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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.
Variable Interest Entities
The company is the primary beneficiary of and consolidates a VIE based on a cost sharing supply contract. The company has both the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. No additional support beyond what was previously contractually required has been provided during any periods presented. The VIE produces blended fertilizer and other lawn care products for the agriculture and turf segment.
The assets and liabilities of this supplier VIE consisted of the following at October 31 in millions of dollars:
2012
2011
Cash and cash equivalents
$
26
$
11
Intercompany receivables
7
14
Inventories
25
30
Property and equipment — net
2
3
Other assets
5
3
Total assets
$
65
$
61
Short-term borrowings
$
5
Accounts payable and accrued expenses
48
$
56
Total liabilities
$
53
$
56
The VIE is financed primarily through its own liabilities. The assets of the VIE can only be used to settle the obligations of the VIE. The creditors of the VIE do not have recourse to the general credit of the company.
See Note 13 for VIEs related to securitization of financing receivables.
Reclassification
Certain items previously reported in the Consolidated Statement of Cash Flows have been reclassified to conform to the 2012 presentation. In the operating activities, insurance receivables were separately stated from other adjustments to net income (see Note 12). The same change was made in the Supplemental Consolidating Data in Note 31, statement of cash flows for financial services. The total cash flows for the consolidated and financial services net cash provided by operating activities did not change.
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. Insurance 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 $177 million in 2012, $163 million in 2011 and $154 million in 2010.
Depreciation and Amortization
Property and equipment, capitalized software and other intangible assets are 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 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 doubtful accounts, and any deferred fees or costs on originated financing receivables. Allowances for credit losses and doubtful accounts 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 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, or 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 Note 5).
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, or the underlying hedged transaction is no longer likely to occur, or 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 losses for foreign exchange in 2012, 2011 and 2010 were $96 million, $121 million and $75 million, respectively.
In the first quarter of 2012, the company adopted the remaining provisions of Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2010-06, Improving Disclosures about Fair Value Measurements, which amends Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures. This ASU requires disclosures of transfers into and out of Levels 1 and 2, more detailed roll forward reconciliations of Level 3 recurring fair value measurements on a gross basis, fair value information by class of assets and liabilities, and descriptions of valuation techniques and inputs for Level 2 and 3 measurements. The effective date was the second quarter of fiscal year 2010 except for the roll forward reconciliations, which were required in the first quarter of fiscal year 2012. The adoption in 2010 and the adoption in the first quarter of 2012 did not have a material effect on the company’s consolidated financial statements.
In the second quarter of 2012, the company adopted FASB ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, which amends ASC 820, Fair Value Measurement. This ASU requires the categorization by level for items that are required to be disclosed at fair value and information about transfers between Level 1 and Level 2 and additional disclosure for Level 3 measurements. In addition, the ASU provides guidance on measuring the fair value of financial instruments managed within a portfolio and the application of premiums and discounts on fair value measurements. The adoption did not have a material effect on the company’s consolidated financial statements.
New Accounting Standards to be Adopted
In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income, which amends ASC 220, Comprehensive Income. This ASU requires the presentation of total comprehensive income, total net income and the components of net income and comprehensive income either in a single continuous statement or in two separate but consecutive statements. The requirements do not change how earnings per share is calculated or presented. The effective date will be the first quarter of fiscal year 2013 and must be applied retrospectively. The adoption will not have a material effect on the company’s consolidated financial statements.
In September 2011, the FASB issued ASU No. 2011-08, Testing Goodwill for Impairment, which amends ASC 350, Intangibles - Goodwill and Other. This ASU gives an entity the option to first assess qualitative factors to determine if goodwill is impaired. The entity may first determine based on qualitative factors if it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If that assessment indicates no impairment, the first and second steps of the quantitative goodwill impairment test are not required. The effective date will be the first quarter of fiscal year 2013. The adoption will not have a material effect on the company’s consolidated financial statements.
In December 2011, the FASB issued ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities, which amends ASC 210, Balance Sheet. This ASU requires entities to disclose gross and net information about both instruments and transactions eligible for offset in the statement of financial position and those subject to an agreement similar to a master netting arrangement. This would include derivatives and other financial securities arrangements. The effective date will be the first quarter of fiscal year 2014 and must be applied retrospectively. The adoption will not have a material effect on the company’s consolidated financial statements.
In July 2012, the FASB issued ASU No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment, which amends ASC 350, Intangibles — Goodwill and Other. This ASU gives an entity the option to first assess qualitative factors to determine if indefinite-lived intangible assets are impaired. The entity may first determine based on qualitative factors if it is more likely than not that the fair value of indefinite-lived intangible assets are less than their carrying amount. If that assessment indicates no impairment, the quantitative impairment test is not required. The effective date will be the first quarter of fiscal year 2013. The adoption will not have a material effect on the company’s consolidated financial statements.
In December 2010, the company sold John Deere Renewables, LLC, its wind energy business for approximately $900 million. The company had concluded that its resources were best invested in growing its core businesses. These assets were reclassified as held for sale and written down to fair value less cost to sell at October 31, 2010 (see Note 26). The asset write-down in the fourth quarter of 2010 was $35 million pretax and included in “Other operating expenses.”
In the fourth quarters of 2012 and 2010, the company recorded non-cash charges in cost of sales for the impairment of goodwill of $33 million pretax, or $31 million after-tax, and $27 million pretax, or $25 million after-tax, respectively. The charges were associated with the company’s John Deere Water reporting unit, which is included in the agriculture and turf operating segment. The goodwill impairments in 2012 and 2010 were due to declines in the forecasted financial performance as a result of more complex integration activities, as well as the global economic downturn prior to 2010. At October 31, 2012, the goodwill in this reporting unit has been completely written off.
The method for determining the fair value of the reporting unit to measure the fair value of the goodwill was a discounted cash flow analysis (see Note 26).
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 $563 million, $449 million and $405 million in 2012, 2011 and 2010, respectively. The company also had accounts payable related to purchases of property and equipment of $185 million, $135 million and $135 million at October 31, 2012, 2011 and 2010, respectively.
Cash payments (receipts) for interest and income taxes consisted of the following in millions of dollars:
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:
2012
2011
2010
Pensions
Service cost
$
220
$
197
$
176
Interest cost
465
492
510
Expected return on plan assets
(787
)
(793
)
(761
)
Amortization of actuarial losses
202
148
113
Amortization of prior service cost
47
46
42
Early-retirement benefits
3
Settlements/curtailments
10
1
24
Net cost
$
160
$
91
$
104
Weighted-average assumptions
Discount rates
4.4
%
5.0
%
5.5
%
Rate of compensation increase
3.9
%
3.9
%
3.9
%
Expected long-term rates of return
8.0
%
8.1
%
8.3
%
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:
2012
2011
2010
Health care and life insurance
Service cost
$
49
$
44
$
44
Interest cost
281
326
337
Expected return on plan assets
(100
)
(113
)
(122
)
Amortization of actuarial losses
136
271
311
Amortization of prior service credit
(15
)
(16
)
(16
)
Net cost
$
351
$
512
$
554
Weighted-average assumptions
Discount rates
4.4
%
5.2
%
5.6
%
Expected long-term rates of return
7.7
%
7.7
%
7.8
%
For fiscal year 2012, the participants in one of the company’s postretirement health care plans became “almost all” inactive as described by the applicable accounting standards due to additional retirements. As a result, the net actuarial loss for this plan in the table above is now being amortized over the longer period for the average remaining life expectancy of the inactive participants rather than the average remaining service period of the active participants. The amortization of actuarial loss also decreased due to lower expected costs from the prescription drug plan to provide group benefits under Medicare Part D as an alternative to collecting the retiree drug subsidy.
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:
2012
2011
2010
Pensions
Net cost
$
160
$
91
$
104
Retirement benefit adjustments included in other comprehensive (income) loss:
Net actuarial losses
999
848
227
Prior service cost
5
9
14
Amortization of actuarial losses
(202
)
(148
)
(113
)
Amortization of prior service cost
(47
)
(46
)
(42
)
Settlements/curtailments
(10
)
(1
)
(24
)
Total loss recognized in other comprehensive (income) loss
745
662
62
Total recognized in comprehensive (income) loss
$
905
$
753
$
166
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:
2012
2011
2010
Health care and life insurance
Net cost
$
351
$
512
$
554
Retirement benefit adjustments included in other comprehensive (income) loss:
Net actuarial losses (gain)
335
132
(28
)
Prior service cost
2
Amortization of actuarial losses
(136
)
(271
)
(311
)
Amortization of prior service credit
15
16
16
Total (gain) loss recognized in other comprehensive (income) loss
216
(123
)
(323
)
Total recognized in comprehensive (income) loss
$
567
$
389
$
231
In 2011, the company decided to participate in a prescription drug plan to provide group benefits under Medicare Part D as an alternative to collecting the retiree drug subsidy. This change, which will take effect in 2013, is expected to result in future cost savings to the company greater than the Medicare retiree drug subsidies over time. The change is included in the health care postretirement benefit obligation beginning in 2011. The participants’ level of benefits will not be affected.
The benefit plan obligations, funded status and the assumptions related to the obligations at October 31 in millions of dollars follow:
Health Care
and
Pensions
Life Insurance
2012
2011
2012
2011
Change in benefit obligations
Beginning of year balance
$
(10,925
)
$
(10,197
)
$
(6,652
)
$
(6,467
)
Service cost
(220
)
(197
)
(49
)
(44
)
Interest cost
(465
)
(492
)
(281
)
(326
)
Actuarial losses
(947
)
(656
)
(347
)
(113
)
Amendments
(5
)
(9
)
(2
)
Benefits paid
656
648
333
340
Health care subsidy receipts
(15
)
(14
)
Settlements/curtailments
10
1
Foreign exchange and other
62
(23
)
(10
)
(28
)
End of year balance
(11,834
)
(10,925
)
(7,023
)
(6,652
)
Change in plan assets (fair value)
Beginning of year balance
9,552
9,504
1,459
1,637
Actual return on plan assets
736
600
113
95
Employer contribution
441
79
37
43
Benefits paid
(656
)
(648
)
(333
)
(340
)
Settlements
(10
)
(1
)
Foreign exchange and other
(46
)
18
11
24
End of year balance
10,017
9,552
1,287
1,459
Funded status
$
(1,817
)
$
(1,373
)
$
(5,736
)
$
(5,193
)
Weighted-average assumptions
Discount rates
3.8
%
4.4
%
3.8
%
4.4
%
Rate of compensation increase
3.9
%
3.9
%
The amounts recognized at October 31 in millions of dollars consist of the following:
Health Care
and
Pensions
Life Insurance
2012
2011
2012
2011
Amounts recognized in balance sheet
Noncurrent asset
$
20
$
30
Current liability
(53
)
(60
)
$
(23
)
$
(23
)
Noncurrent liability
(1,784
)
(1,343
)
(5,713
)
(5,170
)
Total
$
(1,817
)
$
(1,373
)
$
(5,736
)
$
(5,193
)
Amounts recognized in accumulated other comprehensive income — pretax
Net actuarial losses
$
5,260
$
4,473
$
2,266
$
2,067
Prior service cost (credit)
105
147
(47
)
(64
)
Total
$
5,365
$
4,620
$
2,219
$
2,003
The total accumulated benefit obligations for all pension plans at October 31, 2012 and 2011 was $11,181 million and $10,363 million, respectively.
The accumulated benefit obligations and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $10,987 million and $9,787 million, respectively, at October 31, 2012 and $10,168 million and $9,321 million, respectively, at October 31, 2011. The projected benefit obligations and fair value of plan assets for pension plans with projected benefit obligations in excess of plan assets were $11,627 million and $9,790 million, respectively, at October 31, 2012 and $10,784 million and $9,381 million, respectively, at October 31, 2011.
The amounts in accumulated other comprehensive income that are expected to be amortized as net expense (income) during fiscal 2013 in millions of dollars follow:
Health Care
and
Pensions
Life Insurance
Net actuarial losses
$
263
$
147
Prior service cost (credit)
33
(6
)
Total
$
296
$
141
The company expects to contribute approximately $527 million to its pension plans and approximately $27 million to its health care and life insurance plans in 2013, which include direct benefit payments on unfunded plans.
The benefits expected to be paid from the benefit plans, which reflect expected future years of service, and the Medicare subsidy expected to be received are as follows in millions of dollars:
Health Care
Health Care
and
Subsidy
Pensions
Life Insurance
Receipts*
2013
$
682
$
338
$
4
2014
683
345
2015
680
356
2016
683
366
2017
689
384
2018 to 2022
3,490
1,947
* Medicare Part D subsidy.
The annual rates of increase in the per capita cost of covered health care benefits (the health care cost trend rates) used to determine accumulated postretirement benefit obligations were based on the trends for medical and prescription drug claims for pre- and post-65 age groups due to the effects of Medicare. At October 31, 2012, the weighted-average composite trend rates for these obligations were assumed to be a 7.1 percent increase from 2012 to 2013, gradually decreasing to 5.0 percent from 2018 to 2019 and all future years. The obligations at October 31, 2011 and the cost in 2012 assumed a 7.3 percent increase from 2011 to 2012, gradually decreasing to 5.0 percent from 2017 to 2018 and all future years. An increase of one percentage point in the assumed health care cost trend rate would increase the accumulated postretirement benefit obligations by $955 million and the aggregate of service and interest cost component of net periodic postretirement benefits cost for the year by $50 million. A decrease of one percentage point would decrease the obligations by $723 million and the cost by $38 million.
The discount rate assumptions used to determine the postretirement obligations at October 31, 2012 and 2011 were based on hypothetical AA yield curves represented by a series of annualized individual discount rates. These discount rates represent the rates at which the company’s benefit obligations could effectively be settled at the October 31 measurement dates.
Fair value measurement levels in the following tables are defined in Note 26.
The fair values of the pension plan assets at October 31, 2012 follow in millions of dollars:
Total
Level 1
Level 2
Level 3
Cash and short-term investments
$
1,166
$
287
$
879
Equity:
U.S. equity securities
2,481
2,481
U.S. equity funds
43
8
35
International equity securities
1,477
1,477
International equity funds
411
49
362
Fixed Income:
Government and agency securities
404
379
25
Corporate debt securities
220
220
Mortgage-backed securities
126
126
Fixed income funds
853
92
761
Real estate
537
104
14
$
419
Private equity/venture capital
1,319
1,319
Hedge funds
578
2
422
154
Other investments
508
1
507
Derivative contracts - assets*
721
1
720
Derivative contracts - liabilities**
(454
)
(20
)
(434
)
Receivables, payables and other
(41
)
(41
)
Securities lending collateral
223
223
Securities lending liability
(223
)
(223
)
Securities sold short
(332
)
(332
)
Total net assets
$
10,017
$
4,488
$
3,637
$
1,892
* Includes contracts for interest rates of $707 million, foreign currency of $8 million and other of $6 million.
** Includes contracts for interest rates of $418 million, foreign currency of $12 million and other of $24 million.
The fair values of the health care assets at October 31, 2012 follow in millions of dollars:
Total
Level 1
Level 2
Level 3
Cash and short-term investments
$
78
$
11
$
67
Equity:
U.S. equity securities
319
319
U.S. equity funds
67
67
International equity securities
69
69
International equity funds
200
200
Fixed Income:
Government and agency securities
218
215
3
Corporate debt securities
35
35
Mortgage-backed securities
15
15
Fixed income funds
72
72
Real estate
53
7
29
$
17
Private equity/venture capital
54
54
Hedge funds
85
79
6
Other investments
21
21
Derivative contracts - assets*
8
8
Derivative contracts - liabilities**
(1
)
(1
)
Receivables, payables and other
8
8
Securities lending collateral
38
38
Securities lending liability
(38
)
(38
)
Securities sold short
(14
)
(14
)
Total net assets
$
1,287
$
682
$
528
$
77
* Includes contracts for interest rates of $7 million and foreign currency of $1 million.
** Includes contracts for foreign currency of $1 million.
The fair values of the pension plan assets at October 31, 2011 follow in millions of dollars:
Total
Level 1
Level 2
Level 3
Cash and short-term investments
$
1,074
$
179
$
895
Equity:
U.S. equity securities
2,070
2,070
U.S. equity funds
49
11
38
International equity securities
1,086
1,086
International equity funds
319
29
290
Fixed Income:
Government and agency securities
543
516
27
Corporate debt securities
196
196
Mortgage-backed securities
180
180
Fixed income funds
1,077
54
1,023
Real estate
505
75
14
$
416
Private equity/venture capital
1,123
1,123
Hedge funds
608
3
462
143
Other investments
448
448
Derivative contracts - assets*
787
21
766
Derivative contracts - liabilities**
(473
)
(15
)
(458
)
Receivables, payables and other
(40
)
(40
)
Securities lending collateral
750
750
Securities lending liability
(750
)
(750
)
Total net assets
$
9,552
$
3,989
$
3,881
$
1,682
* Includes contracts for interest rates of $742 million, foreign currency of $19 million and other of $26 million.
** Includes contracts for interest rates of $442 million, foreign currency of $17 million and other of $14 million.
The fair values of the health care assets at October 31, 2011 follow in millions of dollars:
Total
Level 1
Level 2
Level 3
Cash and short-term investments
$
58
$
7
$
51
Equity:
U.S. equity securities
372
372
U.S. equity funds
84
84
International equity securities
64
64
International equity funds
210
210
Fixed Income:
Government and agency securities
250
246
4
Corporate debt securities
39
39
Mortgage-backed securities
22
22
Fixed income funds
107
107
Real estate
57
4
32
$
21
Private equity/venture capital
55
55
Hedge funds
110
103
7
Other investments
22
22
Derivative contracts - assets*
12
1
11
Derivative contracts - liabilities**
(2
)
(1
)
(1
)
Receivables, payables and other
(1
)
(1
)
Securities lending collateral
215
215
Securities lending liability
(215
)
(215
)
Total net assets
$
1,459
$
776
$
600
$
83
* Includes contracts for interest rates of $10 million, foreign currency of $1 million and other of $1 million.
** Includes contracts for foreign currency of $1 million and other of $1 million.
A reconciliation of Level 3 pension and health care asset fair value measurements in millions of dollars follows:
Private Equity/
Real
Venture
Hedge
Total
Estate
Capital
Funds
October 31, 2010*
$
1,443
$
378
$
912
$
153
Realized gain
33
32
1
Change in unrealized gain
192
48
141
3
Purchases, sales and settlements - net
97
11
93
(7
)
October 31, 2011*
1,765
437
1,178
150
Realized gain
18
18
Change in unrealized gain (loss)
74
(4
)
65
13
Purchases, sales and settlements - net
112
3
112
(3
)
October 31, 2012*
$
1,969
$
436
$
1,373
$
160
* Health care Level 3 assets represent approximately 4 percent to 5 percent of the reconciliation amounts for 2012, 2011 and 2010.
Fair values are determined as follows:
Cash and Short-Term Investments — Includes accounts and cash funds that are valued based on the account value, which approximates fair value, or on the fund’s net asset value (NAV) based on the fair value of the underlying securities. Also included are securities that are valued using a market approach (matrix pricing model) in which all significant inputs are observable or can be derived from or corroborated by observable market data.
Equity Securities and Funds — The values are determined primarily by closing prices in the active market in which the equity investment trades, or the fund’s NAV, based on the fair value of the underlying securities.
Fixed Income Securities and Funds — The securities are valued using either a market approach (matrix pricing model) in which all significant inputs are observable or can be derived from or corroborated by observable market data such as interest rates, yield curves, volatilities, credit risk and prepayment speeds, or they are valued using the closing prices in the active market in which the fixed income investment trades. Fixed income funds are valued using the NAV, based on the fair value of the underlying securities.
Real Estate,Venture Capital and Private Equity — The investments, which are structured as limited partnerships, are valued using an income approach (estimated cash flows discounted over the expected holding period), as well as a market approach (the valuation of similar securities and properties). These investments are valued at estimated fair value based on their proportionate share of the limited partnership’s fair value that is determined by the general partner. Real estate investment trusts are valued at the closing prices in the active markets in which the investment trades. Real estate investment funds are valued at the NAV, based on the fair value of the underlying securities.
Hedge Funds and Other Investments — The investments are valued using the NAV provided by the administrator of the fund, which is based on the fair value of the underlying securities.
Interest Rate, Foreign Currency and Other Derivative Instruments — The derivatives are valued using either an income approach (discounted cash flow) using market observable inputs, including swap curves and both forward and spot exchange rates, or a market approach (closing prices in the active market in which the derivative instrument trades).
The primary investment objective for the pension plan assets is to maximize the growth of these assets to meet the projected obligations to the beneficiaries over a long period of time, and to do so in a manner that is consistent with the company’s earnings strength and risk tolerance. The primary investment objective for the health care plan assets is to provide the company with the financial flexibility to pay the projected obligations to beneficiaries over a long period of time. The asset allocation policy is the most important decision in managing the assets and it is reviewed regularly. The asset allocation policy considers the company’s financial strength and long-term asset class risk/return expectations since the obligations are long-term in nature. The current target allocations for pension assets are approximately 42 percent for equity securities, 31 percent for debt securities, 5 percent for real estate and 22 percent for other investments. The target allocations for health care assets are approximately 51 percent for equity securities, 31 percent for debt securities, 3 percent for real estate and 15 percent for other investments. The allocation percentages above include the effects of combining derivatives with other investments to manage asset allocations and exposures to interest rates and foreign currency exchange. The assets are well diversified and are managed by professional investment firms as well as by investment professionals who are company employees. As a result of the company’s diversified investment policy, there were no significant concentrations of risk.
The expected long-term rate of return on plan assets reflects management’s expectations of long-term average rates of return on funds invested to provide for benefits included in the projected benefit obligations. The expected return is based on the outlook for inflation and for returns in multiple asset classes, while also considering historical returns, asset allocation and investment strategy. The company’s approach has emphasized the long-term nature of the return estimate such that the return assumption is not changed unless there are fundamental changes in capital markets that affect the company’s expectations for returns over an extended period of time (i.e., 10 to 20 years). The average annual return of the company’s U.S. pension fund was approximately 9.3 percent during the past ten years and approximately 9.7 percent during the past 20 years. Since return premiums over inflation and total returns for major asset classes vary widely even over ten-year periods, recent history is not necessarily indicative of long-term future expected returns. The company’s systematic methodology for determining the long-term rate of return for the company’s investment strategies supports the long-term expected return assumptions.
The company has created certain Voluntary Employees’ Beneficiary Association trusts (VEBAs) for the funding of postretirement health care benefits. The future expected asset returns for these VEBAs are lower than the expected return on the other pension and health care plan assets due to investment in a higher proportion of liquid securities. These assets are in addition to the other postretirement health care plan assets that have been funded under Section 401(h) of the U.S. Internal Revenue Code and maintained in a separate account in the company’s pension plan trust.
The company has defined contribution plans related to employee investment and savings plans primarily in the U.S. The company’s contributions and costs under these plans were $155 million in 2012, $108 million in 2011 and $85 million in 2010. The contribution rate varies primarily based on the company’s performance in the prior year and employee participation in the plans.
The provision for income taxes by taxing jurisdiction and by significant component consisted of the following in millions of dollars:
2012
2011
2010
Current:
U.S.:
Federal
$
1,277
$
928
$
574
State
119
144
50
Foreign
355
520
363
Total current
1,751
1,592
987
Deferred:
U.S.:
Federal
(76
)
(135
)
156
State
(7
)
(28
)
11
Foreign
(9
)
(5
)
8
Total deferred
(92
)
(168
)
175
Provision for income taxes
$
1,659
$
1,424
$
1,162
Based upon the location of the company’s operations, the consolidated income before income taxes in the U.S. in 2012, 2011 and 2010 was $3,582 million, $2,618 million and $2,048 million, respectively, and in foreign countries was $1,152 million, $1,605 million and $977 million, respectively. Certain foreign operations are branches of Deere & Company and are, therefore, subject to U.S. as well as foreign income tax regulations. The pretax income by location and the preceding analysis of the income tax provision by taxing jurisdiction are, therefore, not directly related.
A comparison of the statutory and effective income tax provision and reasons for related differences in millions of dollars follow:
2012
2011
2010
U. S. federal income tax provision at a statutory rate of 35 percent
$
1,657
$
1,478
$
1,059
Increase (decrease) resulting from:
Valuation allowance on foreign deferred taxes
200
18
5
State and local income taxes, net of federal income tax benefit
73
75
40
Nondeductible health care claims*
123
Nondeductible goodwill impairment charge
6
7
Nontaxable foreign partnership earnings
(172
)
Tax rates on foreign earnings
(69
)
(70
)
(59
)
Research and development tax credits
(10
)
(38
)
(5
)
Wind energy production tax credits
(30
)
Other-net
(26
)
(39
)
22
Provision for income taxes
$
1,659
$
1,424
$
1,162
* Cumulative adjustment from change in law. Effect included in state taxes was $7 million.
At October 31, 2012, accumulated earnings in certain subsidiaries outside the U.S. totaled $3,209 million for which no provision for U.S. income taxes or foreign withholding taxes has been made, because it is expected that such earnings will be reinvested outside the U.S. indefinitely. Determination of the amount of unrecognized deferred tax liability on these unremitted earnings is not practicable. At October 31, 2012, the amount of cash and cash equivalents and marketable securities held by these foreign subsidiaries was $628 million.
Deferred income taxes arise because there are certain items that are treated differently for financial accounting than for income tax reporting purposes. An analysis of the deferred income tax assets and liabilities at October 31 in millions of dollars follows:
2012
2011
Deferred
Deferred
Deferred
Deferred
Tax
Tax
Tax
Tax
Assets
Liabilities
Assets
Liabilities
Other postretirement benefit liabilities
$
2,136
$
1,944
Tax over book depreciation
$
606
$
492
Accrual for sales allowances
546
438
Pension liabilities - net
457
279
Lease transactions
317
309
Accrual for employee benefits
249
189
Tax loss and tax credit carryforwards
249
121
Share-based compensation
133
113
Inventory
131
152
Goodwill and other intangible assets
110
123
Allowance for credit losses
92
115
Deferred gains on distributed foreign earnings
84
83
Deferred compensation
40
37
Undistributed foreign earnings
11
19
Other items
443
115
348
112
Less valuation allowances
(285
)
(74
)
Deferred income tax assets and liabilities
$
4,275
$
1,159
$
3,745
$
1,055
Deere & Company files a consolidated federal income tax return in the U.S., which includes the wholly-owned financial services subsidiaries. These subsidiaries account for income taxes generally as if they filed separate income tax returns.
At October 31, 2012, certain tax loss and tax credit carryforwards of $249 million were available with $127 million expiring from 2013 through 2032 and $122 million with an indefinite carryforward period.
The Patient Protection and Affordable Care Act as amended by the Healthcare and Education Reconciliation Act of 2010 was signed into law in the company’s second fiscal quarter of 2010. Under the legislation, to the extent the company’s future health care drug expenses are reimbursed under the Medicare Part D retiree drug subsidy program, the expenses will no longer be tax deductible effective November 1, 2013. Since the tax effects for the retiree health care liabilities were reflected in the company’s financial statements, the entire impact of this tax change relating to the future retiree drug costs was recorded in tax expense in the second quarter of 2010, which was the period in which the legislation was enacted. As a result of the legislation, the company’s tax expenses increased approximately $130 million in 2010.
A reconciliation of the total amounts of unrecognized tax benefits at October 31 in millions of dollars follows:
2012
2011
2010
Beginning of year balance
$
199
$
218
$
260
Increases to tax positions taken during the current year
46
23
36
Increases to tax positions taken during prior years
54
13
83
Decreases to tax positions taken during prior years
(14
)
(42
)
(133
)
Decreases due to lapse of statute of limitations
(9
)
(13
)
(2
)
Settlements
(1
)
(19
)
Foreign exchange
(11
)
1
(7
)
End of year balance
$
265
$
199
$
218
The amount of unrecognized tax benefits at October 31, 2012 that would affect the effective tax rate if the tax benefits were recognized was $65 million. The remaining liability was related to tax positions for which there are offsetting tax receivables, or the uncertainty was only related to timing. The company expects that any reasonably possible change in the amounts of unrecognized tax benefits in the next twelve months would not be significant.
The company files its tax returns according to the tax laws of the jurisdictions in which it operates, which includes the U.S. federal jurisdiction, and various state and foreign jurisdictions. The U.S. Internal Revenue Service has completed the examination of the company’s federal income tax returns for periods prior to 2009. The years 2009 and 2010 federal income tax returns are currently under examination. Various state and foreign income tax returns, including major tax jurisdictions in Canada and Germany, also remain subject to examination by taxing authorities.
The company’s policy is to recognize interest related to income taxes in interest expense and interest income, and recognize penalties in selling, administrative and general expenses. During 2012, 2011 and 2010, the total amount of expense from interest and penalties was $6 million, $3 million and $3 million and the interest income was $1 million, $3 million and $5 million, respectively. At October 31, 2012 and 2011, the liability for accrued interest and penalties totaled $39 million and $39 million and the receivable for interest was $1 million and $7 million, respectively.
The major components of other income and other operating expenses consisted of the following in millions of dollars:
2012
2011
2010
Other income
Insurance premiums and fees earned
$
248
$
236
$
198
Revenues from services
233
217
276
Investment income
14
11
10
Other
180
160
122
Total
$
675
$
624
$
606
Other operating expenses
Depreciation of equipment on operating leases
$
339
$
306
$
288
Insurance claims and expenses
245
193
146
Cost of services
122
115
198
Other
76
102
116
Total
$
782
$
716
$
748
The company issues insurance policies for crop insurance and extended equipment warranties. Beginning in 2011, the crop insurance subsidiary utilized reinsurance to limit its losses and reduce its exposure to claims. Prior to 2011, the crop insurance business was conducted through managing general agency agreements with external insurance companies. Although reinsurance contracts permit recovery of certain claims from reinsurers, the insurance subsidiary is not relieved of its primary obligation to the policyholders. The premiums ceded by the crop insurance subsidiary in 2012 and 2011 were $251 million and $246 million, and claims recoveries on the ceded business were $493 million and $271 million, respectively. These amounts from reinsurance are netted against the insurance premiums and fees earned and the insurance claims and expenses in the table above.
Unconsolidated affiliated companies are companies in which Deere & Company generally owns 20 percent to 50 percent of the outstanding voting shares. Deere & Company does not control these companies and accounts for its investments in them on the equity basis. The investments in these companies primarily consist of Bell Equipment Limited (32 percent ownership), Deere-Hitachi Construction Machinery Corporation (50 percent ownership), John Deere Tiantuo Company, Ltd. (51 percent ownership), Xuzhou XCG John Deere Machinery Manufacturing Co., Ltd. (50 percent ownership) and Ashok Leyland John Deere Construction Equipment Company Private Limited (50 percent ownership). The unconsolidated affiliated companies primarily manufacture or market equipment. Deere & Company’s share of the income or loss of these companies is reported in the consolidated income statement under “Equity in income (loss) of unconsolidated affiliates.” The investment in these companies is reported in the consolidated balance sheet under “Investments in unconsolidated affiliates.”
Combined financial information of the unconsolidated affiliated companies in millions of dollars follows:
Operations
2012
2011
2010
Sales
$
2,722
$
2,233
$
1,502
Net income (loss)
(1
)
34
23
Deere & Company’s equity in net income (loss)
(3
)
9
11
Financial Position
2012
2011
Total assets
$
1,621
$
1,357
Total external borrowings
345
321
Total net assets
558
495
Deere & Company’s share of the net assets
215
202
Consolidated retained earnings at October 31, 2012 include undistributed earnings of the unconsolidated affiliates of $63 million. Dividends from unconsolidated affiliates were $.2 million in 2012, $18 million in 2011 and $6 million in 2010.
All marketable securities are classified as available-for-sale, with unrealized gains and losses shown as a component of stockholders’ equity. Realized gains or losses from the sales of marketable securities are based on the specific identification method.
The amortized cost and fair value of marketable securities at October 31 in millions of dollars follow:
Gross
Gross
Amortized
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
2012
U.S. government debt securities
$
1,193
$
7
$
1,200
Municipal debt securities
35
3
38
Corporate debt securities
100
10
110
Mortgage-backed securities*
117
6
$
1
122
Marketable securities
$
1,445
$
26
$
1
$
1,470
2011
U.S. government debt securities
$
571
$
6
$
1
$
576
Municipal debt securities
34
2
36
Corporate debt securities
83
6
89
Mortgage-backed securities*
82
4
86
Marketable securities
$
770
$
18
$
1
$
787
* Primarily issued by U.S. government sponsored enterprises.
The contractual maturities of debt securities at October 31, 2012 in millions of dollars follow:
Amortized
Fair
Cost
Value
Due in one year or less
$
813
$
813
Due after one through five years
366
370
Due after five through 10 years
85
93
Due after 10 years
64
72
Mortgage-backed securities
117
122
Debt securities
$
1,445
$
1,470
Actual maturities may differ from contractual maturities because some securities may be called or prepaid. Because of the potential for prepayment on mortgage-backed securities, they are not categorized by contractual maturity. Proceeds from the sales of available-for-sale securities were $7 million in 2012, $2 million in 2011 and none in 2010. Realized gains, realized losses, the increase (decrease) in net unrealized gains or losses and unrealized losses that have been continuous for over twelve months were not significant in 2012, 2011 and 2010. Unrealized losses at October 31, 2012 and 2011 were primarily the result of an increase in interest rates and were not recognized in income due to the ability and intent to hold to maturity. There were no impairment write-downs in the periods reported.
Trade accounts and notes receivable at October 31 consisted of the following in millions of dollars:
2012
2011
Trade accounts and notes:
Agriculture and turf
$
3,074
$
2,618
Construction and forestry
725
676
Trade accounts and notes receivable—net
$
3,799
$
3,294
At October 31, 2012 and 2011, dealer notes included in the previous table were $95 million and $97 million, and the allowance for doubtful trade receivables was $66 million and $72 million, respectively.
The equipment operations sell a significant portion of their trade receivables to financial services and provide compensation to these operations at approximate market rates of interest.
Trade accounts and notes receivable primarily arise from sales of goods to independent dealers. Under the terms of the sales to dealers, interest is primarily charged to dealers on outstanding balances, from the earlier of the date when goods are sold to retail customers by the dealer or the expiration of certain interest-free periods granted at the time of the sale to the dealer, until payment is received by the company. Dealers cannot cancel purchases after the equipment is shipped and are responsible for payment even if the equipment is not sold to retail customers. The interest-free periods are determined based on the type of equipment sold and the time of year of the sale. These periods range from one to twelve months for most equipment. Interest-free periods may not be extended. Interest charged may not be forgiven and the past due interest rates exceed market rates. The company evaluates and assesses dealers on an ongoing basis as to their creditworthiness and generally retains a security interest in the goods associated with the trade receivables. The company is obligated to repurchase goods sold to a dealer upon cancellation or termination of the dealer’s contract for such causes as change in ownership and closeout of the business.
Trade accounts and notes receivable have significant concentrations of credit risk in the agriculture and turf sector and construction and forestry sector as shown in the previous table. On a geographic basis, there is not a disproportionate concentration of credit risk in any area.
Financing Receivables
Financing receivables at October 31 consisted of the following in millions of dollars:
2012
2011
Unrestricted/Securitized
Unrestricted/Securitized
Retail notes:
Equipment:
Agriculture and turf
$
14,144
$
3,126
$
12,969
$
2,597
Construction and forestry
1,091
553
1,036
362
Recreational products
4
Total
15,235
3,679
14,009
2,959
Wholesale notes
3,888
3,006
Revolving charge accounts
2,488
2,518
Financing leases (direct and sales-type)
1,411
1,242
Operating loans
42
84
Total financing receivables
23,064
3,679
20,859
2,959
Less:
Unearned finance income:
Equipment notes
619
44
635
36
Financing leases
126
121
Total
745
44
756
36
Allowance for credit losses
160
17
179
18
Financing receivables — net
$
22,159
$
3,618
$
19,924
$
2,905
The residual values for investments in financing leases at October 31, 2012 and 2011 totaled $79 million and $75 million, respectively.
Financing receivables have significant concentrations of credit risk in the agriculture and turf sector and construction and forestry sector as shown in the previous table. On a geographic basis, there is not a disproportionate concentration of credit risk in any area. The company retains as collateral a security interest in the equipment associated with retail notes, wholesale notes and financing leases.
Financing receivables at October 31 related to the company’s sales of equipment that were included in the table above consisted of the following in millions of dollars:
2012
2011
Unrestricted
Unrestricted
Retail notes*:
Equipment:
Agriculture and turf
$
1,810
$
1,633
Construction and forestry
313
310
Total
2,123
1,943
Wholesale notes
3,888
3,006
Sales-type leases
836
776
Total
6,847
5,725
Less:
Unearned finance income:
Equipment notes
191
197
Sales-type leases
61
64
Total
252
261
Financing receivables related to the company’s sales of equipment
$
6,595
$
5,464
* These retail notes generally arise from sales of equipment by company-owned dealers or through direct sales.
Financing receivable installments, including unearned finance income, at October 31 are scheduled as follows in millions of dollars:
2012
2011
Unrestricted/Securitized
Unrestricted/Securitized
Due in months:
0 - 12
$
11,486
$
1,437
$
10,311
$
1,192
13 - 24
4,257
1,004
3,937
807
25 - 36
3,232
712
2,960
524
37 - 48
2,278
399
2,032
305
49 - 60
1,356
120
1,196
119
Thereafter
455
7
423
12
Total
$
23,064
$
3,679
$
20,859
$
2,959
The maximum terms for retail notes are generally seven years for agriculture and turf equipment and five years for construction and forestry equipment. The maximum term for financing leases is generally five years, while the average term for wholesale notes is less than twelve months.
At October 31, 2012 and 2011, the unpaid balances of receivables administered but not owned were $120 million and $146 million, respectively. At October 31, 2012 and 2011, worldwide financing receivables administered, which include financing receivables administered but not owned, totaled $25,897 million and $22,974 million, respectively.
Past due balances of financing receivables still accruing finance income represent the total balance held (principal plus accrued interest) with any payment amounts 30 days or more past the contractual payment due date. Non-performing financing receivables represent loans for which the company has ceased accruing finance income. These receivables are generally 120 days delinquent and the estimated uncollectible amount, after charging the dealer’s withholding account, has been written off to the allowance for credit losses. Finance income for non-performing receivables is recognized on a cash basis. Accrual of finance income is resumed when the receivable becomes contractually current and collections are reasonably assured.
An age analysis of past due and non-performing financing receivables at October 31, 2012 follows in millions of dollars:
30-59
60-89
90 Days
Days
Days
or Greater
Total
Past Due
Past Due
Past Due*
Past Due
Retail Notes:
Agriculture and turf
$
60
$
25
$
17
$
102
Construction and forestry
39
18
9
66
Other:
Agriculture and turf
21
6
3
30
Construction and forestry
8
2
2
12
Total
$
128
$
51
$
31
$
210
Total
Total
Total
Non-
Financing
Past Due
Performing
Current
Receivables
Retail Notes:
Agriculture and turf
$
102
$
117
$
16,432
$
16,651
Construction and forestry
66
13
1,521
1,600
Other:
Agriculture and turf
30
11
6,464
6,505
Construction and forestry
12
3
1,183
1,198
Total
$
210
$
144
$
25,600
25,954
Less allowance for credit losses
177
Total financing receivables - net
$
25,777
* Financing receivables that are 90 days or greater past due and still accruing finance income.
An age analysis of past due and non-performing financing receivables at October 31, 2011 follows in millions of dollars:
30-59
60-89
90 Days
Days
Days
or Greater
Total
Past Due
Past Due
Past Due*
Past Due
Retail Notes:
Agriculture and turf
$
81
$
30
$
25
$
136
Construction and forestry
45
20
11
76
Other:
Agriculture and turf
23
10
5
38
Construction and forestry
7
4
2
13
Total
$
156
$
64
$
43
$
263
Total
Total
Total
Non-
Financing
Past Due
Performing
Current
Receivables
Retail Notes:
Agriculture and turf
$
136
$
132
$
14,667
$
14,935
Construction and forestry
76
17
1,264
1,357
Recreational products
4
4
Other:
Agriculture and turf
38
16
5,655
5,709
Construction and forestry
13
5
1,003
1,021
Total
$
263
$
170
$
22,593
23,026
Less allowance for credit losses
197
Total financing receivables - net
$
22,829
* Financing receivables that are 90 days or greater past due and still accruing finance income.
An analysis of the allowance for credit losses and investment in financing receivables follows in millions of dollars:
Revolving
Retail
Charge
Notes
Accounts
Other
Total
2012
Allowance:
Beginning of year balance
$
130
$
40
$
27
$
197
Provision (credit)
(12
)
8
3
(1
)
Write-offs
(8
)
(30
)
(4
)
(42
)
Recoveries
10
22
1
33
Translation adjustments
(10
)
(10
)
End of year balance
$
110
$
40
$
27
$
177
Balance individually evaluated*
$
1
$
1
Financing receivables:
End of year balance
$
18,251
$
2,488
$
5,215
$
25,954
Balance individually evaluated*
$
11
$
1
$
1
$
13
* Remainder is collectively evaluated.
2011
Allowance:
Beginning of year balance
$
144
$
44
$
37
$
225
Provision (credit)
3
8
(2
)
9
Write-offs
(29
)
(40
)
(10
)
(79
)
Recoveries
12
28
2
42
End of year balance
$
130
$
40
$
27
$
197
Balance individually evaluated*
$
1
$
1
Financing receivables:
End of year balance
$
16,296
$
2,518
$
4,212
$
23,026
Balance individually evaluated*
$
12
$
11
$
23
* Remainder is collectively evaluated.
A comparative analysis of the allowance for credit losses follows in millions of dollars:
2012
2011
2010
Beginning of year balance
$
197
$
225
$
239
Provision (credit)
(1
)
9
100
Write-offs
(42
)
(79
)
(147
)
Recoveries
33
42
31
Translation adjustments
(10
)
2
End of year balance
$
177
$
197
$
225
Past-due amounts over 30 days represented .81 percent and 1.14 percent of the receivables financed at October 31, 2012 and 2011, respectively. The allowance for credit losses represented .68 percent and .86 percent of financing receivables outstanding at October 31, 2012 and 2011, respectively. In addition, at October 31, 2012 and 2011, the company’s financial services operations had $194 million and $188 million, respectively, of deposits withheld from dealers and merchants available for potential credit losses.
Financing receivables are considered impaired when it is probable the company will be unable to collect all amounts due according to the contractual terms. Receivables reviewed for impairment generally include those that are either past due, or have provided bankruptcy notification, or require significant collection efforts. Receivables that are impaired are generally classified as non-performing.
An analysis of the impaired financing receivables at October 31 follows in millions of dollars:
Unpaid
Average
Recorded
Principal
Specific
Recorded
Investment
Balance
Allowance
Investment
2012
Receivables with specific allowance*
$
1
$
1
$
1
$
1
Receivables without a specific allowance**
9
9
10
Total
$
10
$
10
$
1
$
11
Agriculture and turf
$
6
$
6
$
1
$
6
Construction and forestry
$
4
$
4
$
5
2011
Receivables with specific allowance*
$
7
$
7
$
1
$
8
Receivables without a specific allowance**
9
9
12
Total
$
16
$
16
$
1
$
20
Agriculture and turf
$
11
$
11
$
1
$
14
Construction and forestry
$
5
$
5
$
6
* Finance income recognized was not material.
** Primarily retail notes.
A troubled debt restructuring is generally the modification of debt in which a creditor grants a concession it would not otherwise consider to a debtor that is experiencing financial difficulties. These modifications may include a reduction of the stated interest rate, an extension of the maturity dates, a reduction of the face amount or maturity amount of the debt, or a reduction of accrued interest. During 2012 and 2011, the company identified 138 and 213 financing receivable contracts, primarily retail notes, as troubled debt restructurings with aggregate balances of $5 million and $11 million pre-modification and $4 million and $10 million post-modification, respectively. During these same periods, there were no significant troubled debt restructurings that subsequently defaulted and were written off. At October 31, 2012, the company had no commitments to lend additional funds to borrowers whose accounts were modified in troubled debt restructurings.
Other Receivables
Other receivables at October 31 consisted of the following in millions of dollars:
2012
2011
Taxes receivable
$
971
$
844
Reinsurance receivables
569
242
Insurance premium receivables
69
58
Other
182
187
Other receivables
$
1,791
$
1,331
Reinsurance and insurance premium receivables are associated with the financial services’ crop insurance subsidiary (see Note 9).
The company, as a part of its overall funding strategy, periodically transfers certain financing receivables (retail notes) into variable interest entities (VIEs) that are special purpose entities (SPEs), or a non-VIE banking operation, as part of its asset-backed securities programs (securitizations). The structure of these transactions is such that the transfer of the retail notes did not meet the criteria of sales of receivables, and is, therefore, accounted for as a secured borrowing. SPEs utilized in securitizations of retail notes differ from other entities included in the company’s consolidated statements because the assets they hold are legally isolated. Use of the assets held by the SPEs or the non-VIE is restricted by terms of the documents governing the securitization transactions.
In securitizations of retail notes related to secured borrowings, the retail notes are transferred to certain SPEs or to a non-VIE banking operation, which in turn issue debt to investors. The resulting secured borrowings are recorded as “Short-term securitization borrowings” on the balance sheet.
The securitized retail notes are recorded as “Financing receivables securitized - net” on the balance sheet. The total restricted assets on the balance sheet related to these securitizations include the financing receivables securitized less an allowance for credit losses, and other assets primarily representing restricted cash. For those securitizations in which retail notes are transferred into SPEs, the SPEs supporting the secured borrowings are consolidated unless the company does not have both the power to direct the activities that most significantly impact the SPEs’ economic performance and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the SPEs. No additional support to these SPEs beyond what was previously contractually required has been provided during the reporting periods.
In certain securitizations, the company consolidates the SPEs since it has both the power to direct the activities that most significantly impact the SPEs’ economic performance through its role as servicer of all the receivables held by the SPEs, and the obligation through variable interests in the SPEs to absorb losses or receive benefits that could potentially be significant to the SPEs. The restricted assets (retail notes securitized, allowance for credit losses and other assets) of the consolidated SPEs totaled $2,330 million and $1,523 million at October 31, 2012 and 2011, respectively. The liabilities (short-term securitization borrowings and accrued interest) of these SPEs totaled $2,262 million and $1,395 million at October 31, 2012 and 2011, respectively. The credit holders of these SPEs do not have legal recourse to the company’s general credit.
In certain securitizations, the company transfers retail notes to a non-VIE banking operation, which is not consolidated since the company does not have a controlling interest in the entity. The company’s carrying values and interests related to the securitizations with the unconsolidated non-VIE were restricted assets (retail notes securitized, allowance for credit losses and other assets) of $324 million and $369 million at October 31, 2012 and 2011, respectively. The liabilities (short-term securitization borrowings and accrued interest) were $310 million and $346 million at October 31, 2012 and 2011, respectively.
In certain securitizations, the company transfers retail notes into bank-sponsored, multi-seller, commercial paper conduits, which are SPEs that are not consolidated. The company does not service a significant portion of the conduits’ receivables, and therefore, does not have the power to direct the activities that most significantly impact the conduits’ economic performance. These conduits provide a funding source to the company (as well as other transferors into the conduit) as they fund the retail notes through the issuance of commercial paper. The company’s carrying values and variable interest related to these conduits were restricted assets (retail notes securitized, allowance for credit losses and other assets) of $1,049 million and $1,109 million at October 31, 2012 and 2011, respectively. The liabilities (short-term securitization borrowings and accrued interest) related to these conduits were $1,004 million and $1,038 million at October 31, 2012 and 2011, respectively.
The company’s carrying amount of the liabilities to the unconsolidated conduits, compared to the maximum exposure to loss related to these conduits, which would only be incurred in the event of a complete loss on the restricted assets, was as follows at October 31 in millions of dollars:
2012
Carrying value of liabilities
$
1,004
Maximum exposure to loss
1,049
The total assets of unconsolidated VIEs related to securitizations were approximately $31 billion at October 31, 2012.
The components of consolidated restricted assets related to secured borrowings in securitization transactions at October 31 were as follows in millions of dollars:
2012
2011
Financing receivables securitized (retail notes)
$
3,635
$
2,923
Allowance for credit losses
(17
)
(18
)
Other assets
85
96
Total restricted securitized assets
$
3,703
$
3,001
The components of consolidated secured borrowings and other liabilities related to securitizations at October 31 were as follows in millions of dollars:
2012
2011
Short-term securitization borrowings
$
3,575
$
2,777
Accrued interest on borrowings
1
2
Total liabilities related to restricted securitized assets
$
3,576
$
2,779
The secured borrowings related to these restricted securitized retail notes are obligations that are payable as the retail notes are liquidated. Repayment of the secured borrowings depends primarily on cash flows generated by the restricted assets. Due to the company’s short-term credit rating, cash collections from these restricted assets are not required to be placed into a segregated collection account until immediately prior to the time payment is required to the secured creditors. At October 31, 2012, the maximum remaining term of all securitized retail notes was approximately six years.
Operating leases arise primarily from the leasing of John Deere equipment to retail customers. Initial lease terms generally range from four to 60 months. Net equipment on operating leases totaled $2,528 million and $2,150 million at October 31, 2012 and 2011, respectively. The equipment is depreciated on a straight-line basis over the terms of the lease. The accumulated depreciation on this equipment was $499 million and $478 million at October 31, 2012 and 2011, respectively. The corresponding depreciation expense was $339 million in 2012, $306 million in 2011 and $288 million in 2010.
Future payments to be received on operating leases totaled $1,067 million at October 31, 2012 and are scheduled in millions of dollars as follows: 2013 — $445, 2014 — $308, 2015 — $188, 2016 — $103 and 2017 — $23.
Most inventories owned by Deere & Company and its U.S. equipment subsidiaries are valued at cost, on the “last-in, first-out” (LIFO) basis. Remaining inventories are generally valued at the lower of cost, on the “first-in, first-out” (FIFO) basis, or market. The value of gross inventories on the LIFO basis represented 61 percent and 59 percent of worldwide gross inventories at FIFO value at October 31, 2012 and 2011, respectively. If all inventories had been valued on a FIFO basis, estimated inventories by major classification at October 31 in millions of dollars would have been as follows:
A summary of property and equipment at October 31 in millions of dollars follows:
Useful Lives*
(Years)
2012
2011
Equipment Operations
Land
$
137
$
117
Buildings and building equipment
23
2,584
2,430
Machinery and equipment
11
4,393
4,254
Dies, patterns, tools, etc
8
1,330
1,213
All other
6
819
731
Construction in progress
938
649
Total at cost
10,201
9,394
Less accumulated depreciation
5,250
5,107
Total
4,951
4,287
Financial Services
Land
4
4
Buildings and building equipment
27
70
71
All other
6
36
39
Total at cost
110
114
Less accumulated depreciation
49
49
Total
61
65
Property and equipment-net
$
5,012
$
4,352
* Weighted-averages
Total property and equipment additions in 2012, 2011 and 2010 were $1,376 million, $1,059 million and $802 million and depreciation was $555 million, $516 million and $540 million, respectively. Capitalized interest was $7 million, $8 million and $6 million in the same periods, respectively. The cost of leased property and equipment under capital leases of $47 million and $41 million and accumulated depreciation of $25 million and $23 million at October 31, 2012 and 2011, respectively, is included in property and equipment.
Capitalized software has an estimated useful life of three years. The amounts of total capitalized software costs, including purchased and internally developed software, classified as “Other Assets” at October 31, 2012 and 2011 were $684 million and $592 million, less accumulated amortization of $493 million and $451 million, respectively. Amortization of these software costs was $89 million in 2012, $73 million in 2011 and $68 million in 2010. The cost of leased software assets under capital leases amounting to $42 million and $40 million at October 31, 2012 and 2011, respectively, is included in other assets.
The cost of compliance with foreseeable environmental requirements has been accrued and did not have a material effect on the company’s consolidated financial statements.
The changes in amounts of goodwill by operating segments were as follows in millions of dollars:
Agriculture
Construction
and
and
Turf
Forestry
Total
Balance at October 31, 2010
$
705
$
610
$
1,315
Less accumulated impairment losses
316
316
Net balance
389
610
999
Acquisitions
1
1
Translation adjustments and other
(5
)
5
Balance at October 31, 2011
701
615
1,316
Less accumulated impairment losses
316
316
Net balance
385
615
1,000
Impairment loss*
(33
)
(33
)
Translation adjustments and other
(15
)
(31
)
(46
)
Balance at October 31, 2012
686
584
1,270
Less accumulated impairment losses
349
349
Goodwill
$
337
$
584
$
921
* See Note 5.
The components of other intangible assets are as follows in millions of dollars:
Useful Lives*
(Years)
2012
2011
Amortized intangible assets:
Customer lists and relationships
12
$
99
$
109
Technology, patents, trademarks and other
17
109
104
Total at cost
208
213
Less accumulated amortization**
107
90
Total
101
123
Unamortized intangible assets:
Licenses
4
4
Other intangible assets-net
$
105
$
127
* Weighted-averages
** Accumulated amortization at 2012 and 2011 for customer lists and relationships was $60 million and $54 million and technology, patents, trademarks and other was $47 million and $36 million, respectively.
Other intangible assets are stated at cost less accumulated amortization. The amortization of other intangible assets in 2012, 2011 and 2010 was $21 million, $20 million and $18 million, respectively. The estimated amortization expense for the next five years is as follows in millions of dollars: 2013 — $18, 2014 — $16, 2015 — $15, 2016 — $14 and 2017 — $13.
Total short-term borrowings at October 31 consisted of the following in millions of dollars:
2012
2011
Equipment Operations
Commercial paper
$
146
$
265
Notes payable to banks
84
19
Long-term borrowings due within one year
195
244
Total
425
528
Financial Services
Commercial paper
1,061
1,014
Notes payable to banks
117
61
Long-term borrowings due within one year
4,790
*
5,249
*
Total
5,968
6,324
Short-term borrowings
6,393
6,852
Financial Services
Short-term securitization borrowings
3,575
2,777
Total short-term borrowings
$
9,968
$
9,629
* Includes unamortized fair value adjustments related to interest rate swaps.
The short-term securitization borrowings for financial services are secured by financing receivables (retail notes) on the balance sheet (see Note 13). Although these securitization borrowings are classified as short-term since payment is required if the retail notes are liquidated early, the payment schedule for these borrowings of $3,575 million at October 31, 2012 based on the expected liquidation of the retail notes in millions of dollars is as follows: 2013 — $1,853, 2014 — $1,043, 2015 — $499, 2016 — $162, 2017 — $17 and 2018 — $1.
The weighted-average interest rates on total short-term borrowings, excluding current maturities of long-term borrowings, at October 31, 2012 and 2011 were 1.0 percent and 1.1 percent, respectively.
Lines of credit available from U.S. and foreign banks were $5,194 million at October 31, 2012. At October 31, 2012, $3,793 million of these worldwide lines of credit were unused. For the purpose of computing the unused credit lines, commercial paper and short-term bank borrowings, excluding secured borrowings and the current portion of long-term borrowings, were primarily considered to constitute utilization. Included in the above lines of credit were long-term credit facility agreements for $2,750 million, expiring in April 2015, and $1,500 million, expiring in April 2017. The agreements are mutually extendable and the annual facility fees are not significant. These credit agreements require 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, 2012 was $8,273 million. Alternatively under this provision, the equipment operations had the capacity to incur additional debt of $15,364 million at October 31, 2012. All of these requirements of the credit agreements have been met during the periods included in the consolidated financial statements.
Deere & Company has an agreement with Capital Corporation pursuant to which it has agreed 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 Corporation’s consolidated tangible net worth at not less than $50 million. This agreement also obligates Deere & Company to make payments to Capital Corporation such that its consolidated ratio of earnings to fixed charges is not less than 1.05 to 1 for each fiscal quarter. Deere & Company’s 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, Deere & Company’s obligations under the agreement are not measured by the amount of Capital Corporation’s indebtedness, obligations or other liabilities. Deere & Company’s 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 during the periods included in the consolidated financial statements.
Accounts payable and accrued expenses at October 31 consisted of the following in millions of dollars:
2012
2011
Equipment Operations
Accounts payable:
Trade payables
$
2,287
$
2,163
Dividends payable
179
168
Other
147
99
Accrued expenses:
Employee benefits
1,337
1,188
Product warranties
733
662
Dealer sales discounts
1,413
1,092
Other
1,583
1,497
Total
7,679
6,869
Financial Services
Accounts payable:
Deposits withheld from dealers and merchants
194
188
Other
505
324
Accrued expenses:
Unearned revenue
452
345
Accrued interest
160
191
Employee benefits
69
68
Insurance claims reserve*
449
186
Other
301
246
Total
2,130
1,548
Eliminations**
820
612
Accounts payable and accrued expenses
$
8,989
$
7,805
* See Note 9.
** Primarily trade receivable valuation accounts which are reclassified as accrued expenses by the equipment operations as a result of their trade receivables being sold to financial services.
Long-term borrowings at October 31 consisted of the following in millions of dollars:
2012
2011
Equipment Operations
Notes and debentures:
6.95% notes due 2014: ($700 principal)
$
718
*
$
736
*
4.375% notes due 2019
750
750
8-1/2% debentures due 2022
105
105
2.60% notes due 2022
1,000
6.55% debentures due 2028
200
200
5.375% notes due 2029
500
500
8.10% debentures due 2030
250
250
7.125% notes due 2031
300
300
3.90% notes due 2042
1,250
Other notes
372
326
Total
5,445
3,167
Financial Services
Notes and debentures:
Medium-term notes due 2013 — 2023: (principal $15,242 - 2012, $11,911 - 2011) Average interest rates of 1.6% — 2012, 2.0% — 2011
15,737
*
12,261
*
5.10% debentures due 2013: ($650 principal) Swapped $450 in 2011 to variable interest rate of 1.1% — 2011
679
*
2.75% senior note due 2022: ($500 principal) Swapped $500 in 2012 to variable interest rate of 1.1% — 2012
518
*
Other notes
753
853
Total
17,008
13,793
Long-term borrowings**
$
22,453
$
16,960
* Includes unamortized fair value adjustments related to interest rate swaps.
** All interest rates are as of year end.
The approximate principal amounts of the equipment operations’ long-term borrowings maturing in each of the next five years in millions of dollars are as follows: 2013 — $195, 2014 — $778, 2015 — $240, 2016 — $23 and 2017 — $25. The approximate principal amounts of the financial services’ long-term borrowings maturing in each of the next five years in millions of dollars are as follows: 2013 — $4,774, 2014 — $4,283, 2015 — $3,480, 2016 — $1,843 and 2017 — $2,651.
At October 31, 2012, future minimum lease payments under capital leases amounted to $57 million as follows: 2013 — $28, 2014 — $17, 2015 — $4, 2016 — $2, 2017 — $2 and later years $4. Total rental expense for operating leases was $215 million in 2012, $175 million in 2011 and $189 million in 2010. At October 31, 2012, future minimum lease payments under operating leases amounted to $462 million as follows: 2013 — $148, 2014 — $108, 2015 — $74, 2016 — $45, 2017 — $30 and later years $57.
The company generally determines its warranty liability by applying historical claims rate experience to the estimated amount of equipment that has been sold and is still under warranty based on dealer inventories and retail sales. The historical claims rate is primarily determined by a review of five-year claims costs and current quality developments.
The premiums for the company’s extended warranties are primarily recognized in income in proportion to the costs expected to be incurred over the contract period. The unamortized extended warranty premiums (deferred revenue) included in the following table totaled $292 million and $230 million at October 31, 2012 and 2011, respectively.
A reconciliation of the changes in the warranty liability and unearned premiums in millions of dollars follows:
Warranty Liability/
Unearned Premiums
2012
2011
Beginning of year balance
$
892
$
762
Payments
(580
)
(517
)
Amortization of premiums received
(100
)
(93
)
Accruals for warranties
666
665
Premiums received
164
120
Foreign exchange
(17
)
(45
)
End of year balance
$
1,025
$
892
At October 31, 2012, the company had approximately $290 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. At October 31, 2012, the company had accrued losses of approximately $8 million under these agreements. The maximum remaining term of the receivables guaranteed at October 31, 2012 was approximately five years.
At October 31, 2012, the company had commitments of approximately $418 million for the construction and acquisition of property and equipment. At October 31, 2012, the company also had pledged or restricted assets of $129 million, primarily as collateral for borrowings. In addition, see Note 13 for restricted assets associated with borrowings related to securitizations.
The company also had other miscellaneous contingencies totaling approximately $50 million at October 31, 2012, for which it believes the probability for payment is substantially remote. The accrued liability for these contingencies was not material at October 31, 2012.
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, trademark and environmental matters. The company 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.
Changes in the common stock account in millions were as follows:
Number of
Shares Issued
Amount
Balance at October 31, 2009
536.4
$
2,996
Stock options and other
110
Balance at October 31, 2010
536.4
3,106
Stock options and other
146
Balance at October 31, 2011
536.4
3,252
Stock options and other
100
Balance at October 31, 2012
536.4
$
3,352
The number of common shares the company is authorized to issue is 1,200 million. The number of authorized preferred shares, none of which has been issued, is nine million.
The Board of Directors at its meeting in May 2008 authorized the repurchase of up to $5,000 million of additional common stock (58.5 million shares based on the October 31, 2012 closing common stock price of $85.44 per share). At October 31, 2012, this repurchase program had $2,489 million (29.1 million shares at the same price) remaining to be repurchased. Repurchases of the company’s common stock under this plan will be made from time to time, at the company’s discretion, in the open market.
A reconciliation of basic and diluted net income per share attributable to Deere & Company follows in millions, except per share amounts:
2012
2011
2010
Net income attributable to Deere & Company
$
3,064.7
$
2,799.9
$
1,865.0
Less income allocable to participating securities
.8
1.0
.7
Income allocable to common stock
$
3,063.9
$
2,798.9
$
1,864.3
Average shares outstanding
397.1
417.4
424.0
Basic per share
$
7.72
$
6.71
$
4.40
Average shares outstanding
397.1
417.4
424.0
Effect of dilutive stock options
4.4
5.0
4.6
Total potential shares outstanding
401.5
422.4
428.6
Diluted per share
$
7.63
$
6.63
$
4.35
All stock options outstanding were included in the computation during 2012, 2011 and 2010, except 1.8 million options in 2012, none in 2011 and 1.9 million options in 2010 that had an antidilutive effect under the treasury stock method.
The company issues stock options and restricted stock awards to key employees under plans approved by stockholders. Restricted stock is also issued to nonemployee directors for their services as directors under a plan approved by stockholders. Options are awarded with the exercise price equal to the market price and become exercisable in one to three years after grant. Options expire ten years after the date of grant. Restricted stock awards generally vest after three years. The compensation cost for stock options, service based restricted stock units and market/service based restricted stock units, which is based on the fair value at the grant date, is recognized on a straight-line basis over the requisite period the employee is required to render service. The compensation cost for performance/service based units, which is based on the fair value at the grant date, is recognized over the employees’ requisite service period and periodically adjusted for the probable number of shares to be awarded. According to these plans at October 31, 2012, the company is authorized to grant an additional 13.7 million shares related to stock options or restricted stock.
The fair value of each option award was estimated on the date of grant using a binomial lattice option valuation model. Expected volatilities are based on implied volatilities from traded call options on the company’s stock. The expected volatilities are constructed from the following three components: the starting implied volatility of short-term call options traded within a few days of the valuation date; the predicted implied volatility of long-term call options; and the trend in implied volatilities over the span of the call options’ time to maturity. The company uses historical data to estimate option exercise behavior and employee termination within the valuation model. The expected term of options granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding. The risk-free rates utilized for periods throughout the contractual life of the options are based on U.S. Treasury security yields at the time of grant.
The assumptions used for the binomial lattice model to determine the fair value of options follow:
2012
2011
2010
Risk-free interest rate
.01% - 2.0%
.08% - 3.3%
.01% - 3.6%
Expected dividends
1.9%
1.9%
2.9%
Expected volatility
34.1% - 41.9%
34.4% - 34.6%
35.3% - 47.2%
Weighted-average volatility
33.6%
34.4%
35.6%
Expected term (in years)
6.8 - 7.8
6.8 - 7.8
6.6 - 7.7
Stock option activity at October 31, 2012 and changes during 2012 in millions of dollars and shares follow:
Remaining
Contractual
Aggregate
Exercise
Term
Intrinsic
Shares
Price*
(Years)
Value
Outstanding at beginning of year
16.9
$
51.70
Granted
2.5
74.24
Exercised
(1.8
)
33.33
Expired or forfeited
(.2
)
74.51
Outstanding at end of year
17.4
56.78
5.96
$
500.2
Exercisable at end of year
12.8
51.58
5.08
432.5
* Weighted-averages
The weighted-average grant-date fair values of options granted during 2012, 2011 and 2010 were $22.51, $25.61 and $15.71, respectively. The total intrinsic values of options exercised during 2012, 2011 and 2010 were $88 million, $231 million and $139 million, respectively. During 2012, 2011 and 2010, cash received from stock option exercises was $61 million, $170 million and $129 million with tax benefits of $33 million, $85 million and $51 million, respectively.
The company granted 266 thousand and 222 thousand restricted stock units to employees and nonemployee directors in 2012 and 2011, of which 122 thousand and 92 thousand are subject to service based only conditions, 72 thousand and 65 thousand are subject to performance/service based conditions and 72 thousand and 65 thousand are subject to market/service based conditions, respectively. The service based only units award one share of common stock for each unit at the end of the vesting period and include dividend equivalent payments. The performance/service based units are subject to a performance metric based on the company’s compound annual revenue growth rate, compared to a benchmark group of companies over the vesting period. The market/service based units are subject to a market related metric based on total shareholder return, compared to the same benchmark group of companies over the vesting period. The performance/service based units and the market/service based units both award common stock in a range of zero to 200 percent for each unit granted based on the level of the metric achieved and do not include dividend equivalent payments over the vesting period. The weighted-average fair values of the service based only units at the grant dates during 2012 and 2011 were $75.27 and $81.90 per unit, respectively, based on the market price of a share of underlying common stock. The fair value of the performance/service based units at the grant date during 2012 and 2011 were $70.14 and $76.17 per unit, respectively, based on the market price of a share of underlying common stock excluding dividends. The fair value of the market/service based units at the grant date during 2012 and 2011 were $92.85 and $107.31 per unit, respectively, based on a lattice valuation model excluding dividends.
The company’s nonvested restricted shares at October 31, 2012 and changes during 2012 in millions of shares follow:
Grant-Date
Shares
Fair Value*
Service based only
Nonvested at beginning of year
.6
$
49.91
Granted
.1
75.27
Vested
(.3
)
41.59
Nonvested at end of year
.4
66.55
Performance/service and market/service based
Nonvested at beginning of year
.1
$
91.74
Granted
.2
81.50
Nonvested at end of year
.3
86.39
* Weighted-averages
During 2012, 2011 and 2010, the total share-based compensation expense was $75 million, $69 million and $71 million, respectively, with recognized income tax benefits of $28 million, $26 million and $26 million, respectively. At October 31, 2012, there was $36 million of total unrecognized compensation cost from share-based compensation arrangements granted under the plans, which is related to nonvested shares. This compensation is expected to be recognized over a weighted-average period of approximately two years. The total grant-date fair values of stock options and restricted shares vested during 2012, 2011 and 2010 were $76 million, $72 million and $71 million, respectively.
The company currently uses shares that have been repurchased through its stock repurchase programs to satisfy share option exercises. At October 31, 2012, the company had 149 million shares in treasury stock and 29 million shares remaining to be repurchased under its current publicly announced repurchase program (see Note 23).
Other comprehensive income items are transactions recorded stockholders’ equity during the year, excluding net income and transactions with stockholders. Following are the items included in other comprehensive income (loss) for Deere & Company and the related tax effects in millions of dollars:
Before
Tax
After
Tax
(Expense)
Tax
Amount
Credit
Amount
2010
Retirement benefits adjustment:
Net actuarial losses and prior service cost
$
(213
)
$
77
$
(136
)
Reclassification of actuarial losses and prior service cost to net income
474
(180
)
294
Net unrealized gain
261
(103
)
158
Cumulative translation adjustment
49
(13
)
36
Unrealized gain on derivatives:
Hedging loss
(56
)
19
(37
)
Reclassification of realized loss to net income
79
(27
)
52
Net unrealized gain
23
(8
)
15
Unrealized holding gain and net unrealized gain on investments
8
(3
)
5
Total other comprehensive income (loss)
$
341
$
(127
)
$
214
2011
Retirement benefits adjustment:
Net actuarial losses and prior service cost
$
(989
)
$
368
$
(621
)
Reclassification of actuarial losses and prior service cost to net income
450
(167
)
283
Net unrealized loss
(539
)
201
(338
)
Cumulative translation adjustment
14
4
18
Unrealized gain on derivatives:
Hedging gain
31
(11
)
20
Reclassification of realized loss to net income
1
1
Net unrealized gain
32
(11
)
21
Unrealized holding gain and net unrealized gain on investments
2
(1
)
1
Total other comprehensive income (loss)
$
(491
)
$
193
$
(298
)
2012
Retirement benefits adjustment:
Net actuarial losses and prior service cost
$
(1,341
)
$
477
$
(864
)
Reclassification of actuarial losses and prior service cost to net income
380
(140
)
240
Net unrealized loss
(961
)
337
(624
)
Cumulative translation adjustment
(272
)
2
(270
)
Unrealized loss on derivatives:
Hedging loss
(61
)
21
(40
)
Reclassification of realized loss to net income
54
(19
)
35
Net unrealized loss
(7
)
2
(5
)
Unrealized holding gain and net unrealized gain on investments
The fair values of financial instruments that do not approximate the carrying values at October 31 in millions of dollars follow:
2012
2011
Carrying
Fair
Carrying
Fair
Value
Value*
Value
Value
Financing receivables — net
$
22,159
$
22,244
$
19,924
$
19,919
Financing receivables securitized — net
$
3,618
$
3,615
$
2,905
$
2,907
Short-term securitization borrowings
$
3,575
$
3,584
$
2,777
$
2,789
Long-term borrowings due within one year:
Equipment operations
$
195
$
194
$
244
$
233
Financial services
4,790
4,871
5,249
5,331
Total
$
4,985
$
5,065
$
5,493
$
5,564
Long-term borrowings:
Equipment operations
$
5,445
$
6,237
$
3,167
$
3,771
Financial services
17,008
17,438
13,793
14,154
Total
$
22,453
$
23,675
$
16,960
$
17,925
* Fair value measurements above were Level 3 for all financing receivables and Level 2 for all borrowings.
Fair values of the financing receivables that were issued long-term were based on the discounted values of their related cash flows at interest rates currently being offered by the company for similar financing receivables. The fair values of the remaining financing receivables approximated the carrying amounts.
Fair values of long-term borrowings and short-term securitization borrowings were based on current market quotes for identical or similar borrowings and credit risk, or on the discounted values of their related cash flows at current market interest rates. Certain long-term borrowings have been swapped to current variable interest rates. The carrying values of these long-term borrowings included adjustments related to fair value hedges.
Assets and liabilities measured at October 31 at fair value on a recurring basis in millions of dollars follow:
2012*
2011*
Marketable securities
U.S. government debt securities
$
1,200
$
576
Municipal debt securities
38
36
Corporate debt securities
110
89
Mortgage-backed securities**
122
86
Total marketable securities
1,470
787
Other assets
Derivatives:
Interest rate contracts
609
471
Foreign exchange contracts
17
12
Cross-currency interest rate contracts
11
2
Total assets***
$
2,107
$
1,272
Accounts payable and accrued expenses
Derivatives:
Interest rate contracts
$
72
$
61
Foreign exchange contracts
18
100
Cross-currency interest rate contracts
59
7
Total liabilities
$
149
$
168
* All measurements above were Level 2 measurements except for Level 1 measurements of U.S. government debt securities of $1,139 million and $540 million at October 31, 2012 and 2011, respectively.
** Primarily issued by U.S. government sponsored enterprises.
*** Excluded from this table are cash equivalents, which are carried at cost that approximates fair value. The cash equivalents consist primarily of money market funds.
Fair value, nonrecurring, Level 3 measurements at October 31 in millions of dollars follow:
Fair Value*
Losses
2012
2011
2012
2011
2010
Financing receivables**
$
5
$
1
$
5
Goodwill
$
33
$
27
Property and equipment held for sale***
$
35
* Does not include cost to sell.
** Primarily wholesale notes and operating loans.
*** See Note 4.
Level 1 measurements consist of quoted prices in active markets for identical assets or liabilities. Level 2 measurements include significant other observable inputs such as quoted prices for similar assets or liabilities in active markets; identical assets or liabilities in inactive markets; observable inputs such as interest rates and yield curves; and other market-corroborated inputs. Level 3 measurements include significant unobservable inputs.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the company uses various methods including market and income approaches. The company utilizes valuation models and techniques that maximize the use of observable inputs. The models are industry-standard models that consider various assumptions including time values and yield curves as well as other economic measures. These valuation techniques are consistently applied.
The following is a description of the valuation methodologies the company uses to measure certain financial instruments on the balance sheet and nonmonetary assets at fair value:
Marketable Securities — The portfolio of investments is primarily valued on a market approach (matrix pricing model) in which all significant inputs are observable or can be derived from or corroborated by observable market data such as interest rates, yield curves, volatilities, credit risk and prepayment speeds.
Derivatives — The company’s derivative financial instruments consist of interest rate swaps and caps, foreign currency forwards and swaps and cross-currency interest rate swaps. The portfolio is valued based on an income approach (discounted cash flow) using market observable inputs, including swap curves and both forward and spot exchange rates for currencies.
Financing Receivables — Specific reserve impairments are based on the fair value of the collateral, which is measured using a market approach (appraisal values or realizable values). Inputs include a selection of realizable values.
Goodwill — The impairment of goodwill is based on the implied fair value measured as the difference between the fair value of the reporting unit and the fair value of the unit’s identifiable net assets. An estimate of the fair value of the reporting unit is determined by an income approach (discounted cash flows), which includes inputs such as interest rates.
Property and Equipment Held for Sale — The impairment of long-lived assets held for sale is measured at the lower of the carrying amount, or fair value less cost to sell. Fair value is based on the probable sale price. The inputs include estimates of final sale price adjustments.
Certain of the company’s derivative agreements contain credit support provisions that require the company to post collateral based on reductions in credit ratings. The aggregate fair value of all derivatives with credit-risk-related contingent features that were in a liability position at October 31, 2012 and 2011 was $32 million and $23 million, respectively. The company, due to its credit rating and amounts of net liability position, has not posted any collateral. If the credit-risk-related contingent features were triggered, the company would be required to post full collateral for any liability position, prior to considering applicable netting provisions.
Derivative instruments are subject to significant concentrations of credit risk to the banking sector. The company manages individual counterparty exposure by setting limits that consider the credit rating of the counterparty and the size of other financial commitments and exposures between the company and the counterparty banks. All interest rate derivatives are transacted under International Swaps and Derivatives Association (ISDA) documentation. Some of these agreements include credit support provisions. Each master agreement permits the net settlement of amounts owed in the event of default. The maximum amount of loss that the company would incur if counterparties to derivative instruments fail to meet their obligations, not considering collateral received or netting arrangements, was $637 million and $485 million as of October 31, 2012 and 2011, respectively. The amount of collateral received at October 31, 2012 and 2011 to offset this potential maximum loss was $102 million and $25 million, respectively. The netting provisions of the agreements would reduce the maximum amount of loss the company would incur if the counterparties to derivative instruments fail to meet their obligations by an additional $92 million and $59 million as of October 31, 2012 and 2011, respectively. None of the concentrations of risk with any individual counterparty was considered significant at October 31, 2012 and 2011.
Cash Flow Hedges
Certain interest rate and cross-currency interest rate contracts (swaps) were designated as hedges of future cash flows from borrowings. The total notional amounts of the receive-variable/pay-fixed interest rate contracts at October 31, 2012 and 2011 were $2,850 million and $1,350 million, respectively. The total notional amounts of the cross-currency interest rate contracts were $923 million and $853 million at October 31, 2012 and 2011, respectively. The effective portions of the fair value gains or losses on these cash flow hedges were recorded in other comprehensive income (OCI) and subsequently reclassified into interest expense or other operating expenses (foreign exchange) in the same periods during which the hedged transactions affected earnings. These amounts offset the effects of interest rate or foreign currency exchange rate changes on the related borrowings. Any ineffective portions of the gains or losses on all cash flow interest rate contracts designated as cash flow hedges were recognized currently in interest expense or other operating expenses (foreign exchange) and were not material during any years presented. The cash flows from these contracts were recorded in operating activities in the statement of consolidated cash flows.
The amount of loss recorded in OCI at October 31, 2012 that is expected to be reclassified to interest expense or other operating expenses in the next twelve months if interest rates or exchange rates remain unchanged is approximately $10 million after-tax. These contracts mature in up to 71 months. There were no gains or losses reclassified from OCI to earnings based on the probability that the original forecasted transaction would not occur.
Fair Value Hedges
Certain interest rate contracts (swaps) were designated as fair value hedges of borrowings. The total notional amounts of the receive-fixed/pay-variable interest rate contracts at October 31, 2012 and 2011 were $9,266 million and $7,730 million, respectively. The effective portions of the fair value gains or losses on these contracts were offset by fair value gains or losses on the hedged items (fixed-rate borrowings). Any ineffective portions of the gains or losses were recognized currently in interest expense. The ineffective portions were a loss of $2 million in 2012 and a loss of $5 million in 2011. The cash flows from these contracts were recorded in operating activities in the statement of consolidated cash flows.
The gains (losses) on these contracts and the underlying borrowings recorded in interest expense follow in millions of dollars:
2012
2011
Interest rate contracts*
$
180
$
16
Borrowings**
(182
)
(21
)
* Includes changes in fair values of interest rate contracts excluding net accrued interest income of $155 million and $172 million during 2012 and 2011, respectively.
** Includes adjustments for fair values of hedged borrowings excluding accrued interest expense of $282 million and $277 million during 2012 and 2011, respectively.
Derivatives Not Designated as Hedging Instruments
The company has certain interest rate contracts (swaps and caps), foreign exchange contracts (forwards and swaps) and cross-currency interest rate contracts (swaps), which were not formally designated as hedges. These derivatives were held as economic hedges for underlying interest rate or foreign currency exposures primarily for certain borrowings and purchases or sales of inventory. The total notional amounts of the interest rate swaps at October 31, 2012 and 2011 were $4,400 million and $3,216 million, the foreign exchange contracts were $3,999 million and $3,058 million and the cross-currency interest rate contracts were $78 million and $52 million, respectively. At October 31, 2012 and 2011, there were also $1,445 million and $1,402 million, respectively, of interest rate caps purchased and the same amounts sold at the same capped interest rate to facilitate borrowings through securitization of retail notes. The fair value gains or losses from the interest rate contracts were recognized currently in interest expense and the gains or losses from foreign exchange contracts in cost of sales or other operating expenses, generally offsetting over time the expenses on the exposures being hedged. The cash flows from these non-designated contracts were recorded in operating activities in the statement of consolidated cash flows.
Fair values of derivative instruments in the consolidated balance sheet at October 31 in millions of dollars follow:
2012
2011
Other Assets
Designated as hedging instruments:
Interest rate contracts
$
536
$
404
Cross-currency interest rate contracts
10
Total designated
546
404
Not designated as hedging instruments:
Interest rate contracts
73
67
Foreign exchange contracts
17
12
Cross-currency interest rate contracts
1
2
Total not designated
91
81
Total derivatives
$
637
$
485
Accounts Payable and Accrued Expenses
Designated as hedging instruments:
Interest rate contracts
$
12
$
13
Cross-currency interest rate contracts
58
7
Total designated
70
20
Not designated as hedging instruments:
Interest rate contracts
60
48
Foreign exchange contracts
18
100
Cross-currency interest rate contracts
1
Total not designated
79
148
Total derivatives
$
149
$
168
The classification and gains (losses) including accrued interest expense related to derivative instruments on the statement of consolidated income consisted of the following in millions of dollars:
2012
2011
2010
Fair Value Hedges
Interest rate contracts — Interest expense
$
335
$
188
$
372
Cash Flow Hedges
Recognized in OCI
(Effective Portion):
Interest rate contracts — OCI (pretax)*
(28
)
(5
)
(14
)
Foreign exchange contracts — OCI (pretax)*
(33
)
36
(42
)
Reclassified from OCI
(Effective Portion):
Interest rate contracts — Interest expense*
(16
)
(20
)
(68
)
Foreign exchange contracts — Other expense*
(38
)
19
(11
)
Recognized Directly in Income
(Ineffective Portion)
**
**
**
Not Designated as Hedges
Interest rate contracts — Interest expense*
$
(13
)
$
(1
)
$
25
Foreign exchange contracts — Cost of sales
(12
)
(51
)
(19
)
Foreign exchange contracts — Other expense*
7
(127
)
(92
)
Total not designated
$
(18
)
$
(179
)
$
(86
)
* Includes interest and foreign exchange gains (losses) from cross-currency interest rate contracts.
SEGMENT AND GEOGRAPHIC AREA DATA FOR THE YEARS ENDED OCTOBER 31, 2012, 2011 AND 2010
12 Months Ended
Oct. 31, 2012
SEGMENT AND GEOGRAPHIC AREA DATA FOR THE YEARS ENDED OCTOBER 31, 2012, 2011 AND 2010
SEGMENT AND GEOGRAPHIC AREA DATA FOR THE YEARS ENDED OCTOBER 31, 2012, 2011 AND 2010
28. SEGMENT AND GEOGRAPHIC AREA DATA FOR THE YEARS ENDED OCTOBER 31, 2012, 2011 AND 2010
The company’s operations are presently organized and reported in three major business segments described as follows:
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, corn pickers, cotton and sugarcane harvesters and related front-end equipment and sugarcane loaders; 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; precision agricultural irrigation equipment and supplies; landscape and nursery products; 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 operating loans and offers crop risk mitigation products and extended equipment warranties.
Because of integrated manufacturing operations and common administrative and marketing support, a substantial number of allocations must be made to determine operating segment and geographic area data. Intersegment sales and revenues represent sales of components and finance charges, which are generally based on market prices.
Information relating to operations by operating segment in millions of dollars follows. In addition to the following unaffiliated sales and revenues by segment, intersegment sales and revenues in 2012, 2011 and 2010 were as follows: agriculture and turf net sales of $84 million, $98 million and $59 million, construction and forestry net sales of $1 million, $3 million and $7 million, and financial services revenues of $219 million, $210 million and $224 million, respectively.
OPERATING SEGMENTS
2012
2011
2010
Net sales and revenues
Unaffiliated customers:
Agriculture and turf net sales
$
27,123
$
24,094
$
19,868
Construction and forestry net sales
6,378
5,372
3,705
Total net sales
33,501
29,466
23,573
Financial services revenues
2,235
2,163
2,074
Other revenues*
421
384
358
Total
$
36,157
$
32,013
$
26,005
* Other revenues are primarily the equipment operations’ revenues for finance and interest income, and other income as disclosed in Note 31, net of certain intercompany eliminations.
Operating profit
Agriculture and turf
$
3,921
$
3,447
$
2,790
Construction and forestry
476
392
119
Financial services*
712
725
499
Total operating profit
5,109
4,564
3,408
Interest income
43
47
42
Investment income
2
Interest expense
(231
)
(191
)
(184
)
Foreign exchange losses from equipment operations’ financing activities
(11
)
(11
)
(30
)
Corporate expenses — net
(181
)
(177
)
(200
)
Income taxes
(1,659
)
(1,424
)
(1,162
)
Total
(2,037
)
(1,756
)
(1,534
)
Net income
3,072
2,808
1,874
Less: Net income attributable to noncontrolling interests
7
8
9
Net income attributable to Deere & Company
$
3,065
$
2,800
$
1,865
* Operating profit of the financial services business segment includes the effect of its interest expense and foreign exchange gains or losses.
Interest income*
Agriculture and turf
$
29
$
23
$
20
Construction and forestry
2
3
3
Financial services
1,610
1,581
1,528
Corporate
43
47
42
Intercompany
(248
)
(231
)
(229
)
Total
$
1,436
$
1,423
$
1,364
* Does not include finance rental income for equipment on operating leases.
Interest expense
Agriculture and turf
$
168
$
152
$
165
Construction and forestry
36
26
21
Financial services
596
621
670
Corporate
231
191
184
Intercompany
(248
)
(231
)
(229
)
Total
$
783
$
759
$
811
Depreciation* and amortization expense
Agriculture and turf
$
550
$
505
$
470
Construction and forestry
93
82
79
Financial services
361
328
366
Total
$
1,004
$
915
$
915
* Includes depreciation for equipment on operating leases.
Equity in income (loss) of unconsolidated affiliates
Agriculture and turf
$
(2
)
$
5
$
13
Construction and forestry
(2
)
3
(3
)
Financial services
1
1
1
Total
$
(3
)
$
9
$
11
Identifiable operating assets
Agriculture and turf
$
10,429
$
9,178
$
7,593
Construction and forestry
3,365
2,915
2,353
Financial services
34,495
29,795
27,507
Corporate*
7,977
6,319
5,814
Total
$
56,266
$
48,207
$
43,267
* Corporate assets are primarily the equipment operations’ retirement benefits, deferred income tax assets, marketable securities and cash and cash equivalents as disclosed in Note 31, net of certain intercompany eliminations.
Capital additions
Agriculture and turf
$
1,145
$
909
$
729
Construction and forestry
228
148
73
Financial services
3
2
Total
$
1,376
$
1,059
$
802
Investments in unconsolidated affiliates
Agriculture and turf
$
32
$
35
$
66
Construction and forestry
174
159
172
Financial services
9
8
7
Total
$
215
$
202
$
245
The company views and has historically disclosed its operations as consisting of two geographic areas, the U.S. and Canada, and outside the U.S. and Canada, shown below in millions of dollars. No individual foreign country’s net sales and revenues were material for disclosure purposes.
GEOGRAPHIC AREAS
2012
2011
2010
Net sales and revenues
Unaffiliated customers:
U.S. and Canada:
Equipment operations net sales (87%)*
$
20,807
$
17,357
$
14,794
Financial services revenues (79%)*
1,930
1,857
1,817
Total
22,737
19,214
16,611
Outside U.S. and Canada:
Equipment operations net sales
12,694
12,109
8,779
Financial services revenues
305
306
257
Total
12,999
12,415
9,036
Other revenues
421
384
358
Total
$
36,157
$
32,013
$
26,005
* The percentages indicate the approximate proportion of each amount that relates to the U.S. only and are based upon a three-year average for 2012, 2011 and 2010.
Common stock per share sales prices from New York Stock Exchange composite transactions quotations follow:
First
Second
Third
Fourth
Quarter
Quarter
Quarter
Quarter
2012 Market price
High
$
87.99
$
89.05
$
83.43
$
86.86
Low
$
71.92
$
76.51
$
70.59
$
73.81
2011 Market price
High
$
90.99
$
99.24
$
97.39
$
80.82
Low
$
74.70
$
86.91
$
78.51
$
61.72
At October 31, 2012, there were 25,669 holders of record of the company’s $1 par value common stock.
Quarterly information with respect to net sales and revenues and earnings is shown in the following schedule. The company’s fiscal year ends in October and its interim periods (quarters) end in January, April and July. Such information is shown in millions of dollars except for per share amounts.
First
Second
Third
Fourth
Quarter
Quarter
Quarter
Quarter
2012*
Net sales and revenues
$
6,766
$
10,009
$
9,590
$
9,792
Net sales
6,119
9,405
8,930
9,047
Gross profit
1,543
2,570
2,174
2,206
Income before income taxes
800
1,597
1,215
1,122
Net income attributable to Deere & Company
533
1,056
788
688
Per share data:
Basic
1.32
2.64
2.00
1.76
Diluted
1.30
2.61
1.98
1.75
Dividends declared
.41
.46
.46
.46
Dividends paid
.41
.41
.46
.46
2011
Net sales and revenues
$
6,119
$
8,910
$
8,372
$
8,612
Net sales
5,514
8,327
7,722
7,903
Gross profit
1,420
2,221
1,929
1,977
Income before income taxes
746
1,341
1,079
1,057
Net income attributable to Deere & Company
514
904
712
670
Per share data:
Basic
1.22
2.15
1.71
1.63
Diluted
1.20
2.12
1.69
1.62
Dividends declared
.35
.35
.41
.41
Dividends paid
.30
.35
.35
.41
Net income per share for each quarter must be computed independently. As a result, their sum may not equal the total net income per share for the year.
A quarterly dividend of $.46 per share was declared at the Board of Directors meeting on December 5, 2012, payable on February 1, 2013 to stockholders of record on December 31, 2012.
For the Years Ended October 31, 2012, 2011 and 2010
(In millions of dollars)
EQUIPMENT OPERATIONS*
FINANCIAL SERVICES
2012
2011
2010
2012
2011
2010
Net Sales and Revenues
Net sales
$
33,500.9
$
29,466.1
$
23,573.2
Finance and interest income
74.0
73.3
64.8
$
2,155.7
$
2,080.8
$
1,975.1
Other income
493.2
455.5
386.2
298.8
292.5
322.5
Total
34,068.1
29,994.9
24,024.2
2,454.5
2,373.3
2,297.6
Costs and Expenses
Cost of sales
25,009.2
21,920.7
17,400.3
Research and development expenses
1,433.6
1,226.2
1,052.4
Selling, administrative and general expenses
2,988.8
2,786.6
2,496.0
439.3
394.4
482.9
Interest expense
231.1
191.4
184.1
596.4
621.0
670.1
Interest compensation to Financial Services
203.6
178.5
186.3
Other operating expenses
178.1
192.5
177.9
708.1
634.2
646.7
Total
30,044.4
26,495.9
21,497.0
1,743.8
1,649.6
1,799.7
Income of Consolidated Group before Income Taxes
4,023.7
3,499.0
2,527.2
710.7
723.7
497.9
Provision for income taxes
1,407.6
1,169.6
1,035.2
251.8
253.9
126.4
Income of Consolidated Group
2,616.1
2,329.4
1,492.0
458.9
469.8
371.5
Equity in Income (Loss) of Unconsolidated Subsidiaries and Affiliates
Financial Services
460.3
471.0
372.5
1.4
1.2
.9
Other
(4.8
)
7.4
9.9
Total
455.5
478.4
382.4
1.4
1.2
.9
Net Income
3,071.6
2,807.8
1,874.4
460.3
471.0
372.4
Less: Net income (loss) attributable to noncontrolling interests
6.9
7.9
9.4
(.1
)
Net Income Attributable to Deere & Company
$
3,064.7
$
2,799.9
$
1,865.0
$
460.3
$
471.0
$
372.5
* Deere & Company with Financial Services on the equity basis.
The supplemental consolidating data is presented for informational purposes. The “Equipment Operations” reflect the basis of consolidation described in Note 1 to the consolidated financial statements. The consolidated group data in the “Equipment Operations” income statement reflect the results of the agriculture and turf operations and construction and forestry operations. Transactions between the “Equipment Operations” and “Financial Services” have been eliminated to arrive at the consolidated financial statements.
BALANCE SHEET
As of October 31, 2012 and 2011
(In millions of dollars except per share amounts)
EQUIPMENT OPERATIONS*
FINANCIAL SERVICES
2012
2011
2012
2011
ASSETS
Cash and cash equivalents
$
3,907.9
$
3,187.5
$
744.3
$
459.7
Marketable securities
1,101.5
502.6
368.9
284.7
Receivables from unconsolidated subsidiaries and affiliates
1,579.0
1,713.4
Trade accounts and notes receivable - net
1,279.7
1,093.9
3,333.3
2,807.2
Financing receivables - net
11.5
14.0
22,147.5
19,909.5
Financing receivables securitized - net
3,617.6
2,905.0
Other receivables
1,092.4
965.6
703.6
370.1
Equipment on operating leases - net
2,527.8
2,150.0
Inventories
5,170.0
4,370.6
Property and equipment - net
4,950.5
4,287.5
61.4
64.9
Investments in unconsolidated subsidiaries and affiliates
4,102.4
3,473.9
8.7
8.1
Goodwill
921.2
999.8
Other intangible assets - net
101.0
123.4
4.0
4.0
Retirement benefits
14.9
29.6
44.6
28.0
Deferred income taxes
3,497.3
3,052.8
50.3
91.2
Other assets
582.9
468.6
883.5
712.6
Total Assets
$
28,312.2
$
24,283.2
$
34,495.5
$
29,795.0
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Short-term borrowings
$
424.8
$
528.5
$
5,967.7
$
6,323.8
Short-term securitization borrowings
3,574.8
2,777.4
Payables to unconsolidated subsidiaries and affiliates
135.2
117.7
1,519.3
1,665.5
Accounts payable and accrued expenses
7,679.0
6,869.3
2,129.9
1,547.8
Deferred income taxes
93.3
99.0
338.3
354.7
Long-term borrowings
5,444.9
3,167.1
17,008.2
13,792.8
Retirement benefits and other liabilities
7,673.0
6,686.7
61.2
52.6
Total liabilities
21,450.2
17,468.3
30,599.4
26,514.6
Commitments and contingencies (Note 22)
STOCKHOLDERS’ EQUITY
Common stock, $1 par value (authorized — 1,200,000,000 shares; issued — 536,431,204 shares in 2012 and 2011), at paid-in amount
3,352.2
3,251.7
1,834.7
1,570.6
Common stock in treasury, 148,625,875 shares in 2012 and 130,361,345 shares in 2011, at cost
(8,813.8
)
(7,292.8
)
Retained earnings
16,875.2
14,519.4
1,958.3
1,541.5
Accumulated other comprehensive income (loss):
Retirement benefits adjustment
(4,759.0
)
(4,135.4
)
Cumulative translation adjustment
184.1
453.8
98.3
164.7
Unrealized loss on derivatives
(13.4
)
(8.3
)
(11.6
)
(8.3
)
Unrealized gain on investments
16.8
11.9
16.4
11.9
Accumulated other comprehensive income (loss)
(4,571.5
)
(3,678.0
)
103.1
168.3
Total Deere & Company stockholders’ equity
6,842.1
6,800.3
3,896.1
3,280.4
Noncontrolling interests
19.9
14.6
Total stockholders’ equity
6,862.0
6,814.9
3,896.1
3,280.4
Total Liabilities and Stockholders’ Equity
$
28,312.2
$
24,283.2
$
34,495.5
$
29,795.0
* Deere & Company with Financial Services on the equity basis.
The supplemental consolidating data is presented for informational purposes. The “Equipment Operations” reflect the basis of consolidation described in Note 1 to the consolidated financial statements. Transactions between the “Equipment Operations” and “Financial Services” have been eliminated to arrive at the consolidated financial statements.
STATEMENT OF CASH FLOWS
For the Years Ended October 31, 2012, 2011 and 2010
(In millions of dollars)
EQUIPMENT OPERATIONS*
FINANCIAL SERVICES
2012
2011
2010
2012
2011
2010
Cash Flows from Operating Activities
Net income
$
3,071.6
$
2,807.8
$
1,874.4
$
460.3
$
471.0
$
372.4
Adjustments to reconcile net income to net cash provided by operating activities:
Provision (credit) for doubtful receivables
6.0
4.5
6.3
(.9
)
9.0
100.1
Provision for depreciation and amortization
643.1
587.0
548.7
439.2
401.5
424.6
Goodwill impairment charges
33.4
27.2
Undistributed earnings of unconsolidated subsidiaries and affiliates
(413.7
)
(118.8
)
(156.7
)
(1.3
)
(1.0
)
(.9
)
Provision (credit) for deferred income taxes
(115.7
)
(278.3
)
74.8
23.9
110.2
100.2
Changes in assets and liabilities:
Trade receivables
(255.0
)
(109.5
)
(333.0
)
Insurance receivables
(338.5
)
(300.1
)
Inventories
(947.6
)
(1,281.8
)
(647.7
)
Accounts payable and accrued expenses
887.0
1,027.0
1,062.9
382.1
351.3
5.7
Accrued income taxes payable/receivable
(102.7
)
45.3
6.5
30.4
(44.1
)
15.6
Retirement benefits
71.2
483.2
(140.1
)
(7.9
)
12.1
(14.0
)
Other
70.5
(168.0
)
221.6
(109.9
)
55.1
270.5
Net cash provided by operating activities
2,948.1
2,998.4
2,544.9
877.4
1,065.0
1,274.2
Cash Flows from Investing Activities
Collections of receivables (excluding trade and wholesale)
14,320.7
13,333.1
12,287.7
Proceeds from maturities and sales of marketable securities
200.1
.3
40.2
32.2
38.4
Proceeds from sales of equipment on operating leases
799.5
683.4
621.9
Government grants related to property and equipment
92.3
Proceeds from sales of businesses, net of cash sold
30.2
911.1
34.9
Cost of receivables acquired (excluding trade and wholesale)
(16,730.2
)
(15,365.9
)
(13,681.6
)
Purchases of marketable securities
(802.2
)
(503.1
)
(120.0
)
(83.8
)
(63.4
)
Purchases of property and equipment
(1,316.2
)
(1,054.3
)
(735.5
)
(3.1
)
(2.4
)
(26.2
)
Cost of equipment on operating leases acquired
(1,562.0
)
(1,230.5
)
(1,098.4
)
Increase in investment in Financial Services
(264.1
)
(69.0
)
(43.8
)
Acquisitions of businesses, net of cash acquired
(60.8
)
(37.2
)
(8.3
)
Increase in trade and wholesale receivables
(1,518.5
)
(561.8
)
(838.8
)
Other
(95.6
)
(79.5
)
(32.9
)
138.8
(35.7
)
18.3
Net cash used for investing activities
(2,247.8
)
(855.3
)
(814.5
)
(4,634.6
)
(3,231.4
)
(2,658.1
)
Cash Flows from Financing Activities
Increase (decrease) in total short-term borrowings
(36.4
)
230.8
(127.9
)
931.3
(456.9
)
883.9
Change in intercompany receivables/payables
45.5
(552.6
)
(1,229.9
)
(45.5
)
552.6
1,229.9
Proceeds from long-term borrowings
2,521.5
69.0
305.0
8,120.5
5,586.0
2,316.0
Payments of long-term borrowings
(220.1
)
(11.5
)
(311.5
)
(5,175.9
)
(3,209.3
)
(3,364.2
)
Proceeds from issuance of common stock
61.0
170.0
129.1
Repurchases of common stock
(1,587.7
)
(1,667.0
)
(358.8
)
Capital investment from Equipment Operations
264.1
69.0
43.8
Dividends paid
(697.9
)
(593.1
)
(483.5
)
(43.5
)
(340.1
)
(217.2
)
Excess tax benefits from share-based compensation
30.1
70.1
43.5
Other
(32.7
)
(17.3
)
(20.7
)
(33.6
)
(31.2
)
(20.6
)
Net cash provided by (used for) financing activities
83.3
(2,301.6
)
(2,054.7
)
4,017.4
2,170.1
871.6
Effect of Exchange Rate Changes on Cash and Cash Equivalents
(63.2
)
(2.3
)
(17.2
)
24.4
13.7
(7.3
)
Net Increase (Decrease) in Cash and Cash Equivalents
720.4
(160.8
)
(341.5
)
284.6
17.4
(519.6
)
Cash and Cash Equivalents at Beginning of Year
3,187.5
3,348.3
3,689.8
459.7
442.3
961.9
Cash and Cash Equivalents at End of Year
$
3,907.9
$
3,187.5
$
3,348.3
$
744.3
$
459.7
$
442.3
* Deere & Company with Financial Services on the equity basis.
The supplemental consolidating data is presented for informational purposes. The “Equipment Operations” reflect the basis of consolidation described in Note 1 to the consolidated financial statements. Transactions between the “Equipment Operations” and “Financial Services” have been eliminated to arrive at the consolidated financial statements.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)
12 Months Ended
Oct. 31, 2012
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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. Insurance 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 $177 million in 2012, $163 million in 2011 and $154 million in 2010.
Depreciation and Amortization
Property and equipment, capitalized software and other intangible assets are 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 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 doubtful accounts, and any deferred fees or costs on originated financing receivables. Allowances for credit losses and doubtful accounts 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 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, or 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 Note 5).
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, or the underlying hedged transaction is no longer likely to occur, or 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 losses for foreign exchange in 2012, 2011 and 2010 were $96 million, $121 million and $75 million, respectively.
Consolidation, Policy
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.
Cash and Cash Equivalents, Policy
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.
Unremitted Earnings in Foreign Investment, Policy
At October 31, 2012, accumulated earnings in certain subsidiaries outside the U.S. totaled $3,209 million for which no provision for U.S. income taxes or foreign withholding taxes has been made, because it is expected that such earnings will be reinvested outside the U.S. indefinitely. Determination of the amount of unrecognized deferred tax liability on these unremitted earnings is not practicable. At October 31, 2012, the amount of cash and cash equivalents and marketable securities held by these foreign subsidiaries was $628 million.
Marketable Securities, Policy
Realized gains or losses from the sales of marketable securities are based on the specific identification method.
Financing Receivables - Non-Performing, Policy
Past due balances of financing receivables still accruing finance income represent the total balance held (principal plus accrued interest) with any payment amounts 30 days or more past the contractual payment due date. Non-performing financing receivables represent loans for which the company has ceased accruing finance income. These receivables are generally 120 days delinquent and the estimated uncollectible amount, after charging the dealer’s withholding account, has been written off to the allowance for credit losses. Finance income for non-performing receivables is recognized on a cash basis. Accrual of finance income is resumed when the receivable becomes contractually current and collections are reasonably assured.
Financing receivables are considered impaired when it is probable the company will be unable to collect all amounts due according to the contractual terms. Receivables reviewed for impairment generally include those that are either past due, or have provided bankruptcy notification, or require significant collection efforts. Receivables that are impaired are generally classified as non-performing.
Inventory Valuation, Policy
Most inventories owned by Deere & Company and its U.S. equipment subsidiaries are valued at cost, on the “last-in, first-out” (LIFO) basis. Remaining inventories are generally valued at the lower of cost, on the “first-in, first-out” (FIFO) basis, or market.
Extended Product Warranty, Policy
The premiums for the company’s extended warranties are primarily recognized in income in proportion to the costs expected to be incurred over the contract period.
Stock Option and Restricted Stock Awards, Policy
The compensation cost for stock options, service based restricted stock units and market/service based restricted stock units, which is based on the fair value at the grant date, is recognized on a straight-line basis over the requisite period the employee is required to render service. The compensation cost for performance/service based units, which is based on the fair value at the grant date, is recognized over the employees’ requisite service period and periodically adjusted for the probable number of shares to be awarded.
PENSION AND OTHER POSTRETIREMENT BENEFITS (Tables)
12 Months Ended
Oct. 31, 2012
PENSION AND OTHER POSTRETIREMENT BENEFITS
Components of Pension and Postretirement Benefit Costs
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:
2012
2011
2010
Pensions
Service cost
$
220
$
197
$
176
Interest cost
465
492
510
Expected return on plan assets
(787
)
(793
)
(761
)
Amortization of actuarial losses
202
148
113
Amortization of prior service cost
47
46
42
Early-retirement benefits
3
Settlements/curtailments
10
1
24
Net cost
$
160
$
91
$
104
Weighted-average assumptions
Discount rates
4.4
%
5.0
%
5.5
%
Rate of compensation increase
3.9
%
3.9
%
3.9
%
Expected long-term rates of return
8.0
%
8.1
%
8.3
%
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:
2012
2011
2010
Health care and life insurance
Service cost
$
49
$
44
$
44
Interest cost
281
326
337
Expected return on plan assets
(100
)
(113
)
(122
)
Amortization of actuarial losses
136
271
311
Amortization of prior service credit
(15
)
(16
)
(16
)
Net cost
$
351
$
512
$
554
Weighted-average assumptions
Discount rates
4.4
%
5.2
%
5.6
%
Expected long-term rates of return
7.7
%
7.7
%
7.8
%
Schedule of Benefit Plan Costs Recorded in Net Income and Other Changes in Plan Assets and Benefit Obligations Recorded in Other Comprehensive Income
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:
2012
2011
2010
Pensions
Net cost
$
160
$
91
$
104
Retirement benefit adjustments included in other comprehensive (income) loss:
Net actuarial losses
999
848
227
Prior service cost
5
9
14
Amortization of actuarial losses
(202
)
(148
)
(113
)
Amortization of prior service cost
(47
)
(46
)
(42
)
Settlements/curtailments
(10
)
(1
)
(24
)
Total loss recognized in other comprehensive (income) loss
745
662
62
Total recognized in comprehensive (income) loss
$
905
$
753
$
166
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:
2012
2011
2010
Health care and life insurance
Net cost
$
351
$
512
$
554
Retirement benefit adjustments included in other comprehensive (income) loss:
Net actuarial losses (gain)
335
132
(28
)
Prior service cost
2
Amortization of actuarial losses
(136
)
(271
)
(311
)
Amortization of prior service credit
15
16
16
Total (gain) loss recognized in other comprehensive (income) loss
216
(123
)
(323
)
Total recognized in comprehensive (income) loss
$
567
$
389
$
231
Schedule of Benefit Plan Obligations, Funded Status and the Assumptions Related to Obligations
The benefit plan obligations, funded status and the assumptions related to the obligations at October 31 in millions of dollars follow:
Health Care
and
Pensions
Life Insurance
2012
2011
2012
2011
Change in benefit obligations
Beginning of year balance
$
(10,925
)
$
(10,197
)
$
(6,652
)
$
(6,467
)
Service cost
(220
)
(197
)
(49
)
(44
)
Interest cost
(465
)
(492
)
(281
)
(326
)
Actuarial losses
(947
)
(656
)
(347
)
(113
)
Amendments
(5
)
(9
)
(2
)
Benefits paid
656
648
333
340
Health care subsidy receipts
(15
)
(14
)
Settlements/curtailments
10
1
Foreign exchange and other
62
(23
)
(10
)
(28
)
End of year balance
(11,834
)
(10,925
)
(7,023
)
(6,652
)
Change in plan assets (fair value)
Beginning of year balance
9,552
9,504
1,459
1,637
Actual return on plan assets
736
600
113
95
Employer contribution
441
79
37
43
Benefits paid
(656
)
(648
)
(333
)
(340
)
Settlements
(10
)
(1
)
Foreign exchange and other
(46
)
18
11
24
End of year balance
10,017
9,552
1,287
1,459
Funded status
$
(1,817
)
$
(1,373
)
$
(5,736
)
$
(5,193
)
Weighted-average assumptions
Discount rates
3.8
%
4.4
%
3.8
%
4.4
%
Rate of compensation increase
3.9
%
3.9
%
Schedule of Amounts Recognized in Balance Sheet and Accumulated Other Comprehensive Income - Pretax
The amounts recognized at October 31 in millions of dollars consist of the following:
Health Care
and
Pensions
Life Insurance
2012
2011
2012
2011
Amounts recognized in balance sheet
Noncurrent asset
$
20
$
30
Current liability
(53
)
(60
)
$
(23
)
$
(23
)
Noncurrent liability
(1,784
)
(1,343
)
(5,713
)
(5,170
)
Total
$
(1,817
)
$
(1,373
)
$
(5,736
)
$
(5,193
)
Amounts recognized in accumulated other comprehensive income — pretax
Net actuarial losses
$
5,260
$
4,473
$
2,266
$
2,067
Prior service cost (credit)
105
147
(47
)
(64
)
Total
$
5,365
$
4,620
$
2,219
$
2,003
Schedule of Accumulated Other Comprehensive Income Expected to be Amortized as Net Expense (Income) During Fiscal 2013
The amounts in accumulated other comprehensive income that are expected to be amortized as net expense (income) during fiscal 2013 in millions of dollars follow:
Health Care
and
Pensions
Life Insurance
Net actuarial losses
$
263
$
147
Prior service cost (credit)
33
(6
)
Total
$
296
$
141
Schedule of Future Benefits Expected to be Paid from the Benefit Plans and Medicare Subsidy Expected to be Received
The benefits expected to be paid from the benefit plans, which reflect expected future years of service, and the Medicare subsidy expected to be received are as follows in millions of dollars:
Health Care
Health Care
and
Subsidy
Pensions
Life Insurance
Receipts*
2013
$
682
$
338
$
4
2014
683
345
2015
680
356
2016
683
366
2017
689
384
2018 to 2022
3,490
1,947
* Medicare Part D subsidy.
Fair Values of Pension Plan and Health Care Assets
The fair values of the pension plan assets at October 31, 2012 follow in millions of dollars:
Total
Level 1
Level 2
Level 3
Cash and short-term investments
$
1,166
$
287
$
879
Equity:
U.S. equity securities
2,481
2,481
U.S. equity funds
43
8
35
International equity securities
1,477
1,477
International equity funds
411
49
362
Fixed Income:
Government and agency securities
404
379
25
Corporate debt securities
220
220
Mortgage-backed securities
126
126
Fixed income funds
853
92
761
Real estate
537
104
14
$
419
Private equity/venture capital
1,319
1,319
Hedge funds
578
2
422
154
Other investments
508
1
507
Derivative contracts - assets*
721
1
720
Derivative contracts - liabilities**
(454
)
(20
)
(434
)
Receivables, payables and other
(41
)
(41
)
Securities lending collateral
223
223
Securities lending liability
(223
)
(223
)
Securities sold short
(332
)
(332
)
Total net assets
$
10,017
$
4,488
$
3,637
$
1,892
* Includes contracts for interest rates of $707 million, foreign currency of $8 million and other of $6 million.
** Includes contracts for interest rates of $418 million, foreign currency of $12 million and other of $24 million.
The fair values of the health care assets at October 31, 2012 follow in millions of dollars:
Total
Level 1
Level 2
Level 3
Cash and short-term investments
$
78
$
11
$
67
Equity:
U.S. equity securities
319
319
U.S. equity funds
67
67
International equity securities
69
69
International equity funds
200
200
Fixed Income:
Government and agency securities
218
215
3
Corporate debt securities
35
35
Mortgage-backed securities
15
15
Fixed income funds
72
72
Real estate
53
7
29
$
17
Private equity/venture capital
54
54
Hedge funds
85
79
6
Other investments
21
21
Derivative contracts - assets*
8
8
Derivative contracts - liabilities**
(1
)
(1
)
Receivables, payables and other
8
8
Securities lending collateral
38
38
Securities lending liability
(38
)
(38
)
Securities sold short
(14
)
(14
)
Total net assets
$
1,287
$
682
$
528
$
77
* Includes contracts for interest rates of $7 million and foreign currency of $1 million.
** Includes contracts for foreign currency of $1 million.
The fair values of the pension plan assets at October 31, 2011 follow in millions of dollars:
Total
Level 1
Level 2
Level 3
Cash and short-term investments
$
1,074
$
179
$
895
Equity:
U.S. equity securities
2,070
2,070
U.S. equity funds
49
11
38
International equity securities
1,086
1,086
International equity funds
319
29
290
Fixed Income:
Government and agency securities
543
516
27
Corporate debt securities
196
196
Mortgage-backed securities
180
180
Fixed income funds
1,077
54
1,023
Real estate
505
75
14
$
416
Private equity/venture capital
1,123
1,123
Hedge funds
608
3
462
143
Other investments
448
448
Derivative contracts - assets*
787
21
766
Derivative contracts - liabilities**
(473
)
(15
)
(458
)
Receivables, payables and other
(40
)
(40
)
Securities lending collateral
750
750
Securities lending liability
(750
)
(750
)
Total net assets
$
9,552
$
3,989
$
3,881
$
1,682
* Includes contracts for interest rates of $742 million, foreign currency of $19 million and other of $26 million.
** Includes contracts for interest rates of $442 million, foreign currency of $17 million and other of $14 million.
The fair values of the health care assets at October 31, 2011 follow in millions of dollars:
Total
Level 1
Level 2
Level 3
Cash and short-term investments
$
58
$
7
$
51
Equity:
U.S. equity securities
372
372
U.S. equity funds
84
84
International equity securities
64
64
International equity funds
210
210
Fixed Income:
Government and agency securities
250
246
4
Corporate debt securities
39
39
Mortgage-backed securities
22
22
Fixed income funds
107
107
Real estate
57
4
32
$
21
Private equity/venture capital
55
55
Hedge funds
110
103
7
Other investments
22
22
Derivative contracts - assets*
12
1
11
Derivative contracts - liabilities**
(2
)
(1
)
(1
)
Receivables, payables and other
(1
)
(1
)
Securities lending collateral
215
215
Securities lending liability
(215
)
(215
)
Total net assets
$
1,459
$
776
$
600
$
83
* Includes contracts for interest rates of $10 million, foreign currency of $1 million and other of $1 million.
** Includes contracts for foreign currency of $1 million and other of $1 million.
Reconciliation of Level 3 Fair Value Measurements for Pension and Health Care Assets
A reconciliation of Level 3 pension and health care asset fair value measurements in millions of dollars follows:
Private Equity/
Real
Venture
Hedge
Total
Estate
Capital
Funds
October 31, 2010*
$
1,443
$
378
$
912
$
153
Realized gain
33
32
1
Change in unrealized gain
192
48
141
3
Purchases, sales and settlements - net
97
11
93
(7
)
October 31, 2011*
1,765
437
1,178
150
Realized gain
18
18
Change in unrealized gain (loss)
74
(4
)
65
13
Purchases, sales and settlements - net
112
3
112
(3
)
October 31, 2012*
$
1,969
$
436
$
1,373
$
160
* Health care Level 3 assets represent approximately 4 percent to 5 percent of the reconciliation amounts for 2012, 2011 and 2010.
Financing receivable installments, including unearned finance income, at October 31 are scheduled as follows in millions of dollars:
2012
2011
Unrestricted/Securitized
Unrestricted/Securitized
Due in months:
0 - 12
$
11,486
$
1,437
$
10,311
$
1,192
13 - 24
4,257
1,004
3,937
807
25 - 36
3,232
712
2,960
524
37 - 48
2,278
399
2,032
305
49 - 60
1,356
120
1,196
119
Thereafter
455
7
423
12
Total
$
23,064
$
3,679
$
20,859
$
2,959
Age Analysis of Past Due and Non-Performing Financing Receivables
An age analysis of past due and non-performing financing receivables at October 31, 2012 follows in millions of dollars:
30-59
60-89
90 Days
Days
Days
or Greater
Total
Past Due
Past Due
Past Due*
Past Due
Retail Notes:
Agriculture and turf
$
60
$
25
$
17
$
102
Construction and forestry
39
18
9
66
Other:
Agriculture and turf
21
6
3
30
Construction and forestry
8
2
2
12
Total
$
128
$
51
$
31
$
210
Total
Total
Total
Non-
Financing
Past Due
Performing
Current
Receivables
Retail Notes:
Agriculture and turf
$
102
$
117
$
16,432
$
16,651
Construction and forestry
66
13
1,521
1,600
Other:
Agriculture and turf
30
11
6,464
6,505
Construction and forestry
12
3
1,183
1,198
Total
$
210
$
144
$
25,600
25,954
Less allowance for credit losses
177
Total financing receivables - net
$
25,777
* Financing receivables that are 90 days or greater past due and still accruing finance income.
An age analysis of past due and non-performing financing receivables at October 31, 2011 follows in millions of dollars:
30-59
60-89
90 Days
Days
Days
or Greater
Total
Past Due
Past Due
Past Due*
Past Due
Retail Notes:
Agriculture and turf
$
81
$
30
$
25
$
136
Construction and forestry
45
20
11
76
Other:
Agriculture and turf
23
10
5
38
Construction and forestry
7
4
2
13
Total
$
156
$
64
$
43
$
263
Total
Total
Total
Non-
Financing
Past Due
Performing
Current
Receivables
Retail Notes:
Agriculture and turf
$
136
$
132
$
14,667
$
14,935
Construction and forestry
76
17
1,264
1,357
Recreational products
4
4
Other:
Agriculture and turf
38
16
5,655
5,709
Construction and forestry
13
5
1,003
1,021
Total
$
263
$
170
$
22,593
23,026
Less allowance for credit losses
197
Total financing receivables - net
$
22,829
* Financing receivables that are 90 days or greater past due and still accruing finance income.
Analysis of the Allowance for Credit Losses and Investment in Financing Receivables
An analysis of the allowance for credit losses and investment in financing receivables follows in millions of dollars:
Revolving
Retail
Charge
Notes
Accounts
Other
Total
2012
Allowance:
Beginning of year balance
$
130
$
40
$
27
$
197
Provision (credit)
(12
)
8
3
(1
)
Write-offs
(8
)
(30
)
(4
)
(42
)
Recoveries
10
22
1
33
Translation adjustments
(10
)
(10
)
End of year balance
$
110
$
40
$
27
$
177
Balance individually evaluated*
$
1
$
1
Financing receivables:
End of year balance
$
18,251
$
2,488
$
5,215
$
25,954
Balance individually evaluated*
$
11
$
1
$
1
$
13
* Remainder is collectively evaluated.
2011
Allowance:
Beginning of year balance
$
144
$
44
$
37
$
225
Provision (credit)
3
8
(2
)
9
Write-offs
(29
)
(40
)
(10
)
(79
)
Recoveries
12
28
2
42
End of year balance
$
130
$
40
$
27
$
197
Balance individually evaluated*
$
1
$
1
Financing receivables:
End of year balance
$
16,296
$
2,518
$
4,212
$
23,026
Balance individually evaluated*
$
12
$
11
$
23
* Remainder is collectively evaluated.
Comparative Analysis of the Allowance for Credit Losses
A comparative analysis of the allowance for credit losses follows in millions of dollars:
2012
2011
2010
Beginning of year balance
$
197
$
225
$
239
Provision (credit)
(1
)
9
100
Write-offs
(42
)
(79
)
(147
)
Recoveries
33
42
31
Translation adjustments
(10
)
2
End of year balance
$
177
$
197
$
225
Analysis of the Impaired Financing Receivables
An analysis of the impaired financing receivables at October 31 follows in millions of dollars:
Unpaid
Average
Recorded
Principal
Specific
Recorded
Investment
Balance
Allowance
Investment
2012
Receivables with specific allowance*
$
1
$
1
$
1
$
1
Receivables without a specific allowance**
9
9
10
Total
$
10
$
10
$
1
$
11
Agriculture and turf
$
6
$
6
$
1
$
6
Construction and forestry
$
4
$
4
$
5
2011
Receivables with specific allowance*
$
7
$
7
$
1
$
8
Receivables without a specific allowance**
9
9
12
Total
$
16
$
16
$
1
$
20
Agriculture and turf
$
11
$
11
$
1
$
14
Construction and forestry
$
5
$
5
$
6
* Finance income recognized was not material.
** Primarily retail notes.
Schedule of Other Receivables
Other receivables at October 31 consisted of the following in millions of dollars:
2012
2011
Taxes receivable
$
971
$
844
Reinsurance receivables
569
242
Insurance premium receivables
69
58
Other
182
187
Other receivables
$
1,791
$
1,331
Trade Accounts and Notes Receivable
Accounts, Notes, Loans and Financing Receivable
Schedule of Trade Accounts and Notes Receivable, Financing Receivables, and Financing Receivables Related to the Sale of Equipment
Trade accounts and notes receivable at October 31 consisted of the following in millions of dollars:
2012
2011
Trade accounts and notes:
Agriculture and turf
$
3,074
$
2,618
Construction and forestry
725
676
Trade accounts and notes receivable—net
$
3,799
$
3,294
Financing Receivables
Accounts, Notes, Loans and Financing Receivable
Schedule of Trade Accounts and Notes Receivable, Financing Receivables, and Financing Receivables Related to the Sale of Equipment
Financing receivables at October 31 consisted of the following in millions of dollars:
2012
2011
Unrestricted/Securitized
Unrestricted/Securitized
Retail notes:
Equipment:
Agriculture and turf
$
14,144
$
3,126
$
12,969
$
2,597
Construction and forestry
1,091
553
1,036
362
Recreational products
4
Total
15,235
3,679
14,009
2,959
Wholesale notes
3,888
3,006
Revolving charge accounts
2,488
2,518
Financing leases (direct and sales-type)
1,411
1,242
Operating loans
42
84
Total financing receivables
23,064
3,679
20,859
2,959
Less:
Unearned finance income:
Equipment notes
619
44
635
36
Financing leases
126
121
Total
745
44
756
36
Allowance for credit losses
160
17
179
18
Financing receivables — net
$
22,159
$
3,618
$
19,924
$
2,905
Financing Receivables | Related to Sales of Equipment
Accounts, Notes, Loans and Financing Receivable
Schedule of Trade Accounts and Notes Receivable, Financing Receivables, and Financing Receivables Related to the Sale of Equipment
Financing receivables at October 31 related to the company’s sales of equipment that were included in the table above consisted of the following in millions of dollars:
2012
2011
Unrestricted
Unrestricted
Retail notes*:
Equipment:
Agriculture and turf
$
1,810
$
1,633
Construction and forestry
313
310
Total
2,123
1,943
Wholesale notes
3,888
3,006
Sales-type leases
836
776
Total
6,847
5,725
Less:
Unearned finance income:
Equipment notes
191
197
Sales-type leases
61
64
Total
252
261
Financing receivables related to the company’s sales of equipment
$
6,595
$
5,464
* These retail notes generally arise from sales of equipment by company-owned dealers or through direct sales.
Unconsolidated Conduits, Carrying Amount of Liabilities Compared to Maximum Exposure to Loss
The company’s carrying amount of the liabilities to the unconsolidated conduits, compared to the maximum exposure to loss related to these conduits, which would only be incurred in the event of a complete loss on the restricted assets, was as follows at October 31 in millions of dollars:
2012
Carrying value of liabilities
$
1,004
Maximum exposure to loss
1,049
Components of Consolidated Restricted Assets, Secured Borrowings and Other Liabilities Related to Securitization Transactions
The components of consolidated restricted assets related to secured borrowings in securitization transactions at October 31 were as follows in millions of dollars:
2012
2011
Financing receivables securitized (retail notes)
$
3,635
$
2,923
Allowance for credit losses
(17
)
(18
)
Other assets
85
96
Total restricted securitized assets
$
3,703
$
3,001
The components of consolidated secured borrowings and other liabilities related to securitizations at October 31 were as follows in millions of dollars:
2012
2011
Short-term securitization borrowings
$
3,575
$
2,777
Accrued interest on borrowings
1
2
Total liabilities related to restricted securitized assets
If all inventories had been valued on a FIFO basis, estimated inventories by major classification at October 31 in millions of dollars would have been as follows:
The changes in amounts of goodwill by operating segments were as follows in millions of dollars:
Agriculture
Construction
and
and
Turf
Forestry
Total
Balance at October 31, 2010
$
705
$
610
$
1,315
Less accumulated impairment losses
316
316
Net balance
389
610
999
Acquisitions
1
1
Translation adjustments and other
(5
)
5
Balance at October 31, 2011
701
615
1,316
Less accumulated impairment losses
316
316
Net balance
385
615
1,000
Impairment loss*
(33
)
(33
)
Translation adjustments and other
(15
)
(31
)
(46
)
Balance at October 31, 2012
686
584
1,270
Less accumulated impairment losses
349
349
Goodwill
$
337
$
584
$
921
* See Note 5.
Components of Other Intangible Assets
The components of other intangible assets are as follows in millions of dollars:
Useful Lives*
(Years)
2012
2011
Amortized intangible assets:
Customer lists and relationships
12
$
99
$
109
Technology, patents, trademarks and other
17
109
104
Total at cost
208
213
Less accumulated amortization**
107
90
Total
101
123
Unamortized intangible assets:
Licenses
4
4
Other intangible assets-net
$
105
$
127
* Weighted-averages
** Accumulated amortization at 2012 and 2011 for customer lists and relationships was $60 million and $54 million and technology, patents, trademarks and other was $47 million and $36 million, respectively.
Accounts payable and accrued expenses at October 31 consisted of the following in millions of dollars:
2012
2011
Equipment Operations
Accounts payable:
Trade payables
$
2,287
$
2,163
Dividends payable
179
168
Other
147
99
Accrued expenses:
Employee benefits
1,337
1,188
Product warranties
733
662
Dealer sales discounts
1,413
1,092
Other
1,583
1,497
Total
7,679
6,869
Financial Services
Accounts payable:
Deposits withheld from dealers and merchants
194
188
Other
505
324
Accrued expenses:
Unearned revenue
452
345
Accrued interest
160
191
Employee benefits
69
68
Insurance claims reserve*
449
186
Other
301
246
Total
2,130
1,548
Eliminations**
820
612
Accounts payable and accrued expenses
$
8,989
$
7,805
* See Note 9.
** Primarily trade receivable valuation accounts which are reclassified as accrued expenses by the equipment operations as a result of their trade receivables being sold to financial services.
The fair values of financial instruments that do not approximate the carrying values at October 31 in millions of dollars follow:
2012
2011
Carrying
Fair
Carrying
Fair
Value
Value*
Value
Value
Financing receivables — net
$
22,159
$
22,244
$
19,924
$
19,919
Financing receivables securitized — net
$
3,618
$
3,615
$
2,905
$
2,907
Short-term securitization borrowings
$
3,575
$
3,584
$
2,777
$
2,789
Long-term borrowings due within one year:
Equipment operations
$
195
$
194
$
244
$
233
Financial services
4,790
4,871
5,249
5,331
Total
$
4,985
$
5,065
$
5,493
$
5,564
Long-term borrowings:
Equipment operations
$
5,445
$
6,237
$
3,167
$
3,771
Financial services
17,008
17,438
13,793
14,154
Total
$
22,453
$
23,675
$
16,960
$
17,925
* Fair value measurements above were Level 3 for all financing receivables and Level 2 for all borrowings.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets and liabilities measured at October 31 at fair value on a recurring basis in millions of dollars follow:
2012*
2011*
Marketable securities
U.S. government debt securities
$
1,200
$
576
Municipal debt securities
38
36
Corporate debt securities
110
89
Mortgage-backed securities**
122
86
Total marketable securities
1,470
787
Other assets
Derivatives:
Interest rate contracts
609
471
Foreign exchange contracts
17
12
Cross-currency interest rate contracts
11
2
Total assets***
$
2,107
$
1,272
Accounts payable and accrued expenses
Derivatives:
Interest rate contracts
$
72
$
61
Foreign exchange contracts
18
100
Cross-currency interest rate contracts
59
7
Total liabilities
$
149
$
168
* All measurements above were Level 2 measurements except for Level 1 measurements of U.S. government debt securities of $1,139 million and $540 million at October 31, 2012 and 2011, respectively.
** Primarily issued by U.S. government sponsored enterprises.
*** Excluded from this table are cash equivalents, which are carried at cost that approximates fair value. The cash equivalents consist primarily of money market funds.
Assets Measured at Fair Value on a Nonrecurring Basis
Fair value, nonrecurring, Level 3 measurements at October 31 in millions of dollars follow:
Fair Value Hedge Derivative Instruments and Related Borrowings
The gains (losses) on these contracts and the underlying borrowings recorded in interest expense follow in millions of dollars:
2012
2011
Interest rate contracts*
$
180
$
16
Borrowings**
(182
)
(21
)
* Includes changes in fair values of interest rate contracts excluding net accrued interest income of $155 million and $172 million during 2012 and 2011, respectively.
** Includes adjustments for fair values of hedged borrowings excluding accrued interest expense of $282 million and $277 million during 2012 and 2011, respectively.
Fair Value of Derivative Instruments in Consolidated Balance Sheet
Fair values of derivative instruments in the consolidated balance sheet at October 31 in millions of dollars follow:
2012
2011
Other Assets
Designated as hedging instruments:
Interest rate contracts
$
536
$
404
Cross-currency interest rate contracts
10
Total designated
546
404
Not designated as hedging instruments:
Interest rate contracts
73
67
Foreign exchange contracts
17
12
Cross-currency interest rate contracts
1
2
Total not designated
91
81
Total derivatives
$
637
$
485
Accounts Payable and Accrued Expenses
Designated as hedging instruments:
Interest rate contracts
$
12
$
13
Cross-currency interest rate contracts
58
7
Total designated
70
20
Not designated as hedging instruments:
Interest rate contracts
60
48
Foreign exchange contracts
18
100
Cross-currency interest rate contracts
1
Total not designated
79
148
Total derivatives
$
149
$
168
Derivative Instruments Effect on Consolidated Income
The classification and gains (losses) including accrued interest expense related to derivative instruments on the statement of consolidated income consisted of the following in millions of dollars:
2012
2011
2010
Fair Value Hedges
Interest rate contracts — Interest expense
$
335
$
188
$
372
Cash Flow Hedges
Recognized in OCI
(Effective Portion):
Interest rate contracts — OCI (pretax)*
(28
)
(5
)
(14
)
Foreign exchange contracts — OCI (pretax)*
(33
)
36
(42
)
Reclassified from OCI
(Effective Portion):
Interest rate contracts — Interest expense*
(16
)
(20
)
(68
)
Foreign exchange contracts — Other expense*
(38
)
19
(11
)
Recognized Directly in Income
(Ineffective Portion)
**
**
**
Not Designated as Hedges
Interest rate contracts — Interest expense*
$
(13
)
$
(1
)
$
25
Foreign exchange contracts — Cost of sales
(12
)
(51
)
(19
)
Foreign exchange contracts — Other expense*
7
(127
)
(92
)
Total not designated
$
(18
)
$
(179
)
$
(86
)
* Includes interest and foreign exchange gains (losses) from cross-currency interest rate contracts.
SEGMENT AND GEOGRAPHIC AREA DATA FOR THE YEARS ENDED OCTOBER 31, 2012, 2011 AND 2010 (Tables)
12 Months Ended
Oct. 31, 2012
SEGMENT AND GEOGRAPHIC AREA DATA FOR THE YEARS ENDED OCTOBER 31, 2012, 2011 AND 2010
Schedule of Segment Reporting Information by Segment
Information relating to operations by operating segment in millions of dollars follows. In addition to the following unaffiliated sales and revenues by segment, intersegment sales and revenues in 2012, 2011 and 2010 were as follows: agriculture and turf net sales of $84 million, $98 million and $59 million, construction and forestry net sales of $1 million, $3 million and $7 million, and financial services revenues of $219 million, $210 million and $224 million, respectively.
OPERATING SEGMENTS
2012
2011
2010
Net sales and revenues
Unaffiliated customers:
Agriculture and turf net sales
$
27,123
$
24,094
$
19,868
Construction and forestry net sales
6,378
5,372
3,705
Total net sales
33,501
29,466
23,573
Financial services revenues
2,235
2,163
2,074
Other revenues*
421
384
358
Total
$
36,157
$
32,013
$
26,005
* Other revenues are primarily the equipment operations’ revenues for finance and interest income, and other income as disclosed in Note 31, net of certain intercompany eliminations.
Operating profit
Agriculture and turf
$
3,921
$
3,447
$
2,790
Construction and forestry
476
392
119
Financial services*
712
725
499
Total operating profit
5,109
4,564
3,408
Interest income
43
47
42
Investment income
2
Interest expense
(231
)
(191
)
(184
)
Foreign exchange losses from equipment operations’ financing activities
(11
)
(11
)
(30
)
Corporate expenses — net
(181
)
(177
)
(200
)
Income taxes
(1,659
)
(1,424
)
(1,162
)
Total
(2,037
)
(1,756
)
(1,534
)
Net income
3,072
2,808
1,874
Less: Net income attributable to noncontrolling interests
7
8
9
Net income attributable to Deere & Company
$
3,065
$
2,800
$
1,865
* Operating profit of the financial services business segment includes the effect of its interest expense and foreign exchange gains or losses.
Interest income*
Agriculture and turf
$
29
$
23
$
20
Construction and forestry
2
3
3
Financial services
1,610
1,581
1,528
Corporate
43
47
42
Intercompany
(248
)
(231
)
(229
)
Total
$
1,436
$
1,423
$
1,364
* Does not include finance rental income for equipment on operating leases.
Interest expense
Agriculture and turf
$
168
$
152
$
165
Construction and forestry
36
26
21
Financial services
596
621
670
Corporate
231
191
184
Intercompany
(248
)
(231
)
(229
)
Total
$
783
$
759
$
811
Depreciation* and amortization expense
Agriculture and turf
$
550
$
505
$
470
Construction and forestry
93
82
79
Financial services
361
328
366
Total
$
1,004
$
915
$
915
* Includes depreciation for equipment on operating leases.
Equity in income (loss) of unconsolidated affiliates
Agriculture and turf
$
(2
)
$
5
$
13
Construction and forestry
(2
)
3
(3
)
Financial services
1
1
1
Total
$
(3
)
$
9
$
11
Identifiable operating assets
Agriculture and turf
$
10,429
$
9,178
$
7,593
Construction and forestry
3,365
2,915
2,353
Financial services
34,495
29,795
27,507
Corporate*
7,977
6,319
5,814
Total
$
56,266
$
48,207
$
43,267
* Corporate assets are primarily the equipment operations’ retirement benefits, deferred income tax assets, marketable securities and cash and cash equivalents as disclosed in Note 31, net of certain intercompany eliminations.
Capital additions
Agriculture and turf
$
1,145
$
909
$
729
Construction and forestry
228
148
73
Financial services
3
2
Total
$
1,376
$
1,059
$
802
Investments in unconsolidated affiliates
Agriculture and turf
$
32
$
35
$
66
Construction and forestry
174
159
172
Financial services
9
8
7
Total
$
215
$
202
$
245
Schedule of Geographic Area Reporting Information
The company views and has historically disclosed its operations as consisting of two geographic areas, the U.S. and Canada, and outside the U.S. and Canada, shown below in millions of dollars. No individual foreign country’s net sales and revenues were material for disclosure purposes.
GEOGRAPHIC AREAS
2012
2011
2010
Net sales and revenues
Unaffiliated customers:
U.S. and Canada:
Equipment operations net sales (87%)*
$
20,807
$
17,357
$
14,794
Financial services revenues (79%)*
1,930
1,857
1,817
Total
22,737
19,214
16,611
Outside U.S. and Canada:
Equipment operations net sales
12,694
12,109
8,779
Financial services revenues
305
306
257
Total
12,999
12,415
9,036
Other revenues
421
384
358
Total
$
36,157
$
32,013
$
26,005
* The percentages indicate the approximate proportion of each amount that relates to the U.S. only and are based upon a three-year average for 2012, 2011 and 2010.
Common stock per share sales prices from New York Stock Exchange composite transactions quotations follow:
First
Second
Third
Fourth
Quarter
Quarter
Quarter
Quarter
2012 Market price
High
$
87.99
$
89.05
$
83.43
$
86.86
Low
$
71.92
$
76.51
$
70.59
$
73.81
2011 Market price
High
$
90.99
$
99.24
$
97.39
$
80.82
Low
$
74.70
$
86.91
$
78.51
$
61.72
Quarterly Financial Information
The company’s fiscal year ends in October and its interim periods (quarters) end in January, April and July. Such information is shown in millions of dollars except for per share amounts.
First
Second
Third
Fourth
Quarter
Quarter
Quarter
Quarter
2012*
Net sales and revenues
$
6,766
$
10,009
$
9,590
$
9,792
Net sales
6,119
9,405
8,930
9,047
Gross profit
1,543
2,570
2,174
2,206
Income before income taxes
800
1,597
1,215
1,122
Net income attributable to Deere & Company
533
1,056
788
688
Per share data:
Basic
1.32
2.64
2.00
1.76
Diluted
1.30
2.61
1.98
1.75
Dividends declared
.41
.46
.46
.46
Dividends paid
.41
.41
.46
.46
2011
Net sales and revenues
$
6,119
$
8,910
$
8,372
$
8,612
Net sales
5,514
8,327
7,722
7,903
Gross profit
1,420
2,221
1,929
1,977
Income before income taxes
746
1,341
1,079
1,057
Net income attributable to Deere & Company
514
904
712
670
Per share data:
Basic
1.22
2.15
1.71
1.63
Diluted
1.20
2.12
1.69
1.62
Dividends declared
.35
.35
.41
.41
Dividends paid
.30
.35
.35
.41
Net income per share for each quarter must be computed independently. As a result, their sum may not equal the total net income per share for the year.
PENSION AND OTHER POSTRETIREMENT BENEFITS (Details 5) (Health Care and Life Insurance, USD $) In Millions, unless otherwise specified
12 Months Ended
Oct. 31, 2012
Oct. 31, 2011
Health Care and Life Insurance
Health care costs trend rates
Weighted average composite trend rate for first fiscal year following balance sheet date (as a percent)
7.10%
7.30%
Ultimate weighted-average composite trend rate (as a percent)
5.00%
5.00%
Year that weighted-average composite trend rate reaches ultimate rate (year)
2018
2017
The changes in the accumulated postretirement benefit obligation and the aggregate of service and interest cost components of net periodic postretirement benefits cost due to one percentage point change in the assumed health care cost trend rate
Increase in accumulated postretirement benefit obligations due to one percentage point increase in the assumed health care cost trend rate
$ 955
Increase in aggregate of service and interest cost components of net periodic postretirement benefits cost for the year due to one percentage point increase in the assumed health care cost trend rate
50
Decrease in accumulated postretirement benefit obligations due to one percentage point decrease in the assumed health care cost trend rate
723
Decrease in aggregate of service and interest cost components of net periodic postretirement benefits cost for the year due to one percentage point decrease in the assumed health care cost trend rate
RECEIVABLES (Details 4) (USD $) In Millions, unless otherwise specified
12 Months Ended
Oct. 31, 2012
Oct. 31, 2011
Oct. 31, 2010
Oct. 31, 2009
RECEIVABLES
Minimum number of days for a financing receivable to be considered past due
30 days
Generally the approximate number of days before a receivable is considered to be non-performing, accrual of finance income is suspended and the estimated uncollectible amount is written off
120 days
Age Analysis of Past Due and Non-Performing Financing Receivables
30-59 Days Past Due
$ 128
$ 156
60-89 Days Past Due
51
64
90 Days or Greater Past Due
31
43
Total Past Due
210
263
Total Non-performing
144
170
Current
25,600
22,593
Total Financing Receivables
25,954
23,026
Less allowance for credit losses
177
197
225
239
Total financing receivables - net
25,777
22,829
Retail Notes | Agriculture and Turf
Age Analysis of Past Due and Non-Performing Financing Receivables
30-59 Days Past Due
60
81
60-89 Days Past Due
25
30
90 Days or Greater Past Due
17
25
Total Past Due
102
136
Total Non-performing
117
132
Current
16,432
14,667
Total Financing Receivables
16,651
14,935
Retail Notes | Construction and Forestry
Age Analysis of Past Due and Non-Performing Financing Receivables
30-59 Days Past Due
39
45
60-89 Days Past Due
18
20
90 Days or Greater Past Due
9
11
Total Past Due
66
76
Total Non-performing
13
17
Current
1,521
1,264
Total Financing Receivables
1,600
1,357
Recreational Products
Age Analysis of Past Due and Non-Performing Financing Receivables
Current
4
Total Financing Receivables
4
Other Financing Receivables | Agriculture and Turf
Age Analysis of Past Due and Non-Performing Financing Receivables
30-59 Days Past Due
21
23
60-89 Days Past Due
6
10
90 Days or Greater Past Due
3
5
Total Past Due
30
38
Total Non-performing
11
16
Current
6,464
5,655
Total Financing Receivables
6,505
5,709
Other Financing Receivables | Construction and Forestry
Age Analysis of Past Due and Non-Performing Financing Receivables
TOTAL SHORT-TERM BORROWINGS (Details 2) (USD $) In Millions, unless otherwise specified
12 Months Ended
Oct. 31, 2012
Line of Credit Facility
Lines of credit available from U.S. and foreign banks
$ 5,194
Lines of credit unused
3,793
Agreement with Capital Corporation
Minimum ownership percentage of Capital Corporation's capital stock
51.00%
Minimum consolidated tangible net worth of Capital Corporation to be maintained
50
Minimum ratio of earnings to fixed charges to be maintained (as a percent)
1.05
Equipment Operations
Line of Credit Facility
Ratio of total debt to total capital (total debt and stockholders' equity excluding accumulated other comprehensive income (loss)) required by the credit agreements, maximum at the end of each fiscal quarter (as a percent)
0.65
Excess equity capacity and retained earnings balance free of restriction
8,273
Additional debt capacity
15,364
Line of Credit Facilities Expiring April, 2015
Line of Credit Facility
Lines of credit available from U.S. and foreign banks
2,750
Line of Credit Facilities Expiring April, 2017
Line of Credit Facility
Lines of credit available from U.S. and foreign banks
$ 1,500
Capital Corporation
Line of Credit Facility
Consolidated ratio of earnings to fixed charges required by the credit agreements, minimum at the end of each fiscal quarter (as a percent)
1.05
Ratio of senior debt, excluding securitization indebtedness, to capital base (total subordinated debt and stockholder's equity excluding accumulated other comprehensive income (loss)) required by the credit agreements, maximum at the end of any fiscal quarter (as a percent)
FAIR VALUE MEASUREMENTS (Details 2) (USD $) In Millions, unless otherwise specified
Oct. 31, 2012
Oct. 31, 2011
Assets and Liabilities Measured at Fair Value on Recurring and Nonrecurring Basis
Derivative assets
$ 637
$ 485
Derivative liabilities
149
168
Assets and Liabilities Measured at Fair Value on a Recurring Basis | Level 1 and 2
Assets and Liabilities Measured at Fair Value on Recurring and Nonrecurring Basis
Marketable securities
1,470
787
Total assets
2,107
[1]
1,272
[1]
Assets and Liabilities Measured at Fair Value on a Recurring Basis | Level 1 and 2 | U.S. Government Debt Securities
Assets and Liabilities Measured at Fair Value on Recurring and Nonrecurring Basis
Marketable securities
1,200
576
Assets and Liabilities Measured at Fair Value on a Recurring Basis | Level 1 | U.S. Government Debt Securities
Assets and Liabilities Measured at Fair Value on Recurring and Nonrecurring Basis
Marketable securities
1,139
540
Assets and Liabilities Measured at Fair Value on a Recurring Basis | Level 2
Assets and Liabilities Measured at Fair Value on Recurring and Nonrecurring Basis
Total liabilities
149
168
Assets and Liabilities Measured at Fair Value on a Recurring Basis | Level 2 | Interest Rate Contracts | Other Assets
Assets and Liabilities Measured at Fair Value on Recurring and Nonrecurring Basis
Derivative assets
609
471
Assets and Liabilities Measured at Fair Value on a Recurring Basis | Level 2 | Interest Rate Contracts | Accounts Payable and Accrued Expenses
Assets and Liabilities Measured at Fair Value on Recurring and Nonrecurring Basis
Derivative liabilities
72
61
Assets and Liabilities Measured at Fair Value on a Recurring Basis | Level 2 | Foreign Exchange Contracts | Other Assets
Assets and Liabilities Measured at Fair Value on Recurring and Nonrecurring Basis
Derivative assets
17
12
Assets and Liabilities Measured at Fair Value on a Recurring Basis | Level 2 | Foreign Exchange Contracts | Accounts Payable and Accrued Expenses
Assets and Liabilities Measured at Fair Value on Recurring and Nonrecurring Basis
Derivative liabilities
18
100
Assets and Liabilities Measured at Fair Value on a Recurring Basis | Level 2 | Cross-Currency Interest Rate Contracts | Other Assets
Assets and Liabilities Measured at Fair Value on Recurring and Nonrecurring Basis
Derivative assets
11
2
Assets and Liabilities Measured at Fair Value on a Recurring Basis | Level 2 | Cross-Currency Interest Rate Contracts | Accounts Payable and Accrued Expenses
Assets and Liabilities Measured at Fair Value on Recurring and Nonrecurring Basis
Derivative liabilities
59
7
Assets and Liabilities Measured at Fair Value on a Recurring Basis | Level 2 | Municipal Debt Securities
Assets and Liabilities Measured at Fair Value on Recurring and Nonrecurring Basis
Marketable securities
38
36
Assets and Liabilities Measured at Fair Value on a Recurring Basis | Level 2 | Corporate Debt Securities
Assets and Liabilities Measured at Fair Value on Recurring and Nonrecurring Basis
Marketable securities
110
89
Assets and Liabilities Measured at Fair Value on a Recurring Basis | Level 2 | Mortgage-backed securities
Assets and Liabilities Measured at Fair Value on Recurring and Nonrecurring Basis
Marketable securities
$ 122
[2]
$ 86
[2]
[1]
Excluded from this table are cash equivalents, which are carried at cost that approximates fair value. The cash equivalents consist primarily of money market funds.
[2]
Primarily issued by U.S. government sponsored enterprises.
SEGMENT AND GEOGRAPHIC AREA DATA FOR THE YEARS ENDED OCTOBER 31, 2012, 2011 AND 2010 (Details 2) (USD $) In Millions, unless otherwise specified
3 Months Ended
12 Months Ended
Oct. 31, 2012
Jul. 31, 2012
Apr. 30, 2012
Jan. 31, 2012
Oct. 31, 2011
Jul. 31, 2011
Apr. 30, 2011
Jan. 31, 2011
Oct. 31, 2012
Oct. 31, 2011
Oct. 31, 2010
Net Sales and Revenues
Total net sales
$ 9,047
$ 8,930
$ 9,405
$ 6,119
$ 7,903
$ 7,722
$ 8,327
$ 5,514
$ 33,500.9
$ 29,466.1
$ 23,573.2
Total
9,792
9,590
10,009
6,766
8,612
8,372
8,910
6,119
36,157.1
32,012.5
26,004.6
Agriculture and Turf
Net Sales and Revenues
Total net sales
27,123
24,094
19,868
Construction and Forestry
Net Sales and Revenues
Total net sales
6,378
5,372
3,705
Financial Services
Net Sales and Revenues
Total
2,235
2,163
[1]
2,074
Other Reconciling Items
Net Sales and Revenues
Total
$ 421
[1]
$ 384
[1]
$ 358
[1]
Other revenues are primarily the equipment operations, revenues for finance and interest income, and other income as disclosed in Note 31, net of certain intercompany eliminations.
SEGMENT AND GEOGRAPHIC AREA DATA FOR THE YEARS ENDED OCTOBER 31, 2012, 2011 AND 2010 (Details 4) (USD $) In Millions, unless otherwise specified
12 Months Ended
Oct. 31, 2012
Oct. 31, 2011
Oct. 31, 2010
Operating Segments
Depreciation and amortization expense
$ 1,004.2
$ 914.9
$ 914.8
Equity in income (loss) of unconsolidated affiliates
(3.4)
8.6
10.7
Identifiable operating assets
56,265.8
48,207.4
43,267
Capital additions
1,376
1,059
802
Investments in unconsolidated affiliates
215
201.7
245
Agriculture and Turf
Operating Segments
Depreciation and amortization expense
550
505
470
Equity in income (loss) of unconsolidated affiliates
(2)
5
13
Identifiable operating assets
10,429
9,178
7,593
Capital additions
1,145
909
729
Investments in unconsolidated affiliates
32
35
66
Construction and Forestry
Operating Segments
Depreciation and amortization expense
93
82
79
Equity in income (loss) of unconsolidated affiliates
(2)
3
(3)
Identifiable operating assets
3,365
2,915
2,353
Capital additions
228
148
73
Investments in unconsolidated affiliates
174
159
172
Financial Services
Operating Segments
Depreciation and amortization expense
361
328
366
Equity in income (loss) of unconsolidated affiliates
1
1
1
Identifiable operating assets
34,495
29,795
27,507
Capital additions
3
2
Investments in unconsolidated affiliates
9
8
7
Corporate
Operating Segments
Identifiable operating assets
$ 7,977
[1]
$ 6,319
[1]
$ 5,814
[1]
[1]
Corporate assets are primarily the equipment operations, retirement benefits, deferred income tax assets, marketable securities and cash and cash equivalents
as disclosed in Note 31, net of certain intercompany eliminations.
