistently applied.
Level 1 measurements consist of quoted prices in active markets for identical assets or liabilities. Level 2 measurements include significant other observable inputs such as quoted prices for similar assets or liabilities in active markets; identical assets or liabilities in inactive markets; observable inputs such as interest rates and yield curves; and other market-corroborated inputs. Level 3 measurements include significant unobservable inputs.
27
The fair values of financial instruments that do not approximate the carrying values in millions of dollars follow:
February 2, 2020 | November 3, 2019 | January 27, 2019 |
| ||||||||||||||||
Carrying | Fair | Carrying | Fair | Carrying | Fair |
| |||||||||||||
Financing receivables – net: |
| ||||||||||||||||||
Equipment operations | $ |
| $ |
| $ |
| $ |
| $ |
| $ | ||||||||
Financial services | |||||||||||||||||||
Total | $ | $ | $ | $ | $ | $ | |||||||||||||
Financing receivables | |||||||||||||||||||
Equipment operations | $ | $ | $ | $ | $ | $ | |||||||||||||
Financial services | |||||||||||||||||||
Total | $ | $ | $ | $ | $ | $ | |||||||||||||
Short-term securitization borrowings: | |||||||||||||||||||
Equipment operations | $ | $ | $ | $ | $ | $ | |||||||||||||
Financial services | |||||||||||||||||||
Total | $ | $ | $ | $ | $ | $ | |||||||||||||
Long-term borrowings due within one year: ** | |||||||||||||||||||
Equipment operations | $ | $ | $ |
| $ | $ | $ | ||||||||||||
Financial services |
|
|
| ||||||||||||||||
Total | $ | $ | $ | $ | $ | $ | |||||||||||||
Long-term borrowings: ** | |||||||||||||||||||
Equipment operations | $ | $ | $ |
| $ | $ | $ | ||||||||||||
Financial services |
|
|
| ||||||||||||||||
Total | $ | $ | $ | $ | $ | $ | |||||||||||||
* Fair value measurements above were Level 3 for all financing receivables, Level 3 for equipment operations short-term securitization borrowings, and Level 2 for all other borrowings.
** Carrying values exclude finance lease liabilities that are presented as borrowings beginning in 2020 (see Notes 3 and 15).
Fair values of the financing receivables that were issued long-term were based on the discounted values of their related cash flows at interest rates currently being offered by the Company for similar financing receivables. The fair values of the remaining financing receivables approximated the carrying amounts.
Fair values of long-term borrowings and short-term securitization borrowings were based on current market quotes for identical or similar borrowings and credit risk, or 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 included adjustments related to fair value hedges.
28
Assets and liabilities measured at fair value on a recurring basis in millions of dollars follow*:
| February 2 |
| November 3 |
| January 27 |
| ||||
2020 | 2019 | 2019 |
| |||||||
Level 1: | ||||||||||
Marketable securities |
|
|
| |||||||
International equity securities *** | $ | |||||||||
Equity fund *** | $ | $ | ||||||||
U.S. government debt securities |
|
| ||||||||
Total Level 1 marketable securities | ||||||||||
Level 2: | ||||||||||
Marketable securities | ||||||||||
U.S. government debt securities | ||||||||||
Municipal debt securities |
|
| ||||||||
Corporate debt securities |
|
| ||||||||
International debt securities | ||||||||||
Mortgage-backed securities** |
|
| ||||||||
Total Level 2 marketable securities |
|
| ||||||||
Other assets | ||||||||||
Derivatives: | ||||||||||
Interest rate contracts |
|
| ||||||||
Foreign exchange contracts |
|
| ||||||||
Cross-currency interest rate contracts |
|
| ||||||||
Total Level 2 other assets |
| |||||||||
Accounts payable and accrued expenses | ||||||||||
Derivatives: | ||||||||||
Interest rate contracts |
| |||||||||
Foreign exchange contracts |
|
| ||||||||
Cross-currency interest rate contracts | ||||||||||
Total Level 2 accounts payable and accrued expenses | ||||||||||
Level 3: | ||||||||||
Marketable securities | ||||||||||
International debt securities |
| |||||||||
* Excluded from this table were the Company’s cash equivalents, which were carried at cost that approximates fair value. The cash equivalents consist primarily of money market funds and time deposits.
** Primarily issued by U.S. government sponsored enterprises.
***During the first quarter of 2020 and 2019 net unrealized gains on equity securities recorded in “Other income” were $
The contractual maturities of debt securities at February 2, 2020 in millions of dollars are shown below. Actual maturities may differ from those scheduled as a result of prepayments by the issuers. Because of the potential for prepayment on mortgage-backed securities, they are not categorized by contractual maturity.
Amortized | Fair | ||||||
Cost | Value | ||||||
Due in one year or less |
| $ | $ | ||||
Due after one through five years | |||||||
Due after five through 10 years | |||||||
Due after 10 years | |||||||
Mortgage-backed securities | |||||||
Debt securities |
| $ |
| $ | |||
29
Fair value, recurring Level 3 measurements from available-for-sale marketable securities in millions of dollars follow:
| Three Months Ended | ||||||
February 2 | January 27 | ||||||
2020 | 2019 | ||||||
Beginning of period balance |
| $ | $ | ||||
Principal payments |
| ( | |||||
Other |
| ||||||
End of period balance | $ |
| $ | ||||
Fair value, nonrecurring Level 3 measurements from impairments in millions of dollars follow:
Fair Value * | Losses | |||||||||||||||
Three Months Ended | ||||||||||||||||
February 2 | November 3 | January 27 | February 2 | January 27 | ||||||||||||
| 2020 |
| 2019 |
| 2019 |
| 2020 | 2019 |
| |||||||
Equipment on operating leases – net |
| $ | |
| ||||||||||||
Other assets |
| $ | |
| ||||||||||||
* See financing receivables with specific allowances in Note 11. Losses were not significant.
The following is a description of the valuation methodologies the Company uses to measure certain financial instruments on the balance sheet at fair value:
Marketable Securities – The portfolio of investments, except for the Level 3 measurement international debt securities, is primarily valued on a market approach (matrix pricing model) in which all significant inputs are observable or can be derived from or corroborated by observable market data such as interest rates, yield curves, volatilities, credit risk, and prepayment speeds. Funds are primarily valued using the fund’s net asset value, based on the fair value of the underlying securities. The Level 3 measurement international debt securities are primarily valued using an income approach based on discounted cash flows using yield curves derived from limited, observable market data.
Derivatives – The Company’s derivative financial instruments consist of interest rate swaps and caps, foreign currency futures, forwards and swaps, and cross-currency interest rate swaps. The portfolio is valued based on an income approach (discounted cash flow) using market observable inputs, including swap curves and both forward and spot exchange rates for currencies.
Financing Receivables – Specific reserve impairments are based on the fair value of the collateral, which is measured using a market approach (appraisal values or realizable values). Inputs include a selection of realizable values.
Equipment on Operating Leases – Net – The impairments are based on an income approach (discounted cash flow), using the contractual payments, plus an estimate of equipment sale price at lease maturity. Inputs include realized sales values.
Other Assets – The impairments are measured at the fair value of the matured operating lease inventory. The valuations were based on a market approach. The inputs include sales of comparable assets.
(18) Derivative Instruments
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 financial services 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 functional currencies. In addition, the Company has interest rate exposure at certain
30
equipment operations units for below market retail financing programs that are used as sales incentives and are offered for extended periods.
All derivatives are recorded at fair value on the balance sheet. Cash collateral received or paid is not offset against the derivative fair values on the balance sheet. Each derivative is designated as a cash flow hedge, a fair value hedge, or remains undesignated. All designated hedges are formally documented as to the relationship with the hedged item as well as the risk-management strategy. Both at inception and on an ongoing basis the hedging instrument is assessed as to its effectiveness. If and when a derivative is determined not to be highly effective as a hedge, the underlying hedged transaction is no longer likely to occur, the hedge designation is removed, or the derivative is terminated, hedge accounting is discontinued.
Cash Flow Hedges
Certain interest rate contracts (swaps) were designated as hedges of future cash flows from borrowings. The total notional amounts of the receive-variable/pay-fixed interest rate contracts at February 2, 2020, November 3, 2019, and January 27, 2019 were $
The amount of loss recorded in OCI at February 2, 2020 that is expected to be reclassified to interest expense or other operating expenses in the next twelve months if interest rates or exchange rates remain unchanged is approximately $
Fair Value Hedges
Certain interest rate contracts (swaps) were designated as fair value hedges of borrowings. The total notional amounts of the receive-fixed/pay-variable interest rate contracts at February 2, 2020, November 3, 2019, and January 27, 2019 were $
The amounts recorded in the consolidated balance sheet related to borrowings designated in fair value hedging relationships in millions of dollars follow:
Cumulative Increase (Decrease) of Fair |
| ||||||||||||
Value Hedging Adjustments Included in | |||||||||||||
the Carrying Amount | |||||||||||||
Carrying | Active | ||||||||||||
Amount of | Hedging | Discontinued |
| ||||||||||
Hedged Item | Relationships | Relationships | Total |
| |||||||||
February 2, 2020 | |||||||||||||
Long-term borrowings due within one year* |
| $ |
| $ | ( |
| $ | ( |
| $ | ( | ||
Long-term borrowings | ( | ||||||||||||
November 3, 2019 | |||||||||||||
Long-term borrowings due within one year* | $ | $ | ( | $ | ( | $ | ( | ||||||
Long-term borrowings | ( | ||||||||||||
January 27, 2019 | |||||||||||||
Long-term borrowings due within one year* | $ | $ | $ | ( | $ | ( | |||||||
Long-term borrowings | ( | ( | ( | ||||||||||
* Presented in short-term borrowings
Derivatives not designated as hedging instruments
The Company has certain interest rate contracts (swaps and caps), foreign exchange contracts (futures, forwards, and swaps), and cross-currency interest rate contracts (swaps), which were not formally designated as hedges. These derivatives were held as economic hedges for underlying interest rate or foreign currency exposures, primarily for certain borrowings, purchases or sales of inventory, and below market retail
31
financing programs. The total notional amounts of these interest rate swaps at February 2, 2020, November 3, 2019, and January 27, 2019 were $
Fair values of derivative instruments in the condensed consolidated balance sheet in millions of dollars follow:
| February 2 |
| November 3 |
| January 27 |
| ||||
Other Assets | 2020 | 2019 | 2019 |
| ||||||
Designated as hedging instruments: | ||||||||||
Interest rate contracts |
| $ | $ | $ | ||||||
Total designated |
|
| ||||||||
|
|
| ||||||||
Not designated as hedging instruments: |
|
| ||||||||
Interest rate contracts |
|
| ||||||||
Foreign exchange contracts |
|
| ||||||||
Cross-currency interest rate contracts |
|
| ||||||||
Total not designated |
|
| ||||||||
| ||||||||||
Total derivative assets |
| $ | $ | $ | ||||||
| ||||||||||
Accounts Payable and Accrued Expenses | ||||||||||
Designated as hedging instruments: | ||||||||||
Interest rate contracts |
| $ | $ | $ | ||||||
Total designated | ||||||||||
| ||||||||||
Not designated as hedging instruments: | ||||||||||
Interest rate contracts | ||||||||||
Foreign exchange contracts |
|
| ||||||||
Cross-currency interest rate contracts |
|
| ||||||||
Total not designated |
|
| ||||||||
| ||||||||||
Total derivative liabilities |
| $ | $ | $ | ||||||
32
The classification and gains (losses) including accrued interest expense related to derivative instruments on the statement of consolidated income consisted of the following in millions of dollars:
Three Months Ended |
| ||||||
February 2 | January 27 |
| |||||
2020 | 2019 |
| |||||
Fair Value Hedges: |
|
|
|
|
| ||
Interest rate contracts - Interest expense |
| $ | $ | ||||
| |||||||
Cash Flow Hedges: | |||||||
Recognized in OCI | |||||||
Interest rate contracts - OCI (pretax) |
| ( |
| ( | |||
| |||||||
Reclassified from OCI | |||||||
Interest rate contracts - Interest expense |
| ( |
| ||||
| |||||||
Not Designated as Hedges: | |||||||
Interest rate contracts - Net sales | $ | ( | $ | ( | |||
Interest rate contracts - Interest expense * |
| ( | |||||
Foreign exchange contracts - Cost of sales |
|
| ( | ||||
Foreign exchange contracts - Other operating * |
| ( |
| ||||
Total not designated | $ | $ | ( | ||||
* Includes interest and foreign exchange gains (losses) from cross-currency interest rate contracts.
Counterparty Risk and Collateral
Derivative instruments are subject to significant concentrations of credit risk to the banking sector. The Company manages individual counterparty exposure by setting limits that consider the credit rating of the counterparty, the credit default swap spread of the counterparty, and other financial commitments and exposures between the Company and the counterparty banks. All interest rate derivatives are transacted under International Swaps and Derivatives Association (ISDA) documentation. Some of these agreements include credit support provisions. Each master agreement permits the net settlement of amounts owed in the event of default or termination.
Certain of the Company’s derivative agreements contain credit support provisions that may require the Company to post collateral based on the size of the net liability positions and credit ratings. The aggregate fair value of all derivatives with credit-risk-related contingent features that were in a net liability position at February 2, 2020, November 3, 2019, and January 27, 2019, was $
Derivatives are recorded without offsetting for netting arrangements or collateral.
Gross Amounts | Netting | Collateral |
| ||||||||||
February 2, 2020 |
| Recognized |
| Arrangements |
| Received |
| Net Amount |
| ||||
Assets |
| $ |
| $ | ( |
| $ | ( |
| $ | |||
Liabilities | ( |
| |||||||||||
Gross Amounts | Netting | Collateral |
| ||||||||||
November 3, 2019 |
| Recognized |
| Arrangements |
| Received/Paid |
| Net Amount |
| ||||
Assets | $ |
| $ | ( |
|
| $ | ||||||
Liabilities |
| ( | |||||||||||
| Gross Amounts |
| Netting |
| Collateral |
|
| ||||||
January 27, 2019 | Recognized | Arrangements | Paid | Net Amount |
| ||||||||
Assets | $ | $ | ( | $ | |||||||||
Liabilities |
|
| ( | $ | ( |
| |||||||
33
(19) Stock Option and Restricted Stock Awards
In December 2019, the Company granted stock options to employees for the purchase of
(20) Employee-Separation Program
During the first quarter of 2020, the Company announced a broad voluntary employee-separation program for the U.S. salaried workforce that continues the efforts to create a more efficient organization structure and reduce operating costs. The program provided for cash payments based on years of service. The expense was recorded primarily in the period in which the employees irrevocably accepted the separation offer. The program’s total estimated pretax expenses are approximately $
34
(21) SUPPLEMENTAL CONSOLIDATING DATA | |||||||||||||
STATEMENT OF INCOME | |||||||||||||
For the Three Months Ended February 2, 2020 and January 27, 2019 | |||||||||||||
(In millions of dollars) Unaudited | EQUIPMENT OPERATIONS* | FINANCIAL SERVICES |
| ||||||||||
2020 | 2019 | 2020 | 2019 |
| |||||||||
Net Sales and Revenues |
|
|
|
|
|
| |||||||
Net sales | $ | $ | |||||||||||
Finance and interest income |
| $ | $ | ||||||||||
Other income |
|
| |||||||||||
Total |
|
| |||||||||||
Costs and Expenses | |||||||||||||
Cost of sales |
| ||||||||||||
Research and development expenses |
| ||||||||||||
Selling, administrative and general expenses |
|
| |||||||||||
Interest expense |
|
| |||||||||||
Interest compensation to Financial Services |
| ||||||||||||
Other operating expenses |
|
| |||||||||||
Total |
|
| |||||||||||
Income of Consolidated Group before Income Taxes |
|
| |||||||||||
Provision for income taxes |
|
| |||||||||||
Income of Consolidated Group |
|
| |||||||||||
Equity in Income (Loss) of Unconsolidated Subsidiaries | |||||||||||||
Financial Services |
|
| |||||||||||
Other | ( |
| |||||||||||
Total |
|
| |||||||||||
Net Income |
|
| |||||||||||
Less: Net income attributable to noncontrolling interests |
|
|
| ||||||||||
Net Income Attributable to Deere & Company | $ | $ | $ | $ | |||||||||
* Deere & Company with Financial Services on the equity basis.
The supplemental consolidating data is presented for informational purposes. Transactions between the “Equipment Operations” and “Financial Services” have been eliminated to arrive at the consolidated financial statements.
35
SUPPLEMENTAL CONSOLIDATING DATA (Continued) | |||||||||||||||||||
CONDENSED BALANCE SHEET | |||||||||||||||||||
(In millions of dollars) Unaudited | EQUIPMENT OPERATIONS* | FINANCIAL SERVICES |
| ||||||||||||||||
February 2 | November 3 | January 27 | February 2 | November 3 | January 27 |
| |||||||||||||
2020 | 2019 | 2019 | 2020 | 2019 | 2019 |
| |||||||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents | $ | $ | $ | $ | $ | $ | |||||||||||||
Marketable securities |
|
|
|
| |||||||||||||||
Receivables from unconsolidated subsidiaries |
|
| |||||||||||||||||
Trade accounts and notes receivable – net |
|
|
|
| |||||||||||||||
Financing receivables – net |
|
|
|
| |||||||||||||||
Financing receivables securitized – net |
|
| |||||||||||||||||
Other receivables |
|
|
|
| |||||||||||||||
Equipment on operating leases – net |
|
| |||||||||||||||||
Inventories |
|
| |||||||||||||||||
Property and equipment – net |
|
|
|
| |||||||||||||||
Investments in unconsolidated subsidiaries and affiliates |
|
|
|
| |||||||||||||||
Goodwill |
|
| |||||||||||||||||
Other intangible assets – net |
|
|
|
| |||||||||||||||
Retirement benefits |
|
|
|
| |||||||||||||||
Deferred income taxes |
|
|
|
| |||||||||||||||
Other assets |
|
|
|
| |||||||||||||||
Total Assets | $ | $ | $ | $ | $ | $ | |||||||||||||
Liabilities and Stockholders’ Equity | |||||||||||||||||||
Liabilities | |||||||||||||||||||
Short-term borrowings | $ | $ | $ | $ | $ | $ | |||||||||||||
Short-term securitization borrowings |
|
| |||||||||||||||||
Payables to unconsolidated subsidiaries and affiliates |
|
|
|
| |||||||||||||||
Accounts payable and accrued expenses |
|
|
|
| |||||||||||||||
Deferred income taxes |
|
|
|
| |||||||||||||||
Long-term borrowings |
|
|
|
| |||||||||||||||
Retirement benefits and other liabilities |
|
|
|
| |||||||||||||||
Total liabilities | |||||||||||||||||||
Commitments and contingencies (Note 16) | |||||||||||||||||||
Redeemable noncontrolling interest |
|
|
| ||||||||||||||||
Stockholders’ Equity | |||||||||||||||||||
Common stock, $ |
|
|
|
| |||||||||||||||
Common stock in treasury | ( |
| ( |
| ( |
| |||||||||||||
Retained earnings |
|
|
|
| |||||||||||||||
Accumulated other comprehensive income (loss) | ( |
| ( |
| ( | ( |
| ( |
| ( | |||||||||
Total Deere & Company stockholders' equity |
|
| |||||||||||||||||
Noncontrolling interests |
|
|
|
| |||||||||||||||
Total stockholders’ equity |
|
|
|
| |||||||||||||||
Total Liabilities and Stockholders’ Equity | $ | $ | $ | $ | $ | $ | |||||||||||||
* Deere & Company with Financial Services on the equity basis.
The supplemental consolidating data is presented for informational purposes. Transactions between the "Equipment Operations" and "Financial Services" have been eliminated to arrive at the consolidated financial statements.
36
SUPPLEMENTAL CONSOLIDATING DATA (Continued) | |||||||||||||
STATEMENT OF CASH FLOWS | |||||||||||||
For the Three Months Ended February 2, 2020 and January 27, 2019 | |||||||||||||
(In millions of dollars) Unaudited | EQUIPMENT OPERATIONS* | FINANCIAL SERVICES | |||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
| |||||
Net income | $ | $ | $ | $ | |||||||||
Adjustments to reconcile net income to net cash provided by (used for) operating activities: | |||||||||||||
Provision (credit) for credit losses |
|
| ( |
|
| ||||||||
Provision for depreciation and amortization |
|
|
|
| |||||||||
Undistributed earnings of unconsolidated subsidiaries and affiliates |
| ( |
|
| ( |
|
| ||||||
Credit for deferred income taxes |
| ( |
| ( |
| ( |
| ( | |||||
Changes in assets and liabilities: | |||||||||||||
Trade receivables and Equipment Operations' financing receivables |
|
| |||||||||||
Inventories |
| ( |
| ( | |||||||||
Accounts payable and accrued expenses |
| ( |
| ( |
| ( |
| ( | |||||
Accrued income taxes payable/receivable |
| ( |
| ( |
| ( |
| ||||||
Retirement benefits |
|
| ( |
|
| ||||||||
Other |
|
| ( |
|
| ||||||||
Net cash provided by (used for) operating activities |
| ( |
| ( |
|
| |||||||
Cash Flows from Investing Activities | |||||||||||||
Collections of receivables (excluding trade and wholesale) |
|
| |||||||||||
Proceeds from maturities and sales of marketable securities |
|
|
|
| |||||||||
Proceeds from sales of equipment on operating leases |
|
| |||||||||||
Cost of receivables acquired (excluding trade and wholesale) |
| ( |
| ( | |||||||||
Purchases of marketable securities |
| ( |
| ( |
| ( | |||||||
Purchases of property and equipment |
| ( |
| ( |
|
|
| ||||||
Cost of equipment on operating leases acquired |
| ( |
| ( | |||||||||
Increase in trade and wholesale receivables |
| ( |
| ( | |||||||||
Other |
| ( |
| ( |
|
| |||||||
Net cash provided by (used for) investing activities |
| ( |
| ( |
|
| |||||||
Cash Flows from Financing Activities | |||||||||||||
Increase (decrease) in total short-term borrowings |
|
|
| ( |
| ||||||||
Change in intercompany receivables/payables |
|
|
| ( |
| ( | |||||||
Proceeds from long-term borrowings |
|
|
|
| |||||||||
Payments of long-term borrowings |
| ( |
| ( |
| ( |
| ( | |||||
Proceeds from issuance of common stock |
|
| |||||||||||
Repurchases of common stock |
| ( |
| ( | |||||||||
Dividends paid |
| ( |
| ( |
| ( | ( | ||||||
Other |
| ( |
| ( |
| ( |
| ( | |||||
Net cash provided by (used for) financing activities |
|
|
| ( |
| ( | |||||||
Effect of Exchange Rate Changes on Cash, Cash Equivalents, and Restricted Cash |
|
| ( |
| ( |
| ( | ||||||
Net Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash |
| ( |
| ( |
|
| |||||||
Cash, Cash Equivalents, and Restricted Cash at Beginning of Period |
|
|
|
| |||||||||
Cash, Cash Equivalents, and Restricted Cash at End of Period | $ | $ | $ | $ | |||||||||
* Deere & Company with Financial Services on the equity basis.
The supplemental consolidating data is presented for informational purposes. Transactions between the “Equipment Operations” and “Financial Services” have been eliminated to arrive at the consolidated financial statements.
37
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview
Organization
The Company’s equipment operations generate revenues and cash primarily from the sale of equipment to John Deere dealers and distributors. The equipment operations manufacture and distribute a full line of agricultural equipment; a variety of commercial and consumer equipment; and a broad range of equipment for construction, roadbuilding, and forestry. The Company’s financial services primarily provide credit services, which mainly finance sales and leases of equipment by John Deere dealers and trade receivables purchased from the equipment operations. In addition, financial services offers extended equipment warranties. The information in the following discussion is presented in a format that includes information grouped as consolidated, equipment operations, and financial services. The Company also views its operations as consisting of two geographic areas, the U.S. and Canada, and outside the U.S. and Canada. The Company’s operating segments consist of agriculture and turf, construction and forestry, and financial services.
Trends and Economic Conditions
Industry sales of agricultural machinery in the U.S. and Canada are forecast to be down about 5 percent for fiscal year 2020. Industry sales in Europe are forecast to be about the same in 2020. In South America, industry sales of tractors and combines are projected to be approximately the same as 2019 levels. Asian sales are forecast to be about the same in 2020. Industry sales of turf and utility equipment in the U.S. and Canada are expected to be about the same in 2020. The Company’s agriculture and turf segment sales decreased 4 percent in the first quarter and are forecast to decrease about 5 to 10 percent for fiscal year 2020. Construction industry sales in North America for 2020 are expected to decline 5 to 10 percent. In forestry, global industry sales are expected to be about 5 to 10 percent lower. The Company’s construction and forestry segment sales decreased 10 percent in the first quarter, and are forecast to decrease about 10 to 15 percent in 2020 reflecting slowing construction activity as well as efforts to bring down field inventory levels. Net income attributable to Deere & Company for the Company’s financial services operations is forecast to be approximately $600 million in 2020.
Items of concern include trade agreements, the uncertainty of the effectiveness of governmental actions in respect to monetary and fiscal policies, the impact of sovereign debt, Eurozone and Argentine issues, capital market disruptions, changes in demand and pricing for used equipment, potential effects of epidemics, and geopolitical events. Significant fluctuations in foreign currency exchange rates and volatility in the price of many commodities could also impact the Company’s results.
The Company’s results reflect early signs of stabilization in the U.S. farm sector. The Company is encouraged by the broad use of precision technologies and believes it is well positioned to strengthen its leadership position in this area. For the quarter, construction sector activity slowed leading to lower sales and profit for the construction and forestry division. Actions to reduce factory production and lower inventories in response to construction equipment market conditions also negatively affected results. Additionally, the quarter included costs of a voluntary employee-separation program, which is intended to improve the Company’s flexibility. The Company is also proceeding with a series of measures to create a more focused organizational structure. These steps are leading to improved efficiencies and helping the Company focus its resources and investments on areas that have the most impact on performance.
38
2020 Compared with 2019
The following table provides the net income attributable to Deere & Company in millions of dollars and diluted earnings per share in dollars:
Three Months Ended | |||||||
February 2 | January 27 | ||||||
2020 | 2019 | ||||||
Net income attributable to Deere & Company | $ | 517 | $ | 498 | |||
Diluted earnings per share | 1.63 | 1.54 | |||||
The voluntary employee-separation program’s total pretax expense recognized in the first quarter of 2020 was $127 million, with another $9 million to be recorded over the remainder of the year. Included in first quarter expense was $22 million for items excluded from operating profit and $3 million recorded by financial services. Annual estimated savings from the separation program are approximately $85 million, with about $65 million expected in 2020 (see Note 20). Discrete income tax benefits also affected the quarter’s net income (see Note 9).
The worldwide net sales and revenues, price realization, and the effect of currency translation for worldwide, U.S. and Canada, and outside U.S. and Canada in millions of dollars follows:
Three Months Ended | |||||||||
February 2 | January 27 | ||||||||
2020 | 2019 | % Change | |||||||
Worldwide net sales and revenues | $ | 7,631 | $ | 7,984 | -4 | ||||
Worldwide equipment operations net sales | 6,530 | 6,941 | -6 | ||||||
Price realization | +2 | ||||||||
Currency translation (unfavorable) | -1 | ||||||||
U.S. and Canada equipment operations net sales | 3,750 | 4,123 | -9 | ||||||
Price realization | +2 | ||||||||
Outside U.S. and Canada equipment operations net sales | 2,780 | 2,818 | -1 | ||||||
Price realization | +3 | ||||||||
Currency translation (unfavorable) | -3 | ||||||||
The Company’s equipment operations operating profit and net income and financial services operations net income follow in millions of dollars:
Three Months Ended | |||||||||
February 2 | January 27 | ||||||||
2020 | 2019 | % Change | |||||||
Equipment operations operating profit | $ | 466 | $ | 577 | -19 | ||||
Equipment operations net income | 383 | 340 | +13 | ||||||
Financial services net income | 137 | 154 | -11 | ||||||
The discussion on net sales and operating profit are included in the Business Segment Results below.
39
Business Segment Results
Agriculture and Turf. The agriculture and turf segment results in millions of dollars follow:
Three Months Ended | |||||||||
February 2 | January 27 | ||||||||
| 2020 |
| 2019 |
| % Change | ||||
Net sales | $ | 4,486 | $ | 4,681 | -4 | ||||
Operating profit | 373 | 348 | +7 | ||||||
Operating margin | 8.3% | 7.4% | |||||||
Agriculture and turf sales for the quarter declined due to lower shipment volumes and the unfavorable effects of currency translation, partially offset by price realization. Operating profit increased mainly as a result of price realization, improved production costs, and lower warranty related expenses, partially offset by lower shipment volumes / sales mix and voluntary employee-separation expenses.
40
Construction and Forestry. The construction and forestry segment results in millions of dollars follow:
Three Months Ended | |||||||||
February 2 | January 27 | ||||||||
| 2020 |
| 2019 |
| % Change | ||||
Net sales | $ | 2,044 | $ | 2,260 | -10 | ||||
Operating profit | 93 | 229 | -59 | ||||||
Operating margin | 4.5% | 10.1% | |||||||
Construction and forestry sales decreased for the quarter primarily due to lower shipment volumes and the unfavorable effects of currency translation, partially offset by price realization. Operating profit moved lower as a result of lower shipment volumes / sales mix and voluntary employee-separation expenses, partially offset by price realization.
Financial Services. The financial services segment revenue, interest expense, and operating profit in millions of dollars, along with the ratio of earnings to fixed charges follow:
Three Months Ended | |||||||||
February 2 | January 27 | ||||||||
2020 | 2019 | % Change | |||||||
Revenue (including intercompany revenue) | $ | 998 | $ | 926 | +8 | ||||
Interest expense | 275 | 287 | -4 | ||||||
Operating profit | 179 | 192 | -7 | ||||||
Consolidated ratio of earnings to fixed charges | 1.64 | 1.68 | |||||||
Operating profit decreased due to higher losses on lease residual values, an increased provision for credit losses, and higher selling, administrative and general expenses, partially offset by income earned on a higher average portfolio. The average balance of receivables and leases financed was 7 percent higher in the first three months of 2020, compared with the same period last year. Interest expense decreased 4 percent in the first quarter of 2020 primarily as a result of lower average borrowing rates, partially offset by higher average borrowings.
41
The cost of sales to net sales ratio and other significant statement of consolidated income changes not previously discussed follow:
Three Months Ended | |||||||||
February 2 | January 27 | ||||||||
2020 | 2019 | % Change | |||||||
Cost of sales to net sales | 77.7% | 78.3% | |||||||
Research and development expenses | $ | 425 | $ | 407 | +4 | ||||
Selling, administrative and general expenses | 809 | 764 | +6 | ||||||
Other operating expenses | 415 | 351 | +18 | ||||||
The cost of sales ratio improved due to price realization and lower production costs, partially offset by costs of the voluntary employee-separation program. Research and development expenses and selling, administrative and general expenses increased primarily as a result of voluntary employee-separation costs. Other operating expenses increased primarily as a result of higher depreciation of equipment on operating leases and a curtailment in certain OPEB plans (see Note 8).
Market Conditions and Outlook
Net income attributable to Deere & Company is forecast to be in a range of $2,700 million to $3,100 million.
| ● | Agriculture and Turf. The Company’s worldwide sales of agriculture and turf equipment are forecast to decline 5 to 10 percent for fiscal year 2020, including a negative currency translation effect of about 1 percent. Industry sales of agricultural equipment in the U.S. and Canada are forecast to be down about 5 percent, driven by lower demand for large equipment in Canada. Full year industry sales in Europe are forecast to be about the same as are South American industry sales of tractors and combines. Asian sales are forecast to be about the same as the prior year. Industry sales of turf and utility equipment in the U.S. and Canada are expected to be about the same as 2019. |
| ● | Construction and Forestry. The Company’s worldwide sales of construction and forestry equipment are anticipated to be down 10 to 15 percent for 2020, with foreign currency rates having an unfavorable translation effect of about 1 percent. The outlook reflects slowing construction activity as well as efforts to bring down field inventory levels. Industry construction equipment sales in North America are expected to decline by 5 to 10 percent for the year. In forestry, global industry sales are expected to be down 5 to 10 percent due to weaker demand in North America and Russia. |
| ● | Financial Services. Fiscal year 2020 results are expected to benefit from lower losses on lease residual values and income earned from a higher average portfolio, partially offset by a higher provision for credit losses and prior year favorable discrete adjustments to the provision for income taxes. Net income attributable to Deere & Company for the financial services operations is expected to be approximately $600 million. |
Safe Harbor Statement
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: Statements under “Overview,” “Market Conditions and Outlook,” and other forward-looking statements herein that relate to future events, expectations, and trends involve factors that are subject to change, and 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 Company’s agricultural equipment business is subject to a number of uncertainties including the factors that affect farmers’ confidence and financial condition. These factors include demand for agricultural products, world grain stocks, weather conditions, soil conditions, harvest yields, prices for commodities and livestock, crop and livestock production expenses, availability of transport for crops, trade restrictions and tariffs (e.g., China), global trade agreements (e.g., the United States-Mexico-Canada Agreement), the level of farm product exports (including concerns about genetically modified organisms), the growth and sustainability of non-food uses for some crops (including ethanol and biodiesel production), real estate values, available acreage for farming, the land ownership policies of governments, changes in government farm programs and policies, international reaction to such programs, changes in and effects of crop insurance programs, changes in environmental regulations and their impact on farming practices, animal diseases (e.g., African swine fever) and their effects on poultry, beef and pork consumption and prices and on livestock feed demand, and crop pests and diseases.
42
Factors affecting the outlook for the Company’s turf and utility equipment include consumer confidence, weather conditions, customer profitability, labor supply, consumer borrowing patterns, consumer purchasing preferences, housing starts and supply, infrastructure investment, spending by municipalities and golf courses, and consumable input costs.
Consumer spending patterns, real estate and housing prices, the number of housing starts, interest rates and the levels of public and non-residential construction are important to sales and results of the Company’s construction and forestry equipment. Prices for pulp, paper, lumber and structural panels are important to sales of forestry equipment.
All of the Company’s businesses and its results are affected by general economic conditions in the global markets and industries in which the Company operates; customer confidence in general economic conditions; government spending and taxing; foreign currency exchange rates and their volatility, especially fluctuations in the value of the U.S. dollar; interest rates (including the availability of IBOR reference rates); inflation and deflation rates; changes in weather patterns; the political and social stability of the global markets in which the Company operates; the effects of, or response to, terrorism and security threats; wars and other conflicts; natural disasters; and the spread of major epidemics (including Coronavirus) and responses to epidemics such as government-imposed travel restrictions and extended shut down of businesses.
Significant changes in market liquidity conditions, changes in the Company’s credit ratings and any failure to comply with financial covenants in credit agreements could impact access to funding and funding costs, which could reduce the Company’s earnings and cash flows. Financial market conditions could also negatively impact customer access to capital for purchases of the Company’s products and customer confidence and purchase decisions, borrowing and repayment practices, and the number and size of customer loan delinquencies and defaults. A debt crisis, in Europe or elsewhere, could negatively impact currencies, global financial markets, social and political stability, funding sources and costs, asset and obligation values, customers, suppliers, demand for equipment, and Company operations and results. The Company’s investment management activities could be impaired by changes in the equity, bond and other financial markets, which would negatively affect earnings.
The withdrawal of the United Kingdom from the European Union and the perceptions as to the impact of the withdrawal may adversely affect business activity, political stability and economic conditions in the United Kingdom, the European Union and elsewhere. The economic conditions and outlook could be further adversely affected by (i) uncertainty regarding any new or modified trade arrangements between the United Kingdom and the European Union and/or other countries, (ii) the risk that one or more other European Union countries could come under increasing pressure to leave the European Union, or (iii) the risk that the euro as the single currency of the Eurozone could cease to exist. Any of these developments, or the perception that any of these developments are likely to occur, could affect economic growth or business activity in the United Kingdom or the European Union, and could result in the relocation of businesses, cause business interruptions, lead to economic recession or depression, and impact the stability of the financial markets, availability of credit, currency exchange rates, interest rates, financial institutions, and political, financial and monetary systems. Any of these developments could affect our businesses, liquidity, results of operations and financial position.
Additional factors that could materially affect the Company’s operations, access to capital, expenses and results include changes in, uncertainty surrounding and the impact of governmental trade, banking, monetary and fiscal policies, including financial regulatory reform and its effects on the consumer finance industry, derivatives, funding costs and other areas, and governmental programs, policies, tariffs and sanctions in particular jurisdictions or for the benefit of certain industries or sectors; retaliatory actions to such changes in trade, banking, monetary and fiscal policies; actions by central banks; actions by financial and securities regulators; actions by environmental, health and safety regulatory agencies, including those related to engine emissions, carbon and other greenhouse gas emissions, noise and the effects of climate change; changes to GPS radio frequency bands or their permitted uses; changes in labor and immigration regulations; changes to accounting standards; changes in tax rates, estimates, laws and regulations and Company actions related thereto; changes to and compliance with privacy regulations; compliance with U.S. and foreign laws when expanding to new markets and otherwise; and actions by other regulatory bodies.
Other factors that could materially affect results include production, design and technological innovations and difficulties, including capacity and supply constraints and prices; the loss of or challenges to intellectual property rights whether through theft, infringement, counterfeiting or otherwise; the availability and prices of strategically sourced materials, components and whole goods; delays or disruptions in the Company’s supply chain or the loss of liquidity by suppliers; disruptions of infrastructures that support communications, operations or distribution; the failure of suppliers or the Company to comply with laws, regulations and Company policy pertaining to
43
employment, human rights, health, safety, the environment, anti-corruption, privacy and data protection and other ethical business practices; events that damage the Company’s reputation or brand; significant investigations, claims, lawsuits or other legal proceedings; start-up of new plants and products; the success of new product initiatives; changes in customer product preferences and sales mix; gaps or limitations in rural broadband coverage, capacity and speed needed to support technology solutions; oil and energy prices, supplies and volatility; the availability and cost of freight; actions of competitors in the various industries in which the Company competes, particularly price discounting; dealer practices especially as to levels of new and used field inventories; changes in demand and pricing for used equipment and resulting impacts on lease residual values; labor relations and contracts; changes in the ability to attract, train and retain qualified personnel; acquisitions and divestitures of businesses; greater than anticipated transaction costs; the integration of new businesses; the failure or delay in closing or realizing anticipated benefits of acquisitions, joint ventures or divestitures; the implementation of organizational changes; the failure to realize anticipated savings or benefits of cost reduction, productivity, or efficiency efforts; difficulties related to the conversion and implementation of enterprise resource planning systems; security breaches, cybersecurity attacks, technology failures and other disruptions to the Company’s and suppliers’ information technology infrastructure; changes in Company declared dividends and common stock issuances and repurchases; changes in the level and funding of employee retirement benefits; changes in market values of investment assets, compensation, retirement, discount and mortality rates which impact retirement benefit costs; and significant changes in health care costs.
The liquidity and ongoing profitability of John Deere Capital Corporation and other credit subsidiaries depend largely on timely access to capital in order to meet future cash flow requirements, and to fund operations, costs, and purchases of the Company’s products. If general economic conditions deteriorate or capital markets become more volatile, funding could be unavailable or insufficient. Additionally, customer confidence levels may result in declines in credit applications and increases in delinquencies and default rates, which could materially impact write-offs and provisions for credit losses.
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, except as required by law, 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 could materially affect the Company’s financial results, is included in the Company’s other filings with the SEC (including, but not limited to, the factors discussed in Item 1A. Risk Factors of the Company’s most recent annual report on Form 10-K and quarterly reports on Form 10-Q).
Critical Accounting Policies
See the Company’s critical accounting policies discussed in the Management’s Discussion and Analysis of the most recent annual report filed on Form 10-K. There have been no material changes to these policies.
CAPITAL RESOURCES AND LIQUIDITY
The discussion of capital resources and liquidity has been organized to review separately, where appropriate, the Company’s consolidated totals, equipment operations, and financial services operations.
Consolidated
Negative cash flows from consolidated operating activities in the first three months of 2020 were $508 million. This resulted primarily from a decrease in accounts payable and accrued expenses, a seasonal increase in inventories, and a change in accrued income taxes payable / receivable, which were partially offset by net income adjusted for non-cash provisions and a decrease in receivables related to sales. Cash inflows from investing activities were $1,026 million in the first three months of this year, primarily due to collections of receivables (excluding receivables related to sales) and proceeds from sales of equipment on operating leases exceeding the cost of receivables and equipment on operating leases acquired by $1,270 million, partially offset by purchases of property and equipment of $271 million. Negative cash flows from financing activities were $763 million in the first three months of 2020 primarily due to a decrease in borrowings of $422 million, dividends paid of $242 million, and repurchases of common stock of $114 million, partially offset by proceeds from issuance of common stock of $53 million (resulting from the exercise of stock options). Cash, cash equivalents, and restricted cash decreased $246 million during the first three months of this year.
Negative cash flows from consolidated operating activities in the first three months of 2019 were $1,651 million. This resulted primarily from a seasonal increase in inventories, a decrease in accounts payable and accrued expenses, and an increase in receivables related to sales, which were partially offset by net income adjusted for non-
44
cash provisions and a change in accrued income taxes payable / receivable. Cash inflows from investing activities were $969 million in the first three months of 2019, primarily due to collections of receivables (excluding receivables related to sales) and proceeds from sales of equipment on operating leases exceeding the cost of receivables and equipment on operating leases acquired by $1,293 million, partially offset by purchases of property and equipment of $297 million. Positive cash flows from financing activities were $403 million in the first three months of 2019 primarily due to an increase in borrowings of $746 million and proceeds from issuance of common stock of $51 million (resulting from the exercise of stock options), partially offset by dividends paid of $220 million and repurchases of common stock of $144 million. Cash, cash equivalents, and restricted cash decreased $292 million during the first three months of 2019.
The Company has access to most global markets at a reasonable cost and expects to have sufficient sources of global funding and liquidity to meet its funding needs. Sources of liquidity for the Company include cash and cash equivalents, marketable securities, funds from operations, the issuance of commercial paper and term debt, the securitization of retail notes (both public and private markets), and committed and uncommitted bank lines of credit. The Company’s commercial paper outstanding at February 2, 2020, November 3, 2019, and January 27, 2019 was $2,149 million, $2,698 million, and $3,760 million, respectively, while the total cash and cash equivalents and marketable securities position was $4,211 million, $4,438 million, and $4,149 million, respectively. The total cash and cash equivalents and marketable securities held by foreign subsidiaries, was $2,572 million, $2,731 million, and $2,076 million at February 2, 2020, November 3, 2019, and January 27, 2019, respectively.
Lines of Credit. The Company also has access to bank lines of credit with various banks throughout the world. Worldwide lines of credit totaled $8,484 million at February 2, 2020, $5,692 million of which were unused. For the purpose of computing unused credit lines, commercial paper and short-term bank borrowings, excluding secured borrowings and the current portion of long-term borrowings, were primarily considered to constitute utilization. Included in the total credit lines at February 2, 2020 was a 364-day credit facility agreement of $2,800 million, expiring in fiscal April 2020. In addition, total credit lines included long-term credit facility agreements of $2,500 million, expiring in April 2023, and $2,500 million, expiring in April 2024. These credit agreements require John Deere Capital Corporation (Capital Corporation) to maintain 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, excluding securitization indebtedness, to capital base (total subordinated debt and stockholder’s equity excluding accumulated other comprehensive income (loss) at not more than 11 to 1 at the end of any fiscal quarter. The credit agreements also require the equipment operations to maintain a ratio of total debt to total capital (total debt and stockholders’ equity excluding accumulated other comprehensive income (loss) of 65 percent or less at the end of each fiscal quarter. Under this provision, the Company’s excess equity capacity and retained earnings balance free of restriction at February 2, 2020 was $13,729 million. Alternatively under this provision, the equipment operations had the capacity to incur additional debt of $25,497 million at February 2, 2020. All of these requirements of the credit agreement have been met during the periods included in the financial statements.
Debt Ratings. To access public debt capital markets, the Company relies on credit rating agencies to assign short-term and long-term credit ratings to the Company’s securities as an indicator of credit quality for fixed income investors. A security rating is not a recommendation by the rating agency to buy, sell, or hold Company securities. A credit rating agency may change or withdraw Company ratings based on its assessment of the Company’s current and future ability to meet interest and principal repayment obligations. Each agency’s rating should be evaluated independently of any other rating. Lower credit ratings generally result in higher borrowing costs, including costs of derivative transactions, and reduced access to debt capital markets. The senior long-term and short-term debt ratings and outlook currently assigned to unsecured Company debt securities by the rating agencies engaged by the Company are as follows:
| Senior |
|
|
| |||
Long-Term | Short-Term | Outlook |
| ||||
Fitch Ratings | A | F1 | Stable | ||||
Moody’s Investors Service, Inc. |
| A2 |
| Prime-1 |
| Stable | |
Standard & Poor’s |
| A |
| A-1 |
| Stable |
Trade accounts and notes receivable primarily arise from sales of goods to independent dealers. Trade receivables increased $130 million during the first three months of 2020, primarily due to a seasonal increase. These receivables decreased $137 million, compared to a year ago, primarily due to lower shipment volumes and foreign currency translation. The ratios of worldwide trade accounts and notes receivable to the last 12 months’ net sales were 16 percent at February 2, 2020, compared to 15 percent at November 3, 2019 and 16 percent at January 27, 2019. Agriculture and turf trade receivables decreased $69 million and construction and forestry trade receivables decreased $68 million, compared to a year ago. The percentage of total worldwide trade receivables outstanding for
45
periods exceeding 12 months was 3 percent at February 2, 2020, 3 percent at November 3, 2019, and 1 percent at January 27, 2019.
Deere & Company stockholders’ equity was $11,926 million at February 2, 2020, compared with $11,413 million at November 3, 2019 and $11,328 million at January 27, 2019. The increase of $513 million during the first three months of 2020 resulted primarily from net income attributable to Deere & Company of $517 million, a change in the retirement benefits adjustment of $230 million, a change in the cumulative translation adjustment of $43 million, and an increase in common stock of $33 million, partially offset by dividends declared of $239 million and an increase in treasury stock of $75 million.
Equipment Operations
The Company’s equipment businesses are capital intensive and are subject to seasonal variations in financing requirements for inventories and certain receivables from dealers. The equipment operations sell a significant portion of their trade receivables to financial services. To the extent necessary, funds provided from operations are supplemented by external financing sources.
Cash used for operating activities of the equipment operations, including intercompany cash flows, in the first three months of 2020 was $380 million. This resulted primarily from a decrease in accounts payable and accrued expenses, a seasonal increase in inventories, and a change in accrued income taxes payable / receivable. Partially offsetting these operating cash outflows were cash inflows from net income adjusted for non-cash provisions and a decrease in trade and financing receivables held by the equipment operations. Cash, cash equivalents, and restricted cash decreased $313 million in the first three months of 2020.
Cash used for operating activities of the equipment operations, including intercompany cash flows, in the first three months of 2019 was $1,434 million. This resulted primarily from a seasonal increase in inventories, a decrease in accounts payable and accrued expenses, and a change in accrued income taxes payable / receivable. Partially offsetting these operating cash outflows were cash inflows from net income adjusted for non-cash provisions and a decrease in trade and financing receivables held by the equipment operations. Cash, cash equivalents, and restricted cash decreased $521 million in the first three months of 2019.
Trade receivables held by the equipment operations decreased $367 million during the first three months of 2020 and decreased $62 million from a year ago. The equipment operations sell a significant portion of their trade receivables to financial services. See the previous consolidated discussion of trade receivables.
Inventories increased by $507 million during the first three months, primarily due to a seasonal increase. Inventories decreased $920 million, compared to a year ago, primarily due to lower production volumes and the effect of foreign currency translation. A majority of these inventories are valued on the last-in, first-out (LIFO) method. The ratios of inventories on a first-in, first-out (FIFO) basis (see Note 13), which approximates current cost, to the last 12 months’ cost of sales were 31 percent at February 2, 2020, compared to 29 percent at November 3, 2019 and 35 percent at January 27, 2019.
Total interest-bearing debt of the equipment operations was $6,556 million at February 2, 2020, compared with $6,446 million at November 3, 2019 and $6,273 million at January 27, 2019. The ratios of debt to total capital (total interest-bearing debt and stockholders’ equity) were 35 percent, 36 percent, and 36 percent at February 2, 2020, November 3, 2019, and January 27, 2019, respectively.
The Company may from time to time seek to retire portions of its outstanding debt securities through cash repurchases or exchanges for other securities, in open-market purchases, privately negotiated transactions, or otherwise. Such repurchases or exchanges, if any, will be subject to and depend on prevailing market conditions, the company’s liquidity requirements, contractual restrictions, and other factors. The amounts involved in any such transactions, individually or in the aggregate, may be material.
Property and equipment cash expenditures for the equipment operations in the first three months of 2020 were $271 million, compared with $297 million in the same period last year. Capital expenditures for the equipment operations in 2020 are estimated to be approximately $1,100 million.
In October 2019, the Company entered into a definitive agreement to acquire Unimil, a privately held Brazilian company in the aftermarket service parts business for sugarcane harvesters. The expected cash purchase price is R$375 million (or approximately US$90 million based on the exchange rate at the end of the fiscal quarter). The Company expects to fund the acquisition and the transaction expenses with current cash. The transaction requires customary regulatory approval and is expected to close within six months.
46
Financial Services
The financial services 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 commercial paper, term debt, securitization of retail notes, equity capital, and borrowings from Deere & Company.
During the first three months of 2020, the cash provided by operating and investing activities was used for financing activities. Cash flows provided by operating activities, including intercompany cash flows, were $446 million in the first three months of 2020. Cash provided by investing activities totaled $857 million in the first three months of 2020 primarily due to the collection of receivables (excluding trade and wholesale) and proceeds from sales of equipment on operating leases exceeding the cost of receivables and equipment on operating leases acquired by $1,244 million, partially offset by an increase in trade and wholesale receivables of $382 million. Cash used for financing activities totaled $1,232 million, resulting primarily from a decrease in borrowings from Deere & Company of $572 million, a decrease in external borrowings of $526 million, and dividends paid to Deere & Company of $125 million. Cash, cash equivalents, and restricted cash increased $67 million in the first three months of 2020.
During the first three months of 2019, the cash provided by operating and investing activities was used for financing activities. Cash flows provided by operating activities, including intercompany cash flows, were $972 million in the first three months of 2019. Cash provided by investing activities totaled $283 million in the first three months of 2019 primarily due to the collection of receivables (excluding trade and wholesale) and proceeds from sales of equipment on operating leases exceeding the cost of receivables and equipment on operating leases acquired by $1,303 million, partially offset by an increase in trade and wholesale receivables of $1,021 million. Cash used for financing activities totaled $1,025 million, resulting primarily from a decrease in borrowings from Deere & Company of $1,526 million and dividends paid to Deere & Company of $200 million, partially offset by an increase in external borrowings of $709 million. Cash, cash equivalents, and restricted cash increased $229 million in the first three months of 2019.
Receivables and leases held by the financial services operations consist of retail notes originated in connection with retail sales of new and used equipment by dealers of John Deere products, retail notes from non-Deere equipment customers, trade receivables, wholesale notes, revolving charge accounts, credit enhanced international export financing generally involving John Deere products, sales-type and direct financing leases, and operating leases. Total receivables and leases decreased $1,378 million during the first quarter of 2020 and increased $2,617 million in the past 12 months. Acquisition volumes of receivables (excluding trade and wholesale) and leases were 6 percent higher in the first three months of 2020, compared with the same period last year, as volumes of retail notes and operating leases were higher, while volumes of sales-type and direct financing leases and revolving charge accounts were lower. The amount of total trade receivables and wholesale notes increased compared to November 3, 2019 and decreased compared to January 27, 2019.
Total external interest-bearing debt of the financial services operations was $38,343 million at February 2, 2020, compared with $38,888 million at November 3, 2019 and $36,784 million at January 27, 2019. Total external borrowings have generally changed corresponding with the level of receivable and lease portfolio, the level of cash and cash equivalents, the change in payables owed to Deere & Company, and the change in investment from Deere & Company. The financial services operations’ ratio of interest-bearing debt to stockholder’s equity was 7.8 to 1 at February 2, 2020, compared with 8.0 to 1 at November 3, 2019 and 7.4 to 1 at January 27, 2019.
Capital Corporation has a revolving credit agreement to utilize bank conduit facilities to securitize retail notes (see Note 12). During November 2019, the agreement was renewed with a total capacity, or “financing limit,” of $3,500 million of secured financings at any time. After a two-year revolving period, unless the banks and Capital Corporation agree to renew, Capital Corporation would liquidate the secured borrowings over time as payments on the retail notes are collected. At February 2, 2020, $1,935 million of secured short-term borrowings were outstanding under the agreement.
In the first three months of 2020, the financial services operations issued $760 million and retired $664 million of retail note securitization borrowings. In addition, during the first three months of 2020, the financial services operations issued $1,535 million and retired $1,568 million of long-term borrowings, which were primarily medium-term notes.
Dividends
The Company’s Board of Directors at its meeting on February 26, 2020 declared a quarterly dividend of $.76 per share payable May 8, 2020, to stockholders of record on March 31, 2020.
47
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See the Company’s most recent annual report filed on Form 10-K (Part II, Item 7A). There has been no material change in this information.
Item 4. CONTROLS AND PROCEDURES
The Company’s principal executive officer and its principal financial officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act)) were effective as of February 2, 2020, based on the evaluation of these controls and procedures required by Rule 13a-15(b) or 15d-15(b) of the Exchange Act. The Company implemented a new system for lessee accounting with the adoption of ASU No. 2016-02, Leases. The Company began using this system on November 4, 2019 to account for all lease transactions when the Company is the user of the equipment. In addition, controls were implemented to properly account for leasing arrangements in accordance with the new lease standard. During the first quarter, there were no other changes that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
48
PART II. OTHER INFORMATION
Item 1. 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, employment, patent, and trademark matters. Item 103 of the SEC’s Regulation S-K requires disclosure of certain environmental matters when a governmental authority is a party to the proceedings and the proceedings involve potential monetary sanctions that John Deere reasonably believes could exceed $100,000. The following matter is disclosed solely pursuant to that requirement: on October 3, 2018, the Provincia Santa Fe Ministerio de Medio Ambiente of Argentina issued a Notice of Violation to Industrias John Deere Argentina in connection with alleged groundwater contamination at the site; the Company worked with the appropriate authorities to implement corrective actions to remediate the site. On December 16, 2019, the Provincia Santa Fe Ministerio de Medio Ambiente issued a Notice of Fine of approximately $328,000; the Company is determining its response. The Company believes the reasonably possible range of losses for this and other unresolved legal actions would not have a material effect on its financial statements.
Item 1A. Risk Factors
See the Company’s most recent annual report filed on Form 10-K (Part I, Item 1A). There has been no material change in this information. The risks described in the annual report on Form 10-K, and the “Safe Harbor Statement” in this report, are not the only risks faced by the Company. Additional risks and uncertainties may also materially affect the Company’s business, financial condition, or operating results. One should not consider the risk factors to be a complete discussion of risks, uncertainties, and assumptions.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Company’s purchases of its common stock during the first quarter of 2020 were as follows:
|
|
| Total Number of |
|
| |||||
Shares Purchased as | Maximum Number of |
| ||||||||
Total Number of | Part of Publicly | Shares that May Yet Be |
| |||||||
Shares | Announced Plans or | Purchased under the |
| |||||||
Purchased (2) | Average Price | Programs (1) | Plans or Programs (1) |
| ||||||
Period | (thousands) | Paid Per Share | (thousands) | (millions) |
| |||||
Nov 4 to Dec 1 | 79 |
| $ | 175.18 | 79 | 6.7 | ||||
Dec 2 to Dec 29 | 156 | 169.97 | 70 | 57.1 | ||||||
Dec 30 to Feb 2 | 426 | 173.17 | 426 | 56.6 | ||||||
Total | 661 | 575 | ||||||||
| (1) | During the first quarter of 2020, the Company had a share repurchase plan that was announced in December 2013 to purchase up to $8,000 million of shares of the Company’s common stock. In December 2019, the Company announced an additional share repurchase plan authorizing the purchase of up to $8,000 million of shares of the Company’s common stock. The maximum number of shares that may yet be purchased under these plans was based on the end of the first quarter closing share price of $158.58 per share. At the end of the first quarter of 2020, $8,975 million of common stock remains to be purchased under the plans. |
| (2) | In the first quarter of 2020, approximately 86 thousand shares were purchased from plan participants at a market price to pay payroll taxes on certain restricted stock awards. The shares were valued at a weighted-average market price of $172.51. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
49
Item 5. Other Information
Not applicable.
Item 6. Exhibits
Certain instruments relating to long-term borrowings 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.
3.1 | ||
3.2 | ||
10.1 | ||
10.2 | ||
31.1 | ||
31.2 | ||
32 | ||
101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |
* Incorporated by reference. Copies of these exhibits are available from the Company upon request.
50
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DEERE & COMPANY | ||||
Date: | February 27, 2020 | By: | /s/ Ryan D. Campbell | |
Ryan D. Campbell | ||||
(Principal Financial Officer and Principal Accounting Officer) | ||||
51