UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 28, 2019
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file no: 1-4121
DEERE & COMPANY
(Exact name of registrant as specified in its charter)
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Delaware
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36-2382580
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One John Deere Place
Moline, Illinois 61265
(Address of principal executive offices)
Telephone Number: (309) 765-8000
Securities Registered Pursuant to Section 12(b) of the Act:
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Title of each class |
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Trading symbol |
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Name of each exchange on which registered |
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Common stock, $1 par value |
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DE |
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New York Stock Exchange |
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8½% Debentures Due 2022 |
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DE22 |
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New York Stock Exchange |
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6.55% Debentures Due 2028 |
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DE28 |
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New York Stock Exchange |
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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
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).
Yes ☒ No ☐
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.
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Large accelerated filer |
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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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 ☐ No ☒
At July 28, 2019, 314,872,834 shares of common stock, $1 par value, of the registrant were outstanding.
PART I. FINANCIAL INFORMATION
See Condensed Notes to Interim Consolidated Financial Statements.
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See Condensed Notes to Interim Consolidated Financial Statements.
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See Condensed Notes to Interim Consolidated Financial Statements.
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See Condensed Notes to Interim Consolidated Financial Statements.
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See Condensed Notes to Interim Consolidated Financial Statements.
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See Condensed Notes to Interim Consolidated Financial Statements.
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See Condensed Notes to Interim Consolidated Financial Statements.
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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 third quarter ends for fiscal year 2019 and 2018 were July 28, 2019 and July 29, 2018, respectively. Both periods contained 13 weeks.
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 an equity basis. During the second quarter of 2019, the Company made an additional contribution to the joint venture in exchange for non-voting preferred stock and terminated the loan guarantee. The maximum exposure to losses at July 28, 2019 and October 28, 2018 in millions of dollars follows:
(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.
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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 $498 million and $564 million in the first nine months of 2019 and 2018, respectively. The Company also had accounts payable related to purchases of property and equipment of approximately $70 million and $57 million at July 28, 2019 and July 29, 2018, respectively.
The Company’s equipment operations held restricted cash of $9 million, $7 million, $7 million, and $6 million at July 28, 2019, October 28, 2018, July 29, 2018, and October 29, 2017, respectively. The equipment operation’s restricted cash relates to miscellaneous operational activities. The Company’s financial services operations held restricted cash of $90 million, $104 million, $99 million, and $126 million at July 28, 2019, October 28, 2018, July 29, 2018, and October 29, 2017, respectively. The financial services operations’ 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 2019, the Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Accounting Standards Codification (ASC) 605, Revenue Recognition. The ASU was adopted using a modified-retrospective approach to all incomplete contracts as of the adoption date. The ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. A five step model is used to determine the amount and timing of revenue recognized. The ASU also requires expanded disclosures to include disaggregated revenue by geographic regions and major product lines.
The ASU required that a gross asset and liability rather than a net liability be recorded for the value of estimated service parts returns and the related refund liability. The gross asset is recorded in other assets for the inventory value of estimated parts returns and the gross liability is recorded in accounts payable and accrued expenses for the estimated dealer refund. The table below reflects the change for the estimated parts returns in the affected lines on the consolidated balance sheet in millions of dollars.
There were no significant changes affecting the timing of revenue recognition from the adoption. The Company’s updated revenue policies and additional disclosures are included in Note 4.
In the first quarter of 2019, the Company adopted ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which amends ASC 825-10, Financial Instruments – Overall. This ASU changed the treatment for available for sale equity investments by recognizing unrealized fair value changes directly in net income and no longer in other comprehensive income (OCI). The cumulative effect of adoption resulted in an $8 million after-tax reclassification from OCI to retained earnings.
In the first quarter of 2019, the Company adopted ASU No. 2016-18, Restricted Cash, which amends ASC 230, Statement of Cash Flows. The ASU requires that restricted cash be included with cash and cash equivalents in the statement of cash flows. The ASU was adopted using a retrospective transition approach
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resulting in an update to the 2018 consolidated and supplemental consolidating statement of cash flows (see Note 2). The ASU did not have a material effect on the Company’s consolidated financial statements.
In the first quarter of 2019, the Company early adopted ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities, which amends ASC 815, Derivatives and Hedging. The purpose of this ASU is to better align a company’s risk management activities and financial reporting for hedging relationships, simplify the hedge accounting requirements, and improve the disclosures of hedging arrangements. The adoption did not have a material effect on the Company’s consolidated financial statements (see Note 17). The Company continues to evaluate potential additional hedge accounting relationships provided by the new standard to further improve risk management.
The Company also adopted the following standards in the first quarter of 2019, none of which had a material effect on the Company’s consolidated financial statements:
Accounting Standards Updates
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2016-15 |
Classification of Certain Cash Receipts and Cash Payments, which amends ASC 230, Statement of Cash Flows |
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2016-16 |
Intra-Entity Transfers of Assets Other Than Inventory, which amends ASC 740,
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2017-01 |
Clarifying the Definition of a Business, which amends ASC 805, Business Combinations |
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2017-09 |
Scope of Modification Accounting, which amends ASC 718, Compensation -
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2018-13 |
Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which amends ASC 820, Fair Value Measurement |
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2018-14 |
Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans, which amends ASC 715-20, Compensation - Retirement Benefits - Defined Benefit
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2018-16 |
Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes, which amends ASC 815, Derivatives and Hedging |
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New Accounting Standards to be Adopted
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes ASC 840, Leases. The ASU’s primary change is the requirement for lessee entities to recognize a lease liability for payments and a right of use asset during the term of operating lease arrangements. The ASU does not significantly change the lessee’s recognition, measurement, and presentation of expenses and cash flows from the previous accounting standard. Lessors’ accounting under the ASC is largely unchanged from the previous accounting standard. In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases and ASU No. 2018-11, Leases: Targeted Improvements. Both ASUs amend ASC 842, Leases. The provisions affecting the Company in these ASUs are an option that will not require earlier periods to be restated at the adoption date and an option for lessors, if certain criteria are met, to avoid separating the lease and nonlease components (such as preventative maintenance services) in an agreement. In December 2018, the FASB issued ASU No. 2018-20, Narrow-Scope Improvements for Lessors. This ASU provides an election for lessors to exclude sales and related taxes from consideration in the contract, requires lessors to exclude from revenue and expense lessor costs paid directly to a third party by lessees, and clarifies lessors’ accounting for variable payments related to both lease and nonlease components. In March 2019, the FASB issued ASU No. 2019-01, Leases: Codification Improvements. The ASU allows certain lessors, including captive finance companies, to use their cost as the fair value of the to-be-leased asset. The ASU also clarifies the presentation of lease payments in the statement of cash flows and the required transition disclosures. The effective date will be the first quarter of fiscal year 2020. The Company is implementing a software application for lessee accounting, designing new processes and controls, and evaluating the potential effects on the consolidated financial statements. The ASU will be adopted using the modified-retrospective approach that will not require earlier periods to be restated.
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, which establishes ASC 326, Financial Instruments - Credit Losses. The ASU revises the measurement of credit losses for financial assets measured at amortized cost from an incurred loss methodology to an expected loss methodology. The ASU affects trade receivables, debt securities, net investment in leases, and most other financial assets that represent a right to receive cash. Additional disclosures about significant estimates and credit quality are also required. In November 2018, the FASB issued ASU No. 2018-19,
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Codification Improvements to Topic 326, Financial Instruments - Credit Losses. This ASU clarifies that receivables from operating leases are accounted for using the lease guidance and not as financial instruments. In May 2019, the FASB issued ASU No. 2019-05, Targeted Transition Relief, which amends ASC 326. This ASU provides an option to irrevocably elect to measure certain individual financial assets at fair value instead of amortized cost. The effective date will be the first quarter of fiscal year 2021. The ASUs will be adopted using a modified-retrospective approach. The Company is evaluating the potential effects on the consolidated financial statements.
In March 2017, the FASB issued ASU No. 2017-08, Premium Amortization on Purchased Callable Debt Securities, which amends ASC 310-20, Receivables – Nonrefundable Fees and Other Costs. This ASU reduces the amortization period for certain callable debt securities held at a premium to the earliest call date. The treatment of securities held at a discount is unchanged. The effective date is the first quarter of fiscal year 2020. The ASU will be adopted using a modified-retrospective approach. The adoption will not have a material effect on the Company’s consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which amends ASC 718, Compensation – Stock Compensation. The ASU requires that most of the guidance related to stock compensation granted to employees be followed for non-employees, including the measurement date, valuation approach, and performance conditions. The expense is recognized in the same period as though cash were paid for the good or service. The effective date is the first quarter of fiscal year 2020. The ASU will be adopted using a modified-retrospective approach. The adoption will not have a material effect on the consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which amends ASC 350-40, Intangibles – Goodwill and Other – Internal-Use Software. This ASU requires customers in a hosting arrangement that is a service contract to evaluate the implementation costs of the hosting arrangement using the guidance to develop internal-use software. The project development stage determines the implementation costs that are capitalized or expensed. Capitalized implementation costs are amortized over the term of the service arrangement and are presented in the same income statement line item as the service contract costs. The effective date will be the first quarter of fiscal year 2021, with early adoption permitted. The Company will adopt the ASU on a prospective basis. The Company is evaluating the potential effects on the Company’s consolidated financial statements.
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: (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, (2) clarifications to ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities, is the first quarter of fiscal year 2020, with early adoption permitted, which will not have a material effect, and (3) clarifications to ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, is the first quarter of fiscal year 2021, with early adoption permitted, which will not have a material effect.
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(4) Revenue Recognition
Sales of equipment and service parts. Sales of equipment and service parts are recognized when each of the following criteria are met: (1) the Company and an independent customer approve a contract with commercial substance, (2) the sales price is determinable and collectability of the payments are probable based on the terms outlined in the contract, and (3) control of the goods has transferred to the customer. Transfer of control generally occurs for equipment and service parts when the good is delivered as specified in the contract and the risks and rewards of ownership are transferred. In the U.S. and most international locations, this transfer occurs primarily when goods are shipped. In Canada and some other international locations, certain goods are shipped to dealers on a consignment basis under which the risks and rewards of ownership are not transferred to the dealer at the time the goods are shipped. Accordingly, in these locations, sales are not recorded until a retail customer has purchased the goods. Generally, no right of return exists on sales of equipment.
In limited instances, equipment is transferred to a customer or a financial institution with an obligation to repurchase the equipment for a specified amount, which is exercisable at the customer’s option. When the equipment is expected to be repurchased, those arrangements are accounted for as leases. When the operating lease criteria are met, no sale is recorded at the time of the equipment transfer and the difference between sale price and the specified repurchase amount is recognized as revenue on a straight-line basis until the customer’s option expires. When this equipment is not expected to be repurchased, a sale is recorded with a return obligation.
Under the terms of sales agreements with dealers, interest-free periods are determined based on the type of equipment sold and the time of year of the sale. These periods range from one to twelve months for most equipment. Interest-free periods may not be extended. Interest is primarily charged to dealers on outstanding balances, from the earlier of the date when goods are sold to retail customers by the dealer or the expiration of certain interest-free periods granted at the time of the sale to the dealer, until payment is received by the Company. Interest charged may not be forgiven and the past due interest rates exceed market rates. Dealers cannot cancel purchases after the equipment is shipped and are responsible for payment even if the equipment is not sold to retail customers. If the interest-free or below market interest rate period exceeds one year, the Company adjusts the expected sales revenue for the effects of the time value of money using a current market interest rate. The revenue related to the financing component is recognized in finance and interest income using the interest method. The Company elected to not adjust the sales price to account for a financing component if the expected interest-free or below market period is one year or less.
Service parts and certain attachments returns are estimable and accrued at the time a sale is recognized. The estimated parts returns are recorded in other assets for the inventory value of estimated part returns, adjusted for restocking fees. The estimated dealer refund liability, adjusted for restocking fees, is recorded in accounts payable and accrued expenses. The estimated returns are based on historical return rates, current dealer inventory levels, and current economic conditions.
Sales incentives. In certain markets, the Company provides sales incentives to dealers. These incentives may be based on a dealer’s purchase volume, or on retail sales incentive programs for allowances and financing programs that will be due when the dealer sells the equipment to a retail customer. At the time of the sale to a dealer, the Company records an estimated cost of these programs as a reduction to the sales price. The estimated cost is based on historical data, field inventory levels, and forecasted sales volumes. The final cost of these programs is determined at the end of the measurement period for volume based incentives or when the dealer sells the equipment to a retail customer. Actual cost differences from the original cost estimate are recognized in net sales.
Product warranties. For most equipment and parts sales, the Company provides a standard warranty to provide assurance that the equipment will function as intended for a specified period. At the time a sale is recognized, the estimated future warranty costs are recorded. The Company generally determines its total warranty liability by applying historical warranty 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 five-year claims costs with consideration of current quality developments. The Company also offers extended warranty arrangements for purchase at the customer’s option. The premiums for extended warranties are recognized in other income in the statement of consolidated income primarily in proportion to the costs expected to be incurred over the contract period. The unamortized extended warranty premiums (deferred revenue) are recorded in accounts payable and accrued expenses in the consolidated balance sheet.
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Remanufactured components and parts. The Company remanufactures used engines and components (cores) that are sold to dealers and end customers for maintenance and repair parts. Revenue for remanufactured components is recognized using the same criteria as other parts sales. When a remanufactured part is sold, the Company collects a deposit that is repaid if the customer returns a core that meets certain specifications within a defined time period. The deposit received from the customer is recognized as a liability in accounts payable and accrued expenses and the used component that is expected to be returned is recognized in other assets in the consolidated balance sheet. When a customer returns a core, the deposit is repaid, the liability reversed, and the returned core is recorded in inventory to be remanufactured and sold to another customer. If a core is not returned within the required time as estimated, the deposit is recognized as revenue in net sales, and the estimated core return is recorded as an expense in cost of sales in the statement of consolidated income.
Precision guidance, telematics, and other information enabled solutions. Certain equipment is sold with precision guidance, telematics, and other information gathering and analyzing capabilities. The solutions require hardware, software, and include an obligation to provide telematic services for a specific period of time. These solutions are generally bundled with the sale of the equipment and can also be purchased or renewed separately. The revenue related to the hardware and embedded software is generally recognized at the time of the equipment sale and recorded in net sales in the consolidated statement of income. The revenue for the future services is generally deferred and recognized over the service period. The deferred revenue is recorded as a contract liability in accounts payable and accrued expenses in the consolidated balance sheet and is recognized in other income with the associated expenses recognized in other operating expenses in the statement of consolidated income.
Allowance for credit losses. The Company also records an allowance for credit losses related to the receivables from sales (trade receivables and certain financing receivables) in selling, administrative and general expenses. The allowance represents an estimate of the losses inherent in the receivable portfolio. The allowance is based on many quantitative and qualitative factors. The adequacy of the allowance is reviewed quarterly.
Sales and transaction taxes. The Company collects and remits taxes assessed by different governmental authorities that are both imposed on and concurrent with revenue producing transactions between the Company and its customers. These taxes include sales, use, value-added, and some excise taxes. The Company elected to exclude these taxes from the determination of sales price (excluded from revenues).
Shipping and handling costs. Shipping and handling costs related to the sales of the Company’s equipment after a customer obtains control of the equipment are accrued at the time of the sale in cost of sales.
Contract costs. The Company elected to recognize the incremental costs of obtaining a contract as an expense when incurred because the asset’s amortization period would be one year or less.
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The Company’s revenue by primary geographical market, major product line, and timing of revenue recognition in millions of dollars follow:
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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 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 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 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, related attachments, and related service parts.
Compact Construction – Includes net sales of smaller construction equipment, including compact excavators, compact track loaders, compact wheel loaders, skid steers, landscape loaders, related attachments, and related service parts.
Road Building – Includes net sales of equipment used in road building 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, related attachments, and related 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 logging attachments, and related 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 15, was $1,022 million and $915 million at July 28, 2019 and October 28, 2018, respectively. The contract liability is reduced as the revenue is recognized. During the third quarter and first nine months of 2019, $101 million and $360 million, respectively, of revenue was recognized from deferred revenue that was recorded as a contract liability at the beginning of 2019.
The Company entered into contracts with customers to deliver equipment and services that have not been recognized at July 28, 2019 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 $878 million at July 28, 2019. The estimated revenue to be recognized by fiscal year follows in millions of dollars: remainder of 2019 - $133, 2020 - $348, 2021 - $197, 2022 - $116, 2023 - $58, and later years - $26. As permitted, the Company elected only to disclose remaining performance obligations with an original contract duration greater than one year. The contracts with an expected duration of one year or less are generally for sales to dealers and end customers for equipment, service parts, repair services, and certain telematics services.
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(5) Other Comprehensive Income Items
The after-tax changes in accumulated other comprehensive income (loss) in millions of dollars follow:
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Following are amounts recorded in and reclassifications out of other comprehensive income (loss), and the income tax effects, in millions of dollars:
* These accumulated other comprehensive income amounts are included in net periodic pension and OPEB costs. See Note 8 for additional detail.
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* These accumulated other comprehensive income amounts are included in net periodic pension and OPEB costs. See Note 8 for additional detail.
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* These accumulated other comprehensive income amounts are included in net periodic pension and OPEB costs. See Note 8 for additional detail.
In the third quarter of 2019 and 2018, the noncontrolling interests’ comprehensive income in both periods was none, which consisted of net income of none and $1 million and cumulative translation adjustments of none and $(1) million, respectively.
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* These accumulated other comprehensive income amounts are included in net periodic pension and OPEB costs. See Note 8 for additional detail.
In the first nine months of 2019 and 2018, the noncontrolling interests’ comprehensive income was $3 million and $1 million, respectively, which consisted of net income of $3 million and $2 million and cumulative translation adjustments of none and $(1) million, respectively.
(6) Dividends Declared and Paid
Dividends declared and paid on a per share basis were as follows:
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(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:
The income allocable to participating securities was insignificant for all periods and is reflected in the earnings per share.
During the third quarter and first nine months of 2019, .9 million shares and .7 million shares, respectively, were excluded from the computation because the incremental shares would have been antidilutive. During the third quarter and first nine months of 2018, .5 million shares and .4 million shares, respectively, were excluded from the above per share computation.
(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:
The worldwide components of net periodic OPEB cost consisted of the following in millions of dollars:
The components of net periodic pension and OPEB costs excluding the service cost component are included in the line item other operating expenses in the statement of consolidated income.
In August 2019, a committee of the Company’s Board of Directors approved a voluntary contribution to a U.S. OPEB plan for up to $500 million. During the first nine months of 2019, the Company contributed approximately $47 million to its pension plans and $97 million to its OPEB plans. The Company presently
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anticipates contributing an additional $20 million to its pension plans and $340 million to its OPEB plans during the remainder of fiscal year 2019. The anticipated OPEB contributions include a voluntary $300 million to a U.S. plan, which will increase plan assets. The pension and remaining OPEB contributions exceeding the voluntary amounts primarily include direct benefit payments from Company funds.
(9) Income Taxes
In 2019, the Company is subject to additional provisions of the U.S. tax reform legislation enacted in December 2017 (tax reform). The Company’s 2019 U.S. statutory corporate income tax rate is 21 percent and was approximately 23.3 percent for 2018. The provisions of tax reform affecting the Company in 2019 include a tax on global intangible low-taxed income (GILTI), a tax determined by base erosion and anti-abuse tax benefits (BEAT) for certain payments between a U.S. corporation and foreign subsidiaries, a limitation on the deductibility of certain executive compensation, a deduction for foreign derived intangible income (FDII), and interest expense limitations. Based on the current interpretations of tax reform legislation and related regulations, along with the Company’s 2019 forecasts, the Company does not expect the combined effect of these provisions to be significant for the 2019 provision for income taxes.
In 2019 and 2018, the Company recorded discrete tax adjustments related to the remeasurement of the Company’s net deferred tax assets to the new corporate income tax rate and for the deemed earnings repatriation tax (repatriation tax). Those adjustments for the third quarter and first nine months of 2019 and 2018 in millions of dollars follow:
The full year 2018 discrete tax expense for the remeasurement of the net deferred tax assets was $414 million and the repatriation tax was $290 million. The full year 2018 repatriation tax included an accrual of approximately $63 million for foreign withholding taxes on earnings of subsidiaries outside the U.S. that were previously expected to be indefinitely reinvested. The repatriation tax determination for the 2018 U.S. income tax return was completed in the third quarter of 2019 and resulted in a discrete tax benefit of approximately $32 million. The discrete benefit was based on adjustments from completing the 2018 income tax returns and the interpretation of the tax law and associated regulations for the repatriation tax, primarily related to fiscal year end companies. The Company paid the repatriation tax in 2019 with a U.S. income tax overpayment.
The Company’s unrecognized tax benefits at July 28, 2019 were $630 million, compared to $279 million at October 28, 2018. The liability at July 28, 2019, October 28, 2018, and July 29, 2018 consisted of approximately $274 million, $128 million, and $137 million, respectively, which would affect the effective tax rate if the tax benefits were recognized. The increase from the previously reported periods primarily relates to the interpretation of a recently issued repatriation tax regulation for fiscal year end companies. The remaining liability was related to tax positions for which there are offsetting tax receivables, or the uncertainty was only related to timing. The Company expects that any reasonably possible change in the amounts of unrecognized tax benefits in the next 12 months would not be significant.
23
(10) Segment Reporting
Worldwide net sales and revenues, operating profit, and identifiable assets by segment in millions of dollars follow:
* 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 OPEB costs excluding the service cost component, and net income attributable to noncontrolling interests.
(11) Financing Receivables
Past due balances of financing receivables still accruing finance income represent the total balance held (principal plus accrued interest) with any payment amounts 30 days or more past the contractual payment due date. Non-performing financing receivables represent loans for which the Company has ceased accruing finance income. Beginning in the first quarter of 2019, the Company ceased accruing finance income when these receivables are generally 90 days delinquent. Previously, finance income ceased accruing when the receivables were generally 120 days delinquent. This change in estimate was made on a prospective basis and did not have a significant effect on the Company’s consolidated financial statements. Management’s methodology to determine the collectability of delinquent accounts was not affected by the change.
24
Generally, when receivables are 120 days delinquent the estimated uncollectible amount, after charging the dealer’s withholding account, if any, is written off to the allowance for credit losses. Finance income for non-performing receivables is recognized on a cash basis. Accrual of finance income is generally resumed when the receivable becomes contractually current and collections are reasonably assured.
An age analysis of past due financing receivables that are still accruing interest and non-performing financing receivables in millions of dollars follows:
25
An analysis of the allowance for credit losses and investment in financing receivables in millions of dollars during the periods follows:
* Individual allowances were not significant.
** Remainder is collectively evaluated.
26
* Individual allowances were not significant.
** Remainder is collectively evaluated.
Financing receivables are considered impaired when it is probable the Company will be unable to collect all amounts due according to the contractual terms. Receivables reviewed for impairment generally include those that are either past due, or have provided bankruptcy notification, or require significant collection efforts. Receivables that are impaired are generally classified as non-performing.
An analysis of the impaired financing receivables in millions of dollars follows:
* Finance income recognized was not material.
** Primarily retail notes.
27
A troubled debt restructuring is generally the modification of debt in which a creditor grants a concession it would not otherwise consider to a debtor that is experiencing financial difficulties. These modifications may include a reduction of the stated interest rate, an extension of the maturity dates, a reduction of the face amount or maturity amount of the debt, or a reduction of accrued interest. During the first nine months of 2019, the Company identified 416 receivable contracts, primarily trade receivables and retail notes, as troubled debt restructurings with aggregate balances of $34 million pre-modification and $33 million post-modification. During the first nine months of 2018, there were 410 receivable contracts, primarily retail notes, identified as troubled debt restructurings with aggregate balances of $22 million pre-modification and $22 million post-modification. During these same periods, there were no significant troubled debt restructurings that subsequently defaulted and were written off. At July 28, 2019, the Company had commitments to lend approximately $13 million to borrowers whose accounts were modified in troubled debt restructurings.
(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 $3,425 million, $2,593 million, and $2,971 million at July 28, 2019, October 28, 2018, and July 29, 2018, respectively. The liabilities (short-term securitization borrowings and accrued interest) of these SPEs totaled $3,316 million, $2,520 million, and $2,860 million at July 28, 2019, October 28, 2018, and July 29, 2018, respectively. The credit holders of these SPEs do not have legal recourse to the Company’s general credit.
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 $587 million, $504 million, and $592 million at July 28, 2019, October 28, 2018, and July 29, 2018, respectively. The liabilities (short-term securitization borrowings and accrued interest) were $546 million, $475 million, and $553 million at July 28, 2019, October 28, 2018, and July 29, 2018, respectively.
28
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 $1,286 million, $1,033 million, and $1,213 million at July 28, 2019, October 28, 2018, and July 29, 2018, respectively. The liabilities (short-term securitization borrowings and accrued interest) related to these conduits were $1,190 million, $965 million, and $1,118 million at July 28, 2019, October 28, 2018, and July 29, 2018, respectively.
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:
|
|
|
|
|
|
|
|
|
July 28 |
|
|
|
|
|
2019 |
|
|
|
Carrying value of liabilities |
|
$ |
1,190 |
|
|
Maximum exposure to loss |
|
|
1,286 |
|
The total assets of unconsolidated VIEs related to securitizations were approximately $34 billion at July 28, 2019.
The components of consolidated restricted assets related to secured borrowings in securitization transactions follow in millions of dollars:
The components of consolidated secured borrowings and other liabilities related to securitizations follow in millions of dollars:
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 July 28, 2019, the maximum remaining term of all securitized retail notes was approximately six years.
29
(13) Inventories
A majority of inventory owned by Deere & Company and its U.S. equipment subsidiaries and certain foreign equipment subsidiaries are valued at cost on the “last-in, first-out” (LIFO) method. If all of the Company’s inventories had been valued on a “first-in, first-out” (FIFO) method, estimated inventories by major classification in millions of dollars would have been as follows:
(14) Goodwill and Other Intangible Assets–Net
The changes in amounts of goodwill by operating segments were as follows in millions of dollars:
There were no accumulated impairment losses in the reported periods.
The components of other intangible assets were as follows in millions of dollars:
* Weighted-averages
** Accumulated amortization at July 28, 2019, October 28, 2018, and July 29, 2018 for customer lists and relationships totaled $71 million, $46 million, and $38 million and technology, patents, trademarks, and other totaled $190 million, $137 million, and $118 million, respectively.
The amortization of other intangible assets in the third quarter and the first nine months of 2019 was $27 million and $82 million and for 2018 was $27 million and $71 million, respectively. The estimated amortization expense for the next five years is as follows in millions of dollars: remainder of 2019 – $26, 2020 – $104, 2021 – $103, 2022 – $102, and 2023 – $100.
30
(15) 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 five-year claims costs and current quality developments.
The premiums for extended warranties are primarily recognized in income in proportion to the costs expected to be incurred over the contract period. These unamortized extended warranty premiums (deferred revenue) included in the following table totaled $542 million and $486 million at July 28, 2019 and July 29, 2018, respectively.
A reconciliation of the changes in the warranty liability and unearned premiums in millions of dollars follows:
At July 28, 2019, the Company had approximately $325 million of guarantees issued primarily to banks outside the U.S. and Canada related to third-party receivables for the retail financing of John Deere and Wirtgen equipment. The Company may recover a portion of any required payments incurred under these agreements from repossession of the equipment collateralizing the receivables. At July 28, 2019, the Company had accrued losses of approximately $14 million under these agreements. The maximum remaining term of the receivables guaranteed at July 28, 2019 was approximately seven years.
At July 28, 2019, the Company had commitments of approximately $452 million for the construction and acquisition of property and equipment. Also, at July 28, 2019, the Company had restricted assets of $93 million, classified as other assets. See Note 12 for additional restricted assets associated with borrowings related to securitizations.
The Company also had other miscellaneous contingent liabilities totaling approximately $70 million at July 28, 2019. The accrued liability for these contingencies was not material at July 28, 2019.
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.
(16) 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.
31
The fair values of financial instruments that do not approximate the carrying values in millions of dollars follow:
* 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.
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.
32
Assets and liabilities measured at fair value on a recurring basis in millions of dollars follow*:
* 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 third quarter and first nine months of 2019, $1 million and $7 million, respectively, of net unrealized gains on equity securities were recorded in “Other income”.
The contractual maturities of debt securities at July 28, 2019 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.
33
Fair value, recurring Level 3 measurements from available-for-sale marketable securities in millions of dollars follow:
There were no fair value, nonrecurring measurements from impairments in the reported periods. Financing receivables with specific allowances are shown 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.
(17) 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 equipment operations units for below market retail financing programs that are used as sales incentives and are offered for extended periods, along with periodic long-term debt issuances.
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, or the underlying hedged transaction is no longer likely to occur, or the hedge designation is removed, or the derivative is terminated, hedge accounting is discontinued.
Cash Flow Hedges
Certain interest rate and cross-currency 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 July 28, 2019, October 28, 2018, and July 29, 2018 were $2,750 million, $3,050 million, and $2,400 million, respectively. Included in the July 28, 2019 notional amount is $250 million for a forecasted debt issuance expected to occur in the fourth quarter of 2019. The total notional amount of the
34
cross-currency interest rate contract at July 29, 2018 was $11 million. Fair value gains or losses on these cash flow hedges were recorded in OCI and subsequently reclassified into interest expense or other operating expenses (foreign exchange) in the same periods during which the hedged transactions affected earnings. These amounts offset the effects of interest rate or foreign currency exchange rate changes on the related borrowings. The cash flows from these contracts were recorded in operating activities in the statement of consolidated cash flows.
The amount of loss recorded in OCI at July 28, 2019 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 $6 million after-tax. The Company is hedging a portion of its expected exposure to interest rate changes in a forecasted, fourth quarter 2019 debt issuance using an interest rate contract with a term of 30 years. There were no gains or losses reclassified from OCI to earnings based on the probability that the original forecasted transaction would not occur.
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 July 28, 2019, October 28, 2018, and July 29, 2018 were $9,245 million, $8,479 million, and $7,792 million, respectively. The fair value gains or losses on these contracts were generally offset by fair value gains or losses on the hedged items (fixed-rate borrowings) with both items recorded in interest expense.
The amounts recorded in the consolidated balance sheet related to borrowings designated in fair value hedging relationships in millions of dollars follow:
* 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 financing programs. The total notional amounts of these interest rate swaps at July 28, 2019, October 28, 2018, and July 29, 2018 were $7,607 million, $8,075 million, and $6,519 million, the foreign exchange contracts were $6,362 million, $6,842 million, and $7,752 million, and the cross-currency interest rate contracts were $90 million, $81 million, and $96 million, respectively. To facilitate borrowings through securitization of retail notes, interest rate caps were sold with notional amounts of $8 million, $66 million, and $92 million at July 28, 2019, October 28, 2018, and July 29, 2018, respectively. Interest rate caps were also purchased with notional amounts of $8 million, $66 million, and $92 million at the same dates. The fair value gains or losses from the interest rate contracts were recognized currently in interest expense or net sales, and the gains or losses from foreign exchange contracts in cost of sales or other operating expenses, generally offsetting over time the expenses on the exposures being hedged. The cash flows from these non-designated contracts were recorded in operating activities in the statement of consolidated cash flows.
35
Fair values of derivative instruments in the condensed consolidated balance sheet in millions of dollars follow:
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:
* 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
36
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. 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 July 28, 2019, October 28, 2018, and July 29, 2018, was $101 million, $350 million, and $331 million, respectively. In accordance with the limits established in these agreements, the Company paid $59 million and $34 million in cash collateral at October 28, 2018 and July 29, 2018, respectively. No cash collateral was paid or received at July 28, 2019.
Derivatives are recorded without offsetting for netting arrangements or collateral. The impact on the derivative assets and liabilities related to netting arrangements and any collateral received or paid in millions of dollars follows:
(18) Stock Option and Restricted Stock Awards
In December 2018, the Company granted stock options to employees for the purchase of 402 thousand shares of common stock at an exercise price of $148.14 per share and a binomial lattice model fair value of $46.96 per share at the grant date. At July 28, 2019, options for 7.5 million shares were outstanding with a weighted-average exercise price of $91.97 per share. The Company also granted 446 thousand restricted stock units to employees and non-employee directors in the first nine months of 2019, of which 355 thousand are subject to service based only conditions and 91 thousand are subject to performance/service based conditions. The weighted-average fair value of the service based only units at the grant date was $149.54 per unit based on the market price of a share of underlying common stock. The weighted-average fair value of the performance/service based units at the grant date was $140.49 per unit based on the market price of a share of underlying common stock excluding dividends. At July 28, 2019, the Company was authorized to grant an additional 8.3 million shares related to stock option and restricted stock awards.
37
(19) Acquisitions
In September 2018, the Company acquired PLA, a privately held manufacturer of sprayers, planters, and specialty products for agriculture. PLA is based in Argentina, with manufacturing facilities in Las Roses, Argentina and Canoas, Brazil. The total cash purchase price after the final adjustment, net of cash acquired of $1 million, was $69 million with $4 million retained by the Company as escrow to secure indemnity obligations. In addition to the cash purchase price, the Company assumed $29 million of liabilities. The asset and liability fair values at the acquisition date in millions of dollars follow:
The identifiable intangible assets were primarily related to technology, trademarks, and customer relationships, which have a weighted-average amortization period of five years.
The goodwill was the result of future cash flows and related fair values of the entity exceeding the fair value of the identified assets and liabilities, and is not expected to be deducted for tax purposes. The results of PLA were included in the Company’s consolidated financial statements in the agriculture and turf segment since the date of acquisition. The pro forma results of operations as if the acquisition had occurred at the beginning of the prior fiscal year would not differ significantly from the reported results.
38
* 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.
39
* 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.
40
* 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.
41
* 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.
42
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, road building, 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 equipment in the U.S. and Canada as well as for the European Union (EU) 28 nations are forecast to be about the same as last year. South American industry sales of tractors and combines are projected to be about the same to 5 percent higher. Asian sales are forecast to be about the same or decrease slightly. Industry sales of turf and utility equipment in the U.S. and Canada are expected to be about the same to 5 percent higher for 2019. The Company’s agriculture and turf segment sales decreased 6 percent in the third quarter and increased 2 percent for the first nine months. These sales are forecast to increase about 2 percent for fiscal year 2019. Construction equipment markets reflect generally positive fundamentals and economic growth worldwide. In forestry, global industry sales are expected to be about the same to 5 percent higher. The Company’s construction and forestry segment sales increased 1 percent in the third quarter and 11 percent for the first nine months. These sales are forecast to increase about 10 percent in 2019, with the two additional months of Wirtgen adding 4 percent to segment sales. Net income attributable to Deere & Company for the Company’s financial services operations is forecast to be approximately $620 million in 2019.
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, 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 third quarter results reflect the uncertainty that continues in the agricultural sector. Concerns about export market access, near-term demand for commodities, and overall crop conditions have caused farmers to postpone major equipment purchases. General economic conditions remain positive and are contributing to strong results for the construction and forestry business. The global customer base continues to expand and the Company is encouraged by the market’s positive response to its products and services. The Company is assessing its cost structure through reviews of organization efficiency, a footprint assessment, and an increased focus on investments with the most opportunity for differentiation.
2019 Compared with 2018
The following table provides the net income attributable to Deere & Company in millions of dollars and diluted earnings per share in dollars:
Affecting 2019 and 2018 results were discrete charges or benefits to the provision for income taxes due to U.S. tax reform legislation (tax reform). Net income was favorably impacted by $32 million in the third quarter of 2019 and
43
$27 million for the nine-month period ended July 28, 2019. Net income was favorably affected by $62 million in the third quarter of 2018 and unfavorably affected by $741 million in the nine-month period ended July 29, 2018. See Note 9 for more information on tax reform.
The worldwide net sales and revenue, 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:
The Company’s equipment operations operating profit and net income and financial services operations net income follow in millions of dollars:
The discussion on net sales and operating profit are included in the Business Segment Results below. Net income in the third quarter and the first nine months of 2019 and 2018 was affected by discrete adjustments to the provision for income taxes. See Note 9 for the discrete income tax adjustments related to tax reform.
Business Segment Results
Agriculture and Turf. The agriculture and turf segment results in millions of dollars follow:
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|
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Three Months Ended |
|
Nine Months Ended |
|
||||||||||||
|
|
|
July 28 |
|
July 29 |
|
% |
|
July 28 |
|
July 29 |
|
% |
|
||||
|
|
|
2019 |
|
2018 |
|
Change |
|
2019 |
|
2018 |
|
Change |
|
||||
|
Net sales |
|
$ |
5,946 |
|
$ |
6,293 |
|
-6 |
|
$ |
17,909 |
|
$ |
17,585 |
|
+2 |
|
|
Operating profit |
|
|
612 |
|
|
806 |
|
-24 |
|
|
1,978 |
|
|
2,249 |
|
-12 |
|
|
Operating margin |
|
|
10.3% |
|
|
12.8% |
|
|
|
|
11.0% |
|
|
12.8% |
|
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Segment sales decreased for the quarter due to lower shipment volumes and the unfavorable effects of currency translation, partially offset by price realization. Sales for the first nine months increased mainly as a result of price realization and increased shipment volumes, partially offset by the unfavorable effects of currency translation. Operating profit declined for the quarter primarily due to lower shipment volumes, higher production costs, and the unfavorable effects of foreign currency exchange, partially offset by price realization. Operating profit for the first nine months was lower primarily as a result of higher production costs, the unfavorable effects of currency translation, increased research and development costs, and a less favorable sales mix. These factors were partially offset by price realization and higher shipment volumes.
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Construction and Forestry. The construction and forestry segment results in millions of dollars follow:
Segment sales increased for the quarter and first nine months primarily due to price realization, partially offset by the unfavorable effects of currency translation. Nine month sales also benefited from higher shipment volumes. The inclusion of Wirtgen’s sales for two additional months accounted for about 6 percent of the year to date net sales increase. Wirtgen’s operating profit for the third quarter and first nine months was $159 million and $275 million, respectively, compared with $88 million and $37 million for the corresponding periods last year. Excluding Wirtgen, the improvement in the third quarter was primarily driven by price realization, partially offset by a less favorable sales mix. Year to date operating profit, excluding Wirtgen, increased mainly due to price realization and higher shipment volumes, partially offset by higher production costs and the unfavorable effects of currency exchange.
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:
Operating profit increased for the quarter due to income earned on a higher average portfolio, partially offset by higher losses on operating lease residual values and unfavorable financing spreads. Nine month operating profit declined due to unfavorable financing spreads and higher losses on operating lease residual values, largely offset by income earned on a higher average portfolio. The average balance of receivables and leases financed was 9 percent higher in the third quarter and 8 percent higher in the first nine months of 2019, compared with the same periods last year. Interest expense increased in the third quarter and first nine months of 2019 primarily as a result of higher average borrowing rates and higher average borrowings.
The cost of sales to net sales ratio and other significant statement of consolidated income changes not previously discussed follow:
The cost of sales to net sales ratio decreased in the third quarter and the first nine months due to price realization, partially offset by higher production costs, the unfavorable effects of foreign currency exchange, and a less favorable product mix. Research and development expenses increased in both periods primarily as a result of spending to support new, advanced products. Selling, administrative and general expenses decreased in the third quarter primarily due to lower incentive compensation and the favorable effects of foreign currency translation. These expenses increased in the first nine months primarily as a result of the effect of acquisitions, partially offset by favorable effects of foreign currency translation and lower incentive compensation. Other operating expenses increased in both periods primarily due to higher depreciation on operating leases and losses on operating lease
45
residual values, partially offset by lower pension and postretirement benefit costs excluding the service cost component.
Market Conditions and Outlook
Company equipment sales are projected to increase by about 4 percent for fiscal 2019 compared with 2018. Included in the forecast are Wirtgen results for the full fiscal year of 2019 compared with 10 months in 2018. This adds about 1 percent to the Company’s net sales for the current year. Also included in the forecast is a negative foreign currency translation effect of about 2 percent for the year. Net sales and revenues are projected to increase about 5 percent for fiscal 2019. Net income attributable to Deere & Company is forecast to be about $3,200 million.
Agriculture and Turf. The Company’s worldwide sales of agriculture and turf equipment are forecast to increase about 2 percent for fiscal year 2019, including a negative currency translation effect of about 2 percent. Industry sales of agricultural equipment are expected to be about the same as last year for the U.S. and Canada as well as for the EU28 member nations. South American industry sales of tractors and combines are forecast to be about the same to 5 percent higher benefiting from strength in Brazil. Asian sales are forecast to be about the same to down slightly. Industry sales of turf and utility equipment in the U.S. and Canada are expected to be about the same to 5 percent higher for 2019.
Construction and Forestry. The Company’s worldwide sales of construction and forestry equipment are anticipated to increase about 10 percent for 2019, with foreign currency rates having an unfavorable translation effect of about 2 percent. The forecast includes a full year of Wirtgen sales, versus 10 months in fiscal 2018, with the two additional months adding about 4 percent to division sales for the year. The outlook reflects generally positive fundamentals and economic growth worldwide. In forestry, global industry sales are expected to be about the same to 5 percent higher mainly as a result of improved demand in EU28 countries and Russia.
Financial Services. Fiscal year 2019 net income attributable to Deere & Company for the financial services segment is expected to be approximately $620 million. Excluding the 2018 benefit from tax reform, forecasted net income is expected to benefit from a higher average portfolio and favorable adjustments to the provision for income taxes, largely offset by less favorable financing spreads, higher losses on operating lease residual values, and a higher provision for credit losses.
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, global trade agreements (e.g., the North American Free Trade 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.
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.
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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; 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.
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 anticipated 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) the uncertainty concerning the timing and terms of the exit, (ii) new or modified trading arrangements between the United Kingdom and other countries, (iii) the risk that one or more other European Union countries could come under increasing pressure to leave the European Union, or (iv) 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 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
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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
Positive cash flows from consolidated operating activities in the first nine months of 2019 were $404 million. This cash inflow resulted primarily from net income adjusted for non-cash provisions, a change in accrued income taxes payable/receivable, and a change in net retirement benefits, partially offset by a seasonal increase in receivables and inventories, along with an increase in overall demand, and a decrease in accounts payable and accrued expenses. Cash outflows from investing activities were $2,129 million in the first nine months of 2019, primarily due to the cost of receivables and equipment on operating leases acquired exceeding collections of receivables (excluding receivables related to sales) and proceeds from sales of equipment on operating leases by $1,268 million, purchases of property and equipment of $756 million, and purchases of marketable securities exceeding proceeds from maturities and sales by $38 million. Positive cash flows from financing activities were $1,216 million in the first nine months of 2019 primarily due to an increase in borrowings of $2,748 million and proceeds from issuance of common stock of $133 million (resulting from the exercise of stock options), partially offset by repurchases of common stock of $880 million and dividends paid of $703 million. Cash, cash equivalents, and restricted cash decreased $533 million during the first nine months of this year.
Negative cash flows from consolidated operating activities in the first nine months of 2018 were $672 million. This cash outflow resulted primarily from a seasonal increase in receivables and inventories, along with an increase in overall demand, and a change in net retirement benefits, partially offset by net income adjusted for non-cash provisions, an increase in accounts payable and accrued expenses, and a change in accrued income taxes payable/receivable. Cash outflows from investing activities were $6,493 million in the first nine months of 2018, primarily due to acquisitions of businesses, net of cash acquired, of $5,171 million, costs of receivables (excluding receivables related to sales) and equipment on operating leases acquired exceeding the collections of receivables and proceeds from sales of equipment on operating leases acquired by $736 million, purchases of property and equipment of $571 million, and purchases of marketable securities exceeding proceeds from maturities and sales by $45 million. Partially offsetting these cash outflows were cash inflows from proceeds from sales of businesses and unconsolidated affiliates, net of cash sold, of $133 million. Positive cash flows from financing activities were $1,656 million in the first nine months of 2018 primarily due to an increase in borrowings of $2,550 million and proceeds from issuance of common stock of $209 million (resulting from the exercise of stock options), partially offset by dividends paid of $583 million and repurchases of common stock of $454 million. Cash, cash equivalents, and
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restricted cash decreased $5,438 million during the first nine months of 2018, primarily due to the Wirtgen acquisition.
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 July 28, 2019, October 28, 2018, and July 29, 2018 was $2,468 million, $3,857 million, and $4,065 million, respectively, while the total cash and cash equivalents and marketable securities position was $3,948 million, $4,394 million, and $4,412 million, respectively. The total cash and cash equivalents and marketable securities held by foreign subsidiaries was $2,038 million, $2,433 million, and $2,299 million at July 28, 2019, October 28, 2018, and July 29, 2018, 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 $8,543 million at July 28, 2019, $5,332 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 July 28, 2019 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 July 28, 2019 was $13,195 million. Alternatively under this provision, the equipment operations had the capacity to incur additional debt of $24,505 million at July 28, 2019. 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:
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Senior |
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Long-Term |
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Outlook |
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Fitch Ratings |
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A |
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F1 |
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Stable |
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Moody’s Investors Service, Inc. |
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A2 |
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Prime-1 |
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Stable |
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Standard & Poor’s |
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A |
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A-1 |
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Stable |
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Trade accounts and notes receivable primarily arise from sales of goods to independent dealers. Trade receivables increased $1,754 million during the first nine months of 2019, primarily due to a seasonal increase and higher shipment volumes. These receivables increased $550 million, compared to a year ago, primarily due to higher shipment volumes, partially offset by foreign currency translation. The ratios of worldwide trade accounts and notes receivable to the last 12 months’ net sales were 20 percent at July 28, 2019, compared to 15 percent at October 28, 2018 and 19 percent at July 29, 2018. Agriculture and turf trade receivables increased $200 million and construction and forestry trade receivables increased $350 million, compared to a year ago. The percentage of total worldwide trade receivables outstanding for periods exceeding 12 months was 1 percent at July 28, 2019, 2 percent at October 28, 2018, and 1 percent at July 29, 2018.
Deere & Company stockholders’ equity was $12,266 million at July 28, 2019, compared with $11,288 million at October 28, 2018 and $10,356 million at July 29, 2018. The increase of $978 million during the first nine months of 2019 resulted primarily from net income attributable to Deere & Company of $2,532 million, an increase in common stock of $125 million, and a change in the retirement benefits adjustment of $84 million, partially offset by
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an increase in treasury stock of $809 million, dividends declared of $725 million, and a change in cumulative translation adjustment of $218 million.
In August 2019, a committee of the Company’s Board of Directors approved a voluntary contribution to its U.S. OPEB plan for up to $500 million, with an anticipated voluntary contribution of $300 million in the fourth quarter of 2019.
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 provided by operating activities of the equipment operations, including intercompany cash flows, in the first nine months of 2019 was $1,959 million. This resulted primarily from cash inflows from net income adjusted for non-cash provisions, an increase in accounts payable and accrued expenses, and a change in net retirement benefits. Partially offsetting these operating cash inflows were cash outflows from a seasonal increase in inventories and trade receivables, along with an increase in overall demand, and a change in accrued income taxes payable/receivable. Cash, cash equivalents, and restricted cash decreased $499 million in the first nine months of 2019.
Cash provided by operating activities of the equipment operations, including intercompany cash flows, in the first nine months of 2018 was $1,609 million. This resulted primarily from cash inflows from net income adjusted for non-cash provisions, an increase in accounts payable and accrued expenses, and a change in accrued income taxes payable/receivable. Partially offsetting these operating cash inflows were cash outflows from a seasonal increase in inventories and trade receivables, along with an increase in overall demand, and a change in net retirement benefits. Cash, cash equivalents, and restricted cash decreased $5,364 million in the first nine months of 2018, primarily due to the Wirtgen acquisition of $5,130 million.
Trade receivables held by the equipment operations increased $232 million during the first nine months and increased $20 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 $598 million during the first nine months, primarily due to a seasonal increase and higher production volumes based on increased demand. Inventories increased by $508 million compared to a year ago, primarily due to higher production volumes, partially offset by 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 32 percent at July 28, 2019, compared to 30 percent at October 28, 2018 and 31 percent at July 29, 2018.
Total interest-bearing debt of the equipment operations was $6,789 million at July 28, 2019, compared with $6,223 million at October 28, 2018 and $6,405 million at July 29, 2018. The ratios of debt to total capital (total interest-bearing debt and stockholders’ equity) were 36 percent, 36 percent, and 38 percent at July 28, 2019, October 28, 2018, and July 29, 2018, respectively.
Property and equipment cash expenditures for the equipment operations in the first nine months of 2019 were $754 million, compared with $569 million in the same period last year. Capital expenditures for the equipment operations in 2019 are estimated to be approximately $1,100 million.
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 nine months of 2019, the cash provided by operating activities and financing activities was used primarily to increase receivables and leases. Cash flows provided by operating activities, including intercompany cash flows, were $1,836 million in the first nine months. Cash used for investing activities totaled $4,339 million in the first nine months of 2019 primarily due to an increase in trade and wholesale receivables of $2,551 million, the cost of receivables (excluding trade and wholesale) and the cost of equipment on operating leases acquired exceeding the collection of these receivables and proceeds from sales of equipment on operating leases by $1,754 million, and purchases of marketable securities exceeding proceeds from maturities and sales by $44 million. Cash
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provided by financing activities totaled $2,477 million, resulting primarily from an increase in external borrowings of $2,193 million and an increase in borrowings from Deere & Company of $683 million, partially offset by dividends paid to Deere & Company of $377 million. Cash, cash equivalents, and restricted cash decreased $34 million in the first nine months of 2019.
During the first nine months of 2018, the cash provided by operating activities and financing activities was used primarily to increase receivables and leases. Cash flows provided by operating activities, including intercompany cash flows, were $1,341 million in the first nine months. Cash used for investing activities totaled $4,105 million in the first nine months of 2018 primarily due to an increase in trade and wholesale receivables of $2,330 million and the cost of receivables (excluding trade and wholesale) and the cost of equipment on operating leases acquired exceeding the collection of these receivables and proceeds from sales of equipment on operating leases by $1,658 million. Cash provided by financing activities totaled $2,708 million, resulting primarily from an increase in external borrowings of $2,390 million and an increase in borrowings from Deere & Company of $797 million, partially offset by dividends paid to Deere & Company of $454 million. Cash, cash equivalents, and restricted cash decreased $74 million in the first nine months of 2018.
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, and financing and operating leases. Total receivables and leases increased $3,193 million during the first nine months of 2019 and increased $3,579 million in the past 12 months. Acquisition volumes of receivables (excluding trade and wholesale) and leases were 4 percent higher in the first nine months of 2019, compared with the same period last year, as volumes of retail notes and revolving charge accounts were higher, while volumes of operating and financing leases were lower. The amount of total trade receivables and wholesale notes increased compared to both October 28, 2018 and July 29, 2018. Total receivables and leases administered by the financial services operations, which include receivables administered but not owned, amounted to $46,177 million at July 28, 2019, compared with $42,985 million at October 28, 2018 and $42,598 million at July 29, 2018.
Total external interest-bearing debt of the financial services operations was $38,643 million at July 28, 2019, compared with $36,033 million at October 28, 2018 and $35,965 million at July 29, 2018. Total external borrowings have changed generally 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 8.0 to 1 at July 28, 2019, compared with 7.5 to 1 at October 28, 2018 and 7.8 to 1 at July 29, 2018.
Capital Corporation has a revolving credit agreement to utilize bank conduit facilities to securitize retail notes (see Note 12). At July 28, 2019, this facility had 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 July 28, 2019, $1,681 million of secured short-term borrowings was outstanding under the agreement.
In the first nine months of 2019, the financial services operations issued $3,310 million and retired $2,194 million of retail note securitization borrowings. In addition, during the first nine months of 2019, the financial services operations issued $6,572 million and retired $4,162 million of long-term borrowings, which were primarily medium-term notes.
Dividends
The Company’s Board of Directors at its meeting on August 27, 2019 declared a quarterly dividend of $.76 per share payable November 8, 2019, to stockholders of record on September 30, 2019.
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.
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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 July 28, 2019, based on the evaluation of these controls and procedures required by Rule 13a-15(b) or 15d-15(b) of the Exchange Act. During the third quarter, there were no changes that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
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 the Company 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 issued a Notice of Violation to Industrias John Deere Argentina in connection with alleged groundwater contamination at the site; the Company continues to work with the appropriate authorities to implement corrective actions to remediate the site. 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. As reported previously, on March 19, 2018, the Secretaria de Estado de Meio Ambiente e Desenvolvimento Sustentável in Minas Gerais, Brazil issued a fine against John Deere Equipamentos do Brasil in connection with an oil spill that occurred after an April 2016 roadway accident involving a Company truck. The Company paid approximately $120,000 (based on exchange rates), representing the full amount of such fine (including interest) to settle and dismiss the proceeding.
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 third quarter of 2019 were as follows:
| (1) | During the third quarter of 2019, 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. The maximum number of shares that may yet be purchased under these plans was based on the end of the third quarter closing share price of $170.39 per share. At the end of the third quarter of 2019, $1,448 million of common stock remained to be purchased under the plans. |
Item 3. Defaults Upon Senior Securities
None.
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Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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.
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3.1 |
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3.2 |
Bylaws, as amended (Exhibit 3.2 to Form 10-Q of registrant dated February 27, 2019*) |
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31.1 |
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31.2 |
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32 |
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101.SCH |
Inline XBRL Taxonomy Extension Schema Document |
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101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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104 |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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* Incorporated by reference. Copies of these exhibits are available from the Company upon request.
53
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.
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DEERE & COMPANY |
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Date: |
August 29, 2019 |
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By: |
/s/ Ryan D. Campbell |
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Ryan D. Campbell
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54
Exhibit 3.1
DEERE & COMPANY
CERTIFICATE OF INCORPORATION
RESTATED CERTIFICATE OF INCORPORATION
(Adopted February 27, 1985; Amended February 25, 1987;
As Amended November 17, 1995; As Amended November 26, 2007;
As Amended February 25, 2010; As Corrected May 2, 2019)
(The original certificate was filed with the Secretary of State of Delaware on April 25, 1958, under the original name of John Deere & Company.)
FIRST. The name of the corporation is Deere & Company.
SECOND. The registered office of the corporation in the State of Delaware is located at 1209 Orange Street in the City of Wilmington, County of New Castle. The name of the registered agent of the corporation is The Corporation Trust Company.
THIRD. The purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware.
FOURTH. The stock that the corporation shall have authority to issue is 1,209,000,000 shares, of which 1,200,000,000 shares shall be common stock, $1 par value (common stock), and 9,000,000 shares shall be preferred stock, $1 par value (preferred stock), issuable in series.
1. Common stock provisions
1.1 Dividend rights. Subject to provisions of law and the preferences of the preferred stock, the holders of the common stock shall be entitled to receive dividends at such time and in such amounts as may be determined by the board of directors.
1.2 Voting rights. Except as provided in the final two paragraphs of section 2.6, the holders of the common stock shall have one vote for each share on each matter submitted to a vote of the stockholders of the corporation. Except as otherwise provided by law, or by the provisions of the certificate of incorporation or any amendment thereto, or by resolutions of the board of directors providing for the issue of any series of preferred stock, the holders of the common stock shall have sole voting power.
1.3 Liquidation rights. In the event of any liquidation, dissolution or winding up of the corporation, whether voluntary or involuntary, after payment or provision for payment of the debts and other liabilities of the corporation and the preferential amounts to which the holders of the preferred stock shall be entitled, the holders of the common stock shall be entitled to share ratably in the remaining assets of the corporation.
2. Preferred stock provisions
2.1 Authority of the board of directors to issue in series. The preferred stock may be issued from time to time in one or more series. Subject to the provisions of the certificate of incorporation or any amendment thereto, authority is expressly granted to the board of directors to authorize the issue of one or more series of preferred stock, and to fix by
Deere & Company Restated Certificate of Incorporation
resolutions providing for the issue of each such series the voting powers, designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations and restrictions thereof (sometimes referred to as powers, preferences and rights), to the full extent now or hereafter permitted by law, including but not limited to the following:
2.11 The number of shares of such series (which may subsequently be increased by resolutions of the board of directors) and the distinctive designation thereof;
2.12 The dividend rate of such series and any limitations, restrictions or conditions on the payment of such dividends;
2.13 The price or prices at which, and the terms and conditions on which, the shares of such series may be redeemed;
2.14 The amounts which the holders of the shares of such series are entitled to receive upon any liquidation, dissolution or winding up of the corporation;
2.15 The terms of any purchase, retirement or sinking fund to be provided for the shares of such series;
2.16 The terms, if any, upon which the shares of such series shall be convertible into or exchangeable for shares of any other series, class or classes, or other securities, and the terms and conditions of such conversion or exchange;
2.17 The voting powers, if any, of such series in addition to the voting powers provided in this article.
The preferred stock of each series shall rank on a parity with the preferred stock of every other series in priority of payment of dividends and in the distribution of assets in the event of any liquidation, dissolution or winding up of the corporation, whether voluntary or involuntary, to the extent of the preference to which the preferred stock of the respective series shall be entitled under the provisions of the certificate of incorporation or any amendment thereto or the resolutions of the board of directors providing for the issue of such series. All shares of any one series of preferred stock shall be identical except as to the dates of issue and the dates from which dividends on shares of the series issued on different dates shall accumulate (if cumulative).
2.2 Definitions
2.21 The term "arrearages," whenever used in connection with dividends on any share of preferred stock, shall refer to the condition that exists as to dividends, to the extent that they are cumulative (either unconditionally, or conditionally to the extent that the conditions have been fulfilled), on such share which shall not have been paid or declared and set apart for payment to the date or for the period indicated; but the term shall not refer to the condition that exists as to dividends, to the extent that they are non-cumulative, on such share which shall not have been paid or declared and set apart for payment.
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Deere & Company Restated Certificate of Incorporation
2.22 The term "stock junior to the preferred stock," whenever used with reference to the preferred stock, shall mean the common stock and other stock of the corporation over which the preferred stock has preference or priority in the payment of dividends or in the distribution of assets on any dissolution, liquidation or winding up of the corporation.
2.23 The term "subsidiary" shall mean any corporation, association or business trust, the majority of whose outstanding shares (at the time of determination) having voting power for the election of directors or trustees, either at all times or only so long as no senior class of shares has such voting power because of arrearages in dividends or because of the existence of some default, is owned directly or indirectly by the corporation.
2.3 Dividend rights
2.31 The holders of the preferred stock of each series shall be entitled to receive, when and as declared by the board of directors, preferential dividends in cash payable at such rate, from such date, and on such quarterly dividend payment dates and, if cumulative, cumulative from such date or dates, as may be fixed by the resolutions of the board of directors providing for the issue of such series. The holders of the preferred stock shall not be entitled to receive any dividends thereon other than those specifically provided for by the certificate of incorporation or any amendment thereto, or such resolutions of the board of directors, nor shall any arrearages in dividends on the preferred stock bear any interest.
2.32 So long as any of the preferred stock is outstanding, no dividends (other than dividends payable in stock junior to the preferred stock or in options, rights or warrants to purchase or acquire such stock junior to the preferred and cash in lieu of fractional shares in connection with any such dividend) shall be paid or declared in cash or otherwise, nor shall any other distribution be made, on any stock junior to the preferred stock, unless
2.321 there shall be no arrearages in dividends on preferred stock for any past quarterly dividend period, and dividends in full for the current quarterly dividend period shall have been paid or declared on all preferred stock (cumulative and non-cumulative); and
2.322 the corporation shall have paid or set aside all amounts, if any, then or theretofore required to be paid or set aside for all sinking funds, if any, for the preferred stock of any series; and
2.323 the corporation shall not be default on any of its obligations to redeem any of the preferred stock.
2.33 So long as any of the preferred stock is outstanding, no shares of any stock junior to the preferred stock shall be purchased, redeemed or otherwise acquired by the corporation or by any subsidiary except in connection with a reclassification or exchange of any stock junior to the preferred stock through the issuance of other
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Deere & Company Restated Certificate of Incorporation
stock junior to the preferred stock (or of options, rights or warrants to purchase or acquire such stock junior to the preferred), or the purchase, redemption or other acquisition of any stock junior to the preferred stock with proceeds of a reasonably contemporaneous sale of other stock junior to the preferred stock (or of options, rights or warrants to purchase or acquire such stock junior to the preferred), nor shall any funds be set aside or made available for any sinking fund for the purchase or redemption of any stock junior to the preferred stock, unless
2.331 there shall be no arrearages in dividends on preferred stock for any past quarterly dividend period; and
2.332 the corporation shall have paid or set aside all amounts, if any, then or theretofore required to be paid or set aside for all sinking funds, if any, for the preferred stock of any series; and
2.333 the corporation shall not be in default on any of its obligations to redeem any of the preferred stock.
2.34 Subject to the foregoing provisions and not otherwise, such dividends (payable in cash, property or stock junior to the preferred stock or in options, rights or warrants to purchase or acquire such stock junior to the preferred) as may be determined by the board of directors may be declared and paid on the shares of any stock junior to the preferred stock from time to time, and in the event of the declaration and payment of any such dividends, the holders of such stock junior to the preferred shall be entitled, to the exclusion of holders of the preferred stock, to share ratably therein according to their respective interests.
2.35 Dividends in full shall not be declared or paid or set apart for payment on any series of preferred stock, unless there shall be no arrearages in dividends on preferred stock for any past quarterly dividend period and dividends in full for the current quarterly dividend period shall have been paid or declared on all preferred stock to the extent that such dividends are cumulative, and any dividends paid or declared when dividends are not so paid or declared in full shall be shared ratably by the holders of all series of preferred stock in proportion to such respective arrearages and unpaid and undeclared current quarterly cumulative dividends.
2.4 Liquidation rights
2.41 In the event of any liquidation, dissolution or winding up of the corporation, whether voluntary or involuntary, the holders of preferred stock of each series shall be entitled to receive the full preferential amount fixed by the certificate of incorporation or any amendment thereto, or by the resolutions of the board of directors providing for the issue of such series, including any arrearages in dividends thereon to the date fixed for the payment in liquidation, before any distribution shall be made to the holders of any stock junior to the preferred stock. After such payment in full to the holders of the preferred stock, the remaining assets of the corporation shall then be distributable exclusively among the holders of any stock junior to the preferred stock outstanding, according to their respective interests.
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Deere & Company Restated Certificate of Incorporation
2.42 If the assets of the corporation are insufficient to permit the payment of the full preferential amounts payable to the holders of the preferred stock of the respective series in the event of a liquidation, dissolution or winding up, then the assets available for distribution to holders of the preferred stock shall be distributed ratably to such holders in proportion to the full preferential amounts payable on the respective shares.
2.43 A consolidation or merger of the corporation with or into one or more other corporations or a sale of all or substantially all of the assets of the corporation shall not be deemed to be a liquidation, dissolution or winding up, voluntary or involuntary.
2.5 Redemption
2.51 The provisions of this section 2.5 shall apply only to those series of preferred stock to which such provisions are expressly made applicable by resolutions of the board of directors providing for the issue of such series.
2.52 At the option of the board of directors, the corporation may redeem the whole or any part of the preferred stock, or of any series thereof, at any time or from time to time within the period during which such stock is by its terms redeemable at the option of the board of directors, by paying such redemption price thereof as shall have been fixed by the resolutions of the board of directors providing for the issue of the preferred stock to be redeemed, including an amount in the case of each share so to be redeemed equal to any arrearages in dividends thereon to the date fixed for redemption (the total amount so to be paid being hereinafter called the "redemption price").
2.53 Unless expressly provided otherwise in the resolutions of the board of directors providing for the issue of the preferred stock to be redeemed, (i) notice of each such redemption shall be mailed not less than thirty days nor more than ninety days prior to the date fixed for redemption to each holder of record of shares of the preferred stock to be redeemed, at his address as the same may appear on the books of the corporation, and (ii) in case of a redemption of a part only of any series of the preferred stock, the shares of such series to be redeemed shall be selected pro rata or by lot or in such other manner as the board of directors may determine. The board of directors shall have full power and authority, subject to the limitations and provisions contained in the certificate of incorporation or any amendment thereto or in the resolutions of the board of directors providing for the issue of the preferred stock to be redeemed, to prescribe the manner in which and the terms and conditions upon which the preferred stock may be redeemed from time to time.
2.54 If any such notice of redemption shall have been duly given, then on and after the date fixed in such notice of redemption (unless default shall be made by the corporation in the payment or deposit of the redemption price pursuant to such notice) all arrearages in dividends, if any, on the shares of preferred stock so called for redemption shall cease to accumulate, and on such date all rights of the holders of the preferred stock so called for redemption shall cease and terminate except the right to receive the redemption price upon surrender of their certificates for
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Deere & Company Restated Certificate of Incorporation
redemption and such rights, if any, of conversion or exchange as may exist with respect to such preferred stock under the resolutions of the board of directors providing for the issue of such preferred stock.
2.55 If, before the redemption date specified in any notice of the redemption of any preferred stock, the corporation shall deposit the redemption price with a bank or trust company in Chicago, Illinois or New York, New York having a capital and surplus of at least $5,000,000 according to its last published statement of condition, in trust for payment on the redemption date to the holders of the preferred stock to be redeemed, from and after the date of such deposit all rights of the holders of the preferred stock so called for redemption shall cease and terminate except the right to receive the redemption price upon surrender of their certificates for redemption and such rights, if any, of conversion or exchange as may exist with respect to such preferred stock under the resolutions of the board of directors providing for the issue of such preferred stock. Any funds so deposited which are not required for such redemption because of the exercise of any such right of conversion or exchange subsequent to the date of such deposit shall be returned to the corporation forthwith. The corporation shall be entitled to receive from the depositary, from time to time, the interest, if any allowed on such funds deposited with it, and the holders of the shares so redeemed shall have no claim to any interest. Any funds so deposited and remaining unclaimed at the end of six years from the redemption date shall, if thereafter requested by the board of directors, be repaid to the corporation.
2.56 Shares of preferred stock of any series may also be subject to redemption through operation of any sinking fund created therefor, in the manner hereinabove prescribed under section 2.5, at the redemption prices and under the terms and provisions contained in the resolutions of the board of directors providing for the issue of such series.
2.57 The corporation shall not be required to register a transfer of any share of preferred stock (i) within fifteen days preceding a selection for redemption of shares of the series of preferred stock of which such share is a part or (ii) which has been selected for redemption.
2.58 During the continuance of any arrearages in dividends for any past quarterly dividend period or a failure in fulfillment of any sinking fund or redemption obligation on any series of preferred stock, the corporation shall not purchase or redeem any shares of preferred stock or of any other stock ranking on a parity with the preferred stock as to dividends or upon liquidation, nor permit any subsidiary to do so, without the consent given in writing or affirmative vote given in person or by proxy at a meeting called for the purpose, by the holders of at least 66-2/3 percent of all the shares of preferred stock then outstanding; provided that (i) to meet the requirements of any purchase, retirement or sinking fund provisions with respect to any series, the corporation may use shares of such series acquired by it prior to such arrearages in dividends or failure of payment and then held by it as treasury stock, valued at redemption price, and (ii) the corporation may complete the purchase or redemption of shares of preferred stock for which a purchase contract was entered into for any
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Deere & Company Restated Certificate of Incorporation
purchase, retirement or sinking fund purposes, or the notice of redemption of which was initially mailed, prior to such arrearages in dividends or failure of payment.
2.59 If any obligation to retire shares of preferred stock is not paid in full on all series as to which such obligation exists, the number of shares of each such series to be retired pursuant to any such obligation shall be in proportion to the respective amounts which would be payable if all amounts payable for the retirement of all such series were discharged in full.
2.6 Restrictions on certain action affecting preferred stock. The corporation will not, without the consent given in writing or affirmative vote given in person or by proxy at a meeting called for the purpose,
2.61 by the holders of at least 66-2/3 percent of all the shares of preferred stock then outstanding, (i) create any other class or classes of stock ranking prior to the preferred stock, either as to dividends or upon liquidation, or create any stock or other security convertible into or exchangeable for or evidencing the right to purchase any such stock so ranking prior to the preferred stock, or increase the authorized number of shares of any such other class of stock or other security, (ii) amend, alter or repeal any of the provisions of the certificate of incorporation or any amendment thereto so as to affect adversely the powers, preferences or rights of the holders of the preferred stock; or
2.62 by the holders of at least 66-2/3 percent of the shares of any series of preferred stock then outstanding, amend, alter or repeal any of the provisions of the certificate of incorporation or any amendment thereto or of the resolutions of the board of directors providing for the issue of such series so as to affect adversely the powers, preferences or rights of the holders of the preferred stock of such series; or
2.63 by the holders of at least a majority of all the shares of preferred stock then outstanding, (i) increase the authorized amount of the preferred stock, or (ii) create any other class or classes of stock ranking on a parity with the preferred stock, either as to dividends or upon liquidation, or create any stock or other security convertible into or exchangeable for or evidencing the right to purchase any such stock ranking on a parity with the preferred stock, or increase the authorized number of shares of any such other class of stock or other security.
If an amendment described in clause (ii) of subsection 2.61 would in no way affect adversely the powers, preferences or rights of the holders of any stock of the corporation other than the preferred stock, such amendment may be made effective by the adoption and filing of an appropriate amendment to the certificate of incorporation of the corporation without obtaining the consent or vote of the holders of any stock of the corporation other than the preferred stock.
If an amendment described in subsection 2.62 would in no way affect adversely the powers, preferences or rights of the holders of any stock of the corporation other than the preferred stock of such series, such amendment may be made effective by the adoption and filing of an appropriate amendment to the certificate of incorporation of the corporation
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Deere & Company Restated Certificate of Incorporation
without obtaining the consent or vote of the holders of any stock of the corporation other than the preferred stock of such series.
2.7 Election of directors by holders of certain preferred stock in event of non-declaration of dividends.
2.71 The provisions under section 2.7 shall apply only to those series of preferred stock (applicable preferred stock) to which such provisions are expressly made applicable by resolutions of the board of directors providing for the issue of such series.
2.72 Whenever declarations of dividends (including non-cumulative dividends) on any share of any series of applicable preferred stock shall be omitted in an aggregate amount equal to six quarterly dividends on such share the holders of the applicable preferred stock shall have the exclusive and special right (in addition to any other voting rights), voting separately as a class and without regard to series, to elect at an annual meeting of stockholders or special meeting held in place thereof, or at a special meeting of the holders of the applicable preferred stock called as hereinafter provided, two members of the board of directors, until four consecutive quarterly dividends shall have been paid on or declared and set apart for payment on such share, if the share is non-cumulative, or until all arrearages in dividends and dividends in full for the current quarterly period shall have been paid or declared and set apart for payment on the share, if the share is cumulative, whereupon all voting rights as a class provided for under section 2.7 shall be divested from the applicable preferred stock (subject, however, to being at any time or from time to time similarly revived if declarations of dividends for subsequent quarterly periods shall be omitted).
2.73 At any time after the holders of the applicable preferred stock shall have thus become entitled to elect two members of the board of directors, the secretary of the corporation may, and upon written request of holders of record of at least 10 percent of the shares of the applicable preferred stock then outstanding addressed to him at the principal office of the corporation shall, call a special meeting of the holders of the applicable preferred stock for the purpose of electing such directors, to be held at the place of annual meetings of shareholders of the corporation as soon as practicable after the receipt of such request upon the notice provided by law and the bylaws of the corporation for the holding of special meetings of shareholders; provided, however, that the secretary need not call any such special meeting if the next annual meeting of stockholders is to convene within ninety days after the receipt of such request. If such special meeting shall not be called by the secretary within thirty days after receipt of such request (not including, however, a request falling within the proviso to the foregoing sentence), then the holders of record of at least 10 percent of the shares of the applicable preferred stock then outstanding may designate in writing one of their number to call such a meeting at the place and upon the notice above provided, and any person so designated for that purpose shall have access to the stock records of the corporation for such purpose.
2.74 At any meeting at which the holders of the applicable preferred stock shall be entitled to vote for the election of such two directors as above provided, the holders of
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Deere & Company Restated Certificate of Incorporation
33-1/3 percent of the applicable preferred stock then outstanding present in person or by proxy shall constitute a quorum for the election of such two directors and for no other purpose, and the vote of the holders of a majority of the applicable preferred stock so present at any such meeting at which there shall be such a quorum shall be sufficient to elect two directors. The election of such directors or one such director shall automatically increase the number of members of the board of directors by the number of directors so elected. The persons so elected, as directors by the holders of the applicable preferred stock shall hold office until their successors shall have been elected by such holders or until the right of the holders of the applicable preferred stock to vote, as a class in the election of directors shall be divested as provided in subsection 2.72. Upon divestment of the right to elect directors as above provided, any directors so elected by the holders of the applicable preferred stock shall forthwith cease to be directors of the corporation, and the number of directorships shall automatically be reduced accordingly. If a vacancy occurs in a directorship elected by the holders of the applicable preferred stock voting as a class, a successor may be appointed by the remaining director so elected by the holders of the applicable preferred stock.
2.75 At any such meeting or any adjournment thereof, (i) the absence of a quorum of the holders of the applicable preferred stock shall not prevent the election of the directors other than those to be elected by the holders of the applicable preferred stock voting as a class, and the absence of a quorum of holders of the shares entitled to vote for directors other than those to be elected by the holders of the applicable preferred stock voting as a class, shall not prevent the election of the directors to be elected by the holders of the applicable preferred stock voting as a class, and (ii) in the absence of a quorum of the holders of the applicable preferred stock, the holders of a majority of the applicable preferred stock present in person or by proxy shall have power to adjourn from time to time the meeting for the election of the directors which they are entitled to elect voting as a class, without notice other than announcement at the meeting, until a quorum shall be present, and in the absence of a quorum of the holders of the shares entitled to vote for directors other than those elected by the holders of the applicable preferred stock voting as a class, the holders of a majority of such stock present in person or by proxy shall have power to adjourn from time to time the meeting for the election of the directors which they are entitled to elect, without notice other than announcement at the meeting, until a quorum shall be present.
3. Other provisions
3.1 Authority for issuance of shares. The board of directors shall have authority to authorize the issuance, from time to time without any vote or other action by the stockholders, of any or all shares of stock of the corporation of any class at any time authorized, and any securities convertible into or exchangeable for any such shares, and any options, rights or warrants to purchase or acquire any such shares, in each case to such persons and on such terms (including as a dividend or distribution on or with respect to, or in connection with a split or combination of, the outstanding shares of stock of the same or any other class) as the board of directors from time to time in its discretion lawfully may determine; provided, however, that the consideration for the issuance of shares of stock of the corporation having par value (unless issued as such a dividend or distribution or in
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Deere & Company Restated Certificate of Incorporation
connection with such a split or combination) shall not be less than such par value. Shares so issued, shall be full paid stock, and the holders of such stock shall not be liable to any further call or assessments thereon.
3.2 Abandonment of dividends and distributions. Anything herein contained to the contrary notwithstanding, any and all right, title, interest, and claim in or to any dividends declared, or other distributions made, by the corporation, whether in cash, stock or otherwise, which are unclaimed by the stockholder entitled thereto for a period of six years after the close of business on the payment date, shall be and be deemed to be extinguished and abandoned; and such unclaimed dividends or other distributions in the possession of the corporation, its transfer agents or other agents or depositaries, shall at such time become the absolute property of the corporation, free and clear of any and all claims of any persons whatsoever.
FIFTH. The board of directors shall have authority to adopt, make, alter and repeal the bylaws of the corporation.
SIXTH. The business and affairs of the corporation shall be managed by or under the direction of a board of directors consisting of not less than three nor more than eighteen directors. The exact number shall be determined from time to time by resolution adopted by the affirmative vote of a majority of the directors in office at the time of adoption of such resolution.
At each annual meeting of stockholders beginning at the 2011 annual meeting, directors whose terms expire at that meeting (or such directors’ successors) shall be elected for a one-year term. Accordingly, at the 2011 annual meeting of stockholders, the directors whose terms expire at that meeting (or such directors’ successors) shall be elected to hold office for a one-year term expiring at the 2012 annual meeting of stockholders; at the 2012 annual meeting of stockholders, the directors whose terms expire at that meeting (or such directors’ successors) shall be elected to hold office for a one-year term expiring at the 2013 annual meeting of stockholders; and at the 2013 annual meeting of stockholders and each annual meeting of stockholders thereafter, all directors shall be elected to hold office for a one-year term expiring at the next annual meeting of stockholders.
Subject to prior death, resignation, retirement or removal from office (which may be with or without cause for all directors elected after the 2010 annual meeting), a director shall hold office until his or her term has expired and his or her successor has been duly elected and qualified. Except as required by law, any vacancy on the board of directors that results from an increase in the number of directors may be filled by a majority of the board of directors then in office, and any other vacancy occurring on the board of directors may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. Any director so chosen shall serve until the next annual meeting of stockholders and until his or her successor has been duly elected and qualified, subject, however, to such director’s prior death, resignation, retirement or removal from office. In no case will a decrease in the number of directors shorten the term of any incumbent director.
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Deere & Company Restated Certificate of Incorporation
Notwithstanding the foregoing, whenever the holders of any one or more classes or series of preferred stock issued by the corporation shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of this certificate of incorporation applicable thereto.
SEVENTH. Each person who is or was a director or officer of the corporation, and each person who serves or served at the request of the corporation as a director or officer (or equivalent) of another enterprise, shall be indemnified by the corporation to the fullest extent authorized by the General Corporation Law of Delaware as it may be in effect from time to time, except as to any action, suit or proceeding brought by or on behalf of a director or officer without prior approval of the board of directors.
EIGHTH. No stockholder action required to be taken or which may be taken at any annual or special meeting of stockholders of the corporation may be taken without a meeting, and the power of stockholders to consent in writing without a meeting to the taking of any action is specifically denied.
NINTH. No director shall be personally liable to the corporation or its stockholders for monetary damages for any breach of fiduciary duty by such director as a director. Notwithstanding the foregoing sentence, a director shall be liable to the extent provided by applicable law (i) for breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the Delaware General Corporation Law or (iv) for any transaction from which the director derived an improper personal benefit. No amendment to or repeal of this Article NINTH shall apply to or have any effect on the liability or alleged liability of any director of the corporation for or with respect to any acts or omissions of such director occurring prior to such amendment.
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Exhibit 31.1
CERTIFICATIONS
I, Samuel R. Allen, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Deere & Company;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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August 29, 2019 |
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/s/ Samuel R. Allen |
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Samuel R. Allen |
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Chairman and Chief Executive Officer |
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(Principal Executive Officer) |
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Exhibit 31.2
CERTIFICATIONS
I, Ryan D. Campbell, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Deere & Company;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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Date: |
August 29, 2019 |
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By: |
/s/ Ryan D. Campbell |
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Ryan D. Campbell |
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Senior Vice President and Chief Financial Officer |
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(Principal Financial Officer and Principal Accounting Officer) |
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EXHIBIT 32
STATEMENT PURSUANT TO
18 U.S.C. SECTION 1350
AS REQUIRED BY
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Deere & Company (the “Company”) on Form 10-Q for the period ending July 28, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certify that to the best of our knowledge:
1.The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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August 29, 2019 |
/s/ Samuel R. Allen |
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Chairman and Chief Executive Officer |
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Samuel R. Allen |
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(Principal Executive Officer) |
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August 29, 2019 |
/s/ Ryan D. Campbell |
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Senior Vice President and Chief Financial Officer |
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Ryan D. Campbell |
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(Principal Financial Officer and Principal Accounting Officer) |
A signed original of this written statement required by Section 906 has been provided to Deere & Company and will be retained by Deere & Company and furnished to the Securities and Exchange Commission or its staff upon request.