UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended April 30, 2006

Commission file no: 1-4121

DEERE  &  COMPANY

Delaware (State of incorporation)

36-2382580 (IRS employer identification no.)

 

One John Deere Place
Moline, Illinois 61265
(Address of principal executive offices)
Telephone Number:  (309) 765-8000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer x

Accelerated Filer o

Non-Accelerated Filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x

At April 30, 2006, 235,271,079 shares of common stock, $1 par value, of the registrant were outstanding.

 

Index to Exhibits:  Page 36

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DEERE & COMPANY
STATEMENT OF CONSOLIDATED INCOME
For the Three Months Ended April 30, 2006 and 2005
(In millions of dollars and shares except per share amounts) Unaudited

		2006			2005
Net Sales and Revenues
Net sales		$	6,029.0		$	6,019.2
Finance and interest income		416.9			341.9
Other income		115.6			79.7
Total		6,561.5			6,440.8
Costs and Expenses
Cost of sales		4,542.7			4,545.7
Research and development expenses		187.8			170.4
Selling, administrative and general expenses		613.8			563.1
Interest expense		250.4			180.1
Other operating expenses		181.6			94.1
Total		5,776.3			5,553.4
Income of Consolidated Group Before Income Taxes		785.2			887.4
Provision for income taxes		269.9			294.4
Income of Consolidated Group		515.3			593.0
Equity in Income of Unconsolidated Affiliates
Credit		.2			.1
Other		1.5			6.2
Total		1.7			6.3
Income from Continuing Operations		517.0			599.3
Income from Discontinued Operations		227.6			4.7
Net Income		$	744.6		$	604.0
Per Share Data
Basic:
Continuing operations		$	2.19		$	2.44
Discontinued operations		.97			.02
Net income		$	3.16		$	2.46
Diluted:
Continuing operations		$	2.17		$	2.41
Discontinued operations		.96			.02
Net income		$	3.13		$	2.43
Average Shares Outstanding:
Basic		235.3			245.4
Diluted		238.1			248.7

See Notes to Interim Financial Statements.

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DEERE & COMPANY
STATEMENT OF CONSOLIDATED INCOME
For the Six Months Ended April 30, 2006 and 2005
(In millions of dollars and shares except per share amounts) Unaudited

		2006			2005
Net Sales and Revenues
Net sales		$	9,720.3		$	9,545.7
Finance and interest income		820.4			667.5
Other income		222.9			162.1
Total		10,763.6			10,375.3
Costs and Expenses
Cost of sales		7,439.0			7,315.4
Research and development expenses		348.8			319.7
Selling, administrative and general expenses		1,081.5			992.7
Interest expense		480.3			347.2
Other operating expenses		288.7			179.5
Total		9,638.3			9,154.5
Income of Consolidated Group Before Income Taxes		1,125.3			1,220.8
Provision for income taxes		386.0			409.9
Income of Consolidated Group		739.3			810.9
Equity in Income of Unconsolidated Affiliates
Credit		.3			.3
Other		1.3			3.1
Total		1.6			3.4
Income from Continuing Operations		740.9			814.3
Income for Discontinued Operations		239.6			12.5
Net Income		$	980.5		$	826.8
Per Share Data
Basic:
Continuing operations		$	3.14		$	3.31
Discontinued operations		1.02			.05
Net income		$	4.16		$	3.36
Diluted:
Continuing operations		$	3.11		$	3.26
Discontinued operations		1.00			.05
Net income		$	4.11		$	3.31
Average Shares Outstanding:
Basic		235.8			246.2
Diluted		238.5			249.8

See Notes to Interim Financial Statements.

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DEERE & COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET
(In millions of dollars) Unaudited

		April 30			October 31			April 30
		2006			2005			2005
Assets
Cash and cash equivalents		$	1,201.9		$	2,258.2		$	3,056.7
Marketable securities		1,774.7			2,169.1			1.7
Receivables from unconsolidated affiliates		22.7			18.4			21.4
Trade accounts and notes receivable — net		4,400.6			3,117.8			4,389.6
Financing receivables — net		13,082.9			12,869.4			11,769.9
Restricted financing receivables — net		1,685.3			1,457.9			600.3
Other receivables		366.7			523.0			301.2
Equipment on operating leases — net		1,360.9			1,335.6			1,214.4
Inventories		2,711.8			2,134.9			2,890.0
Property and equipment — net		2,449.9			2,343.3			2,155.5
Investments in unconsolidated affiliates		109.8			106.7			109.7
Goodwill		1,083.3			1,088.5			973.8
Other intangible assets — net		53.3			18.3			21.0
Prepaid pension costs		2,648.2			2,662.7			2,652.7
Other assets		458.3			419.8			450.3
Deferred income taxes		538.1			628.1			597.3
Deferred charges		146.4			133.8			138.3
Assets of discontinued operations					351.3			349.8
Total Assets		$	34,094.8		$	33,636.8		$	31,693.6
Liabilities and Stockholders’ Equity
Short-term borrowings		$	7,584.5		$	6,883.8		$	5,364.0
Payables to unconsolidated affiliates		188.0			140.8			174.3
Accounts payable and accrued expenses		4,330.7			4,320.9			4,196.1
Accrued taxes		246.2			214.3			188.7
Deferred income taxes		67.0			62.7			61.8
Long-term borrowings		11,479.8			11,738.8			11,324.3
Retirement benefit accruals and other liabilities		2,638.3			3,232.3			3,431.0
Liabilities of discontinued operations					191.7			213.7
Total liabilities		26,534.5			26,785.3			24,953.9
Common stock, $1 par value (issued shares at April 30, 2006 — 268,215,602)		2,157.5			2,081.7			2,043.5
Common stock in treasury		(1,991.5		)	(1,743.5		)	(1,389.0		)
Unamortized restricted stock compensation		(12.9		)	(16.4		)	(24.6		)
Retained earnings		7,353.0			6,556.1			6,106.1
Total		7,506.1			6,877.9			6,736.0
Accumulated other comprehensive income (loss)		54.2			(26.4		)	3.7
Stockholders’ equity		7,560.3			6,851.5			6,739.7
Total Liabilities and Stockholders’ Equity		$	34,094.8		$	33,636.8		$	31,693.6

See Notes to Interim Financial Statements.

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DEERE & COMPANY
STATEMENT OF CONSOLIDATED CASH FLOWS
For the Six Months Ended April 30, 2006 and 2005
(In millions of dollars) Unaudited

		2006			2005
Cash Flows from Operating Activities
Net income		$	980.5		$	826.8
Adjustments to reconcile net income to net cash used for operating activities:
Provision for doubtful receivables		17.4			4.6
Provision for depreciation and amortization		331.9			313.8
Gain on the sale of a business		(355.4		)
Undistributed earnings of unconsolidated affiliates		(.2		)	(2.3		)
Provision (credit) for deferred income taxes		82.4			(72.0		)
Changes in assets and liabilities:
Trade, notes and financing receivables related to sales of equipment		(1,478.3		)	(1,201.5		)
Inventories		(657.7		)	(982.4		)
Accounts payable and accrued expenses		44.2			266.5
Retirement benefit accruals/prepaid pension costs		(592.0		)	(52.3		)
Other		234.3			148.3
Net cash used for operating activities		(1,392.9		)	(750.5		)
Cash Flows from Investing Activities
Collections of financing receivables		4,921.0			3,927.4
Proceeds from sales of financing receivables		39.6			51.5
Proceeds from maturities and sales of marketable securities		1,913.0			26.8
Proceeds from sales of equipment on operating leases		157.0			200.6
Proceeds from sales of businesses, net of cash sold		437.2			46.0
Cost of financing receivables acquired		(5,002.3		)	(4,935.8		)
Purchases of marketable securities		(1,443.8		)	(57.7		)
Purchases of property and equipment		(322.8		)	(182.4		)
Cost of operating leases acquired		(190.2		)	(136.0		)
Acquisitions of businesses, net of cash acquired		(14.6		)	(6.1		)
Other		(40.8		)	25.2
Net cash provided by (used for) investing activities		453.3			(1,040.5		)
Cash Flows from Financing Activities
Increase in short-term borrowings		456.4			976.5
Proceeds from long-term borrowings		1,479.8			1,480.1
Payments on long-term borrowings		(1,657.9		)	(270.7		)
Proceeds from issuance of common stock		268.1			96.6
Repurchases of common stock		(566.4		)	(484.4		)
Dividends paid		(165.7		)	(138.6		)
Excess tax benefits from share-based compensation		66.7
Other		(9.6		)	(.7		)
Net cash provided by (used for) financing activities		(128.6		)	1,658.8
Effect of Exchange Rate Changes on Cash		11.9			7.8
Net Decrease in Cash and Cash Equivalents		(1,056.3		)	(124.4		)
Cash and Cash Equivalents at Beginning of Period		2,258.2			3,181.1
Cash and Cash Equivalents at End of Period		$	1,201.9		$	3,056.7

See Notes to Interim Financial Statements.

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Notes to Interim Financial Statements (Unaudited)

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

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

Certain amounts for prior periods have been reclassified to conform with 2006 financial statement presentations.

All cash flows from the changes in trade accounts and notes receivable are classified as operating activities in the Statement of Consolidated Cash Flows as these receivables arise from the sale of equipment to the Company’s customers. Cash flows from financing receivables that are related to the sale of equipment to the Company’s customers are also included in operating activities. The remaining financing receivables are related to the financing of equipment sold by an independent dealer and are included in investing activities. The Company had non-cash operating and investing activities that were not included in the Statement of Consolidated Cash Flows related to use of equipment included in the Company’s inventory (operating activity) for equipment leased to customers under operating leases (investing activity) of approximately $90 million and $99 million in the first six months of 2006 and 2005, respectively.

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

Equipment Operations — Includes the Company’s agricultural equipment, commercial and consumer equipment and construction and forestry operations with Financial Services reflected on the equity basis except for the health care operations, which are reported on a discontinued basis (see Note 13).

Financial Services — Includes the Company’s credit and certain miscellaneous service operations with the health care operations reported on a discontinued basis (see Note 13).

Consolidated — Represents the consolidation of the Equipment Operations and Financial Services with the health care operations reported on a discontinued basis (see Note 13). References to “Deere & Company” or “the Company” refer to the entire enterprise.

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

 

(4)             In the first quarter of 2006, the Company adopted Financial Accounting Standards Board (FASB) Statement No. 123 (revised 2004), Share-Based Payment, for the recognition of share-based employee compensation expense in its financial statements (see Note 16). In the prior periods, the Company used the intrinsic value method for share-based employee compensation. The pro forma net income and net income per share, as if the fair value method in FASB Statement No. 123 had been used to account for stock-based compensation, with dollars in millions except per share amounts, were as follows:

 

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

 

(6)             Contingencies:

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

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

 

Beginning in 2005, the credit operations’ new securitizations of financing receivables (retail notes) held by special purpose entities (SPEs) met the criteria for secured financings rather than sales of receivables under FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. The borrowings related to these securitizations of retail notes are included in short-term borrowings on the balance sheet as shown in the following table. The securitized retail notes are recorded as “Restricted financing receivables — net” on the balance sheet. In addition to the restricted assets, the creditors of an unconsolidated SPE involved in secured borrowings and sales of receivables related to a $2 billion revolving bank conduit facility have recourse to a reserve fund held by the SPE totaling approximately $29 million as of April 30, 2006. A portion of the previous transfers of retail notes to this facility qualified as sales of receivables. As a result, this reserve fund is also included in the maximum exposure to losses for receivables that have been sold.

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The total components of consolidated restricted assets related to securitizations follow in millions of dollars:

 

The components of consolidated secured liabilities related to securitizations follow in millions of dollars:

 

A portion of the restricted retail notes totaling $1,187 million at April 30, 2006, $816 million at October 31, 2005 and $602 million at April 30, 2005 related to secured financings were transferred to SPEs that are not consolidated since the Company is not the primary beneficiary. The borrowings related to these restricted retail notes included above are the obligations to these SPEs that are payable as the retail notes are liquidated. The remaining restricted retail notes totaling $506 million at April 30, 2006 and $650 million at October 31, 2005 were transferred to a SPE that has been consolidated since the Company is the primary beneficiary. This SPE is not a qualified SPE under FASB Statement No. 140 and, therefore, not exempt from consolidation. These restricted retail notes are the primary assets of this consolidated SPE. The borrowings included above for the consolidated SPE are obligations to the creditors of the SPE that are also payable as the retail notes are liquidated. SPEs utilized in securitizations of retail notes differ from other entities included in the Company’s consolidated statements because the assets they hold are legally isolated. For bankruptcy analysis purposes, the Company has sold the receivables to the SPEs in a true sale and the SPEs are separate legal entities. Use of the assets held by the SPEs is restricted by terms of the governing documents. Repayment of the secured borrowings depends primarily on cash flows generated by the restricted assets and the reserve fund mentioned above. At April 30, 2006, the maximum remaining term of the restricted receivables was approximately six years.

The Company has certain recourse obligations on financing receivables that it has previously sold. If the receivables sold are not collected, the Company would be required to cover those losses up to the amount of its recourse obligation. At April 30, 2006, the maximum amount of exposure to losses under these agreements was $153 million. The estimated risk associated with sold receivables totaled $6 million at April 30, 2006. This risk of loss is recognized primarily in the retained interests on the Company’s balance sheet. The retained interests are related to assets held by unconsolidated SPEs. At April 30, 2006, the assets of these SPEs related to the Company’s securitization and sale of retail notes totaled approximately $1,351 million. The Company may recover a portion of any required payments incurred under these agreements from the repossession of the equipment collateralizing the receivables. At April 30, 2006, the maximum remaining term of the receivables sold was approximately four years.

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At April 30, 2006, the Company had approximately $140 million of guarantees issued primarily to overseas banks related to third-party receivables for the retail financing of John Deere equipment. The Company may recover a portion of any required payments incurred under these agreements from repossession of the equipment collateralizing the receivables. At April 30, 2006, the Company had accrued losses of approximately $2 million under these agreements. The maximum remaining term of the receivables guaranteed at April 30, 2006 was approximately seven years.

At April 30, 2006, the Company had guaranteed approximately $10 million of residual value for one operating lease related to a manufacturing building. The Company is obligated at the end of each lease term to pay to the lessor any reduction in market value of the leased property up to the guaranteed residual value. The Company recognizes the expense for the future estimated lease payments over the life of the operating lease and had accrued expenses of $4 million related to this agreement at April 30, 2006. The lease has a term expiring in June 2006.

The credit operation’s subsidiary, John Deere Risk Protection, Inc., offers crop insurance products through a managing general agency agreement (Agreement) with an insurance company (Insurance Carrier) rated “Excellent” with A.M. Best Company. As a managing general agent, John Deere Risk Protection, Inc. will receive commissions from the Insurance Carrier for selling crop insurance to producers. The credit operations have guaranteed certain obligations under the Agreement, including the obligation to pay the Insurance Carrier for any uncollected premiums. At April 30, 2006, the maximum exposure for uncollected premiums was approximately $49 million. Substantially all of the credit operations’ crop insurance risk under the Agreement has been mitigated by a syndicate of private reinsurance companies. These reinsurance companies are rated “Excellent” or higher by A.M. Best Company. In the event of a widespread catastrophic crop failure throughout the U.S. and the default of these highly rated private reinsurance companies on their reinsurance obligations, the credit operations would be required to reimburse the Insurance Carrier for exposure under the Agreement of approximately $319 million at April 30, 2006. The credit operations believe that the likelihood of the occurrence of substantially all of the events that give rise to the exposure under this Agreement is extremely remote and as a result, at April 30, 2006, the credit operations have accrued probable losses of approximately $.1 million under the Agreement.

At April 30, 2006, the Company had commitments of approximately $319 million for the construction and acquisition of property and equipment. The Company had pledged assets of $86 million, outside the U.S., as collateral for borrowings at April 30, 2006 and $15 million of restricted other assets related to the sale of the health care operations.

The Company also had other miscellaneous contingent liabilities totaling approximately $40 million at April 30, 2006, for which it believes the probability for payment is primarily remote.

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

 

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

 

*                    Additional intersegment sales and revenues

 

**             Includes equipment operations outside the U.S. and Canada as follows:

 

Other revenues and operating profit in the prior periods as presented above decreased $180 million and $6 million, respectively, in the second quarter and $373 million and $15 million, respectively, in the first six months from the amounts reported in 2005 due to a reclassification of the health care operations included in “Other” last year to discontinued operations this year. Identifiable “Other” assets decreased $400 million and were reclassified to discontinued operations and corporate assets (see Note 13).

***      Operating profit is income from continuing operations before external interest expense, certain foreign exchange gains and losses, income taxes and certain corporate expenses. However, operating profit of the credit segment includes the effect of interest expense and foreign exchange gains or losses.

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

 

Out of the total stock options outstanding during the second quarter and first six months of 2006, options to purchase 3.5 million shares were excluded from the above diluted per share computation because the incremental shares related to the exercise of these options under the treasury stock method would have caused an antidilutive effect on net income per share. All stock options outstanding were included in the above computations during 2005.

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

 

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

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

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

 

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

 

During the first six months of 2006, the Company contributed approximately $32 million to its pension plans and $782 million to its other postretirement benefit plans. The Company presently anticipates contributing an additional $33 million to its pension plans and $10 million to its other postretirement benefit plans in the remainder of fiscal year 2006. These contributions include payments from Company funds to either increase plan assets or make direct payments to plan participants.

(13)       In February 2006, the Company sold its wholly-owned subsidiary, John Deere Health Care, Inc. (health care operations), to UnitedHealthcare for approximately $500 million and recognized a gain on the sale of approximately $350 million pretax, or $220 million after-tax in the second quarter and first six months of 2006. In accordance with FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, these operations and the gain on the sale have been reflected as discontinued operations in the consolidated financial statements for all periods presented. The health care operations were previously reported by the Company as a component of “Other” under the provisions of FASB Statement No. 131, Disclosures about Segments of an Enterprise and Related Information.

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