UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 2016
Commission file number 1-4121
DEERE & COMPANY
(Exact name of registrant as specified in its charter)
Delaware |
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36-2382580 |
(State of incorporation) |
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(IRS Employer Identification No.) |
One John Deere Place, Moline, Illinois |
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61265 |
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(309) 765-8000 |
(Address of principal executive offices) |
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(Zip Code) |
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(Telephone Number) |
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
Title of each class |
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Name of each exchange on which registered |
Common stock, $1 par value |
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New York Stock Exchange |
8-1/2% Debentures Due 2022 |
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New York Stock Exchange |
6.55% Debentures Due 2028 |
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New York Stock Exchange |
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x |
Accelerated filer o |
Non-accelerated filer o |
Smaller reporting company o |
(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o No x
The aggregate quoted market price of voting stock of registrant held by non-affiliates at April 30, 2016 was $26,385,877,434. At November 30, 2016, 316,872,632 shares of common stock, $1 par value, of the registrant were outstanding. Documents Incorporated by Reference. Portions of the proxy statement for the annual meeting of stockholders to be held on February 22, 2017 are incorporated by reference into Part III of this Form 10-K.
TABLE OF CONTENTS
This Annual Report on Form 10-K contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this Annual Report on Form 10-K are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, and other important information about forward-looking statements are disclosed under Item 1A, Risk Factors and Item 7, Managements Discussion and Analysis of Financial Condition and Results of OperationsSafe Harbor Statement in this Annual Report on Form 10-K.
Products
Deere & Company (the Company) and its subsidiaries (collectively, John Deere) have operations that are categorized into three major business segments.
The agriculture and turf segment primarily manufactures and distributes a full line of agriculture and turf equipment and related service parts including large, medium and utility tractors; loaders; combines, cotton pickers, cotton strippers, and sugarcane harvesters; related front-end harvesting equipment; sugarcane loaders and pull-behind scrapers; tillage, seeding and application equipment, including sprayers, nutrient management and soil preparation machinery; hay and forage equipment, including self-propelled forage harvesters and attachments, balers and mowers; 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; integrated agricultural management systems technology and solutions; and other outdoor power products.
The construction and forestry segment primarily manufactures and distributes a broad range of machines and service parts used in construction, earthmoving, material handling and timber harvesting including backhoe loaders; crawler dozers and loaders; four-wheel-drive loaders; excavators; motor graders; articulated dump trucks; landscape loaders; skid-steer loaders; and log skidders, feller bunchers, log loaders, log forwarders, log harvesters and related attachments.
The products and services produced by the segments above are marketed primarily through independent retail dealer networks and major retail outlets.
The financial services segment primarily finances sales and leases by John Deere dealers of new and used agriculture and turf equipment and construction and forestry equipment. In addition, the financial services segment provides wholesale financing to dealers of the foregoing equipment, finances retail revolving charge accounts and offers extended equipment warranties.
John Deeres worldwide agriculture and turf operations and construction and forestry operations are sometimes collectively referred to as the equipment operations. The financial services segment is sometimes referred to as the financial services operations.
Additional information is presented in the discussion of business segment and geographic area results on page 23. The John Deere enterprise has manufactured agricultural machinery since 1837. The present Company was incorporated under the laws of Delaware in 1958.
The Companys internet address is http://www.JohnDeere.com. Through that address, the Companys Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are available free of charge as soon as reasonably practicable after they are filed with the United States Securities and Exchange Commission (Securities and Exchange Commission or Commission). The information contained on the Companys website is not included in, or incorporated by reference into, this annual report on Form 10-K.
Market Conditions and Outlook
The Companys equipment sales are projected to decrease 1 percent for fiscal year 2017 and decrease about 4 percent for the first quarter, compared with the same periods in 2016. Included in the forecast is a positive foreign currency translation effect of about 1 percent for the year and about 2 percent for the quarter. For fiscal year 2017, net income attributable to Deere & Company is anticipated to be about $1.4 billion. In December 2016, the Company sold a portion of its interest in SiteOne Landscape Supply, Inc. (SiteOne) (see Note 30) resulting in a gain of approximately $105 million pretax or $66 million after-tax. This gain is not included in the fiscal year 2017 net income forecast above.
During the fourth quarter of 2016, the Company announced voluntary employee separation programs as part of its effort to reduce operating costs. The expense of these programs is recorded in the period in which employees accept their separation offer. Total pretax expenses related to the programs are estimated to be $111 million, of which $11 million was recorded in the fourth quarter of 2016, and $100 million will be recorded primarily in the first quarter of 2017. Savings from the separation programs are expected to be approximately $70 million in 2017.
Agriculture & Turf. The Companys worldwide sales of agriculture and turf equipment are forecast to decrease by about 1 percent for fiscal year 2017, including a positive currency translation effect of about 1 percent. Industry sales for agricultural equipment in the U.S. and Canada are forecast to be down 5 to 10 percent for 2017. The decline, which reflects the continuing impact of low commodity prices and weak farm incomes, is expected to be felt in the sale of both large and small models of equipment.
Full year 2017 industry sales in the EU28 member nations are forecast to decline about 5 percent, with the decline attributable to low commodity prices and farm incomes. South American industry sales of tractors and combines are projected to increase about 15 percent as a result of improving economic and political conditions in Brazil and Argentina. Asian sales are projected to be about the same to up slightly, benefiting from higher sales in India. Industry sales of turf and utility equipment in the U.S. and Canada are expected to be about the same for 2017, with company sales outpacing the industry.
Construction & Forestry. The Companys construction and forestry equipment sales are forecast to increase about 1 percent for 2017, including a positive currency translation effect of about 1 percent. The forecast reflects the impact of generally slow economic growth worldwide. In forestry, global industry sales are expected to be about the same as in 2016 with some moderation in the North American market.
Financial Services. Fiscal year 2017 net income attributable to Deere & Company for the financial services operations is expected to be approximately $480 million. The outlook reflects lower losses on lease residual values, partially offset by less favorable financing spreads and an increased provision for credit losses.
2016 Consolidated Results Compared with 2015
Worldwide net income attributable to Deere & Company in 2016 was $1,524 million, or $4.81 per share diluted ($4.83 basic), compared with $1,940 million, or $5.77 per share diluted ($5.81 basic), in 2015. Worldwide net sales and revenues decreased 8 percent to $26,644 million in 2016, compared with $28,863 million in 2015. Net sales of the worldwide equipment operations declined 9 percent in 2016 to $23,387 million from $25,775 million last year. Sales included price realization of 2 percent and an unfavorable currency translation effect of 2 percent. Equipment net sales in the United States and Canada decreased 13 percent for 2016. Outside the U.S. and Canada, net sales decreased 3 percent for the year, with an unfavorable currency translation effect of 4 percent for 2016.
Worldwide equipment operations had an operating profit of $1,880 million in 2016, compared with $2,177 million in 2015. The operating profit decline was primarily on account of reduced shipment volumes, the unfavorable effects of foreign currency exchange and a less favorable product mix, partially offset by price realization, lower production costs, lower selling, administrative and general expenses and a gain on the sale of a partial interest in the unconsolidated affiliate SiteOne.
Net income of the Companys equipment operations was $1,058 million for 2016, compared with $1,308 million in 2015. In addition to the operating factors mentioned above, a higher effective tax rate in 2016 reduced net income.
Net income of the financial services operations attributable to Deere & Company in 2016 decreased to $468 million, compared with $633 million in 2015. The decline was primarily due to less favorable financing spreads, higher losses on lease residual values, and a higher provision for credit losses. Prior year results benefited from a gain on the sale of the crop insurance business
The cost of sales to net sales ratio for 2016 was 78.0 percent, compared with 78.1 percent last year. The decrease was due primarily to price realization and lower production costs, largely offset by the unfavorable effects of foreign currency exchange and the impact of a less favorable product mix.
Additional information on 2016 results is presented on pages 22-24.
EQUIPMENT OPERATIONS
Agriculture and Turf
The John Deere agriculture and turf segment manufactures and distributes a full line of agriculture and turf equipment and related service parts. The segment consolidates all markets into four geographical customer focus areas to facilitate deep customer understanding and deliver world-class customer service. The segments equipment operations are consolidated into five product platforms crop harvesting (combines, cotton pickers, cotton strippers, and sugarcane harvesters, related front-end harvesting equipment, sugarcane loaders and pull-behind scrapers); turf and utility (utility vehicles, riding lawn equipment, walk-behind mowers, commercial mowing equipment, golf course equipment, implements for mowing,tilling, snow and debris handling, aerating and many other residential, commercial, golf and sports turf care applications and other outdoor power products); hay and forage (self-propelled forage harvesters and attachments, balers and mowers); crop care (tillage, seeding and application equipment, including sprayers, nutrient management and soil preparation machinery); and tractors (loaders and large, medium and utility tractors and related attachments). John Deere also purchases certain products from other manufacturers for resale.
The segment also provides integrated agricultural business and equipment management systems. John Deere has developed a comprehensive agricultural management systems approach using advanced communications, data collection and global satellite positioning technologies to enable farmers to better control input costs and yields, improve soil conservation, minimize chemical use, and to gather information. John Deeres advanced telematics systems remotely connect agricultural equipment owners, business managers and dealers to agricultural equipment in the field, providing real-time alerts and information about equipment location, utilization, performance and maintenance to improve productivity and efficiency.
In addition to the John Deere brand, the agriculture and turf segment purchases and sells a variety of equipment attachments under the Frontier, Kemper and Green Systems brand names, and manufactures and sells walk-behind mowers and scarifiers in select European countries under the SABO brand name. John Deere manufactures its agriculture and turf equipment for sale primarily through independent retail dealer networks, and also builds turf products for sale by mass retailers, including The Home Depot and Lowes.
Sales of agricultural equipment are affected by total farm cash receipts, which reflect levels of farm commodity prices, acreage planted, crop yields and government policies, including the amount and timing of government payments. Sales are also influenced by general economic conditions, farm land prices, farmers debt levels and access to financing, interest and exchange rates, agricultural trends, including the production of and demand for renewable fuels, labor availability and costs, energy costs, tax policies and other input costs associated with farming. Other important factors affecting new agricultural equipment sales are the value and level of used equipment, including tractors, harvesting equipment, self-propelled sprayers, hay and forage equipment and seeding equipment. Weather and climatic conditions can also affect buying decisions of agricultural equipment purchasers.
Innovations in machinery and technology also influence agricultural equipment purchasing. For example, larger, more productive equipment is well accepted where farmers are striving for more efficiency in their operations. Large, cost-efficient, highly-mechanized agricultural operations account for an important share of worldwide farm output. The large-size agricultural equipment used on such farms has been particularly important to John Deere. A large proportion of the equipment operations total agricultural equipment sales in the U.S. and Canada, and a significant proportion of sales in many countries outside the U.S. and Canada, comprises tractors over 100 horsepower, self-propelled combines, self-propelled cotton pickers, self-propelled forage harvesters, self-propelled sprayers and seeding equipment. However, John Deeres sales of small tractors below 100 horsepower are increasing, and John Deere offers a number of harvesting solutions to support development of the mechanized harvesting of grain, oilseeds, cotton, sugar and biomass.
Retail sales of lawn and garden tractors, compact utility tractors, residential and commercial mowers, utility vehicles, and golf and turf equipment are influenced by weather conditions, consumer spending patterns and general economic conditions.
Seasonality. Seasonal patterns in retail demand for agricultural equipment result in substantial variations in the volume and mix of products sold to retail customers during the year. Seasonal demand must be estimated in advance, and equipment must be manufactured in anticipation of such demand in order to achieve efficient utilization of manpower and facilities throughout the year. For certain equipment, John Deere offers early order discounts to retail customers. Production schedules are based, in part, on these early order programs. The segment incurs substantial seasonal variation in cash flows to finance production and inventory of agricultural equipment. The segment also incurs costs to finance sales to dealers in advance of seasonal demand. New combine and cotton harvesting equipment has been sold under early order programs with waivers of retail finance charges available to customers who take delivery of machines during off-season periods. In Australia, Canada and the U.S., there are typically several used equipment trade-in transactions as part of most new agricultural equipment sales. To provide support to its dealers for these used equipment trade-ins, John Deere provides dealers in these countries with a pool of funds, awarded to dealers as a percentage of the dealer cost for eligible new equipment sales. Dealers can use these funds to defray the costs of carrying or marketing used equipment inventory or to provide financing incentives to customers purchasing the used equipment.
Retail demand for turf and utility equipment is normally higher in the second and third fiscal quarters. John Deere has pursued a strategy of building and shipping such equipment as close to retail demand as possible. Consequently, to increase asset turnover and reduce the average level of field inventories through the year, production and shipment schedules of these product lines are normally proportionately higher in the second and third fiscal quarters of each year, corresponding closely to the seasonal pattern of retail sales.
Construction and Forestry
John Deeres construction and forestry equipment includes a broad range of backhoe loaders, crawler dozers and loaders, four-wheel-drive loaders, excavators, motor graders, articulated dump trucks, landscape loaders, skid-steer loaders, log skidders, log feller bunchers, log loaders, log forwarders, log harvesters and a variety of attachments. John Deere provides a broad line of construction equipment and the most complete line of forestry machines and attachments available in the world. The construction and forestry machines are distributed under the John Deere brand name, and forestry attachments are distributed under the John Deere and Waratah brand names. In addition to the equipment manufactured by the construction and forestry segment, John Deere purchases certain products from other manufacturers for resale. The segment also provides comprehensive fleet management telematics solutions designed to improve customer productivity and efficiency through access to fleet location, utilization and maintenance information.
The prevailing levels of residential, commercial and public construction and the condition of the forestry products industry influence retail sales of John Deere construction, earthmoving, material handling and forestry equipment. General economic conditions, the level of interest rates, the availability of credit and certain commodity prices such as those applicable to pulp, paper and saw logs also influence sales.
John Deere licenses Bell Equipment Limited (Bell) to manufacture and sell certain John Deere-designed construction equipment in specified territories of Africa. Bell is also the distributor of certain John Deere-manufactured construction equipment under the Bell brand and forestry equipment under the John Deere brand in certain territories of Africa. Bell and John Deere terminated the articulated dump truck manufacturing and license agreements in 2016.
John Deere and Hitachi Construction Machinery Co. (Hitachi) have a joint venture for the manufacture of hydraulic excavators and tracked forestry equipment and loaders in the U.S. and Canada and a joint venture for the manufacture of excavators in Brazil. John Deere distributes Hitachi brands of construction and mining equipment in North, Central and South America. John Deere also has supply agreements with Hitachi under which a range of construction, earthmoving, material handling and forestry equipment manufactured by John Deere in the U.S., Finland and New Zealand is distributed by Hitachi in certain Asian markets.
The segment has a number of initiatives in the rent-to-rent, or short-term rental, market for construction, earthmoving and material handling equipment. These include specially designed rental programs for John Deere dealers and expanded cooperation with major, national equipment rental companies.
John Deere also owns Nortrax, Inc. that in turn owns Nortrax Canada Inc. that in turn owns Nortrax Quebec Inc. (collectively called Nortrax). Nortrax is an authorized John Deere dealer for construction, earthmoving, material handling and forestry equipment in a variety of markets in the U.S. and Canada. John Deere also owns retail forestry sales operations in Australia, Brazil, Finland, Ireland, New Zealand, Norway, Sweden and the United Kingdom.
Competition
The equipment operations sell products and services into a variety of highly competitive global and regional markets. The principal competitive factors in all markets include product performance, innovation and quality, distribution, customer service and price. In North America and many other parts of the world, John Deeres brand recognition is a competitive factor.
The competitive environment for the agriculture and turf segment includes some global competitors, including AGCO Corporation, CLAAS KGaA mbH, CNH Global N.V., Kubota Tractor Corporation and The Toro Company and many regional and local competitors. These competitors have varying numbers of product lines competing with the segments products and each has varying degrees of regional focus. An important part of the competition within the agricultural equipment industry during the past decade has come from a variety of short-line and specialty manufacturers, as well as indigenous regional competitors, with differing manufacturing and marketing methods. Because of industry conditions, including the merger of certain large integrated competitors and the emergence and expanding global capability of many competitors, particularly in emerging and high potential markets such as Brazil, China and India where John Deere seeks to increase market share, the agricultural equipment business continues to undergo significant change and is becoming even more competitive. The segments turf equipment is sold primarily in the highly competitive North American and Western European markets.
The construction and forestry segment operates in highly competitive North American and global markets, including Brazil, China and Russia. Global competitors of the construction and forestry segment include Caterpillar Inc., Komatsu Ltd., Volvo Construction Equipment (part of Volvo Group AB), CNH Global N.V., Tigercat Industries Inc. and Ponsse Plc. The segment manufactures over 90 percent of the types of construction equipment used in the U.S. and Canada, including construction, earthmoving and material handling equipment.
Engineering and Research
John Deere invests heavily in engineering and research to improve the quality and performance of its products, to develop new products and to comply with government regulations. Such expenditures were $1,389 million, or 5.9 percent of net sales, in 2016, $1,425 million, or 5.5 percent of net sales, in 2015 and $1,452 million, or 4.4 percent of net sales, in 2014.
Manufacturing
Manufacturing Plants. In the U.S. and Canada, the equipment operations own and operate 21 factory locations and lease and operate another two locations, which contain approximately 28.7 million square feet of floor space. Of these 23 factories, 13 are devoted primarily to agriculture and turf equipment, four to construction and forestry equipment, one to engines, two to engine and component remanufacturing, two to hydraulic and power train components, and one to electronic components. Outside the U.S. and Canada, the equipment operations own or lease and operate: agriculture and turf equipment factories in Brazil, China, France, Germany, India, Israel, Mexico, the Netherlands, Russia and Spain; construction equipment factories in Brazil and China; engine, engine/power train, or electronic component factories in Argentina, China, France, India and Mexico; and forestry equipment factories in Finland and New Zealand. These factories and manufacturing operations outside the U.S. and Canada contain approximately 20 million square feet of floor space. The engine factories referred to above manufacture non-road, heavy duty diesel engines.
The equipment operations also have financial interests in other manufacturing organizations, which include agricultural equipment manufacturers in the U.S., Bell in South Africa, the Hitachi joint venture that builds hydraulic excavators and track log loaders in the U.S. and Canada and the Hitachi joint venture that builds hydraulic excavators in Brazil, and ventures that manufacture transaxles and transmissions used in certain agriculture and turf segment products.
John Deeres facilities are well maintained, in good operating condition and suitable for their present purposes. These facilities, together with both short-term and long-term planned capital expenditures, are expected to meet John Deeres manufacturing needs in the foreseeable future.
Existing capacity is sufficient to satisfy John Deeres current expectations for retail market demand. The equipment operations manufacturing strategy involves the implementation of appropriate levels of technology and automation to allow manufacturing processes to remain profitable at varying production levels. Operations are also designed to be flexible enough to accommodate the product design changes required to meet market conditions and changing customer requirements. Common manufacturing facilities and techniques are employed in the production of components for agriculture and turf equipment and construction and forestry equipment.
In order to utilize manufacturing facilities and technology more effectively, the equipment operations pursue continuous improvements in manufacturing processes. These include steps to streamline manufacturing processes and enhance responsiveness to customers. John Deere has implemented flexible assembly lines that can accommodate a wider product mix and deliver products in line with dealer and customer demand. Additionally, considerable effort is being directed to manufacturing cost reduction through process improvement and improvements in product design, advanced manufacturing technology, supply management and logistics, and environment, health, and safety management systems as well as compensation incentives related to productivity and organizational structure. In past years, John Deere has experienced volatility in the price of many raw materials. John Deere has responded to cost pressures by implementing the cost-reduction measures described above and by increasing prices. Significant cost increases, if they occur, could have an adverse effect on the Companys operating results. The equipment operations also pursue external sales of selected parts and components that can be manufactured and supplied to third parties on a competitive basis, including engines, power train components and electronic components.
Capital Expenditures. The equipment operations capital expenditures totaled $665 million in 2016, compared with $649 million in 2015 and $1,001 million in 2014. Provisions for depreciation applicable to these operations property and equipment during these years were $695 million, $687 million and $690 million, respectively. Capital expenditures for the equipment operations in 2017 are currently estimated to be approximately $600 million. The 2017 expenditures will relate primarily to the modernization and restructuring of key manufacturing facilities, U.S. Tier 4 emission requirements and the development of new products. Future levels of capital expenditures will depend on business conditions.
Patents and Trademarks
John Deere owns a significant number of patents, trade secrets, licenses and trademarks related to John Deere products and services, and expects the number to grow as John Deere continues to pursue technological innovations. John Deeres policy is to further its competitive position by filing patent applications in the U.S. and internationally to protect technology and improvements considered important to the business. John Deere believes that, in the aggregate, the rights under these patents and licenses are generally important to its operations and competitive position, but does not regard any of its businesses as being dependent upon any single patent or group of patents. However, certain John Deere trademarks, which contribute to John Deeres identity and the recognition of its products and services, including but not limited to the John Deere mark, the leaping deer logo, the Nothing Runs Like a Deere slogan, the prefix JD associated with many products and green and yellow equipment colors, are an integral part of John Deeres
business, and their loss could have a material adverse effect on the Company. For additional information see Risk FactorThe potential loss of John Deere intellectual property through trade secret theft, infringement of patents, trademark counterfeiting, or other loss of rights to exclusive use of John Deere intellectual property may have a material adverse effect on the Company. Our products may infringe the intellectual property rights of others.
Marketing
In the U.S. and Canada, the equipment operations distribute equipment and service parts through the following facilities: two agriculture and turf equipment sales and administration offices located in Olathe, Kansas and Cary, North Carolina and one sales branch located in Grimsby, Ontario; and one construction, earthmoving, material handling and forestry equipment sales and administration office located in Moline, Illinois. In addition, the equipment operations operate a centralized parts distribution warehouse in coordination with nine regional parts depots and distribution centers in the U.S. and Canada.
Through these U.S. and Canadian facilities, John Deere markets products to approximately 2,365 dealer locations, most of which are independently owned and operated. Of these, approximately 1,522 sell agricultural equipment, while approximately 424 sell construction, earthmoving, material handling and/or forestry equipment. Nortrax owns some of the 424 dealer locations. Turf equipment is sold at most John Deere agricultural equipment locations, a few construction, earthmoving, material handling and forestry equipment locations and about 419 turf-only locations, many of which also sell dissimilar lines of non-John Deere products. In addition, certain lawn and garden product lines are sold through The Home Depot and Lowes.
Outside the U.S. and Canada, John Deere agriculture and turf equipment is sold to distributors and dealers for resale in over 100 countries. Sales and administrative offices are located in Argentina, Australia, Brazil, China, France, Germany, India, Italy, Mexico, the Netherlands, Poland, Russia, Singapore, South Africa, Spain, Sweden, Switzerland, Thailand, Turkey, Ukraine and the United Kingdom and administrative offices located in Ghana and Kenya. Associated companies doing business in China also sell agricultural equipment. Turf equipment sales outside the U.S. and Canada occur primarily in Europe and Australia. Construction, earthmoving, material handling and forestry equipment is sold to distributors and dealers primarily by sales offices located in Australia, Brazil, China, Finland, New Zealand, Miami, Russia and Singapore. Some of these dealers are independently owned while John Deere owns others. The equipment operations operate centralized parts distribution warehouses in Brazil, Germany, India and Russia in coordination with regional parts depots and distribution centers in Argentina, Australia, China, Mexico, South Africa, Sweden and the United Kingdom.
John Deere markets engines, power train and electronic components worldwide through select sales branches or directly to regional and global original equipment manufacturers and independently owned engine distributors.
Raw Materials
John Deere purchases raw materials and some manufactured components and replacement parts for its equipment, engines and other products from leading suppliers both domestically and internationally. These materials and components include a variety of steel products, steel and iron castings, forgings, plastics, electronics and ready-to-assemble components made to certain specifications. John Deere also purchases various goods and services used in production, logistics, offices and research and development processes. John Deere maintains strategic sourcing models to meet its production needs and build upon long-term supplier relationships. John Deere uses a variety of agreements with suppliers intended to drive innovation, ensure availability and delivery of industry-leading quality raw materials and components, manage costs on a globally competitive basis, protect John Deeres intellectual property and minimize other supply-related risks. Supply chain risks monitored by John Deere to minimize the likelihood of the supply base causing business disruption include supplier financial viability, capacity, business continuity, quality, delivery and weather-related events including natural disasters. In fiscal year 2016, John Deere experienced no significant work stoppages as a result of shortages of raw materials or other commodities.
Backlog Orders
The dollar amount of backlog orders for the agriculture and turf segment believed to be firm was approximately $4.2 billion at October 31, 2016, compared with $4.2 billion at October 31, 2015. The agriculture and turf backlog is generally highest in the second and third quarters due to seasonal buying trends in these industries. John Deere generally produces and ships its construction and forestry equipment on average within approximately 60 days after an order is deemed to become firm. Therefore, no significant amount of construction and forestry backlog orders accumulates during any period.
Trade Accounts and Notes Receivable
Trade accounts and notes receivable arise primarily from sales of goods to independent dealers. Most trade receivables originated by the equipment operations are purchased by the financial services operations. The equipment operations compensate the financial services operations at approximate market rates of interest for these receivables. Additional information appears in Note 12 to the Consolidated Financial Statements.
FINANCIAL SERVICES
U.S. and Canada. The financial services segment primarily provides and administers financing for retail purchases from John Deere dealers of new equipment manufactured by John Deeres agriculture and turf and construction and forestry segments and used equipment taken in trade for this equipment.
The Company and John Deere Construction & Forestry Company (a wholly-owned subsidiary of the Company) are referred to as the sales companies. John Deere Capital Corporation (Capital Corporation), a U.S. financial services subsidiary, generally purchases retail installment sales and loan contracts (retail notes) from the sales companies. These retail notes are acquired by the sales companies through John Deere retail dealers in the U.S. John Deere Financial Inc., a Canadian financial services subsidiary, purchases and finances retail notes acquired by John Deere Canada ULC, the Companys Canadian sales branch. The terms of retail notes and the basis on which the financial services operations acquire retail notes from the sales companies are governed by agreements with the sales companies. The financial services segment also finances and services revolving charge accounts, in most cases acquired from and offered through merchants in the agriculture and turf and construction and forestry markets (revolving charge accounts). Additionally, the financial services operations provide wholesale financing for inventories of John Deere agriculture and turf equipment and construction and forestry equipment owned by dealers of those products (wholesale notes). The various financing options offered by the financial services operations are designed to enhance sales of John Deere products and generate financing income for the financial services operations. In the U.S., certain subsidiaries included in the financial services segment offer extended equipment warranties.
Retail notes acquired by the sales companies are immediately sold to the financial services operations. The equipment operations are the financial services operations major source of business, but many retail purchasers of John Deere products finance their purchases outside the John Deere organization through a variety of sources, including commercial banks and finance and leasing companies.
The financial services operations offer retail leases to equipment users in the U.S. A small number of leases are executed with units of local government. Leases are usually written for periods of four months to sixty months, and typically contain an option permitting the customer to purchase the equipment at the end of the lease term. Retail leases are also offered in a generally similar manner to customers in Canada through John Deere Financial Inc. and John Deere Canada ULC.
The financial services operations terms for financing equipment retail sales (other than smaller items financed with unsecured revolving charge accounts) generally provide for retention of a security interest in the equipment financed. The financial services operations guidelines for minimum down payments, which vary with the types of equipment and repayment provisions, are generally 10 percent to 30 percent of the purchase price. Finance charges are sometimes waived for specified periods or reduced on certain John Deere products sold or leased in advance of the season of use or in other sales promotions. The financial services operations generally receive compensation from the sales companies at approximate market interest rates for periods during which finance charges are waived or reduced on the retail notes or leases. The cost is accounted for as a deduction in arriving at net sales by the equipment operations.
The Company has an agreement with Capital Corporation to make payments to Capital Corporation such that its ratio of earnings to fixed charges is not less than 1.05 to 1 for any fiscal quarter. For 2016 and 2015, Capital Corporations ratios were 2.22 to 1 and 3.42 to 1, respectively, and never less than 2.01 to 1 and 3.26 to 1 for any fiscal quarter of 2016 and 2015, respectively. The Company has also committed to continue to own, directly or through one or more wholly-owned subsidiaries, at least 51 percent of the voting shares of capital stock of Capital Corporation and to maintain Capital Corporations consolidated tangible net worth at not less than $50 million. The Companys obligations to make payments to Capital Corporation under the agreement are independent of whether Capital Corporation is in default on its indebtedness, obligations or other liabilities. Further, the Companys obligations under the agreement are not measured by the amount of Capital Corporations indebtedness, obligations or other liabilities. The Companys obligations to make payments under this agreement are expressly stated not to be a guaranty of any specific indebtedness, obligation or liability of Capital Corporation and are enforceable only by or in the name of Capital Corporation. No payments were required under this agreement in 2016 or 2015.
Outside the U.S. and Canada. The financial services operations also offer financing, primarily for John Deere products, in Australia, Brazil, China, India, New Zealand, Russia, Thailand and in several other countries in Africa, Asia, Europe and Latin America. In certain areas, financing is offered through cooperation agreements or joint ventures. The manner in which the financial services operations offer financing in these countries is affected by a variety of country-specific laws, regulations and customs, including those governing property rights and debtor obligations, that are subject to change and that may introduce greater risk to the financial services operations.
The financial services operations also offer to select customers and dealers credit enhanced international export financing for the purchase of John Deere products.
Additional information on the financial services operations appears on pages 23-24, 26 and 28.
ENVIRONMENTAL MATTERS
John Deere is subject to a wide variety of local, state and federal environmental laws and regulations in the U.S., as well as the environmental laws and regulations of other countries in which John Deere conducts business. John Deere strives to comply and believes it is in compliance in all material respects with applicable laws and regulations. However, failure to comply with these regulations could lead to fines and other penalties. John Deere is involved in the evaluation and clean-up of a limited number of sites but does not expect that these matters or other expenses or liabilities John Deere may incur in connection with any noncompliance with environmental laws or regulations or the cleanup of any additional properties, will have a material adverse effect on the consolidated financial position, results of operations, cash flows or competitive position of John Deere. With respect to acquired properties and businesses or properties and businesses acquired in the future, John Deere conducts due diligence into potential exposure to environmental liabilities, but cannot be certain that it has identified or will identify all adverse environmental conditions. Compliance with these laws and regulations has added, and will continue to add, to the cost of John Deeres products.
The U.S. Environmental Protection Agency has issued stringent emissions regulations for off-road engines, and governmental agencies throughout the world are similarly enacting more stringent laws to reduce off-road engine emissions. John Deere has achieved and plans to continue to achieve compliance with these regulations through significant investments in the development of new engine technologies and after-treatment systems. Compliance with emissions regulations has added and will continue to add to the cost of John Deeres products.
EMPLOYEES
At October 31, 2016, John Deere had approximately 56,800 employees, including approximately 27,900 employees in the U.S. and Canada. John Deere also retains consultants, independent contractors, and temporary and part-time workers. Unions are certified as bargaining agents for approximately 84 percent of John Deeres U.S. production and maintenance employees. Approximately 7,600 of John Deeres active U.S. production and maintenance workers are covered by a collective bargaining agreement with the United Auto Workers (UAW), with an expiration date of October 1, 2021.
Unions also represent the majority of employees at John Deere manufacturing facilities outside the U.S.
EXECUTIVE OFFICERS OF THE REGISTRANT
Following are the names and ages of the executive officers of the Company, their positions with the Company and summaries of their backgrounds and business experience. All executive officers are elected or appointed by the Board of Directors and hold office until the annual meeting of the Board of Directors following the annual meeting of stockholders in each year.
Name, age and office (at December 1, 2016), and year elected to office |
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Principal occupation during last | |||
Samuel R. Allen |
63 |
Chairman and Chief Executive Officer |
2010 |
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Has held this position for the last five years |
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James M. Field |
53 |
President, Agriculture & Turf Division-Global Harvesting & Turf Platforms, Americas and Australia |
2012 |
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2009 2012 Senior Vice President and Chief Financial Officer |
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Jean H. Gilles |
59 |
Senior Vice President, John Deere Power Systems, Worldwide Parts Services, Advanced Technology & Engineering and Global Supply Management and Logistics |
2010 |
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Has held this position for the last five years |
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Max A. Guinn |
58 |
President, Worldwide Construction & Forestry |
2014 |
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2012 2014 Senior Vice President, Human Resources, Communications, Public Affairs and Labor Relations; 2009 2012 Senior Vice President Agriculture & Turf Division, Global Platform, Crop Harvesting |
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Marc A. Howze |
53 |
Senior Vice President and Chief Administrative Officer |
2016 |
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2012 2016 Vice President, Global Human Resources & Employee Communications; 2012 Global Director, Cotton Harvesting Product Line; 2009 2012 Factory Manager, John Deere Turf Care |
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Mary K.W. Jones |
48 |
Senior Vice President and General Counsel |
2013 |
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2010 2013 Vice President Global Human Resources |
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Rajesh Kalathur |
48 |
Senior Vice President and Chief Financial Officer |
2012 |
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2012 Deputy Financial Officer; 2009 2012 Vice President, Sales & Marketing, China/India/South and East Asia/Sub-Saharan and South Africa, Agriculture & Turf Division |
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John C. May |
47 |
President, Agricultural Solutions & Chief Information Officer |
2012 |
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2009 2012 Vice President, Agriculture & Turf Global Platform, Turf & Utility |
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Cory J. Reed |
46 |
President, John Deere Financial |
2016 |
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2013 2016 Senior Vice President, Intelligent Solutions Group; 2012 2013 Senior Vice President, Global Marketing Services; 2011 2012 Vice President, Global Marketing Services Agricultural and Turf Division |
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Markwart von Pentz |
53 |
President, Agriculture & Turf Division-Europe, Asia, Africa, and Global Tractor Platform |
2012 |
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2009 2012 President, Agriculture & Turf Division-Europe, CIS, Northern Africa, Middle East, Latin America, and Global Harvesting, Crop Care, Hay & Forage Products |
The following risks are considered the most significant to John Deeres business based upon current knowledge, information and assumptions. This discussion of risk factors should be considered closely in conjunction with Managements Discussion and Analysis beginning on page 22, including the risks and uncertainties described in the Safe Harbor Statement on pages 24 and 25, and the Notes to Consolidated Financial Statements beginning on page 37. These risk factors and other forward-looking statements that relate to future events, expectations, trends and operating periods involve certain factors that are subject to change, and important risks and uncertainties that could cause actual results to differ materially. Some of these risks and uncertainties could affect particular lines of business, while others could affect all of the Companys businesses. Although each risk is discussed
separately, many are interrelated. The Company, except as required by law, undertakes no obligation to update or revise this risk factors discussion, whether as a result of new developments or otherwise. The risks described in this Annual Report on Form 10-K and the Safe Harbor Statement in this report are not the only risks faced by the Company.
International, national and regional trade laws, regulations and policies (particularly those related to or restricting global trade) and government farm programs and policies could significantly impair John Deeres profitability and growth prospects.
International, national and regional laws, regulations and policies directly or indirectly related to or restricting the import and export of John Deeres products, services and technology, including protectionist policies in particular jurisdictions or for the benefit of favored industries or sectors, could harm John Deeres multinational business and subject John Deere to civil and criminal sanctions. John Deeres profitability and growth prospects are tied directly to the global marketplace. Restricted access to global markets impairs John Deeres ability to export goods and services from its various manufacturing locations around the world, and limits the ability to access raw materials and high quality parts and components at competitive prices on a timely basis. Trade restrictions could limit John Deeres ability to capitalize on current and future growth opportunities in international markets and impair John Deeres ability to expand the business by offering new technologies, products and services. These restrictions may affect John Deeres competitive position. Additionally, John Deeres competitive position and results could be adversely affected by changes inor uncertainty surroundingU.S. trade policy. Furthermore, the ability to export agricultural and forestry commodities is critical to John Deeres agricultural and forestry customers. Policies impacting exchange rates and commodity prices or those limiting the export or import of commodities could have a material adverse effect on the international flow of agricultural and other commodities that may result in a corresponding negative effect on the demand for agricultural and forestry equipment in many areas of the world. John Deeres agricultural equipment sales could be especially harmed because farm income strongly influences sales of agricultural equipment around the world. Furthermore, trade restrictions could impede those in developing countries from achieving a higher standard of living, which could negatively impact John Deeres future growth opportunities arising from increasing global demand for food, fuel and infrastructure. Additionally, changes in government farm programs and policies, including direct payment and other subsidies, can significantly influence demand for agricultural equipment. Furthermore, embargoes and sanctions imposed by the U.S. and other governments restricting or prohibiting sales or transactions to specific persons, including financial institutions, or countries or based on product classification expose John Deere to potential criminal and civil sanctions. Although John Deere has a compliance program in place designed to reduce the likelihood of potential violations of import and export laws and sanctions, these laws and sanctions, particularly with respect to eastern Europe, Cuba, and Iran, are changing rapidly. Violations of these laws could have an adverse effect on John Deeres reputation, business and results of operations and financial condition.
Changes in government banking, monetary and fiscal policies could have a negative effect on John Deere.
Policies of the U.S. and other governments regarding banking, monetary and fiscal policies intended to promote or maintain liquidity, stabilize financial markets and/or address local deficit or structural economic issues may not be effective and could have a material impact on John Deeres customers and markets. John Deeres operations and results could also be impacted by financial regulatory reform that could have an adverse effect on the financial services segment and on John Deeres customers by limiting their ability to enter into hedging transactions or to finance purchases of John Deere products. Government policies on taxes and spending can also affect John Deere, especially the construction and forestry segment due to the impact of government spending on infrastructure development.
Changing worldwide demand for food and different forms of bio-energy could have an effect on the price of farm commodities and consequently the demand for certain John Deere equipment and could also result in higher research and development costs related to changing machine fuel requirements.
Changing worldwide demand for farm outputs to meet the worlds growing food and bio-energy demands, driven in part by government policies and a growing world population, are likely to result in fluctuating agricultural commodity prices, which directly affect sales of agricultural equipment. Lower farm commodity prices directly affect farm incomes, which could negatively affect sales of agricultural equipment. While higher commodity prices benefit John Deeres crop-producing agricultural equipment customers, higher commodity prices also could result in greater feed costs for livestock and poultry producers which in turn may result in lower levels of equipment purchased by these customers. Furthermore, changing bio-fuel demands may cause farmers to change the types or quantities of the crops they raise, with corresponding changes in equipment demands. Finally, changes in governmental policies regulating bio-fuel utilization could affect demand for John Deeres diesel-fueled equipment and result in higher research and development costs related to equipment fuel standards.
As John Deere seeks to expand its business globally, growth opportunities may be impacted by greater political, economic and social uncertainty and the continuing and accelerating globalization of businesses could significantly change the dynamics of John Deeres competition, customer base and product offerings.
John Deeres efforts to grow its businesses depend to a large extent upon access to additional geographic markets including, but not limited to, Brazil, China, India and Russia, and its success in developing market share and operating profitably in such markets. In some cases, these countries have greater political and economic volatility, greater vulnerability to infrastructure and labor disruptions and differing local customer product preferences and requirements than John Deeres other markets. Operating and seeking to expand business in a number of different regions and countries exposes John Deere to multiple and potentially conflicting cultural practices, business practices and legal and regulatory requirements that are subject to change, including those related to tariffs and trade barriers, investments, property ownership rights, taxation, sanctions requirements, repatriation of earnings and advanced technologies. Expanding business operations globally also increases exposure to currency fluctuations which can materially affect the Companys financial results. As these emerging geographic markets become more important to John Deere, its competitors are also seeking to expand their production capacities and sales in these same markets. While John Deere maintains a positive corporate image and the John Deere brand is widely recognized and valued in its traditional markets, the brand is less well known in some emerging markets which could impede John Deeres efforts to successfully compete in these markets. Although John Deere is taking measures to adapt to these changing circumstances, John Deeres reputation and/or business results could be negatively affected should these efforts prove unsuccessful.
John Deere operates in highly competitive markets.
John Deere operates in a variety of highly competitive global and regional markets. John Deere competes worldwide with a number of other manufacturers and distributors that produce and sell similar products. John Deere competes on the basis of product performance, innovation and quality, distribution, customer service and price. Aggressive pricing or other strategies pursued by competitors, unanticipated product or manufacturing delays or John Deeres failure to price its products competitively could adversely affect John Deeres business, results of operations and financial condition.
John Deeres business results depend largely on its ability to understand its customers specific preferences and requirements, and to develop, manufacture and market products that meet customer demand.
John Deeres ability to match new product offerings to diverse global customers anticipated preferences for different types and sizes of equipment and various equipment features and functionality, at affordable prices, is critical to its success. This requires a thorough understanding of John Deeres existing and potential customers on a global basis, particularly in potentially high-growth and emerging markets, including Brazil, China, India and Russia. Failure to deliver quality products that meet customer needs at competitive prices ahead of competitors could have a significant adverse effect on John Deeres business.
Negative economic conditions and outlook can materially weaken demand for John Deeres equipment and services, limit access to funding and result in higher funding costs.
The demand for John Deeres products and services can be significantly reduced in an economic environment characterized by high unemployment, cautious consumer spending, lower corporate earnings, U.S. budget issues and lower business investment. Negative or uncertain economic conditions causing John Deeres customers to lack confidence in the general economic outlook can significantly reduce their likelihood of purchasing John Deeres equipment. Sustained negative economic conditions and outlook affect housing starts and other construction which dampens demand for certain construction equipment. John Deeres turf operations and its construction and forestry business are dependent on construction activity and general economic conditions. Decreases in construction activity and housing starts could have a material adverse effect on John Deeres results of operations. If negative economic conditions affect the overall farm economy, there could be a similar effect on John Deeres agricultural equipment sales. In addition, uncertain or negative outlook with respect to ongoing U.S. budget issues as well as general economic conditions and outlook can cause significant changes in market liquidity conditions. Such changes could impact access to funding and associated funding costs, which could reduce the Companys earnings and cash flows. Additionally, the Companys investment management activities could be adversely affected by changes in the equity and bond markets, which would negatively affect earnings.
In addition, demand for John Deeres products and services can be significantly reduced by concerns regarding the diverse economic and political circumstances of the individual countries in the eurozone, the debt burden of certain eurozone countries and their ability to meet future financial obligations, uncertainty related to the potential withdrawal of the United Kingdom from the European Union, and the long term stability of the euro as a single common currency. Persistent disparity with respect to the widely varying economic conditions within the individual countries in the eurozone, and its implications for the euro as well as market perceptions concerning these and related issues, could adversely affect the value of the Companys euro-denominated assets and obligations, have an adverse effect on demand for John Deeres products and services in the eurozone and have an adverse effect on financial markets in Europe and globally. More specifically, it could affect the ability of John Deeres customers, suppliers and lenders to finance their respective businesses, to access liquidity at acceptable financing costs, if at all, and the availability of supplies and materials and on the demand for John Deeres products.
The Companys consolidated financial results are reported in U.S. dollars while certain assets and other reported items are denominated in the currencies of other countries, creating currency exchange and translation risk.
John Deere operates in many areas of the world, involving transactions denominated in a variety of currencies. John Deere is subject to currency exchange risk to the extent that its costs are denominated in currencies other than those in which John Deere earns revenues.
Additionally, the reporting currency for the Companys consolidated financial statements is the U.S. dollar. Certain of John Deeres assets, liabilities, expenses and revenues are denominated in other countries currencies. Those assets, liabilities, expenses and revenues are translated into U.S. dollars at the applicable exchange rates to prepare the Companys consolidated financial statements. Therefore, increases or decreases in exchange rates between the U.S. dollar and those other currencies affect the value of those items as reflected in the Companys consolidated financial statements, even if their value remains unchanged in their original currency. Substantial fluctuations in the value of the U.S. dollar could have a significant impact on John Deeres results.
Because the financial services segment provides financing for a significant portion of John Deeres sales worldwide, John Deeres operations and financial results could be impacted materially should negative economic conditions affect the financial industry.
In recent years, negative economic conditions have frequently had an adverse effect on the financial industry in which the financial services segment operates. The financial services segment provides financing for a significant portion of John Deeres sales worldwide. The financial services segment is exposed to the risk that customers and others will default on contractual obligations. The financial services segment may experience credit losses that exceed its expectations and adversely affect its financial condition and results of operations. The financial services segments inability to access funds at cost-effective rates to support its financing activities could have a material adverse effect on John Deeres business. The financial services segments liquidity and ongoing profitability depend largely on timely access to capital in order to meet future cash flow requirements and to fund operations and costs associated with engaging in diversified funding activities. Additionally, negative market conditions could reduce customer confidence levels, resulting in declines in credit applications and increases in delinquencies and default rates, which could materially impact the financial services segments write-offs and provision for credit losses. The financial services segment may also experience residual value losses that exceed its expectations caused by lower pricing for used equipment and higher than expected equipment returns at lease maturity.
John Deeres equipment operations and financial services segments are subject to interest rate risks. Changes in interest rates can reduce demand for equipment, adversely affect interest margins and limit the ability to access capital markets while increasing borrowing costs.
Rising interest rates could have a dampening effect on overall economic activity and/or the financial condition of John Deeres customers, either or both of which could negatively affect customer demand for John Deere equipment and customers ability to repay obligations to John Deere. In addition, credit market dislocations could have an impact on funding costs which are very important to John Deeres financial services segment because such costs affect the segments ability to offer customers competitive financing rates. While the Company strives to match the interest rate characteristics of our financial assets and liabilities, changing interest rates could have an adverse effect on the Companys net interest rate marginthe difference between the yield the Company earns on its assets and the interest rates the Company pays for funding, which could in turn affect the Companys net interest income and earnings. Actions by credit rating agencies, such as downgrades or negative changes to ratings outlooks, can affect the availability and cost of funding for the Company and can increase the Companys cost of capital and hurt its competitive position.
The potential loss of John Deere intellectual property through trade secret theft, infringement of patents, trademark counterfeiting, or other loss of rights to exclusive use of John Deere intellectual property may have a material adverse effect on the Company. Our products may infringe the intellectual property rights of others.
John Deere relies on a combination of patents, trademarks, trade secret laws, and confidentiality agreements to protect our intellectual property rights. In particular, we heavily rely on certain John Deere trademarks, which contribute to John Deeres identity and the recognition of its products and services, including but not limited to the John Deere mark, the leaping deer logo, the Nothing Runs Like a Deere slogan and the prefix JD associated with many products and the green and yellow equipment colors. These trademarks, as well as the many patents used in our products, are integral to the John Deere business, and their loss could have a material adverse effect on the Company.
Additionally, third parties may initiate litigation to challenge the validity of our patents or allege that we infringe their patents. We may incur substantial costs if our competitors or other third parties initiate litigation to challenge the validity of our patents or allege that we infringe their patents, or if we initiate any proceedings to protect our proprietary rights. If the outcome of any such litigation is unfavorable to us, our business could be adversely affected. We also cannot be certain that our products or technologies have not infringed or will not infringe the proprietary rights of others. Any such infringement could cause third parties, including our competitors, to bring claims against us, resulting in significant costs, possible damages and substantial uncertainty.
John Deere is subject to extensive anti-corruption laws and regulations.
John Deeres global operations must comply with all applicable anti-corruption laws, including the U.S. Foreign Corrupt Practices Act and the UK Bribery Act. These anti-corruption laws generally prohibit companies and their intermediaries from making improper payments or providing anything of value to improperly influence government officials or private individuals for the purpose of obtaining or retaining a business advantage regardless of whether those practices are legal or culturally expected in a particular jurisdiction. Recently, there has been a substantial increase in the global enforcement of anti-corruption laws. Although John Deere has a compliance program in place designed to reduce the likelihood of potential violations of such laws, violations of these laws could result in criminal or civil sanctions and have an adverse effect on John Deeres reputation, business and results of operations and financial condition.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Act) and the regulations implementing the Act impose additional supervisory, financial and reporting requirements and compliance costs on John Deere and John Deeres financial services operations and could therefore adversely affect John Deere and its financial services segment.
The Act was enacted on July 21, 2010 to broadly reform practices in the financial services industry, including equipment financing and securitizations. The Act directs federal agencies, including the Consumer Financial Protection Bureau, the Board of Governors of the Federal Reserve System, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation and others, to adopt rules to regulate depository institutions, systemically important financial institutions, holding companies, the consumer finance industry and the capital markets, including certain commercial transactions such as derivatives contracts. Although the effects of the Act on the capital markets and the financial industry will not be fully known until all the regulations have been finalized and implemented, the Act and its regulations impose, or may impose, additional reporting, stress testing, leverage, liquidity, and capital requirements; and other supervisory and financial standards and restrictions that increase regulatory compliance costs for John Deere and John Deeres financial services operations and could adversely affect John Deere and its financial services segments funding activities, liquidity, structure (including relationships with affiliates), operations and performance. Moreover, John Deeres operations, including those outside of the United States, will also be impacted by non-U.S. regulatory reforms, including Basel III, being implemented to further regulate non-U.S. financial institutions and markets.
John Deeres business may be directly and indirectly affected by unfavorable weather conditions or natural disasters that reduce agricultural production and demand for agriculture and turf equipment.
Poor or unusual weather conditions, particularly during the planting and early growing season, can significantly affect the purchasing decisions of John Deeres customers, particularly the purchasers of agriculture and turf equipment. The timing and quantity of rainfall are two of the most important factors in agricultural production. Insufficient levels of rain prevent farmers from planting new crops and may cause growing crops to die or result in lower yields. Excessive rain or flooding can prevent planting from occurring at optimal times, and may cause crop loss through increased disease or mold growth. Temperatures outside normal ranges can also cause crop failure or decreased yields, and may also affect disease incidence. Temperature affects the rate of growth, crop maturity and crop quality. Natural calamities such as regional floods, hurricanes or other storms, and droughts can have significant negative effects on agricultural and livestock production. The resulting negative impact on farm income can strongly affect demand for agricultural equipment. Sales of turf equipment, particularly during the important spring selling season, can be dramatically impacted by weather. Adverse weather conditions in a particular geographic region may adversely affect sales of some turf equipment. Drought conditions can adversely affect sales of certain mowing equipment and unusually rainy weather can similarly cause lower sales volumes.
Changes in the availability and price of certain raw materials, components and whole goods could result in production disruptions or increased costs and lower profits on sales of John Deere products.
John Deere requires access to various raw materials, components and whole goods at competitive prices to manufacture and distribute its products. Changes in the availability and price of these raw materials, components and whole goods, which have fluctuated significantly in the past and are more likely to fluctuate during times of economic volatility, can significantly increase the costs of production which could have a material negative effect on the profitability of the business, particularly if John Deere, due to pricing considerations or other factors, is unable to recover the increased costs from its customers. John Deere relies on suppliers to acquire raw materials, components and whole goods required to manufacture its products. Certain components and parts used in John Deeres products are available from a single supplier and cannot be re-sourced quickly. Supply chain disruptions due to supplier financial distress, capacity constraints, business continuity, quality, delivery or disruptions due to weather-related or natural disaster events could affect John Deeres operations and profitability.
John Deeres operations, suppliers and customers are subject to and affected by increasingly rigorous environmental, health and safety laws and regulations of federal, state and local authorities in the U.S. and various regulatory authorities with jurisdiction over John Deeres international operations. In addition, private civil litigation on these subjects has increased, primarily in the U.S.
Enforcement actions arising from violations of environmental, health and safety laws or regulations can lead to investigation and defense costs, and result in significant fines or penalties. In addition, new or more stringent requirements of governmental authorities could prevent or restrict John Deeres operations, or those of our suppliers and customers, require significant expenditures to achieve compliance and/or give rise to civil or criminal liability. There can be no assurance that violations of such legislation and/or regulations, or private civil claims for damages to property or personal injury arising from the environmental, health or safety impacts of John Deeres operations, or those of our suppliers and customers, would not have consequences that result in a material adverse effect on John Deeres business, financial condition or results of operations.
Increasingly stringent engine emission standards could impact John Deeres ability to manufacture and distribute certain engines or equipment, which could negatively affect business results.
John Deeres equipment operations must meet increasingly stringent engine emission reduction standards, including Final Tier 4 non-road diesel emission requirements in the U.S. and the European Unions Stage IV standard and recently enacted Stage V standard. In addition, governmental agencies throughout the world are enacting more stringent laws and regulations to reduce off-road engine emissions. These standards are applicable to many engines manufactured by John Deere and used in many models of John Deere agriculture and construction and forestry equipment. John Deere has incurred and continues to incur substantial research and development costs and is introducing many new equipment models, largely due to the implementation of these more rigorous standards. While John Deere has developed and is executing comprehensive plans to meet these requirements and does not currently foresee significant obstacles that would prevent timely compliance, these plans are subject to many variables that could delay or otherwise affect John Deeres ability to manufacture and distribute certain equipment or engines, which could negatively impact business results.
John Deere may incur increased costs due to new or more stringent greenhouse gas emission standards designed to address climate change and could be further impacted by physical effects attributed to climate change on its facilities, suppliers and customers.
There is a political and scientific consensus that emissions of greenhouse gases (GHG) continue to alter the composition of Earths atmosphere in ways that are affecting and are expected to continue to affect the global climate. These considerations may lead to international, national, regional or local legislative or regulatory responses in the future. Various stakeholders, including legislators and regulators, shareholders and non-governmental organizations, as well as companies in many business sectors, including John Deere, are considering ways to reduce GHG emissions. The regulation of GHG emissions from certain stationary or mobile sources could result in additional costs to John Deere in the form of taxes or emission allowances, facilities improvements and energy costs, which would increase John Deeres operating costs through higher utility, transportation and materials costs. Increased input costs, such as fuel and fertilizer, and compliance-related costs could also impact customer operations and demand for John Deere equipment. Because the impact of any future GHG legislative, regulatory or product standard requirements on John Deeres global businesses and products is dependent on the timing and design of mandates or standards, John Deere is unable to predict its potential impact at this time.
Furthermore, the potential physical impacts of climate change on John Deeres facilities, suppliers and customers and therefore on John Deeres operations are highly uncertain and will be particular to the circumstances developing in various geographical regions. These may include long-term changes in temperature levels and water availability. These potential physical effects may adversely impact the demand for John Deeres products and the cost, production, sales and financial performance of John Deeres operations.
Security breaches and other disruptions to John Deeres information technology infrastructure could interfere with John Deeres operations and could compromise John Deeres and its customers and suppliers information, exposing John Deere to liability that would cause John Deeres business and reputation to suffer.
In the ordinary course of business, John Deere relies upon information technology networks and systems, some of which are managed by third parties, to process, transmit and store electronic information, and to manage or support a variety of business processes and activities, including supply chain, manufacturing, distribution, invoicing and collection of payments from dealers or other purchasers of John Deere equipment and from customers of John Deeres financial services operations. John Deere uses information technology systems to record, process and summarize financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting, legal and tax requirements. Additionally, John Deere collects and stores sensitive data, including intellectual property, proprietary business information and the proprietary business information of John Deeres customers and suppliers, as well as personally identifiable information of John Deeres customers and employees, in data centers and on information technology networks. The secure operation of these information technology networks and the processing and maintenance of this
information is critical to John Deeres business operations and strategy. Despite security measures and business continuity plans, John Deeres information technology networks and infrastructure may be vulnerable to damage, disruptions or shutdowns due to attacks by cyber criminals or breaches due to employee error or malfeasance or other disruptions during the process of upgrading or replacing computer software or hardware, power outages, computer viruses, telecommunication or utility failures, terrorist acts or natural disasters or other catastrophic events. The occurrence of any of these events could compromise John Deeres networks, and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information, disrupt operations, and damage John Deeres reputation, which could adversely affect John Deeres business. In addition, as security threats continue to evolve we may need to invest additional resources to protect the security of our systems.
John Deere is subject to governmental laws, regulations and other legal obligations related to privacy and data protection.
The legislative and regulatory framework for privacy and data protection issues worldwide is rapidly evolving and is likely to remain uncertain for the foreseeable future. John Deere collects personally identifiable information (PII) and other data as an integral part of its business processes and activities. This data is subject to a variety of U.S. and international laws and regulations, including oversight by various regulatory or other governmental bodies. Many foreign countries and governmental bodies, including the European Union, Canada, and other relevant jurisdictions where we conduct business, have laws and regulations concerning the collection and use of PII and other data obtained from their residents or by businesses operating within their jurisdiction that are more restrictive than those in the U.S. Additionally, in May 2016, the European Union adopted the General Data Protection Regulation that will impose more stringent data protection requirements and will provide for greater penalties for noncompliance beginning in May 2018. Any inability, or perceived inability, to adequately address privacy and data protection concerns, even if unfounded, or comply with applicable laws, regulations, policies, industry standards, contractual obligations, or other legal obligations could result in additional cost and liability to us or company officials, damage our reputation, inhibit sales, and otherwise adversely affect our business.
John Deeres ability to execute its strategy is dependent upon the ability to attract, train and retain qualified personnel.
John Deeres continued success depends, in part, on its ability to identify, attract, motivate, train and retain qualified personnel in key functions. In particular, John Deere is dependent on its ability to identify, attract, motivate, train and retain qualified personnel with the requisite education, background and industry experience. Failure to attract, train and retain qualified personnel, whether as a result of an insufficient number of qualified applicants, difficulty in recruiting new personnel, or the allocation of inadequate resources to training, integration and retention of qualified personnel, could impair John Deeres ability to execute its business strategy and could adversely affect John Deeres business. In addition, while John Deere strives to reduce the impact of the departure of its employees, John Deeres operations or ability to execute its business strategy may be impacted by the loss of personnel.
Sustained increases in funding obligations under the Companys pension plans may impair the Companys liquidity or financial condition.
The Company maintains certain defined benefit pension plans for certain employees, which impose funding obligations. The Company uses many assumptions in calculating its future payment obligations under the plans. Significant adverse changes in credit or market conditions could result in actual rates of returns on pension investments being lower than expected. The Company may be required to make significant contributions to its pension plans in the future. These factors could significantly increase the Companys payment obligations under the plans and adversely affect its business, results of operations and financial condition.
The reallocation of radio frequency (RF) spectrums could disrupt or degrade the reliability of John Deeres high precision augmented Global Positioning System (GPS) technology, which could impair John Deeres ability to develop and market GPS-based technology solutions as well as significantly reduce agricultural and construction customers profitability.
John Deeres current and planned integrated agricultural business and equipment management systems, as well as its fleet management telematics solutions for construction equipment, depend upon the use of RF signals. These signals include, but are not limited to, GPS signals, other GPS-like satellite signals, augmented GPS services and other RF equipment which link equipment, operations, owners, dealers and technicians. These radio services depend on frequency allocations governed by international and national agencies. Any international or national reallocation of frequency bands, including frequency bands segmentation and band spectrum sharing, or other modifications concerning the regulation of frequency bands, could significantly disrupt or degrade the utility and reliability of John Deeres GPS-based products, which could negatively affect John Deeres ability to develop and market GPS-based technology solutions. For John Deeres agricultural customers, the inability to use high-precision augmented GPS signals or other RF signals could result in lower crop yields and higher equipment maintenance, seed, fertilizer, fuel and wage costs. For construction customers, disrupting GPS or RF applications could result in higher fuel and equipment maintenance costs, as well as lower construction design and project management efficiencies. These cost increases could significantly reduce customers profitability and demand for John Deere products.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
See Manufacturing in Item 1.
The equipment operations own or lease nine facilities housing one centralized parts distribution center and eight regional parts depots and distribution centers throughout the U.S. and Canada. These facilities contain approximately 4.7 million square feet of floor space. Outside the U.S. and Canada, the equipment operations also own or lease and occupy buildings housing four centralized parts distribution centers in Brazil, Germany, India and Russia and regional parts depots and distribution centers in Argentina, Australia, China, Mexico, South Africa, Sweden and the United Kingdom. These facilities contain approximately 2.9 million square feet of floor space. John Deere also owns and leases facilities for the manufacture and distribution of other brands of replacement parts containing approximately 1.4 million square feet.
The Companys administrative offices and research facilities, which are owned and leased by John Deere, contain about 3.8 million square feet of floor space globally and miscellaneous other facilities total 4.1 million square feet globally.
Overall, John Deere owns approximately 59.1 million square feet of facilities and leases approximately 15.2 million additional square feet in various locations.
John Deere 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. John Deere believes the reasonably possible range of losses for these unresolved legal actions in addition to the amounts accrued would not have a material effect on its financial statements.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
(a) The Companys common stock is listed on the New York Stock Exchange. See the information concerning quoted prices of the Companys common stock, the number of stockholders and the data on dividends declared and paid per share in Notes 29 and 30 to the Consolidated Financial Statements.
(b) Not applicable.
(c) The Companys purchases of its common stock during the fourth quarter of 2016 were as follows:
ISSUER PURCHASES OF EQUITY SECURITIES
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Maximum |
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|
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Total Number of |
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Number of Shares |
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|
|
|
|
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Shares Purchased |
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that May Yet Be |
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Total Number of |
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as Part of Publicly |
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Purchased under |
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|
|
Shares |
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Average Price |
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Announced Plans |
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the Plans or |
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|
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Purchased |
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Paid Per |
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or Programs (1) |
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Programs (1) |
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Period |
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(thousands) |
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Share |
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(thousands) |
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(millions) |
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|
|
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|
|
|
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Aug 1 to Aug 31 |
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|
|
|
|
|
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37.4 |
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|
|
|
|
|
|
|
|
|
|
Sept 1 to Sept 30 |
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|
|
|
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|
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37.4 |
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|
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|
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Oct 1 to Oct 31 |
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37.4 |
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Total |
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(1) During the fourth quarter of 2016, the Company had a share repurchase plan that was announced in December 2013 to purchase up to $8,000 million of shares of the Companys common stock. The maximum number of shares above that may yet be purchased under the $8,000 million plan was based on the end of the fourth quarter closing share price of $87.17 per share. At the end of the fourth quarter, $3,260 million of common stock remains to be purchased under this plan.
ITEM 6. SELECTED FINANCIAL DATA.
Financial Summary
(Millions of dollars except per share amounts) |
|
2016 |
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2015 |
|
2014 |
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2013 |
|
2012 |
| |||||
For the Year Ended October 31: |
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|
|
|
|
|
|
|
|
|
| |||||
Total net sales and revenues |
|
$ |
26,644 |
|
$ |
28,863 |
|
$ |
36,067 |
|
$ |
37,795 |
|
$ |
36,157 |
|
Net income attributable to Deere & Company |
|
$ |
1,524 |
|
$ |
1,940 |
|
$ |
3,162 |
|
$ |
3,537 |
|
$ |
3,065 |
|
Net income per share basic |
|
$ |
4.83 |
|
$ |
5.81 |
|
$ |
8.71 |
|
$ |
9.18 |
|
$ |
7.72 |
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Net income per share diluted |
|
$ |
4.81 |
|
$ |
5.77 |
|
$ |
8.63 |
|
$ |
9.09 |
|
$ |
7.63 |
|
Dividends declared per share |
|
$ |
2.40 |
|
$ |
2.40 |
|
$ |
2.22 |
|
$ |
1.99 |
|
$ |
1.79 |
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At October 31: |
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|
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|
|
|
|
|
|
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Total assets |
|
$ |
57,981 |
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$ |
57,948 |
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$ |
61,336 |
|
$ |
59,521 |
|
$ |
56,266 |
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Long-term borrowings |
|
$ |
23,760 |
|
$ |
23,833 |
|
$ |
24,381 |
|
$ |
21,578 |
|
$ |
22,453 |
|
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
See the information under the caption Managements Discussion and Analysis on pages 22 31.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to a variety of market risks, including interest rates and currency exchange rates. The Company attempts to actively manage these risks. See the information under Managements Discussion and Analysis beginning on page 22 and in Note 27 to the Consolidated Financial Statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the Consolidated Financial Statements and notes thereto and supplementary data on pages 32 69.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
The Companys principal executive officer and its principal financial officer have concluded that the Companys 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 October 31, 2016, based on the evaluation of these controls and procedures required by Rule 13a-15(b) or 15d-15(b) of the Exchange Act.
Managements Report on Internal Control Over Financial Reporting
The Companys management is responsible for establishing and maintaining adequate internal control over financial reporting. The Companys internal control system was designed to provide reasonable assurance regarding the preparation and fair presentation of published financial statements in accordance with generally accepted accounting principles.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation in accordance with generally accepted accounting principles.
Management assessed the effectiveness of the Companys internal control over financial reporting as of October 31, 2016, using the criteria set forth in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, management believes that, as of October 31, 2016, the Companys internal control over financial reporting was effective.
The Companys independent registered public accounting firm has issued an audit report on the effectiveness of the Companys internal control over financial reporting. That report is included herein.
Not applicable.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information regarding directors in the definitive proxy statement expected to be filed no later than January 13, 2017 (proxy statement), under the captions Election of Directors, and in the second bullet point in the Audit Review Committee item under the caption Board Committees, is incorporated herein by reference. Information regarding executive officers is presented in Item 1 of this report under the caption Executive Officers of the Registrant.
The Company has adopted a code of ethics that applies to its principal executive officer, principal financial officer and principal accounting officer. This code of ethics and the Companys corporate governance policies are posted on the Companys website at http://www.JohnDeere.com. The Company intends to satisfy disclosure requirements regarding amendments to or waivers from its code of ethics by posting such information on this website. The charters of the Audit Review, Corporate Governance, Compensation and Finance committees of the Companys Board of Directors are available on the Companys website as well. This information is also available in print free of charge to any person who requests it.
ITEM 11. EXECUTIVE COMPENSATION.
The information in the proxy statement under the captions Compensation of Directors, Compensation Discussion & Analysis, Compensation Committee Report and Executive Compensation Tables is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
(a) Securities authorized for issuance under equity compensation plans.
Equity compensation plan information in the proxy statement under the caption Equity Compensation Plan Information is incorporated herein by reference.
(b) Security ownership of certain beneficial owners.
The information on the security ownership of certain beneficial owners in the proxy statement under the caption Security Ownership of Certain Beneficial Owners and Management is incorporated herein by reference.
(c) Security ownership of management.
The information on shares of common stock of the Company beneficially owned by, and under option to (i) each director, (ii) certain named executive officers and (iii) the directors and officers as a group, contained in the proxy statement under the captions Security Ownership of Certain Beneficial Owners and Management and Executive Compensation Tables - Outstanding Equity Awards at Fiscal 2016 Year-End is incorporated herein by reference.
(d) Change in control.
None.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information in the proxy statement under the captions Our Values, Director Independence and Review and Approval of Related Person Transactions is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information in the proxy statement under the caption Fees Paid to the Independent Registered Public Accounting Firm is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
See the "Index to Exhibits" on pages 74 - 76 of this report
Certain instruments relating to long-term borrowings, constituting less than 10 percent of registrant's total assets, are not filed as exhibits herewith pursuant to Item 601(b)4(iii)(A) of Regulation S-K. Registrant agrees to file copies of such instruments upon request of the Commission.
Financial Statement Schedules Omitted
The following schedules for the Company and consolidated subsidiaries are omitted because of the absence of the conditions under which they are required: I, III, IV and V.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS |
RESULTS OF OPERATIONS FOR THE YEARS ENDED |
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 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
The company's agriculture and turf equipment sales decreased 7 percent in 2016 and are forecast to decrease 1 percent for 2017. Industry agricultural machinery sales in the U.S. and Canada for 2017 are forecast to decrease 5 to 10 percent, compared to 2016. Industry sales in the European Union (EU)28 member nations are forecast to decline approximately 5 percent in 2017, while South American industry sales are projected to increase about 15 percent from 2016 levels. Asian sales are projected to be about the same or increase slightly in 2017. Industry sales of turf and utility equipment in the U.S. and Canada are expected to be approximately the same for 2017. The company's construction and forestry sales decreased 18 percent in 2016 and are forecast to increase about 1 percent in 2017. Global forestry industry sales are expected to be approximately the same in 2017, compared to 2016. Net income of the company's financial services operations attributable to Deere & Company in 2017 is expected to be approximately $480 million.
Items of concern include the uncertainty of the effectiveness of governmental actions in respect to monetary and fiscal policies, the global economic recovery, the impact of sovereign debt, eurozone issues, capital market disruptions, trade agreements, 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. Designing and producing products with engines that continue to meet high performance standards and increasingly stringent emissions regulations is one of the company's major priorities.
The company completed a successful year in spite of continuing weakness in the global agricultural and construction equipment sectors. The results reflect adept execution of the operating plans and disciplined cost management as well as the impact of a broad product portfolio. The forecast calls for lower results in
2017, but the outlook is considerably better than in earlier downturns with a more durable business model and a focus on further efficiency gains. The company remains in a strong position to carry out its growth plans and attract new customers throughout the world. The company is confident in the present direction and believes it will provide value to customers and investors in the future.
2016 COMPARED WITH 2015 |
CONSOLIDATED RESULTS
Worldwide net income attributable to Deere & Company in 2016 was $1,524 million, or $4.81 per share diluted ($4.83 basic), compared with $1,940 million, or $5.77 per share diluted ($5.81 basic), in 2015. Worldwide net sales and revenues decreased 8 percent to $26,644 million in 2016, compared with $28,863 million in 2015. Net sales of the worldwide equipment operations declined 9 percent in 2016 to $23,387 million from $25,775 million last year. Sales included price realization of 2 percent and an unfavorable currency translation effect of 2 percent. Equipment net sales in the United States and Canada decreased 13 percent for 2016. Outside the U.S. and Canada, net sales decreased 3 percent for the year, with an unfavorable currency translation effect of 4 percent for 2016.
Worldwide equipment operations had an operating profit of $1,880 million in 2016, compared with $2,177 million in 2015. The operating profit decline was primarily on account of reduced shipment volumes, the unfavorable effects of foreign currency exchange and a less favorable product mix, partially offset by price realization, lower production costs, lower selling, administrative and general expenses and a gain on the sale of a partial interest in the unconsolidated affiliate SiteOne Landscape Supply, Inc. (SiteOne) (see Note 5).
Net income of the company's equipment operations was $1,058 million for 2016, compared with $1,308 million in 2015. In addition to the operating factors mentioned above, a higher effective tax rate in 2016 reduced net income.
Net income of the financial services operations attributable to Deere & Company in 2016 decreased to $468 million, compared with $633 million in 2015. The decline was primarily due to less favorable financing spreads, higher losses on lease residual values (see Note 5), and a higher provision for credit losses. Prior year results benefited from a gain on the sale of the crop insurance business (see Note 4). Additional information is presented in the following discussion of the "Worldwide Financial Services Operations."
The cost of sales to net sales ratio for 2016 was 78.0 percent, compared with 78.1 percent last year. The decrease was due primarily to price realization and lower production costs, largely offset by the unfavorable effects of foreign currency exchange and the impact of a less favorable product mix.
Finance and interest income increased in 2016 due to a larger average leasing portfolio, partially offset by a lower average financing receivables portfolio. Other income increased due primarily to a gain on the sale of a partial interest in SiteOne (see Note 5) and was primarily offset by the gain on the sale of the Crop Insurance operations in 2015 (see Note 4). Research and development costs decreased largely due to a lower level of activity and the favorable effects of currency translation. Selling, administrative and general expenses decreased due primarily to
22
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lower pension and postretirement benefit expenses, lower incentive compensation expense and the favorable effects of currency translation, partially offset by a higher provision for credit losses. Interest expense increased due to higher average interest rates, partially offset by lower average borrowings. Other operating expenses increased primarily due to higher depreciation of equipment on operating leases, and higher losses and impairments on lease residual values.
The company has several defined benefit pension plans and defined benefit health care and life insurance plans. The company's postretirement benefit costs for these plans in 2016 were $312 million, compared with $512 million in 2015. The long-term expected return on plan assets, which is reflected in these costs, was an expected gain of 7.3 percent in 2016 and 2015, or $810 million in 2016 and $824 million in 2015. The actual return was a gain of $645 million in 2016 and $606 million in 2015. In 2017, the expected return will be approximately 7.2 percent. The company's postretirement costs in 2017 are expected to increase approximately $30 million. The company makes any required contributions to the plan assets under applicable regulations and voluntary contributions from time to time based on the company's liquidity and ability to make tax-deductible contributions. Total company contributions to the plans were $127 million in 2016 and $131 million in 2015, which include direct benefit payments for unfunded plans. These contributions also included voluntary contributions to plan assets of $3 million in both 2016 and 2015. Total company contributions in 2017 are expected to be approximately $97 million, which are primarily direct benefit payments for unfunded plans. The company has no significant required contributions to U.S. pension plan assets in 2017 under applicable funding regulations. See the discussion in "Critical Accounting Policies" for more information about postretirement benefit obligations.
BUSINESS SEGMENT AND GEOGRAPHIC AREA RESULTS
The following discussion relates to operating results by reportable segment and geographic area. Operating profit is income before certain external interest expense, certain foreign exchange gains or losses, income taxes and corporate expenses. However, operating profit of the financial services segment includes the effect of interest expense and foreign currency exchange gains or losses.
Worldwide Agriculture and Turf Operations
The agriculture and turf segment had an operating profit of $1,700 million for the year, compared with $1,649 million in 2015. Net sales decreased 7 percent in 2016 due to lower shipment volumes and the unfavorable effects of currency translation, partially offset by price realization. Operating profit was higher primarily due to price realization, lower production costs, lower selling, administrative and general expenses and a gain on the sale of a partial interest in SiteOne (see Note 5), partially offset by lower shipment volumes, unfavorable effects of foreign currency exchange and a less favorable product mix.
Worldwide Construction and Forestry Operations
The construction and forestry segment had an operating profit of $180 million in 2016, compared with $528 million in 2015. Net sales decreased 18 percent for the year largely as a result of lower shipment volumes and higher sales incentive costs. Operating profit declined primarily due to lower shipment volumes and higher sales incentive costs, partially offset by a
reduction in both selling, administrative and general expenses and production costs.
Worldwide Financial Services Operations
The operating profit of the financial services segment was $709 million in 2016, compared with $963 million in 2015. The decline was primarily due to less favorable financing spreads, higher losses on lease residual values and a higher provision for credit losses. Additionally, full year results in 2015 benefited from a gain on the sale of the crop insurance business (see Note 4). Total revenues of the financial services operations, including intercompany revenues, increased 4 percent in 2016. The average balance of receivables and leases financed was 1 percent lower in 2016, compared with 2015. Interest expense increased 18 percent in 2016 as a result of higher average borrowing rates, partially offset by lower average borrowings. The financial services operations' ratio of earnings to fixed charges was 2.35 to 1 in 2016, compared with 3.29 to 1 in 2015.
Equipment Operations in U.S. and Canada
The equipment operations in the U.S. and Canada had an operating profit of $1,305 million in 2016, compared with $1,643 million in 2015. The decline was due primarily to lower shipment volumes, the unfavorable effects of foreign currency exchange and the impact of a less favorable product mix. The decline was partially offset by price realization, lower production costs, lower selling, administrative and general expenses and a gain on the sale of a partial interest in SiteOne (see Note 5). Net sales decreased 13 percent due primarily to lower shipment volumes partially offset by price realization. The physical volume of sales decreased 14 percent, compared with 2015.
Equipment Operations outside U.S. and Canada
The equipment operations outside the U.S. and Canada had an operating profit of $575 million in 2016, compared with $534 million in 2015. The increase was due primarily to price realization, lower production costs and lower selling, administrative and general expenses, partially offset by the unfavorable effects of foreign currency exchange, the impact of a less favorable product mix and lower shipment volumes. Net sales were 3 percent lower primarily reflecting the unfavorable effects of foreign currency translation and decreased shipment volumes, partially offset by price realization. The physical volume of sales decreased 2 percent, compared with 2015.
MARKET CONDITIONS AND OUTLOOK
Company equipment sales are projected to decrease 1 percent for fiscal year 2017 and decrease about 4 percent for the first quarter, compared with the same periods in 2016. Included in the forecast is a positive foreign currency translation effect of about 1 percent for the year and about 2 percent for the quarter. For fiscal year 2017, net income attributable to Deere & Company is anticipated to be about $1.4 billion. In fiscal December 2016, the company sold a portion of its interest in SiteOne (see Note 30) resulting in a gain of $105 million pretax or $66 million after-tax. This gain is not included in the fiscal year 2017 net income forecast above.
During the fourth quarter of 2016, the company announced voluntary employee separation programs as part of its effort to reduce operating costs. The expense of these programs is recorded in the period in which employees accept their separation offer. Total pretax expenses related to the programs are estimated to be $111 million, of which $11 million was
23
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recorded in the fourth quarter of 2016, and $100 million will be recorded primarily in the first quarter of 2017. Savings from the separation programs are expected to be approximately $70 million in 2017.
Agriculture and Turf. The company's worldwide sales of agriculture and turf equipment are forecast to decrease by about 1 percent for fiscal year 2017, including a positive currency translation effect of about 1 percent. Industry sales for agricultural equipment in the U.S. and Canada are forecast to be down 5 to 10 percent for 2017. The decline, which reflects the continuing impact of low commodity prices and weak farm incomes, is expected to be felt in the sale of both large and small models of equipment. Full year 2017 industry sales in the EU28 member nations are forecast to decline about 5 percent, with the decline attributable to low commodity prices and farm incomes. South American industry sales of tractors and combines are projected to increase about 15 percent as a result of improving economic and political conditions in Brazil and Argentina. Asian sales are projected to be about the same to up slightly, benefiting from higher sales in India. Industry sales of turf and utility equipment in the U.S. and Canada are expected to be about the same for 2017, with company sales outpacing the industry.
Construction and Forestry. The company's worldwide sales of construction and forestry equipment are forecast to increase about 1 percent for 2017, including a positive currency translation effect of about 1 percent. The forecast reflects the impact of generally slow economic growth worldwide. In forestry, global industry sales are expected to be about the same as in 2016 with some moderation in the North American market.
Financial Services. Fiscal year 2017 net income attributable to Deere & Company for the financial services operations is expected to be approximately $480 million. The outlook reflects lower losses on lease residual values, partially offset by less favorable financing spreads and an increased 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, 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 environmental regulations and their impact on farming practices; changes in and effects of crop insurance programs, global trade agreements, animal
diseases and their effects on poultry, beef and pork consumption and prices, crop pests and diseases, and the level of farm product exports (including concerns about genetically modified organisms).
Factors affecting the outlook for the company's turf and utility equipment include consumer confidence, weather conditions, customer profitability, consumer borrowing patterns, consumer purchasing preferences, housing starts, infrastructure investment, spending by municipalities and golf courses, and consumable input costs.
Consumer spending patterns, real estate and housing prices, the number of housing starts, interest rates and the levels of public and non-residential construction are important to sales and results of the company's construction and forestry equipment. Prices for pulp, paper, lumber and structural panels are important to sales of forestry equipment.
All of the company's businesses and its results are affected by general economic conditions in the global markets and industries in which the company operates; customer confidence in general economic conditions; government spending and taxing; foreign currency exchange rates and their volatility, especially fluctuations in the value of the U.S. dollar; interest rates; 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 potential 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
24
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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; 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 regulations; changes to accounting standards; changes in tax rates, estimates, and regulations and company actions related thereto; 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 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 to comply with laws, regulations and company policy pertaining to employment, human rights, health, safety, the environment 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; labor relations and contracts; acquisitions and divestitures of businesses; the integration of new businesses; the implementation of organizational changes; difficulties related to the conversion and implementation of enterprise resource planning systems; security breaches 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.
2015 COMPARED WITH 2014 |
CONSOLIDATED RESULTS
Worldwide net income attributable to Deere & Company in 2015 was $1,940 million, or $5.77 per share diluted ($5.81 basic), compared with $3,162 million, or $8.63 per share diluted ($8.71 basic), in 2014. Net sales and revenues decreased 20 percent to $28,863 million in 2015, compared with $36,067 million in 2014. Net sales of the worldwide equipment operations declined 22 percent in 2015 to $25,775 million from $32,961 million in 2014. 2015 sales included price realization of 1 percent and an unfavorable currency translation effect of 5 percent. Equipment net sales in the United States and Canada decreased 18 percent in 2015. Outside the U.S. and Canada, net sales decreased 28 percent in 2015, with an unfavorable currency translation effect of 10 percent.
Worldwide equipment operations had an operating profit of $2,177 million in 2015, compared with $4,297 million in 2014. The operating profit decline was due primarily to lower shipment volumes, the impact of a less favorable product mix and the unfavorable effects of foreign currency exchange. These factors were partially offset by price realization, lower selling, administrative and general expenses and lower production costs.
Net income of the company's equipment operations was $1,308 million for 2015, compared with $2,548 million in 2014. In addition to the operating factors mentioned above, a lower effective tax rate benefited the results. The lower rate resulted mainly from a reduction of a valuation allowance recorded during the fourth quarter of 2015 due to a change in the expected realizable value of a deferred tax asset.
Net income of the financial services operations attributable to Deere & Company in 2015 increased to $633 million, compared with $624 million in 2014. Results improved due to growth in the average credit portfolio, the previously announced crop insurance sale and higher crop insurance margins experienced prior to divestiture (see Note 4), and lower selling, administrative and general expenses. These factors were partially offset by the unfavorable effects of foreign currency exchange translation, less favorable financing spreads and higher losses on residual values primarily for construction equipment operating leases. The results in 2014 also benefited from a more favorable effective tax rate. Additional information is presented in the
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following discussion of the "Worldwide Financial Services Operations."
The cost of sales to net sales ratio for 2015 was 78.1 percent, compared with 75.2 percent in 2014. The increase was due primarily to the impact of a less favorable product mix and the unfavorable effects of foreign currency exchange, partially offset by price realization and lower production costs.
Finance and interest income increased in 2015 due to a larger average credit portfolio, partially offset by lower average financing rates and the unfavorable effects of currency translation. Other income decreased due primarily to a reduction in crop insurance premiums as a result of the sale of the Crop Insurance operations (see Note 4), partially offset by the gain on the sale of the Crop Insurance operations and higher extended warranty revenue. Research and development costs decreased largely due to the effect of currency translation. Selling, administrative and general expenses decreased mainly due to the effect of currency translation, lower incentive compensation and dealer commission expenses, the sale of the Water and Crop Insurance operations, and the deconsolidation of Landscapes (see Note 4). Interest expense increased due to higher average interest rates and higher average borrowings, partially offset by the favorable effects of currency translation. Other operating expenses decreased primarily due to a reduction in crop insurance claims, the Water operations' impairment and sale in 2014 (see Note 4), the effect of currency translation, partially offset by higher depreciation of equipment on operating leases.
The company has several defined benefit pension plans and defined benefit health care and life insurance plans. The company's postretirement benefit costs for these plans in 2015 were $512 million, compared with $432 million in 2014. The long-term expected return on plan assets, which is reflected in these costs, was an expected gain of 7.3 percent in 2015 and 7.5 percent in 2014, or $824 million in 2015 and $848 million in 2014. The actual return was a gain of $606 million in 2015 and $1,213 million in 2014. Total company contributions to the plans were $131 million in 2015 and $138 million in 2014, which include direct benefit payments for unfunded plans. These contributions also included voluntary contributions to plan assets of $3 million in 2015 and $5 million in 2014.
BUSINESS SEGMENT AND GEOGRAPHIC AREA RESULTS
Worldwide Agriculture and Turf Operations
The agriculture and turf segment had an operating profit of $1,649 million in 2015, compared with $3,649 million in 2014. Net sales decreased 25 percent in 2015 due largely to lower shipment volumes and the unfavorable effects of currency translation. These factors were partially offset by price realization. Lower operating profit was driven primarily by the impact of lower shipment volumes, a less favorable product mix and the unfavorable effects of foreign currency exchange, partially offset by price realization, lower selling, administrative and general expenses, and lower production costs.
Worldwide Construction and Forestry Operations
The construction and forestry segment had an operating profit of $528 million in 2015, compared with $648 million in 2014. Net sales decreased 9 percent in 2015 mainly as a result of lower shipment volumes and the unfavorable effect of currency translation, partially offset by price realization. Operating profit declined mainly due to lower shipment volumes, the unfavorable
effects of foreign exchange and higher production costs, partially offset by price realization and lower selling, administrative and general expenses.
Worldwide Financial Services Operations
The operating profit of the financial services segment was $963 million in 2015, compared with $921 million in 2014. The results improved due to growth in the average credit portfolio, the previously announced Crop Insurance operations sale (see Note 4) and higher crop insurance margins experienced prior to the divestiture, and lower selling, administrative and general expenses. These factors were partially offset by the unfavorable effects of foreign currency exchange translation, less favorable financing spreads and higher losses on residual values primarily for construction equipment operating leases. Total revenues of the financial services operations, including intercompany revenues, were approximately the same in 2015, compared with 2014. The average balance of receivables and leases financed was 1 percent higher in 2015, compared with 2014. Interest expense increased 6 percent in 2015 as a result of higher average borrowings and higher average interest rates. The financial services operations' ratio of earnings to fixed charges was 3.29 to 1 in 2015, compared with 3.37 to 1 in 2014.
Equipment Operations in U.S. and Canada
The equipment operations in the U.S. and Canada had an operating profit of $1,643 million in 2015, compared with $3,311 million in 2014. The decline was due primarily to lower shipment volumes and the impact of a less favorable product mix. The decline was partially offset by price realization. Net sales decreased 18 percent due primarily to lower shipment volumes and the unfavorable effects of currency translation, partially offset by price realization. The physical volume of sales decreased 18 percent, compared with 2014.
Equipment Operations outside U.S. and Canada
The equipment operations outside the U.S. and Canada had an operating profit of $534 million in 2015, compared with $986 million in 2014. The decrease was due primarily to lower shipment volumes, the impact of a less favorable product mix and the unfavorable effects of foreign currency exchange. These factors were partially offset by price realization. Net sales were 28 percent lower primarily reflecting decreased shipment volumes and the unfavorable effects of foreign currency translation, partially offset by price realization. The physical volume of sales decreased 19 percent, compared with 2014.
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 2016 were $3,764 million. This resulted primarily from net income adjusted for non-cash provisions, a decrease in receivables related to sales and a change in net retirement benefits, which were partially offset by a decrease in accounts payable and accrued expenses, and an increase in inventories primarily related to equipment transferred to operating leases (see Note 6). Cash outflows from investing activities were $1,177 million in 2016, due primarily to purchases of property and equipment of $644 million, the cost of receivables
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(excluding receivables related to sales) and cost of equipment on operating leases exceeding the collections of receivables and the proceeds from sales of equipment on operating leases by $398 million and acquisitions of businesses, net of cash acquired, of $199 million, partially offset by proceeds from sales of businesses and unconsolidated affiliates, net of cash sold, of $81 million. Cash outflows from financing activities were $2,401 million in 2016 due primarily to a decrease in borrowings of $1,411 million, dividends paid of $761 million and repurchases of common stock of $205 million. Cash and cash equivalents increased $174 million during 2016.
Over the last three years, operating activities have provided an aggregate of $11,031 million in cash. In addition, increases in borrowings were $3,051 million, proceeds from maturities and sales exceeded purchases of marketable securities by $1,112 million, proceeds from sales of businesses and unconsolidated affiliates were $576 million and proceeds from issuance of common stock (resulting from the exercise of stock options) were $358 million. The aggregate amount of these cash flows was used mainly to repurchase common stock of $5,707 million, acquire receivables (excluding receivables related to sales) and equipment on operating leases that exceeded collections of receivables and the proceeds from sales of equipment on operating leases by $3,998 million, purchase property and equipment of $2,387 million, pay dividends of $2,364 million and acquire businesses of $199 million. Cash and cash equivalents increased $832 million over the three-year period.
The company has access to most global markets at reasonable costs and expects to have sufficient sources of global funding and liquidity to meet its funding needs. The company's exposures to receivables from customers in European countries experiencing economic strains are not significant. 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 October 31, 2016 and 2015 was $1,253 million and $2,968 million, respectively, while the total cash and cash equivalents and marketable securities position was $4,789 million and $4,600 million, respectively. The amount of the total cash and cash equivalents and marketable securities held by foreign subsidiaries, in which earnings are considered indefinitely reinvested, was $2,301 million and $1,588 million at October 31, 2016 and 2015, 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 $7,315 million at October 31, 2016, $5,747 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 October 31, 2016 were long-term credit facility agreements of $2,900 million, expiring in April 2020, and $2,900 million, expiring in April 2021. 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 October 31, 2016 was $9,553 million. Alternatively under this provision, the equipment operations had the capacity to incur additional debt of $17,742 million at October 31, 2016. All of these requirements of the credit agreements have been met during the periods included in the consolidated 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 securities by the rating agencies engaged by the company are as follows:
| | | | | | |
|
Senior Long-Term |
Short-Term | Outlook | |||
| | | | | | |
Fitch Ratings |
A | F1 | Stable | |||
Moody's Investors Service, Inc. |
A2 | Prime-1 | Negative | |||
Standard & Poor's |
A | A-1 | Stable | |||
| | | | | | |
Trade accounts and notes receivable primarily arise from sales of goods to independent dealers. Trade receivables decreased by $40 million in 2016 due primarily to lower shipment volumes in the U.S. and Canada, partially offset by higher fourth quarter agriculture and turf shipment volumes outside the U.S. and Canada. The ratio of trade accounts and notes receivable at October 31 to fiscal year net sales was 13 percent in 2016 and 12 percent in 2015. Total worldwide agriculture and turf receivables increased $160 million and construction and forestry receivables decreased $200 million. The collection period for trade receivables averages less than 12 months. The percentage of trade receivables outstanding for a period exceeding 12 months was 2 percent at October 31, 2016 and 1 percent at October 31, 2015.
Deere & Company's stockholders' equity was $6,520 million at October 31, 2016, compared with $6,743 million at October 31, 2015. The decrease of $223 million resulted from a change in the retirement benefits adjustment of $908 million, dividends declared of $757 million and an increase in treasury stock of $180 million, which were partially offset by net income attributable to Deere & Company of $1,524 million and an increase in common stock of $86 million.
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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 during 2016, including intercompany cash flows, was $2,906 million due primarily to net income adjusted for non-cash provisions, a decrease in inventories and a change in net retirement benefits, partially offset by an increase in trade receivables and a decrease in accounts payable and accrued expenses.
Over the last three years, these operating activities, including intercompany cash flows, have provided an aggregate of $10,494 million in cash.
Trade receivables held by the equipment operations increased by $169 million during 2016. The equipment operations sell a significant portion of their trade receivables to financial services (see previous consolidated discussion).
Inventories decreased by $477 million in 2016 due primarily to lower production volumes, partially offset by acquisitions (see Note 4) and currency translation. Most 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 15), which approximates current cost, to fiscal year cost of sales were 26 percent at both October 31, 2016 and 2015.
Total interest-bearing debt of the equipment operations was $4,835 million at the end of 2016, compared with $4,925 million at the end of 2015 and $5,077 million at the end of 2014. The ratio of total debt to total capital (total interest-bearing debt and stockholders' equity) at the end of 2016, 2015 and 2014 was 43 percent, 42 percent and 36 percent, respectively.
Property and equipment cash expenditures for the equipment operations in 2016 were $642 million, compared with $688 million in 2015. Capital expenditures in 2017 are estimated to be $600 million.
In November 2015, the company announced the signing of a definitive purchase agreement to acquire Precision Planting LLC., a developer and distributor of retrofit components for precision agriculture applications. The estimated purchase price, net of cash acquired, is $190 million. In August 2016, the U.S. Department of Justice filed a lawsuit to block the acquisition, which the company plans to contest. As a result of this development, the closing date for this transaction is uncertain.
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.
The cash provided by operating activities was used for financing and investing activities. Cash flows from the financial services' operating activities, including intercompany cash flows, were $1,861 million in 2016. Cash used by investing activities totaled $826 million in 2016 due primarily to the cost of receivables
(excluding trade and wholesale) and cost of equipment on operating leases exceeding collections of these receivables and the proceeds from sales of equipment on operating leases by $1,316 million, partially offset by a decrease in trade receivables and wholesale notes of $493 million. Cash used for financing activities totaled $1,110 million in 2016, representing primarily a decrease in external borrowings of $1,304 million and dividends paid of $562 million to Deere & Company, partially offset by an increase in borrowings from Deere & Company of $756 million. Cash and cash equivalents decreased $67 million.
Over the last three years, the operating activities, including intercompany cash flows, have provided $4,764 million in cash. In addition, an increase in total borrowings of $4,173 million, a decrease in trade receivables and wholesale notes of $368 million, proceeds from sales of businesses, net of cash sold, of $149 million and a capital investment from Deere & Company of $122 million provided cash inflows. These amounts have been used mainly to fund receivables (excluding trade and wholesale) and equipment on operating lease acquisitions, which exceeded collections and the proceeds from sales of equipment on operating leases by $7,208 million, pay dividends to Deere & Company of $1,392 million and purchase marketable securities that exceeded proceeds from maturities and sales by $47 million. Cash and cash equivalents increased $715 million over the three-year period.
Receivables and equipment on operating leases decreased by $66 million in 2016, compared with 2015. Total acquisition volumes of receivables (excluding trade and wholesale notes) and cost of equipment on operating leases decreased 5 percent in 2016, compared with 2015. The volumes of retail notes and financing leases decreased approximately 13 percent and 3 percent, respectively, while operating lease and revolving charge accounts volumes increased 7 percent and 3 percent, respectively. During 2016, the amount of trade receivables and wholesale notes decreased 7 percent and 5 percent, respectively. At October 31, 2016 and 2015, net receivables and leases administered, which include receivables administered but not owned, were $38,116 million and $38,188 million, respectively.
Total external interest-bearing debt of the financial services operations was $30,839 million at the end of 2016, compared with $31,925 million at the end of 2015 and $31,882 million at the end of 2014. Total external borrowings have changed generally corresponding with the level of the 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 total interest-bearing debt to total stockholder's equity was 7.6 to 1 at the end of 2016, 7.6 to 1 at the end of 2015 and 7.4 to 1 at the end of 2014.
The Capital Corporation has a revolving credit agreement to utilize bank conduit facilities to securitize retail notes (see Note 13). At October 31, 2016, the facility had a total capacity, or "financing limit," of up to $3,880 million of secured financings at any time. The facility was renewed in November 2016 with a capacity of $3,500 million. 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 October 31, 2016, $2,344 million of short-term securitization borrowings was outstanding under the agreement.
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During 2016, the financial services operations issued $3,187 million and retired $2,774 million of retail note securitization borrowings. During 2016, the financial services operations also issued $4,897 million and retired $5,195 million of long-term borrowings, which were primarily medium-term notes.
OFF-BALANCE-SHEET ARRANGEMENTS |
At October 31, 2016, the company had approximately $152 million of guarantees issued primarily to banks outside the U.S. related to third-party receivables for the retail financing of John Deere equipment. The company may recover a portion of any required payments incurred under these agreements from repossession of the equipment collateralizing the receivables. The maximum remaining term of the receivables guaranteed at October 31, 2016 was approximately four years.
AGGREGATE CONTRACTUAL OBLIGATIONS |
The payment schedule for the company's contractual obligations at October 31, 2016 in millions of dollars is as follows:
| | | | | | | | | | | | |||||||||
|
| Total | | Less than 1 year | | 2&3 years |
| 4&5 years |
| More than 5 years |
| |||||||||
| | | | | | | | | | | | |||||||||
On-balance-sheet |
| | | | | | | | | | ||||||||||
Debt* |
| | | | | | | | | | ||||||||||
Equipment operations |
| $ | 4,848 | | $ | 249 | | $ | 955 | | | $ | 32 | | | | $ | 3,612 | | |
Financial services** |
| 30,597 | | 9,389 | | 12,318 | | | 5,253 | | | | 3,637 | | | |||||
| | | | | | | | | | | | | | | | |||||
Total |
| 35,445 | | 9,638 | | 13,273 | | | 5,285 | | | | 7,249 | | | |||||
Interest relating to debt*** |
| 4,384 | | 719 | | 1,026 | | | 659 | | | | 1,980 | | | |||||
Accounts payable |
| 2,478 | | 2,339 | | 104 | | | 32 | | | | 3 | | | |||||
Capital leases |
| 34 | | 18 | | 11 | | | 4 | | | | 1 | | | |||||
Off-balance-sheet |
| | | | | | | | | | ||||||||||
Purchase obligations |
| 1,969 | | 1,902 | | 21 | | | 20 | | | | 26 | | | |||||
Operating leases |
| 392 | | 101 | | 137 | | | 86 | | | | 68 | | | |||||
| | | | | | | | | | | | | | | | |||||
Total |
| $ | 44,702 | | $ | 14,717 | | $ | 14,572 | | | $ | 6,086 | | | | $ | 9,327 | | |
| | | | | | | | | | | | | | | | |||||
| | | | | | | | | | | | | | | | |||||
| | | | | | | | | | | | | | | |
The previous table does not include unrecognized tax benefit liabilities of approximately $198 million at October 31, 2016, since the timing of future payments is not reasonably estimable at this time (see Note 8). For additional information regarding pension and other postretirement employee benefit obligations, short-term borrowings, long-term borrowings and lease obligations, see Notes 7, 18, 20 and 21, respectively.
CRITICAL ACCOUNTING POLICIES |
The preparation of the company's consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect reported amounts of assets, liabilities, revenues and expenses. Changes in these estimates and assumptions could have a significant effect on the financial statements. The accounting policies below are those management believes are the most critical to the preparation of the company's financial statements and require the most difficult, subjective or complex judgments. The company's other accounting policies are described in the Notes to the Consolidated Financial Statements.
Sales Incentives
At the time a sale to a dealer is recognized, the company records an estimate of the future sales incentive costs for allowances and financing programs that will be due when the dealer sells the equipment to a retail customer. The estimate is based on historical data, announced incentive programs, field inventory levels and retail sales volumes. The final cost of these programs and the amount of accrual required for a specific sale are fully determined when the dealer sells the equipment to the retail customer. This is due to numerous programs available at any particular time and new programs that may be announced after the company records the sale. Changes in the mix and types of programs affect these estimates, which are reviewed quarterly.
The sales incentive accruals at October 31, 2016, 2015 and 2014 were $1,391 million, $1,463 million and $1,573 million, respectively. The decreases in 2016 and 2015 were due primarily to lower sales volumes.
The estimation of the sales incentive accrual is impacted by many assumptions. One of the key assumptions is the historical percent of sales incentive costs to retail sales from dealers. Over the last five fiscal years, this percent has varied by an average of approximately plus or minus 1.3 percent, compared to the average sales incentive costs to retail sales percent during that period. Holding other assumptions constant, if this estimated cost experience percent were to increase or decrease 1.3 percent, the sales incentive accrual at October 31, 2016 would increase or decrease by approximately $86 million.
Product Warranties
At the time a sale to a dealer is recognized, the company records the estimated future warranty costs. 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 consideration of current quality developments. Variances in claims experience and the type of warranty programs affect these estimates, which are reviewed quarterly.
The product warranty accruals, excluding extended warranty unamortized premiums, at October 31, 2016, 2015 and 2014 were $779 million, $807 million and $809 million, respectively. The changes were due primarily to lower sales volumes in 2016 and 2015.
Estimates used to determine the product warranty accruals are significantly affected by the historical percent of warranty claims costs to sales. Over the last five fiscal years, this percent has varied by an average of approximately plus or minus .13 percent, compared to the average warranty costs to sales percent during that period. Holding other assumptions constant, if this estimated cost experience percent were to increase or decrease .13 percent, the warranty accrual at October 31, 2016 would increase or decrease by approximately $35 million.
Postretirement Benefit Obligations
Pension obligations and other postretirement employee benefit (OPEB) obligations are based on various assumptions used by the company's actuaries in calculating these amounts. These assumptions include discount rates, health care cost trend rates, expected return on plan assets, compensation increases, retirement rates, mortality rates and other factors. Actual results
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that differ from the assumptions and changes in assumptions affect future expenses and obligations.
The pension liabilities, net of pension assets, recognized on the balance sheet at October 31, 2016, 2015 and 2014 were $1,949 million, $1,022 million and $743 million, respectively. The increase in pension net liabilities in 2016 was due primarily to decreases in discount rates. The increase in pension net liabilities in 2015 was due primarily to interest on the liabilities and updated mortality assumptions based on the Society of Actuaries' RP-2015 base table and MP 2015 projection scale, partially offset by return on plan assets. The OPEB liabilities, net of OPEB assets, at October 31, 2016, 2015 and 2014 were $6,065 million, $5,395 million and $5,347 million, respectively. The increase in OPEB net liabilities in 2016 was due primarily to decreases in discount rates and interest on the liabilities. The increase in OPEB net liabilities in 2015 was due primarily to interest on the liabilities and a change in the health care cost trend, primarily related to higher prescription drug costs, partially offset by the transition to a Medicare Advantage plan for certain retirees (see Note 7).
In 2016, the company changed the method used to estimate the service and interest cost components of the net periodic pension and postretirement benefits cost. The new method uses the spot yield curve approach to estimate the service and interest cost by applying the specific spot rates along the yield curve used to determine the benefit plan obligations to relevant projected cash outflows. Prior to 2016, the service and interest cost components were determined using a single weighted-average discount rate. The change does not affect the measurement of the total benefit plan obligations as the change in service and interest cost offsets in the actuarial gains and losses recorded in other comprehensive income.
The company changed to the new method to provide a more precise measure of service and interest cost by improving the correlation between the projected benefit cash flows and the discrete spot yield curve rates. The company accounted for this change as a change in estimate prospectively beginning in 2016.
The effect of hypothetical changes to selected assumptions on the company's major U.S. retirement benefit plans would be as follows in millions of dollars:
| | | | | | | | ||||||
|
| | October 31, 2016 |
| 2017 |
| |||||||
Assumptions |
| Percentage Change |
| Increase (Decrease) PBO/APBO* |
| Increase (Decrease) Expense |
| ||||||
| | | | | | | | ||||||
Pension |
| | | | | | | | |||||
Discount rate** |
| +/-.5 | | | $ | (698)/789 | | | | $ | (32)/36 | | |
Expected return on assets |
| +/-.5 | | | | | | (49)/49 | | | |||
OPEB |
| | | | | | | | |||||
Discount rate** |
| +/-.5 | | | (379)/420 | | | | (14)/15 | | | ||
Expected return on assets |
| +/-.5 | | | | | | (1)/1 | | | |||
Health care cost |
| +/-1.0 | | | 854/(656) | | | | 98/(76) | | |
Goodwill
Goodwill is not amortized and is tested for impairment annually and when events or circumstances change such that it is more
likely than not that the fair value of a reporting unit is reduced below its carrying amount. The end of the fiscal third quarter is the annual measurement date. To test for goodwill impairment, the carrying value of each reporting unit is compared with its fair value. If the carrying value of the goodwill is considered impaired, a loss is recognized based on the amount by which the carrying value exceeds the implied fair value of the goodwill.
An estimate of the fair value of the reporting unit is determined through a combination of comparable market values for similar businesses and discounted cash flows. These estimates can change significantly based on such factors as the reporting unit's financial performance, economic conditions, interest rates, growth rates, pricing, changes in business strategies and competition.
Based on this testing, the company has not identified a reporting unit for which the goodwill was impaired in 2016, 2015 or 2014. A 10 percent decrease in the estimated fair value of the company's reporting units would have had no impact on the carrying value of goodwill at the annual measurement date in 2016.
Allowance for Credit Losses
The allowance for credit losses represents an estimate of the losses inherent in the company's receivable portfolio. The level of the allowance is based on many quantitative and qualitative factors, including historical loss experience by product category, portfolio duration, delinquency trends, economic conditions and credit risk quality. The adequacy of the allowance is assessed quarterly. Different assumptions or changes in economic conditions would result in changes to the allowance for credit losses and the provision for credit losses.
The total allowance for credit losses at October 31, 2016, 2015 and 2014 was $226 million, $198 million and $230 million, respectively. The allowance increased in 2016 compared to 2015 due to higher write-offs, and decreased in 2015 compared to 2014, due primarily to foreign currency translation.
The assumptions used in evaluating the company's exposure to credit losses involve estimates and significant judgment. The historical loss experience on the receivable portfolio represents one of the key assumptions involved in determining the allowance for credit losses. Over the last five fiscal years, this percent has varied by an average of approximately plus or minus .06 percent, compared to the average loss experience percent during that period. Holding other assumptions constant, if this estimated loss experience on the receivable portfolio were to increase or decrease ..06 percent, the allowance for credit losses at October 31, 2016 would increase or decrease by approximately $19 million.
Operating Lease Residual Values
The carrying value of equipment on operating leases is affected by the estimated fair values of the equipment at the end of the lease (residual values). Upon termination of the lease, the equipment is either purchased by the lessee or sold to a third party, in which case the company may record a gain or a loss for the difference between the estimated residual value and the sales price. The residual values are dependent on current economic conditions and are reviewed when events or circumstances necessitate an evaluation. Changes in residual value assumptions would affect the amount of depreciation
30
|
expense and the amount of investment in equipment on operating leases.
The total operating lease residual values at October 31, 2016, 2015 and 2014 were $4,347 million, $3,603 million and $2,786 million, respectively. The changes in 2016 and 2015 were due primarily to the increasing levels of operating leases.
Estimates used in determining end of lease market values for equipment on operating leases significantly impact the amount and timing of depreciation expense. Hypothetically, if future market values for this equipment were to decrease 10 percent from the company's present estimates, the total impact would be to increase the company's annual depreciation for equipment on operating leases by approximately $200 million.
Income Taxes
The company's income tax provision, deferred income tax assets and liabilities, and liabilities for uncertain tax benefits represent the company's best estimate of current and future income taxes to be paid. The annual tax rate is based on income tax laws, statutory tax rates, taxable income levels and tax planning opportunities available in various jurisdictions where the company operates. These tax laws are complex, and require significant judgement to determine the consolidated provision for income taxes. Changes in tax laws, statutory tax rates and estimates of the company's future taxable income levels could result in actual realization of deferred taxes being materially different from amounts provided for in the consolidated financial statements.
Deferred income taxes represent temporary differences between the tax and the financial reporting basis of assets and liabilities, which will result in taxable or deductible amounts in the future. Deferred tax assets also include loss carryforwards and tax credits. These assets are regularly assessed for the likelihood of recoverability from estimated future taxable income, reversal of deferred tax liabilities and tax planning strategies. To the extent the company determines that it is more likely than not a deferred income tax asset will not be realized, a valuation allowance is established. The recoverability analysis of the deferred income tax assets and the related valuation allowances requires significant judgement and relies on estimates.
Uncertain tax positions are determined based on whether it is more likely than not the tax positions will be sustained based on the technical merits of the position. For those positions that meet the more likely than not criteria, an estimate of the largest amount of tax benefit that is greater than 50 percent likely to be realized upon ultimate settlement with the related tax authority is recognized. The ultimate resolution of the tax position could take many years and result in a payment that is significantly different than the original estimate.
A provision for U.S. income taxes or foreign withholding taxes has not been recorded on undistributed profits of the company's non-U.S. subsidiaries that are not currently taxable in the U.S. and that are determined to be indefinitely reinvested outside the U.S. If management intentions or U.S. tax law changes in the future, there may be a significant impact on the provision for income taxes in the period the change occurs. For further information on income taxes, see Note 8 to the consolidated financial statements.
FINANCIAL INSTRUMENT MARKET RISK INFORMATION |
The company is naturally exposed to various interest rate and foreign currency risks. As a result, the company enters into derivative transactions to manage certain of these exposures that arise in the normal course of business and not for the purpose of creating speculative positions or trading. The company's 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. Accordingly, from time to time, these operations enter into interest rate swap agreements to manage their interest rate exposure. The company also has foreign currency exposures at some of its foreign and domestic operations related to buying, selling and financing in currencies other than the functional currencies. The company has entered into agreements related to the management of these foreign currency transaction risks.
Interest Rate Risk
Quarterly, the company uses a combination of cash flow models to assess the sensitivity of its financial instruments with interest rate exposure to changes in market interest rates. The models calculate the effect of adjusting interest rates as follows. Cash flows for financing receivables are discounted at the current prevailing rate for each receivable portfolio. Cash flows for marketable securities are primarily discounted at the applicable benchmark yield curve plus market credit spreads. Cash flows for unsecured borrowings are discounted at the applicable benchmark yield curve plus market credit spreads for similarly rated borrowers. Cash flows for securitized borrowings are discounted at the swap yield curve plus a market credit spread for similarly rated borrowers. Cash flows for interest rate swaps are projected and discounted using forward rates from the swap yield curve at the repricing dates. The net loss in these financial instruments' fair values which would be caused by increasing the interest rates by 10 percent from the market rates at October 31, 2016 would have been approximately $13 million. The net loss from increasing the interest rates by 10 percent at October 31, 2015 would have been approximately $14 million.
Foreign Currency Risk
In the equipment operations, the company's practice is to hedge significant currency exposures. Worldwide foreign currency exposures are reviewed quarterly. Based on the equipment operations' anticipated and committed foreign currency cash inflows, outflows and hedging policy for the next twelve months, the company estimates that a hypothetical 10 percent strengthening of the U.S. dollar relative to other currencies through 2017 would decrease the 2017 expected net cash inflows by approximately $77 million. At October 31, 2015, a hypothetical 10 percent strengthening of the U.S. dollar under similar assumptions and calculations indicated a potential $32 million adverse effect on the 2016 net cash inflows.
In the financial services operations, the company's policy is to hedge the foreign currency risk if the currency of the borrowings does not match the currency of the receivable portfolio. As a result, a hypothetical 10 percent adverse change in the value of the U.S. dollar relative to all other foreign currencies would not have a material effect on the financial services cash flows.
31
DEERE & COMPANY
STATEMENT OF CONSOLIDATED INCOME
For the Years Ended October 31, 2016, 2015 and 2014
(In millions of dollars)
|
2016 | 2015 | 2014 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Net Sales and Revenues |
||||||||||
Net sales |
$ | 23,387.3 | $ | 25,775.2 | $ | 32,960.6 | ||||
Finance and interest income |
2,511.2 | 2,381.1 | 2,282.1 | |||||||
Other income |
745.5 | 706.5 | 824.2 | |||||||
| | | | | | | | | | |
Total |
26,644.0 | 28,862.8 | 36,066.9 | |||||||
| | | | | | | | | | |
Costs and Expenses |
||||||||||
Cost of sales |
18,248.9 | 20,143.2 | 24,775.8 | |||||||
Research and development expenses |
1,389.1 | 1,425.1 | 1,452.0 | |||||||
Selling, administrative and general expenses |
2,763.7 | 2,873.3 | 3,284.4 | |||||||
Interest expense |
763.7 | 680.0 | 664.0 | |||||||
Other operating expenses |
1,254.6 | 961.1 | 1,093.3 | |||||||
| | | | | | | | | | |
Total |
24,420.0 | 26,082.7 | 31,269.5 | |||||||
| | | | | | | | | | |
Income of Consolidated Group before Income Taxes |
2,224.0 |
2,780.1 |
4,797.4 |
|||||||
Provision for income taxes |
700.1 | 840.1 | 1,626.5 | |||||||
| | | | | | | | | | |
Income of Consolidated Group |
1,523.9 |
1,940.0 |
3,170.9 |
|||||||
Equity in income (loss) of unconsolidated affiliates |
(2.4 | ) | .9 | (7.6 | ) | |||||
| | | | | | | | | | |
Net Income |
1,521.5 |
1,940.9 |
3,163.3 |
|||||||
Less: Net income (loss) attributable to noncontrolling interests |
(2.4 | ) | .9 | 1.6 | ||||||
| | | | | | | | | | |
Net Income Attributable to Deere & Company |
$ | 1,523.9 | $ | 1,940.0 | $ | 3,161.7 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Per Share Data |
||||||||||
Basic |
$ | 4.83 | $ | 5.81 | $ | 8.71 | ||||
Diluted |
$ | 4.81 | $ | 5.77 | $ | 8.63 | ||||
Dividends declared |
$ | 2.40 | $ | 2.40 | $ | 2.22 | ||||
Average Shares Outstanding |
||||||||||
Basic |
315.2 | 333.6 | 363.0 | |||||||
Diluted |
316.6 | 336.0 | 366.1 | |||||||
| | | | | | | | | | |
The notes to consolidated financial statements are an integral part of this statement.
32
DEERE & COMPANY
STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME
For the Years Ended October 31, 2016, 2015 and 2014
(In millions of
dollars)
|
2016 | 2015 | 2014 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Net Income |
$ | 1,521.5 | $ | 1,940.9 | $ | 3,163.3 | ||||
| | | | | | | | | | |
Other Comprehensive Income (Loss), Net of Income Taxes |
||||||||||
Retirement benefits adjustment |
(907.6 | ) | (7.7 | ) | (684.4 | ) | ||||
Cumulative translation adjustment |
9.0 | (935.1 | ) | (415.5 | ) | |||||
Unrealized gain (loss) on derivatives |
2.9 | (2.5 | ) | 2.8 | ||||||
Unrealized gain (loss) on investments |
(.9 | ) | (1.5 | ) | 6.9 | |||||
| | | | | | | | | | |
Other Comprehensive Income (Loss), Net of Income Taxes |
(896.6 | ) | (946.8 | ) | (1,090.2 | ) | ||||
| | | | | | | | | | |
Comprehensive Income of Consolidated Group |
624.9 | 994.1 | 2,073.1 | |||||||
Less: Comprehensive income (loss) attributable to noncontrolling interests |
(2.4 | ) | .5 | 1.3 | ||||||
| | | | | | | | | | |
Comprehensive Income Attributable to Deere & Company |
$ | 627.3 | $ | 993.6 | $ | 2,071.8 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
The notes to consolidated financial statements are an integral part of this statement.
33
DEERE & COMPANY
CONSOLIDATED BALANCE SHEET
As of October 31, 2016 and 2015
(In millions of dollars except per share amounts)
|
2016 | 2015 | |||||
---|---|---|---|---|---|---|---|
ASSETS |
|||||||
Cash and cash equivalents |
$ | 4,335.8 | $ | 4,162.2 | |||
Marketable securities |
453.5 | 437.4 | |||||
Receivables from unconsolidated affiliates |
16.5 | 33.3 | |||||
Trade accounts and notes receivable net |
3,011.3 | 3,051.1 | |||||
Financing receivables net |
23,702.3 | 24,809.0 | |||||
Financing receivables securitized net |
5,126.5 | 4,834.6 | |||||
Other receivables |
1,018.5 | 991.2 | |||||
Equipment on operating leases net |
5,901.5 | 4,970.4 | |||||
Inventories |
3,340.5 | 3,817.0 | |||||
Property and equipment net |
5,170.6 | 5,181.5 | |||||
Investments in unconsolidated affiliates |
232.6 | 303.5 | |||||
Goodwill |
815.7 | 726.0 | |||||
Other intangible assets net |
104.1 | 63.6 | |||||
Retirement benefits |
93.6 | 215.6 | |||||
Deferred income taxes |
2,964.4 | 2,767.3 | |||||
Other assets |
1,694.0 | 1,583.9 | |||||
| | | | | | | |
Total Assets |
$ | 57,981.4 | $ | 57,947.6 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY |
|||||||
LIABILITIES |
|||||||
Short-term borrowings |
$ | 6,912.2 | $ | 8,426.6 | |||
Short-term securitization borrowings |
5,002.5 | 4,590.0 | |||||
Payables to unconsolidated affiliates |
81.6 | 80.6 | |||||
Accounts payable and accrued expenses |
7,240.1 | 7,311.5 | |||||
Deferred income taxes |
166.0 | 160.8 | |||||
Long-term borrowings |
23,759.7 | 23,832.8 | |||||
Retirement benefits and other liabilities |
8,274.5 | 6,787.7 | |||||
| | | | | | | |
Total liabilities |
51,436.6 | 51,190.0 | |||||
| | | | | | | |
Commitments and contingencies (Note 22) |
|||||||
Redeemable noncontrolling interest (Note 4) |
14.0 | ||||||
STOCKHOLDERS' EQUITY |
|||||||
Common stock, $1 par value (authorized 1,200,000,000 shares; |
3,911.8 | 3,825.6 | |||||
Common stock in treasury, 221,663,380 shares in 2016 and 219,743,893 shares in 2015, at cost |
(15,677.1 | ) | (15,497.6 | ) | |||
Retained earnings |
23,911.3 | 23,144.8 | |||||
Accumulated other comprehensive income (loss) |
(5,626.0 | ) | (4,729.4 | ) | |||
| | | | | | | |
Total Deere & Company stockholders' equity |
6,520.0 | 6,743.4 | |||||
Noncontrolling interests |
10.8 | 14.2 | |||||
| | | | | | | |
Total stockholders' equity |
6,530.8 | 6,757.6 | |||||
| | | | | | | |
Total Liabilities and Stockholders' Equity |
$ | 57,981.4 | $ | 57,947.6 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
The notes to consolidated financial statements are an integral part of this statement.
34
DEERE & COMPANY
STATEMENT OF CONSOLIDATED CASH FLOWS
For the Years Ended October 31, 2016, 2015 and 2014
(In millions of dollars)
|
2016 | 2015 | 2014 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Cash Flows from Operating Activities |
||||||||||
Net income |
$ | 1,521.5 | $ | 1,940.9 | $ | 3,163.3 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||
Provision for credit losses |
94.3 | 55.4 | 38.1 | |||||||
Provision for depreciation and amortization |
1,559.8 | 1,382.4 | 1,306.5 | |||||||
Impairment charges |
85.1 | 34.8 | 95.9 | |||||||
Share-based compensation expense |
70.6 | 66.1 | 78.5 | |||||||
Undistributed earnings of unconsolidated affiliates |
(1.9 | ) | (1.0 | ) | 9.3 | |||||
Provision (credit) for deferred income taxes |
282.7 | (18.4 | ) | (280.1 | ) | |||||
Changes in assets and liabilities: |
||||||||||
Trade, notes and financing receivables related to sales |
335.2 | 811.6 | (749.0 | ) | ||||||
Insurance receivables |
333.4 | (149.9 | ) | |||||||
Inventories |
(106.1 | ) | (691.4 | ) | (297.9 | ) | ||||
Accounts payable and accrued expenses |
(155.2 | ) | (503.6 | ) | (137.1 | ) | ||||
Accrued income taxes payable/receivable |
1.6 | (137.6 | ) | 342.6 | ||||||
Retirement benefits |
238.6 | 427.5 | 336.9 | |||||||
Other |
(161.9 | ) | 40.2 | (231.2 | ) | |||||
| | | | | | | | | | |
Net cash provided by operating activities |
3,764.3 | 3,740.3 | 3,525.9 | |||||||
| | | | | | | | | | |
Cash Flows from Investing Activities |
||||||||||
Collections of receivables (excluding receivables related to sales) |
14,611.4 | 14,919.7 | 15,319.1 | |||||||
Proceeds from maturities and sales of marketable securities |
169.4 | 860.7 | 1,022.5 | |||||||
Proceeds from sales of equipment on operating leases |
1,256.2 | 1,049.4 | 1,091.5 | |||||||
Proceeds from sales of businesses and unconsolidated affiliates, net of cash sold |
81.1 | 149.2 | 345.8 | |||||||
Cost of receivables acquired (excluding receivables related to sales) |
(13,954.5 | ) | (14,996.5 | ) | (17,240.4 | ) | ||||
Purchases of marketable securities |
(171.2 | ) | (154.9 | ) | (614.6 | ) | ||||
Purchases of property and equipment |
(644.4 | ) | (694.0 | ) | (1,048.3 | ) | ||||
Cost of equipment on operating leases acquired |
(2,310.7 | ) | (2,132.1 | ) | (1,611.0 | ) | ||||
Acquisitions of businesses, net of cash acquired |
(198.5 | ) | ||||||||
Other |
(16.0 | ) | (60.2 | ) | (145.6 | ) | ||||
| | | | | | | | | | |
Net cash used for investing activities |
(1,177.2 | ) | (1,058.7 | ) | (2,881.0 | ) | ||||
| | | | | | | | | | |
Cash Flows from Financing Activities |
||||||||||
Increase (decrease) in total short-term borrowings |
(1,213.6 | ) | 501.6 | 89.2 | ||||||
Proceeds from long-term borrowings |
5,070.7 | 5,711.0 | 8,232.0 | |||||||
Payments of long-term borrowings |
(5,267.6 | ) | (4,863.2 | ) | (5,209.1 | ) | ||||
Proceeds from issuance of common stock |
36.0 | 172.1 | 149.5 | |||||||
Repurchases of common stock |
(205.4 | ) | (2,770.7 | ) | (2,731.1 | ) | ||||
Dividends paid |
(761.3 | ) | (816.3 | ) | (786.0 | ) | ||||
Excess tax benefits from share-based compensation |
5.4 | 18.5 | 30.8 | |||||||
Other |
(64.7 | ) | (72.1 | ) | (63.6 | ) | ||||
| | | | | | | | | | |
Net cash used for financing activities |
(2,400.5 | ) | (2,119.1 | ) | (288.3 | ) | ||||
| | | | | | | | | | |
Effect of Exchange Rate Changes on Cash and Cash Equivalents |
(13.0 | ) | (187.3 | ) | (73.6 | ) | ||||
| | | | | | | | | | |
Net Increase in Cash and Cash Equivalents |
173.6 | 375.2 | 283.0 | |||||||
Cash and Cash Equivalents at Beginning of Year |
4,162.2 | 3,787.0 | 3,504.0 | |||||||
| | | | | | | | | | |
Cash and Cash Equivalents at End of Year |
$ | 4,335.8 | $ | 4,162.2 | $ | 3,787.0 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
The notes to consolidated financial statements are an integral part of this statement.
35
DEERE & COMPANY
STATEMENT OF CHANGES IN CONSOLIDATED STOCKHOLDERS' EQUITY
For the Years Ended October 31, 2014, 2015 and 2016
(In
millions of dollars)
|
|
Total Stockholders' Equity | |
|
||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
Deere & Company Stockholders | |
|
|
|||||||||||||||||||
|
Total Stockholders' Equity |
Common Stock |
Treasury Stock |
Retained Earnings |
Accumulated Other Comprehensive Income (Loss) |
Noncontrolling Interests |
|
Redeemable Noncontrolling Interest |
||||||||||||||||
Balance October 31, 2013 |
$ | 10,267.7 | $ | 3,524.2 | $ | (10,210.9 | ) | $ | 19,645.6 | $ | (2,693.1 | ) | $ | 1.9 | ||||||||||
Net income |
3,163.3 |
3,161.7 |
1.6 |
|||||||||||||||||||||
Other comprehensive loss |
(1,090.2 | ) | (1,089.9 | ) | (.3 | ) | ||||||||||||||||||
Repurchases of common stock |
(2,731.1 | ) | (2,731.1 | ) | ||||||||||||||||||||
Treasury shares reissued |
107.8 | 107.8 | ||||||||||||||||||||||
Dividends declared |
(803.7 | ) | (803.4 | ) | (.3 | ) | ||||||||||||||||||
Stock options and other |
151.7 | 151.2 | .5 | |||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance October 31, 2014 |
9,065.5 | 3,675.4 | (12,834.2 | ) | 22,004.4 | (3,783.0 | ) | 2.9 | ||||||||||||||||
Net income |
1,940.9 |
1,940.0 |
..9 |
|||||||||||||||||||||
Other comprehensive loss |
(946.8 | ) | (946.4 | ) | (.4 | ) | ||||||||||||||||||
Repurchases of common stock |
(2,770.7 | ) | (2,770.7 | ) | ||||||||||||||||||||
Treasury shares reissued |
107.3 | 107.3 | ||||||||||||||||||||||
Dividends declared |
(800.8 | ) | (799.5 | ) | (1.3 | ) | ||||||||||||||||||
Stock options and other |
162.2 | 150.2 | (.1 | ) | 12.1 | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance October 31, 2015 |
6,757.6 | 3,825.6 | (15,497.6 | ) | 23,144.8 | (4,729.4 | ) | 14.2 | ||||||||||||||||
Net income (loss) |
1,521.5 |
1,523.9 |
(2.4 |
) |
||||||||||||||||||||
Other comprehensive loss |
(896.6 | ) | (896.6 | ) | ||||||||||||||||||||
Repurchases of common stock |
(205.4 | ) | (205.4 | ) | ||||||||||||||||||||
Treasury shares reissued |
25.9 | 25.9 | ||||||||||||||||||||||
Dividends declared |
(758.0 | ) | (757.1 | ) | (.9 | ) | ||||||||||||||||||
Acquisition (Note 4) |
$ | 14.0 | ||||||||||||||||||||||
Stock options and other |
85.8 | 86.2 | (.3 | ) | (.1 | ) | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance October 31, 2016 |
$ | 6,530.8 | $ | 3,911.8 | $ | (15,677.1 | ) | $ | 23,911.3 | $ | (5,626.0 | ) | $ | 10.8 | $ | 14.0 | ||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
The notes to consolidated financial statements are an integral part of this statement.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
1. ORGANIZATION AND CONSOLIDATION |
Structure of Operations
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.
Principles of Consolidation
The consolidated financial statements represent primarily the consolidation of all companies in which Deere & Company has a controlling interest. Certain variable interest entities (VIEs) are consolidated since the company has both the power to direct the activities that most significantly impact the VIEs' economic performance and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIEs. Deere & Company records its investment in each unconsolidated affiliated company (generally 20 to 50 percent ownership) at its related equity in the net assets of such affiliate (see Note 10). Other investments (less than 20 percent ownership) are recorded at cost.
Fiscal Year
The company uses a 52/53 week fiscal year ending on the last Sunday in the reporting period. The fiscal year ends for 2016, 2015 and 2014 were October 30, 2016, November 1, 2015 and November 2, 2014, respectively. Fiscal year 2014 contained 53 weeks. For ease of presentation, the consolidated financial statements and notes continue to be dated October 31.
Variable Interest Entities
See Note 13 for VIEs related to securitization of financing receivables.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
The following are significant accounting policies in addition to those included in other notes to the consolidated financial statements.
Use of Estimates in Financial Statements
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.
Revenue Recognition
Sales of equipment and service parts are recorded when the sales price is determinable and the risks and rewards of ownership are transferred to independent parties based on the sales agreements in effect. 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. Accordingly, in these locations, sales are not recorded until a retail customer has purchased the goods. In all cases, when a
sale is recorded by the company, no significant uncertainty exists surrounding the purchaser's obligation to pay. No right of return exists on sales of equipment. Service parts and certain attachments returns are estimable and accrued at the time a sale is recognized. The company makes appropriate provisions based on experience for costs such as doubtful receivables, sales incentives and product warranty.
Financing revenue is recorded over the lives of related receivables using the interest method. Extended warranty premiums recorded in other income are generally recognized in proportion to the costs expected to be incurred over the contract period. Deferred costs on the origination of financing receivables are recognized as a reduction in finance revenue over the expected lives of the receivables using the interest method. Income and deferred costs on the origination of operating leases are recognized on a straight-line basis over the scheduled lease terms in finance revenue.
Sales Incentives
At the time a sale is recognized, the company records an estimate of the future sales incentive costs for allowances and financing programs that will be due when a dealer sells the equipment to a retail customer. The estimate is based on historical data, announced incentive programs, field inventory levels and retail sales volumes.
Product Warranties
At the time a sale is recognized, the company records the estimated future warranty costs. These costs are usually estimated based on historical warranty claims (see Note 22).
Sales 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 may include sales, use, value-added and some excise taxes. The company reports the collection of these taxes on a net basis (excluded from revenues).
Shipping and Handling Costs
Shipping and handling costs related to the sales of the company's equipment are included in cost of sales.
Advertising Costs
Advertising costs are charged to expense as incurred. This expense was $169 million in 2016, $157 million in 2015 and $174 million in 2014.
Depreciation and Amortization
Property and equipment, capitalized software and other intangible assets are generally stated at cost less accumulated depreciation or amortization. These assets are depreciated over their estimated useful lives generally using the straight-line method. Equipment on operating leases is depreciated over the terms of the leases using the straight-line method. Property and equipment expenditures for new and revised products, increased capacity and the replacement or major renewal of significant items are capitalized. Expenditures for maintenance, repairs and minor renewals are generally charged to expense as incurred.
Securitization of Receivables
Certain financing receivables are periodically transferred to special purpose entities (SPEs) in securitization transactions (see
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Note 13). These securitizations qualify as collateral for secured borrowings and no gains or losses are recognized at the time of securitization. The receivables remain on the balance sheet and are classified as "Financing receivables securitized net." The company recognizes finance income over the lives of these receivables using the interest method.
Receivables and Allowances
All financing and trade receivables are reported on the balance sheet at outstanding principal adjusted for any charge-offs, the allowance for credit losses, and any deferred fees or costs on originated financing receivables. Allowances for credit losses are maintained in amounts considered to be appropriate in relation to the receivables outstanding based on collection experience, economic conditions and credit risk quality. Receivables are written-off to the allowance when the account is considered uncollectible.
Impairment of Long-Lived Assets, Goodwill and Other Intangible Assets
The company evaluates the carrying value of long-lived assets (including equipment on operating leases, property and equipment, goodwill and other intangible assets) when events or circumstances warrant such a review. Goodwill and intangible assets with indefinite lives are tested for impairment annually at the end of the third fiscal quarter each year, and more often if events or circumstances indicate a reduction in the fair value below the carrying value. Goodwill is allocated and reviewed for impairment by reporting units, which consist primarily of the operating segments and certain other reporting units. The goodwill is allocated to the reporting unit in which the business that created the goodwill resides. To test for goodwill impairment, the carrying value of each reporting unit is compared with its fair value. If the carrying value of the goodwill or long-lived asset is considered impaired, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the asset (see Notes 5 and 26).
Derivative Financial 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 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.
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 either a cash flow hedge, a fair value hedge, or remains undesignated. Changes in the fair value of derivatives that are designated and effective as cash flow hedges are recorded in other comprehensive income and reclassified to the income statement when the effects of the item being hedged are recognized in the income statement. Changes in the fair value of derivatives that are designated and effective as fair value hedges are recognized currently in net income. These changes are offset in net income to the extent the hedge was
effective by fair value changes related to the risk being hedged on the hedged item. Changes in the fair value of undesignated hedges are recognized currently in the income statement. All ineffective changes in derivative fair values are recognized currently in net income.
All designated hedges are formally documented as to the relationship with the hedged item as well as the risk-management strategy. Both at inception and on an ongoing basis the hedging instrument is assessed as to its effectiveness. If and when a derivative is determined not to be highly effective as a hedge, the underlying hedged transaction is no longer likely to occur, the hedge designation is removed, or the derivative is terminated, the hedge accounting discussed above is discontinued (see Note 27).
Foreign Currency Translation
The functional currencies for most of the company's foreign operations are their respective local currencies. The assets and liabilities of these operations are translated into U.S. dollars at the end of the period exchange rates. The revenues and expenses are translated at weighted-average rates for the period. The gains or losses from these translations are recorded in other comprehensive income. Gains or losses from transactions denominated in a currency other than the functional currency of the subsidiary involved and foreign exchange forward contracts are included in net income. The pretax net gain (loss) for foreign exchange in 2016, 2015 and 2014 was $(38) million, $22 million and $(47) million, respectively.
3. NEW ACCOUNTING STANDARDS |
New Accounting Standard Adopted
In September 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments, which amends Accounting Standards Codification (ASC) 805, Business Combinations. This ASU requires that acquiring entities recognize measurement period adjustments in the reporting period the amounts are determined, including earnings adjustments that would have been recorded in previous periods if the adjustments were known at the acquisition date. The company early adopted this ASU in the second quarter of 2016. The adoption did not have a material effect on the company's consolidated financial statements.
New Accounting Standards to be Adopted
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. This 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. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue. In August 2015, the FASB amended the effective date to be the first quarter of fiscal year 2019 with early adoption permitted in the first quarter of fiscal year 2018. The FASB issued several amendments clarifying various aspects of the ASU, including revenue transactions that involve a third party, goods or services that are immaterial in the context of the contract and licensing arrangements. The adoption will use one of two retrospective application methods. The company plans to adopt the ASU
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effective the first quarter of fiscal year 2019 and is evaluating the potential effects on the consolidated financial statements.
In June 2014, the FASB issued ASU No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period, which amends ASC 718, Compensation Stock Compensation. This ASU requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods the service has already been rendered. The total compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The effective date will be the first quarter of fiscal year 2017. The adoption will not have a material effect on the company's consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which amends ASC 835-30, Interest Imputation of Interest. This ASU requires that debt issuance costs related to borrowings be presented in the balance sheet as a direct deduction from the carrying amount of the borrowing. The effective date will be the first quarter of fiscal year 2017 and will be applied retrospectively. The adoption will not have a material effect on the company's consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-05, Customer's Accounting for Fees Paid in a Cloud Computing Arrangement, which amends ASC 350-40, Intangibles-Goodwill and Other-Internal-Use Software. This ASU provides guidance to customers about whether a cloud computing arrangement includes a software license. If an arrangement includes a software license, the accounting for the license will be consistent with licenses of other intangible assets. If the arrangement does not include a license, the arrangement will be accounted for as a service contract. The effective date will be the first quarter of fiscal year 2017 and will be adopted prospectively. The adoption will not have a material effect on the company's consolidated financial statements.
In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, which amends ASC 330, Inventory. This ASU simplifies the subsequent measurement of inventory by using only the lower of cost or net realizable value. The ASU does not apply to inventory measured using the last-in, first-out method. The company will early adopt the ASU in the first quarter of fiscal year 2017. The adoption will not have a material effect on the company's consolidated financial statements.
In August 2015, the FASB issued ASU No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, which amends ASC 835-30, Interest Imputation of Interest. This ASU clarifies the presentation and subsequent measurement of debt issuance costs associated with lines of credit. These costs may be presented as an asset and amortized ratably over the term of the line of credit arrangement, regardless of whether there are outstanding borrowings on the arrangement. The effective date will be the first quarter of fiscal year 2017 and will be applied
retrospectively. The adoption will not have a material effect on the company's consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which amends ASC 825-10, Financial Instruments Overall. This ASU changes 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. The effective date will be the first quarter of fiscal year 2019. Early adoption of the provisions affecting the company is not permitted. The ASU will be adopted with a cumulative-effect adjustment to the balance sheet in the year of adoption. The company is evaluating the potential effects on the consolidated financial statements.
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. Lessees and lessors will use a modified retrospective transition approach. The effective date will be the first quarter of fiscal year 2020 with early adoption permitted. The company is evaluating the potential effects on the consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-07, Simplifying the Transition to the Equity Method of Accounting, which amends ASC 323, Investments Equity Method and Joint Ventures. This ASU eliminates the requirement to retroactively restate the investment, results of operations and retained earnings on a step by step basis when an investment qualifies for use of the equity method as a result of an increase in ownership or degree of influence. The effective date will be the first quarter of fiscal year 2018, with early adoption permitted, and will be adopted prospectively. The adoption will not have a material effect on the company's consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC 718, Compensation Stock Compensation. This ASU simplifies the treatment of share based payment transactions by recognizing the impact of excess tax benefits or deficiencies related to exercised or vested awards in income tax expense in the period of exercise or vesting. This change will be recognized prospectively. The presentation of excess tax benefits in the statement of consolidated cash flows is also modified to be included with other income tax cash flows as an operating activity. The change can be adopted using a prospective or retrospective transition method. The ASU also clarifies that cash paid by an employer when directly withholding shares for tax withholding purposes should be presented as a financing activity in the statement of consolidated cash flows and should be applied retrospectively. The effective date will be the first quarter of fiscal year 2018, with early adoption permitted. The company is evaluating the potential effects on the consolidated financial statements.
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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. The effective date will be the first quarter of fiscal year 2021, with early adoption permitted beginning in fiscal year 2020. The ASU will be adopted using a modified-retrospective approach. The company is evaluating the potential effects on the consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments, which amends ASC 230, Statement of Cash Flows. This ASU provides guidance on the statement of cash flows presentation of certain transactions where diversity in practice exists. The effective date will be the first quarter of fiscal year 2019, with early adoption permitted. The ASU will be adopted using a retrospective transition approach. The adoption will not have a material effect on the company's consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory, which amends ASC 740, Income Taxes. This ASU requires that the income tax consequences of an intra-entity asset transfer other than inventory are recognized at the time of the transfer. The effective date will be the first quarter of fiscal year 2019, with early adoption permitted. 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 November 2016, the FASB issued ASU No. 2016-18, Restricted Cash, which amends ASC 230, Statement of Cash Flows. This ASU requires that a statement of cash flows explain the change during the reporting period in the total of cash, cash equivalents, and restricted cash or restricted cash equivalents. The effective date will be the first quarter of fiscal year 2019, with early adoption permitted, and will be adopted using a retrospective transition approach. The adoption will not have a material effect on the company's consolidated financial statements.
4. ACQUISITIONS AND DISPOSITIONS |
In March 2016, the company acquired an 80 percent interest in Hagie Manufacturing Company, LLC, the U.S. market leader in high-clearance sprayers located in Clarion, Iowa, for a cost of approximately $53 million, net of cash acquired of $3 million. The fair values assigned to the assets and liabilities related to the acquired entity were approximately $2 million of trade receivables, $33 million of inventories, $17 million of property and equipment, $33 million of goodwill, $22 million of identifiable intangible assets, $3 million of other assets and $43 million of accounts payable and accrued expenses, with a $14 million redeemable noncontrolling interest. The identifiable intangibles were primarily related to technology, trade name and customer relationships, which have a weighted average amortization period of eight years. The goodwill is expected to be deducted for tax purposes. If certain events occur, the
minority interest holder has the right to exercise a put option that would require the company to purchase the holder's membership interest. The company also has a call option exercisable after a certain period of time. The put and call options cannot be separated from the noncontrolling interest. Due to the redemption features, the minority interest holder's value is classified as a redeemable noncontrolling interest in the company's consolidated balance sheet.
In February 2016, the company acquired Monosem for a cost of approximately $146 million, net of cash acquired of $20 million. Monosem, with four facilities in France and two in the U.S., is the European market leader in precision planters. The fair values assigned to the assets and liabilities related to the acquired entity were approximately $5 million of trade receivables, $2 million of other receivables, $29 million of inventories, $24 million of property and equipment, $62 million of goodwill, $42 million of identifiable intangible assets, $23 million of other assets, $22 million of accounts payable and accrued expenses and $19 million of deferred tax liabilities. The identifiable intangibles were primarily related to trade name, customer relationships and technology, which have a weighted average amortization period of nine years. The goodwill is not expected to be deducted for tax purposes.
For both 2016 acquisitions, the entities were consolidated and the results of these operations have been included in the company's consolidated financial statements in the agriculture and turf operating segment since the date of acquisition. The pro forma results of operations as if the acquisitions had occurred at the beginning of the current or comparative fiscal year would not differ significantly from the reported results.
In March 2015, the company closed the sale of all of the stock of its wholly-owned subsidiaries, John Deere Insurance Company and John Deere Risk Protection, Inc. (collectively the Crop Insurance operations) to Farmers Mutual Hail Insurance Company of Iowa. These operations were included in the company's financial services operating segment. At January 31, 2015, the total assets of $381 million and liabilities of $267 million were classified as held for sale in the consolidated financial statements, which consisted of $13 million of cash and cash equivalents, $79 million of marketable securities, $265 million of other receivables, $4 million of other intangible assets-net and $20 million of other assets. The related liabilities held for sale consisted of accounts payable and accrued expenses. The total amount of proceeds from the sale was approximately $154 million, including $5 million of cash and cash equivalents sold, with a gain recorded in other income of $42 million pretax and $40 million after-tax. The tax expense was partially offset by a change in a valuation allowance on a capital loss carryforward. The company provided certain business services for a fee during a transition period.
In May 2014, the company closed the sale of the stock and certain assets of the entities that compose the company's Water operations to FIMI Opportunity Funds. At April 30, 2014, the total assets of $85 million and liabilities of $50 million were classified as held for sale in the consolidated financial statements. The total amount of proceeds from the sale was approximately $35 million with a loss recorded in other operating expenses of $10 million pretax and after-tax in addition to the
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impairments recorded (see Note 5). The company provided certain business services for a fee during a transition period.
In December 2013, the company sold 60 percent of its subsidiary John Deere Landscapes, LLC (Landscapes) to a private equity investment firm affiliated with Clayton, Dubilier & Rice, LLC (CD&R). At October 31, 2013, the total assets of $505 million and liabilities of $120 million for these operations were classified as held for sale in the consolidated financial statements and written down to realizable value. The total amount of proceeds from the sale at closing was approximately $305 million with no significant additional gain or loss, after recording a non-cash charge in the fourth quarter of 2013 of $45 million pretax and after-tax to write down Landscapes to net realizable value. The proceeds consisted of $174 million equity contribution and third party debt raised by Landscapes.
The equity contribution was in the form of newly issued cumulative convertible participating preferred units representing 60 percent of the voting rights (on an as converted basis), which were converted to common shares in May 2016 (see Note 5).
The company initially retained 40 percent of the Landscapes business in the form of common stock. As of January 2014, the company deconsolidated Landscapes and began reporting the results as an equity investment in unconsolidated affiliates. Due to the company's continuing involvement through its initial 40 percent interest, Landscapes' historical operating results are presented in continuing operations. Landscapes was rebranded to SiteOne Landscapes Supply, Inc. during 2015.
5. SPECIAL ITEMS |
Impairments
In the fourth quarter of 2016, the company recorded a non-cash charge in cost of sales for the impairment of long-lived assets of $13 million pretax and after-tax. The assets are part of the company's construction and forestry operations in China. The impairment is the result of a decline in forecasted financial performance that indicated it was probable the future cash flows would not cover the carrying amount of assets used to manufacture construction equipment in that country. In addition, the company recorded a non-cash charge of $12 million pretax and after-tax, in equity in loss of unconsolidated affiliates for an other than temporary decline in value of an investment in a construction equipment joint venture in Brazil (see Note 26).
In 2016, the company recorded non-cash charges in other operating expenses of approximately $31 million pretax for the impairment of equipment on operating leases and approximately $29 million pretax on matured operating lease inventory recorded in other assets. The impairment was the result of lower estimated values of used agriculture and construction equipment than originally estimated with the probable effect that the future cash flows would not cover the carrying amount of the net assets. The assets are part of the financial services operations (see Note 26).
In the fourth quarter of 2014, the company recorded non-cash charges in cost of sales for the impairment of long-lived assets of $18 million and other assets of $16 million pretax and after-tax. The assets are part of the company's agriculture and turf operations in China. The impairment is the result of a decline in forecasted financial performance that indicated it was probable the future cash flows would not cover the carrying
amount of assets used to manufacture agricultural equipment in that country (see Note 26).
In 2014, the company recorded non-cash charges of $62 million pretax, or $30 million after-tax, related to the Water operations. In the first quarter, a $26 million pretax and after-tax loss was recorded in cost of sales for the impairment of long-lived assets. In the second quarter, an additional non-cash charge of $36 million pretax, or $4 million after-tax, was recorded in other operating expenses for an impairment to write the Water operations down to fair value less costs to sell. The tax benefits recognized resulted primarily from a change in valuation allowances of the Water operations. These operations were included in the company's agriculture and turf operating segment (see Note 26).
Sale of Partial Investment in Unconsolidated Affiliate
In May 2016, the company received a distribution of $60 million from SiteOne that reduced the company's investment in unconsolidated affiliates. The distribution included $4 million of a return on investment, which is shown in the statement of consolidated cash flows in undistributed earnings of unconsolidated affiliates in net cash provided by operating activities, and $56 million of a return of investment shown in other cash flows from investing activities. In May 2016, the company also sold approximately 30 percent of its interest in SiteOne in an initial public offering and terminated a service agreement resulting in gross proceeds of approximately $81 million with a total gain of $75 million pretax or $47 million after-tax. The gain is recorded in other income. The company retained approximately a 24 percent ownership interest in SiteOne. The approximate fair value of the company's holding at the fiscal year end was $292 million. In December 2016, the company sold an additional portion of its interest in SiteOne. Details of the sale are included in Note 30.
6. CASH FLOW INFORMATION |
For purposes of the statement of consolidated cash flows, the company considers investments with purchased maturities of three months or less to be cash equivalents. Substantially all of the company's short-term borrowings, excluding the current maturities of long-term borrowings, mature or may require payment within three months or less.
The equipment operations sell a significant portion of their trade receivables to financial services. These intercompany cash flows are eliminated in the consolidated cash flows.
All cash flows from the changes in trade accounts and notes receivable (see Note 12) 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 (see Note 12) 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 $685 million, $674 million and $794 million in 2016, 2015 and 2014, respectively. The company also had accounts payable related to purchases of property and equipment of $114 million, $89 million and $128 million at October 31, 2016, 2015 and 2014, respectively.
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Cash payments for interest and income taxes consisted of the following in millions of dollars:
| | | | | | | | | | |
|
2016 |
2015 |
2014 |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | |
Interest: |
||||||||||
Equipment operations |
$ | 442 | $ | 471 | $ | 506 | ||||
Financial services |
524 | 443 | 454 | |||||||
Intercompany eliminations |
(240 | ) | (253 | ) | (268 | ) | ||||
| | | | | | | | | | |
Consolidated |
$ | 726 | $ | 661 | $ | 692 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Income taxes: |
||||||||||
Equipment operations |
$ | 314 | $ | 828 | $ | 1,640 | ||||
Financial services |
(26 | ) | 190 | 333 | ||||||
Intercompany eliminations |
104 | (117 | ) | (253 | ) | |||||
| | | | | | | | | | |
Consolidated |
$ | 392 | $ | 901 | $ | 1,720 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
7. PENSION AND OTHER POSTRETIREMENT BENEFITS |
The company has several defined benefit pension plans and postretirement health care and life insurance plans covering its U.S. employees and employees in certain foreign countries. The company uses an October 31 measurement date for these plans.
The components of net periodic pension cost and the assumptions related to the cost consisted of the following in millions of dollars and in percents:
| | | | | | | | | | |
|
2016 |
2015 |
2014 |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | |
Pensions |
||||||||||
Service cost |
$ | 254 | $ | 282 | $ | 244 | ||||
Interest cost |
391 | 474 | 480 | |||||||
Expected return on plan assets |
(775 | ) | (769 | ) | (776 | ) | ||||
Amortization of actuarial loss |
211 | 223 | 177 | |||||||
Amortization of prior service cost |
16 | 25 | 25 | |||||||
Other postemployment benefits |
2 | 1 | 5 | |||||||
Settlements/curtailments |
11 | 11 | 9 | |||||||
| | | | | | | | | | |
Net cost |
$ | 110 | $ | 247 | $ | 164 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Weighted-average assumptions |
||||||||||
Discount rates service cost |
4.3% | 4.0% | 4.5% | |||||||
Discount rates interest cost |
3.4% | 4.0% | 4.5% | |||||||
Rate of compensation increase |
3.8% | 3.8% | 3.8% | |||||||
Expected long-term rates of return |
7.3% | 7.3% | 7.5% | |||||||
| | | | | | | | | | |
The components of net periodic postretirement benefits cost and the assumptions related to the cost consisted of the following in millions of dollars and in percents:
| | | | | | | | | | |
|
2016 |
2015 |
2014 |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | |
Health care and life insurance |
||||||||||
Service cost |
$ | 38 | $ | 46 | $ | 44 | ||||
Interest cost |
204 | 259 | 267 | |||||||
Expected return on plan assets |
(35 | ) | (55 | ) | (72 | ) | ||||
Amortization of actuarial loss |
73 | 91 | 33 | |||||||
Amortization of prior service credit |
(78 | ) | (77 | ) | (3 | ) | ||||
Settlements/curtailments |
1 | (1 | ) | |||||||
| | | | | | | | | | |
Net cost |
$ | 202 | $ | 265 | $ | 268 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Weighted-average assumptions |
||||||||||
Discount rates service cost |
5.0% | 4.2% | 4.7% | |||||||
Discount rates interest cost |
3.5% | 4.2% | 4.7% | |||||||
Expected long-term rates of return |
6.6% | 7.0% | 7.2% | |||||||
| | | | | | | | | | |
In 2016, the company changed the method used to estimate the service and interest cost components of the net periodic pension and postretirement benefits cost. The new method uses the spot yield curve approach to estimate the service and interest cost by applying the specific spot rates along the yield curve used to determine the benefit plan obligations to relevant projected cash outflows. Previously, the service and interest cost components were determined using a single weighted-average discount rate. The change does not affect the measurement of the total benefit plan obligations as the change in service and interest cost offsets in the actuarial gains and losses recorded in other comprehensive income. The spot yield curve approach provides a more precise measure of service and interest cost by improving the correlation between the projected benefit cash flows and the discrete spot yield curve rates. The company accounted for this change as a change in estimate prospectively beginning in 2016. The discount rate used to measure the 2016 service and interest cost using the single weighted-average discount rate method would have been 4.1 percent for pension and 4.3 percent for postretirement benefits. The decrease in the 2016 total service and interest cost was approximately $175 million compared to the previous method.
The previous pension cost in net income and other changes in plan assets and benefit obligations in other comprehensive income in millions of dollars were as follows:
| | | | | | | | | | |
|
2016 |
2015 |
2014 |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | |
Pensions |
||||||||||
Net cost |
$ | 110 | $ | 247 | $ | 164 | ||||
Retirement benefit adjustments included in other comprehensive (income) loss: |
||||||||||
Net actuarial loss |
1,140 | 361 | 940 | |||||||
Prior service cost |
1 | 66 | ||||||||
Amortization of actuarial loss |
(211 | ) | (223 | ) | (177 | ) | ||||
Amortization of prior service cost |
(16 | ) | (25 | ) | (25 | ) | ||||
Settlements/curtailments |
(14 | ) | (11 | ) | (9 | ) | ||||
| | | | | | | | | | |
Total loss recognized in other comprehensive (income) loss |
900 | 168 | 729 | |||||||
| | | | | | | | | | |
Total recognized in comprehensive (income) loss |
$ | 1,010 | $ | 415 | $ | 893 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
The previous postretirement benefits cost in net income and other changes in plan assets and benefit obligations in other comprehensive income in millions of dollars were as follows:
| | | | | | | | | | |
|
2016 |
2015 |
2014 |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | |
Health care and life insurance |
||||||||||
Net cost |
$ | 202 | $ | 265 | $ | 268 | ||||
Retirement benefit adjustments included in other comprehensive (income) loss: |
||||||||||
Net actuarial (gain) loss |
496 | (141 | ) | 748 | ||||||
Prior service credit |
(3 | ) | (3 | ) | (370 | ) | ||||
Amortization of actuarial loss |
(73 | ) | (91 | ) | (33 | ) | ||||
Amortization of prior service credit |
78 | 77 | 3 | |||||||
Settlements/curtailments |
(2 | ) | 1 | |||||||
| | | | | | | | | | |
Total (gain) loss recognized in other comprehensive (income) loss |
498 | (160 | ) | 349 | ||||||
| | | | | | | | | | |
Total recognized in comprehensive (income) loss |
$ | 700 | $ | 105 | $ | 617 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
42
|
The benefit plan obligations, funded status and the assumptions related to the obligations at October 31 in millions of dollars follow:
| | | | | | | | | | | | | |
|
Pensions | Health Care and Life Insurance |
|||||||||||
|
2016 | 2015 | 2016 | 2015 |
|||||||||
| | | | | | | | | | | | | |
Change in benefit obligations |
|||||||||||||
Beginning of year balance |
$ | (12,186 | ) | $ | (12,190 | ) | $ | (6,084 | ) | $ | (6,304 | ) | |
Service cost |
(254 | ) | (282 | ) | (38 | ) | (46 | ) | |||||
Interest cost |
(391 | ) | (474 | ) | (204 | ) | (259 | ) | |||||
Actuarial gain (loss) |
(1,001 | ) | (174 | ) | (478 | ) | 172 | ||||||
Amendments |
(1 | ) | (66 | ) | 3 | 3 | |||||||
Benefits paid |
702 | 781 | 321 | 344 | |||||||||
Health care subsidies |
(16 | ) | (20 | ) | |||||||||
Other postemployment benefits |
(2 | ) | (1 | ) | |||||||||
Settlements/curtailments |
6 | 2 | 1 | ||||||||||
Foreign exchange and other |
41 | 218 | (4 | ) | 25 | ||||||||
| | | | | | | | | | | | | |
End of year balance |
(13,086 | ) | (12,186 | ) | (6,500 | ) | (6,084 | ) | |||||
| | | | | | | | | | | | | |
Change in plan assets (fair value) |
|||||||||||||
Beginning of year balance |
11,164 | 11,447 | 689 | 957 | |||||||||
Actual return on plan assets |
628 | 582 | 17 | 24 | |||||||||
Employer contribution |
80 | 83 | 47 | 48 | |||||||||
Benefits paid |
(702 | ) | (781 | ) | (321 | ) | (344 | ) | |||||
Settlements |
(3 | ) | (2 | ) | |||||||||
Foreign exchange and other |
(30 | ) | (165 | ) | 3 | 4 | |||||||
| | | | | | | | | | | | | |
End of year balance |
11,137 | 11,164 | 435 | 689 | |||||||||
| | | | | | | | | | | | | |
Funded status |
$ | (1,949 | ) | $ | (1,022 | ) | $ | (6,065 | ) | $ | (5,395 | ) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Weighted-average assumptions |
|||||||||||||
Discount rates |
3.6% | 4.1% | 3.8% | 4.3% | |||||||||
Rate of compensation increase |
3.8% | 3.8% | |||||||||||
| | | | | | | | | | | | | |
In the fourth quarter of 2015, the company decided to transition Medicare eligible wage and certain Medicare eligible salaried retirees to a Medicare Advantage plan offered by a private insurance company effective in January 2016. This change did not affect the participants' level of benefits and is expected to result in future cost savings for the company.
The mortality assumptions for the 2016 and 2015 benefit plan obligations reflect the most recent tables issued by the Society of Actuaries at that time.
For Medicare eligible salaried retirees that primarily retire after July 1, 1993 and are eligible for postretirement medical benefits, the company's postretirement benefit plan consists of annual Retiree Medical Credits (RMCs). The RMC is a monetary amount provided to the retirees annually to assist with their medical costs. In October 2014, the RMC plan was modified to change the annual cost sharing provisions. Beginning in 2015, the annual RMC amount did not increase and future changes in the amount will be set each year by the company.
The amounts recognized at October 31 in millions of dollars consist of the following:
| | | | | | | | | | | | | |
|
Pensions | Health Care and Life Insurance |
|||||||||||
|
2016 | 2015 | 2016 | 2015 |
|||||||||
| | | | | | | | | | | | | |
Amounts recognized in |
|||||||||||||
Noncurrent asset |
$ | 94 | $ | 216 | |||||||||
Current liability |
(33 | ) | (44 | ) | $ | (32 | ) | $ | (20 | ) | |||
Noncurrent liability |
(2,010 | ) | (1,194 | ) | (6,033 | ) | (5,375 | ) | |||||
| | | | | | | | | | | | | |
Total |
$ | (1,949 | ) | $ | (1,022 | ) | $ | (6,065 | ) | $ | (5,395 | ) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | |