Deere Reports Third Quarter Net Income of $811 Million

|Aug 21|magazine95 min read
  • Operating margins reach 14.6% helped by strong execution in face of global pandemic.
  • Yearly net income forecast increased to about $2.25 billion.
  • New operating model taking shape.

MOLINE, Ill., Aug. 21, 2020 /PRNewswire/ -- Deere & Company (NYSE: DE) reported net income of $811 million for the third quarter ended August 2, 2020, or $2.57 per share, compared with net income of $899 million, or $2.81 per share, for the quarter ended July 28, 2019. For the first nine months of the year, net income attributable to Deere & Company was $1.993 billion, or $6.30 per share, compared with $2.532 billion, or $7.87 per share, for the same period last year.

Worldwide net sales and revenues decreased 11 percent, to $8.925 billion, for the third quarter of 2020 and declined 12 percent, to $25.809 billion, for nine months. Net sales of the equipment operations were $7.859 billion for the quarter and $22.612 billion for nine months, compared with $8.969 billion and $26.182 billion last year.

"With outstanding support from our dedicated global workforce and dealer organization, John Deere delivered a strong performance in the third quarter in the face of a serious global pandemic and uncertain market conditions," said John C. May, chairman and chief executive officer. "As we manage through the pandemic, Deere's number-one priority continues to be safeguarding the health and well-being of its employees. Thanks to aggressive measures taken early in the crisis, we have had success keeping our employees safe, our factories and parts centers functioning, and our customers served."

Company Outlook & Summary

Net income attributable to Deere & Company is forecast to be about $2.25 billion for the full year. However, many uncertainties remain regarding the effects of the global pandemic that could negatively affect the company's results and financial position in the future. In addition, the company has announced broad employee-separation programs that will be completed during the fourth quarter in support of its strategy to create a leaner, more agile organization. The programs' total pretax expense included in the forecast is about $175 million with estimated annual savings of $175 million.

"Although unsettled market conditions and related customer uncertainty are expected to have a moderating effect on key markets in the near term, we believe Deere is well-positioned to help make our customers more profitable and sustainable," May said. "In addition, we are encouraged by the early benefits we are experiencing from the company's recently launched smart-industrial operating model. We're confident it will help accelerate our ability to deliver differentiated solutions to our customers, while contributing to improved efficiencies across the company."



















Deere & Company


Third Quarter


Year to Date


$ in millions


2020


2019


% Change


2020


2019


% Change


Net sales and revenues


$

8,925


$

10,036


-11%


$

25,809


$

29,362


-12%


Net income


$

811


$

899


-10%


$

1,993


$

2,532


-21%


Fully diluted EPS


$

2.57


$

2.81




$

6.30


$

7.87




 

In the third quarter, the company recorded impairments and closure costs totaling $37 million pretax and after-tax. In addition, the quarter's net income was unfavorably affected by discrete income-tax adjustments, while the third quarter of 2019 had favorable discrete income-tax adjustments.











Equipment Operations


Third Quarter


$ in millions


2020


2019


% Change


Net sales


$

7,859


$

8,969


-12%


Operating profit


$

1,147


$

990


16%


Net income


$

630


$

717


-12%


 

For a discussion of net sales and operating profit results, see the Agriculture & Turf and Construction & Forestry sections below.











Agriculture & Turf


Third Quarter


$ in millions


2020


2019


% Change


Net sales


$

5,672


$

5,946


-5%


Operating profit


$

942


$

612


54%


Operating margin



16.6%



10.3%




 

Agriculture & Turf sales decreased for the quarter due to lower shipment volumes and the unfavorable effects of currency translation, partially offset by price realization. Operating profit increased primarily due to price realization, and lower selling, administrative, and general expenses. Research and development and warranty expenses were down as well. These items were partially offset by the unfavorable effects of foreign-currency exchange, lower shipment volumes / sales mix, and impairments and closure costs.











Construction & Forestry


Third Quarter


$ in millions


2020


2019


% Change


Net sales


$

2,187


$

3,023


-28%


Operating profit


$

205


$

378


-46%


Operating margin



9.4%



12.5%




 

Construction & Forestry sales declined for the quarter due mainly to lower shipment volumes and the unfavorable effects of currency translation, partially offset by price realization. Third-quarter operating profit declined due largely to lower shipment volumes / sales mix, partially offset by price realization and lower selling, administrative, and general expenses.











Financial Services


Third Quarter


$ in millions


2020


2019


% Change


Net income


$

183


$

175


5%


 

Financial services net income for the quarter increased due primarily to lower losses on operating-lease residual values, decreased selling, administrative, and general expenses, and a reduced provision for credit losses. These items were largely offset by a higher provision for income taxes related to favorable discrete adjustments last year.









Market Conditions and Outlook (Annual)




Currency


Price


$ in millions


Net Sales


Translation


Realization


Agriculture & Turf


-10%


-2%


3%


Construction & Forestry


-25%


-1%


1%










John Deere Financial


Net Income


$ 510




 

Agriculture & Turf. Deere's worldwide sales of agriculture and turf equipment are forecast to decline about 10 percent for fiscal year 2020, including a negative currency-translation effect of about 2 percent. Industry sales of agricultural equipment are expected to be down 5 to 10 percent from last year for the U.S. and Canada, while sales in Europe are also expected to be down 5 to 10 percent. South American industry sales of tractors and combines are projected to be down 10 to 15 percent. Asian sales are forecast to be down slightly. Industry sales of turf and utility equipment in the U.S. and Canada are expected to be down about 5 percent for 2020.

Construction & Forestry. Deere's worldwide sales of construction and forestry equipment are anticipated to be down about 25 percent for 2020, with foreign-currency rates having an unfavorable translation effect of about 1 percent. The outlook reflects market uncertainty as a result of COVID-19 as well as efforts to bring down field inventory levels. Industry construction-equipment sales in North America are expected to decline by about 20 percent for the year. In forestry, global industry sales are expected to be down 20 to 25 percent due to weaker demand in North America and Russia.

Financial Services. Full-year results are expected to decline due to a higher provision for credit losses and less-favorable financing spreads, partially offset by lower losses and impairments on operating-lease residual values. 

John Deere Capital Corporation

The following is disclosed on behalf of the company's financial services subsidiary, John Deere Capital Corporation (JDCC), in connection with the disclosure requirements applicable to its periodic issuance of debt securities in the public market.





















Third Quarter


Year to Date


$ in millions


2020


2019


% Change


2020


2019


% Change


Revenue


$

696


$

742


-6%


$

2,115


$

2,106




Net income


$

146


$

145


1%


$

271


$

351


-23%


Ending portfolio balance










$

38,766


$

38,625




 

Net income for the current quarter was about the same as the third quarter of 2019 with lower losses on operating-lease residual values, a reduced provision for credit losses, and decreased selling, administrative, and general expenses, offset by a higher provision for income taxes from favorable discrete adjustments in the prior year. Nine-month net income declined due to a higher provision for credit losses, unfavorable financing spreads, increased losses and impairments on lease residual values, and a higher provision for income taxes offset in part by income from a higher average portfolio.

Safe Harbor Statement

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995:  Statements under "Company Outlook & Summary," "Market Conditions & Outlook," and other forward-looking statements herein that relate to future events, expectations, and trends involve factors that are subject to change, and risks and uncertainties that could cause actual results to differ materially.  Some of these risks and uncertainties could affect particular lines of business, while others could affect all of the company's businesses.

The company's agricultural equipment business is subject to a number of uncertainties including the factors that affect farmers' confidence and financial condition.  These factors include demand for agricultural products, world grain stocks, weather conditions, soil conditions, harvest yields, prices for commodities and livestock, crop and livestock production expenses, availability of transport for crops, trade restrictions and tariffs (e.g., China), global trade agreements (e.g., the United States-Mexico-Canada Agreement), the level of farm product exports (including concerns about genetically modified organisms), the growth and sustainability of non-food uses for some crops (including ethanol and biodiesel production), real estate values, available acreage for farming, the land ownership policies of governments, changes in government farm programs and policies, international reaction to such programs, changes in and effects of crop insurance programs, changes in environmental regulations and their impact on farming practices, animal diseases (e.g., African swine fever) and their effects on poultry, beef and pork consumption and prices and on livestock feed demand, and crop pests and diseases and the impact of the COVID-19 pandemic on the agricultural industry including demand for, and production and exports of, agricultural products, and commodity prices.

Factors affecting the outlook for the company's turf and utility equipment include consumer confidence, weather conditions, customer profitability, labor supply, consumer borrowing patterns, consumer purchasing preferences, housing starts and supply, infrastructure investment, spending by municipalities and golf courses, and consumable input costs.  Many of these factors have been and may continue to be impacted by global economic effects, including the downturn resulting from the COVID-19 pandemic and responses to the pandemic taken by governments and other authorities.

Consumer spending patterns, real estate and housing prices, the number of housing starts, interest rates and the levels of public and non-residential construction are important to sales and results of the company's construction and forestry equipment.  Prices for pulp, paper, lumber and structural panels are important to sales of forestry equipment.  Many of these factors affecting the outlook for the company's construction and forestry equipment have been and may continue to be impacted by global economic effects, including the downturn resulting from the COVID-19 pandemic and responses to the pandemic taken by governments and other authorities.

All of the company's businesses and its results are affected by general economic conditions in the global markets and industries in which the company operates; customer confidence in general economic conditions; government spending and taxing; foreign currency exchange rates and their volatility, especially fluctuations in the value of the U.S. dollar; interest rates (including the availability of IBOR reference rates); inflation and deflation rates; changes in weather patterns; the political and social stability of the global markets in which the company operates; the effects of, or response to, terrorism and security threats; wars and other conflicts; natural disasters; and the spread of major epidemics (including the COVID-19 pandemic) and government and industry responses to epidemics such as travel restrictions and extended shut down of businesses.

Uncertainties related to the magnitude and duration of the COVID-19 pandemic may significantly adversely affect the company's business and outlook.  These uncertainties include: prolonged reduction or closure of the company's operations, or a delayed recovery in our operations; additional closures as mandated or otherwise made necessary by governmental authorities; disruptions in the supply chain and a prolonged delay in resumption of operations by one or more key suppliers, or the failure of any key suppliers; the company's ability to meet commitments to customers on a timely basis as a result of increased costs and supply challenges; the ability to receive goods on a timely basis and at anticipated costs; increased logistics costs; delays in the company's strategic initiatives as a result of reduced spending on research and development; additional operating costs at facilities that remain open due to remote working arrangements, adherence to social distancing guidelines and other COVID-19-related challenges; absence of employees due to illness; the impact of the pandemic on the company's customers and dealers, and their delays in their plans to invest in new equipment; requests by the company's customers or dealers for payment deferrals and contract modifications; the impact of disruptions in the global capital markets and/or continued declines in the company's financial performance, outlook or credit ratings, which could impact the company's ability to obtain funding in the future; a resurgence in COVID-19 cases following a reopening in any country, state, or region; and the impact of the pandemic on demand for our products and services as discussed above.  It is unclear when a sustained economic recovery could occur and what a recovery may look like.  All of these factors could materially and adversely affect our business, liquidity, results of operations and financial position.

Significant changes in market liquidity conditions, changes in the company's credit ratings and any failure to comply with financial covenants in credit agreements could impact access to funding and funding costs, which could reduce the company's earnings and cash flows.  Financial market conditions could also negatively impact customer access to capital for purchases of the company's products and customer confidence and purchase decisions, borrowing and repayment practices, and the number and size of customer loan delinquencies and defaults.  A debt crisis, in Europe or elsewhere, could negatively impact currencies, global financial markets, social and political stability, funding sources and costs, asset and obligation values, customers, suppliers, demand for equipment, and company operations and results.  The company's investment management activities could be impaired by changes in the equity, bond and other financial markets, which would negatively affect earnings.

The withdrawal of the United Kingdom from the European Union and the perceptions as to the impact of the withdrawal may adversely affect business activity, political stability and economic conditions in the United Kingdom, the European Union and elsewhere. The economic conditions and outlook could be further adversely affected by (i) uncertainty regarding any new or modified trade arrangements between the United Kingdom and the European Union and/or other countries, (ii) the risk that one or more other European Union countries could come under increasing pressure to leave the European Union, or (iii) the risk that the euro as the single currency of the Eurozone could cease to exist. Any of these developments, or the perception that any of these developments are likely to occur, could affect economic growth or business activity in the United Kingdom or the European Union, and could result in the relocation of businesses, cause business interruptions, lead to economic recession or depression, and impact the stability of the financial markets, availability of credit, currency exchange rates, interest rates, financial institutions, and political, financial and monetary systems. Any of these developments could affect our businesses, liquidity, results of operations and financial position.

Additional factors that could materially affect the company's operations, access to capital, expenses and results include changes in, uncertainty surrounding and the impact of governmental trade, banking, monetary and fiscal policies, including financial regulatory reform and its effects on the consumer finance industry, derivatives, funding costs and other areas, and governmental programs, policies, tariffs and sanctions in particular jurisdictions or for the benefit of certain industries or sectors; retaliatory actions to such changes in trade, banking, monetary and fiscal policies; actions by central banks; actions by financial and securities regulators; actions by environmental, health and safety regulatory agencies, including those related to engine emissions, carbon and other greenhouse gas emissions, noise and the effects of climate change; changes to GPS radio frequency bands or their permitted uses; changes in labor and immigration regulations; changes to accounting standards; changes in tax rates, estimates, laws and regulations and company actions related thereto; changes to and compliance with privacy regulations; compliance with U.S. and foreign laws when expanding to new markets and otherwise; and actions by other regulatory bodies.

Other factors that could materially affect results include production, design and technological innovations and difficulties, including capacity and supply constraints and prices; the loss of or challenges to intellectual property rights whether through theft, infringement, counterfeiting or otherwise; the availability and prices of strategically sourced materials, components and whole goods; delays or disruptions in the company's supply chain or the loss of liquidity by suppliers; disruptions of infrastructures that support communications, operations or distribution; the failure of suppliers or the company to comply with laws, regulations and company policy pertaining to employment, human rights, health, safety, the environment, anti-corruption, privacy and data protection and other ethical business practices; events that damage the company's reputation or brand; significant investigations, claims, lawsuits or other legal proceedings; start-up of new plants and products; the success of new product initiatives; changes in customer product preferences and sales mix; gaps or limitations in rural broadband coverage, capacity and speed needed to support technology solutions; oil and energy prices, supplies and volatility; the availability and cost of freight; actions of competitors in the various industries in which the company competes, particularly price discounting; dealer practices especially as to levels of new and used field inventories; changes in demand and pricing for used equipment and resulting impacts on lease residual values; labor relations and contracts; changes in the ability to attract, train and retain qualified personnel; acquisitions and divestitures of businesses; greater than anticipated transaction costs; the integration of new businesses; the failure or delay in closing or realizing anticipated benefits of acquisitions, joint ventures or divestitures; the implementation of organizational changes; the failure to realize anticipated savings or benefits of cost reduction, productivity, or efficiency efforts; difficulties related to the conversion and implementation of enterprise resource planning systems; security breaches, cybersecurity attacks, technology failures and other disruptions to the company's and suppliers' information technology infrastructure; changes in company declared dividends and common stock issuances and repurchases; changes in the level and funding of employee retirement benefits; changes in market values of investment assets, compensation, retirement, discount and mortality rates which impact retirement benefit costs; and significant changes in health care costs. 

The liquidity and ongoing profitability of John Deere Capital Corporation and other credit subsidiaries depend largely on timely access to capital in order to meet future cash flow requirements, and to fund operations, costs, and purchases of the company's products.  If general economic conditions deteriorate or capital markets become more volatile, including as a result of the COVID-19 pandemic, funding could be unavailable or insufficient.  Additionally, customer confidence levels may result in declines in credit applications and increases in delinquencies and default rates, which could materially impact write-offs and provisions for credit losses.

The company's outlook is based upon assumptions relating to the factors described above, which are sometimes based upon estimates and data prepared by government agencies.  Such estimates and data are often revised.  The company, except as required by law, undertakes no obligation to update or revise its outlook, whether as a result of new developments or otherwise.  Further information concerning the company and its businesses, including factors that could materially affect the company's financial results, is included in the company's other filings with the SEC (including, but not limited to, the factors discussed in Item 1A. Risk Factors of the company's most recent annual report on Form 10-K and quarterly reports on Form 10-Q).

 

Third Quarter 2020 Press Release

(in millions of dollars)

Unaudited





















Three Months Ended


Nine Months Ended



August 2


July 28


%


August 2


July 28


%



2020


2019


Change


2020


2019


Change

Net sales and revenues:

















Agriculture and turf


$

5,672


$

5,946


-5


$

16,127


$

17,909


-10

Construction and forestry



2,187



3,023


-28



6,485



8,273


-22

Total net sales



7,859



8,969


-12



22,612



26,182


-14

Financial services



892



910


-2



2,699



2,650


+2

Other revenues



174



157


+11



498



530


-6

Total net sales and revenues


$

8,925


$

10,036


-11


$

25,809


$

29,362


-12


















Operating profit: *

















Agriculture and turf


$

942


$

612


+54


$

2,109


$

1,978


+7

Construction and forestry



205



378


-46



394



954


-59

Financial services



243



204


+19



498



566


-12

Total operating profit



1,390



1,194


+16



3,001



3,498


-14

Reconciling items **



(122)



(74)


+65



(256)



(218)


+17

Income taxes



(457)



(221)


+107



(752)



(748)


+1

Net income attributable to Deere & Company


$

811


$

899


-10


$

1,993


$

2,532


-21



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



** 

Reconciling items are primarily corporate expenses, certain external interest expense, certain foreign exchange gains and losses, pension and postretirement benefit costs excluding the service cost component, and net income attributable to noncontrolling interests.

 

 

DEERE & COMPANY

STATEMENT OF CONSOLIDATED INCOME

For the Three Months Ended August 2, 2020 and July 28, 2019

(In millions of dollars and shares except per share amounts) Unaudited



2020


2019

Net Sales and Revenues







Net sales


$

7,859


$

8,969

Finance and interest income



838



884

Other income



228



183

Total



8,925



10,036








Costs and Expenses







Cost of sales



5,835



6,870

Research and development expenses



370



431

Selling, administrative and general expenses



752



896

Interest expense



290



374

Other operating expenses



408



352

Total



7,655



8,923








Income of Consolidated Group before Income Taxes



1,270



1,113

Provision for income taxes



457



221

Income of Consolidated Group



813



892

Equity in income (loss) of unconsolidated affiliates



(2)



7

Net Income



811



899

Less: Net income attributable to noncontrolling interests







Net Income Attributable to Deere & Company


$

811


$

899








Per Share Data







Basic


$

2.59


$

2.84

Diluted


$

2.57


$

2.81








Average Shares Outstanding







Basic



313.0



315.9

Diluted



315.8



319.8



See Condensed Notes to Interim Consolidated Financial Statements.

 

 

DEERE & COMPANY

STATEMENT OF CONSOLIDATED INCOME

For the Nine Months Ended August 2, 2020 and July 28, 2019

(In millions of dollars and shares except per share amounts) Unaudited



2020


2019

Net Sales and Revenues







Net sales


$

22,612


$

26,182

Finance and interest income



2,584



2,537

Other income



613



643

Total



25,809



29,362








Costs and Expenses







Cost of sales



17,206



20,056

Research and development expenses



1,201



1,295

Selling, administrative and general expenses



2,467



2,607

Interest expense



969



1,078

Other operating expenses



1,199



1,063

Total



23,042



26,099








Income of Consolidated Group before Income Taxes



2,767



3,263

Provision for income taxes



752



748

Income of Consolidated Group



2,015



2,515

Equity in income (loss) of unconsolidated affiliates



(20)



20

Net Income



1,995



2,535

Less: Net income attributable to noncontrolling interests



2



3

Net Income Attributable to Deere & Company


$

1,993


$

2,532








Per Share Data







Basic


$

6.36


$

7.98

Diluted


$

6.30


$

7.87








Average Shares Outstanding







Basic



313.3



317.3

Diluted



316.4



321.5



See Condensed Notes to Interim Consolidated Financial Statements.

 

 

DEERE & COMPANY

CONDENSED CONSOLIDATED BALANCE SHEET

(In millions of dollars) Unaudited



August 2


November 3


July 28



2020


2019


2019

Assets










Cash and cash equivalents


$

8,190


$

3,857


$

3,383

Marketable securities



640



581



565

Receivables from unconsolidated affiliates



26



46



54

Trade accounts and notes receivable - net



5,473



5,230



6,758

Financing receivables - net



27,814



29,195



27,049

Financing receivables securitized - net



5,469



4,383



5,200

Other receivables



1,217



1,487



1,535

Equipment on operating leases - net



7,158



7,567



7,269

Inventories



5,650



5,975



6,747

Property and equipment - net



5,754



5,973



5,798

Investments in unconsolidated affiliates



199



215



219

Goodwill



2,984



2,917



3,013

Other intangible assets - net



1,301



1,380



1,444

Retirement benefits



1,031



840



1,431

Deferred income taxes



1,534



1,466



1,088

Other assets



2,824



1,899



1,977

Total Assets


$

77,264


$

73,011


$

73,530











Liabilities and Stockholders' Equity




















Liabilities










Short-term borrowings


$

9,075


$

10,784


$

11,142

Short-term securitization borrowings



5,361



4,321



5,048

Payables to unconsolidated affiliates



80



142



136

Accounts payable and accrued expenses



9,565



9,656



9,390

Deferred income taxes



479



495



507

Long-term borrowings



34,037



30,229



29,242

Retirement benefits and other liabilities



5,776



5,953



5,781

Total liabilities



64,373



61,580



61,246











Redeemable noncontrolling interest






14



14











Stockholders' Equity










Total Deere & Company stockholders' equity



12,888



11,413



12,266

Noncontrolling interests



3



4



4

Total stockholders' equity



12,891



11,417



12,270

Total Liabilities and Stockholders' Equity


$

77,264


$

73,011


$

73,530



See Condensed Notes to Interim Consolidated Financial Statements.

 

 

DEERE & COMPANY

STATEMENT OF CONSOLIDATED CASH FLOWS

For the Nine Months Ended August 2, 2020 and July 28, 2019

(In millions of dollars) Unaudited



2020


2019

Cash Flows from Operating Activities







Net income


$

1,995


$

2,535

Adjustments to reconcile net income to net cash provided by operating activities:







Provision for credit losses



123



58

Provision for depreciation and amortization



1,614



1,522

Impairment charges



147




Share-based compensation expense



63



63

Undistributed earnings of unconsolidated affiliates



(5)



10

Credit for deferred income taxes



(160)



(332)

Changes in assets and liabilities:







Trade, notes, and financing receivables related to sales



626



(2,206)

Inventories



(1)



(1,168)

Accounts payable and accrued expenses



(572)



(306)

Accrued income taxes payable/receivable



4



253

Retirement benefits



88



40

Other



135



(65)

Net cash provided by operating activities



4,057



404








Cash Flows from Investing Activities







Collections of receivables (excluding receivables related to sales)



13,237



12,685

Proceeds from maturities and sales of marketable securities



70



72

Proceeds from sales of equipment on operating leases



1,310



1,171

Cost of receivables acquired (excluding receivables related to sales)



(14,449)



(13,662)

Purchases of marketable securities



(91)



(110)

Purchases of property and equipment



(594)



(756)

Cost of equipment on operating leases acquired



(1,312)



(1,462)

Collateral on derivatives - net



324



59

Other



(12)



(126)

Net cash used for investing activities



(1,517)



(2,129)








Cash Flows from Financing Activities







Increase (decrease) in total short-term borrowings



170



(336)

Proceeds from long-term borrowings



8,331



7,440

Payments of long-term borrowings



(5,797)



(4,356)

Proceeds from issuance of common stock



111



133

Repurchases of common stock



(263)



(880)

Dividends paid



(718)



(703)

Other



(110)



(82)

Net cash provided by financing activities



1,724



1,216








Effect of Exchange Rate Changes on Cash, Cash Equivalents, and Restricted Cash



80



(24)








Net Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash



4,344



(533)

Cash, Cash Equivalents, and Restricted Cash at Beginning of Period



3,956



4,015

Cash, Cash Equivalents, and Restricted Cash at End of Period


$

8,300


$

3,482



See Condensed Notes to Interim Consolidated Financial Statements.

 


 

Condensed Notes to Interim Consolidated Financial Statements (Unaudited)


(1)

In the third quarter of 2020, the Company reached a definitive agreement to sell its German walk-behind lawn mower business, which is expected to close in the fourth quarter. As a result, a non-cash charge of $24 million pretax and after-tax was recorded in "Other operating expenses" for an impairment to write the operations down to approximate realizable value. The Company also closed a factory producing small agricultural equipment in China at the end of the third quarter. In connection with this closure, a non-cash impairment of property and intangible assets of $9 million, and severance costs of $4 million, both pretax and after-tax, were recorded. The charges were recorded in "Cost of sales." Both operations are in the agriculture and turf division.




The Company recorded non-cash asset impairments in the second quarter of 2020 totaling $114 million pretax and approximately $105 million after-tax. The impairments related to the following: $62 million pretax of fixed assets of an asphalt plant factory in Germany, which is included in the Company's construction and forestry operations with the impairment recorded in "Cost of sales"; $32 million pretax of equipment on operating leases and matured operating lease inventory, which is included in the financial services operations with the impairments recorded in "Other operating expenses"; and $20 million pretax of a minority investment in a  construction equipment company headquartered in South Africa, which is included in the construction and forestry operations with the impairment recorded in "Equity in loss of unconsolidated affiliates." 



(2)

During the first quarter of 2020, the Company announced a broad voluntary employee-separation program for the U.S. salaried workforce that continues the efforts to create a more efficient organization structure and reduce operating costs. The program provided for cash payments based on years of service. The expense was recorded primarily in the period in which the employees irrevocably accepted the separation offer. The program's total pretax expenses were approximately $138 million with the final $2 million recorded in the third quarter. The payments for the program were substantially made in the first quarter. Included in the total pretax expense is a non-cash charge of $21 million resulting from a curtailment in certain OPEB plans, which was recorded outside of operating profit in "Other operating expenses." The first nine months of 2020 expenses that were included in operating profit of $115 million are allocated 36 percent "Cost of sales," 16 percent "Research and development," and 48 percent "Selling, administrative and general." In addition, the expenses were allocated 74 percent to the agriculture and turf operations, 23 percent to the construction and forestry operations, and 3 percent to the financial services operations. Annual savings from this program are estimated to be approximately $85 million with about $65 million in 2020.



(3)

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






Three Months Ended


Nine Months Ended





August 2


July 28


August 2


July 28





2020


2019


2020


2019



Dividends declared


$

.76


$

.76


$

2.28


$

2.28



Dividends paid


$

.76


$

.76


$

2.28


$

2.21




(4)

The calculation of basic net income per share is based on the average number of shares outstanding. The calculation of diluted net income per share recognizes any dilutive effect of share-based compensation.



(5)

The consolidated financial statements represent the consolidation of all Deere & Company's subsidiaries. In the supplemental consolidating data in Note 6 to the financial statements, "Equipment Operations" include the Company's agriculture and turf operations and construction and forestry operations with "Financial Services" reflected on the equity basis.

 

 

(6) SUPPLEMENTAL CONSOLIDATING DATA

STATEMENT OF INCOME

For the Three Months Ended August 2, 2020 and July 28, 2019

(In millions of dollars) Unaudited


EQUIPMENT OPERATIONS*


FINANCIAL SERVICES



2020


2019


2020


2019

Net Sales and Revenues













Net sales


$

7,859


$

8,969







Finance and interest income



25



30


$

878


$

952

Other income



206



185



73



51

Total



8,090



9,184



951



1,003














Costs and Expenses













Cost of sales



5,836



6,871







Research and development expenses



370



431







Selling, administrative and general expenses



616



751



137



147

Interest expense



91



67



206



311

Interest compensation to Financial Services



58



93







Other operating expenses



94



64



363



339

Total



7,065



8,277



706



797














Income of Consolidated Group before Income Taxes



1,025



907



245



206

Provision for income taxes



395



190



62



31

Income of Consolidated Group



630



717



183



175














Equity in Income (Loss) of Unconsolidated Subsidiaries and Affiliates













Financial Services



183



175







Other



(2)



7







Total



181



182







Net Income



811



899



183



175

Less: Net income attributable to noncontrolling interests













Net Income Attributable to Deere & Company


$

811


$

899


$

183


$

175


* Deere & Company with Financial Services on the equity basis.


The supplemental consolidating data is presented for informational purposes. Transactions between the "Equipment Operations" and "Financial Services" have been eliminated to arrive at the consolidated financial statements.

 

 

SUPPLEMENTAL CONSOLIDATING DATA (Continued)
STATEMENT OF INCOME

For the Nine Months Ended August 2, 2020 and July 28, 2019

(In millions of dollars) Unaudited


EQUIPMENT OPERATIONS*


FINANCIAL SERVICES



2020


2019


2020


2019

Net Sales and Revenues













Net sales


$

22,612


$

26,182







Finance and interest income



75



79


$

2,720


$

2,727

Other income



597



614



196



184

Total



23,284



26,875



2,916



2,911














Costs and Expenses













Cost of sales



17,208



20,058







Research and development expenses



1,201



1,295







Selling, administrative and general expenses



1,989



2,191



483



422

Interest expense



237



182



747



910

Interest compensation to Financial Services



195



254







Other operating expenses



186



203



1,187



1,008

Total



21,016



24,183



2,417



2,340














Income of Consolidated Group before Income Taxes



2,268



2,692



499



571

Provision for income taxes



632



625



120



123

Income of Consolidated Group



1,636



2,067



379



448














Equity in Income (Loss) of Unconsolidated Subsidiaries and Affiliates













Financial Services



381



450



2



2

Other



(22)



18







Total



359



468



2



2

Net Income



1,995



2,535



381



450

Less: Net income attributable to noncontrolling interests



2



3







Net Income Attributable to Deere & Company


$

1,993


$

2,532


$

381


$

450


* Deere & Company with Financial Services on the equity basis.


The supplemental consolidating data is presented for informational purposes. Transactions between the "Equipment Operations" and "Financial Services" have been eliminated to arrive at the consolidated financial statements.

 

 

SUPPLEMENTAL CONSOLIDATING DATA (Continued)

CONDENSED BALANCE SHEET

(In millions of dollars) Unaudited


EQUIPMENT OPERATIONS*


FINANCIAL SERVICES



August 2


November 3


July 28


August 2


November 3


July 28



2020


2019


2019


2020


2019


2019

Assets



















Cash and cash equivalents


$

7,440


$

3,175


$

2,694


$

750


$

682


$

689

Marketable securities



8



1



5



632



580



560

Receivables from unconsolidated subsidiaries and affiliates



3,619



2,017



2,395










Trade accounts and notes receivable - net



1,251



1,482



1,606



5,595



5,153



6,807

Financing receivables - net



111



65



100



27,703



29,130



26,949

Financing receivables securitized - net



37



44



54



5,432



4,339



5,146

Other receivables



1,083



1,376



1,428



162



116



126

Equipment on operating leases - net












7,158



7,567



7,269

Inventories



5,650



5,975



6,747










Property and equipment - net



5,711



5,929



5,753



43



44



45

Investments in unconsolidated subsidiaries and affiliates



5,383



5,326



5,309



19



16



16

Goodwill



2,984



2,917



3,013










Other intangible assets - net



1,301



1,380



1,444










Retirement benefits



972



836



1,374



59



58



57

Deferred income taxes



1,865



1,896



1,579



56



57



72

Other assets



1,566



1,158



1,269



1,260



741



708

Total Assets


$

38,981


$

33,577


$

34,770


$

48,869


$

48,483


$

48,444




















Liabilities and Stockholders' Equity






































Liabilities



















Short-term borrowings


$

853


$

987


$

1,372


$

8,222


$

9,797


$

9,770

Short-term securitization borrowings



37



44



53



5,324



4,277



4,995

Payables to unconsolidated subsidiaries and affiliates



80



142



136



3,593



1,970



2,341

Accounts payable and accrued expenses



8,834



9,232



9,422



2,134



1,836



1,641

Deferred income taxes



398



414



454



468



568



616

Long-term borrowings



10,217



5,415



5,364



23,820



24,814



23,878

Retirement benefits and other liabilities



5,671



5,912



5,685



105



94



97

Total liabilities



26,090



22,146



22,486



43,666



43,356



43,338




















Redeemable noncontrolling interest






14



14





























Stockholders' Equity



















Total Deere & Company stockholders' equity



12,888



11,413



12,266



5,203



5,127



5,106

Noncontrolling interests



3



4



4










Total stockholders' equity



12,891



11,417



12,270



5,203



5,127



5,106

Total Liabilities and Stockholders' Equity


$

38,981


$

33,577


$

34,770


$

48,869


$

48,483


$

48,444


* Deere & Company with Financial Services on the equity basis.


The supplemental consolidating data is presented for informational purposes. Transactions between the "Equipment Operations" and "Financial Services" have been eliminated to arrive at the consolidated financial statements.

 

 

SUPPLEMENTAL CONSOLIDATING DATA (Continued)

STATEMENT OF CASH FLOWS

For the Nine Months Ended August 2, 2020 and July 28, 2019

(In millions of dollars) Unaudited


EQUIPMENT OPERATIONS*


FINANCIAL SERVICES



2020


2019


2020


2019

Cash Flows from Operating Activities













Net income


$

1,995


$

2,535


$

381


$

450

Adjustments to reconcile net income to net cash provided by operating activities:













Provision for credit losses



6



1



117



57

Provision for depreciation and amortization



787



782



925



836

Impairment charges



115






32




Undistributed earnings of unconsolidated subsidiaries and affiliates



(124)



(62)



(1)



(1)

Credit for deferred income taxes



(57)



(123)



(103)



(209)

Changes in assets and liabilities:













Trade receivables and Equipment Operations' financing receivables



116



(248)







Inventories



387



(670)







Accounts payable and accrued expenses



(567)



50



(38)



23

Accrued income taxes payable/receivable



(25)



(282)



29



535

Retirement benefits



77



35



11



5

Other



145



(59)



89



140

Net cash provided by operating activities



2,855



1,959



1,442



1,836














Cash Flows from Investing Activities













Collections of receivables (excluding trade and wholesale)









14,352



13,807

Proceeds from maturities and sales of marketable securities






9



70



63

Proceeds from sales of equipment on operating leases









1,310



1,171

Cost of receivables acquired (excluding trade and wholesale)









(15,367)



(14,597)

Purchases of marketable securities






(3)



(91)



(107)

Purchases of property and equipment



(591)



(754)



(3)



(2)

Cost of equipment on operating leases acquired









(1,836)



(2,135)

Decrease (increase) in trade and wholesale receivables









423



(2,551)

Collateral on derivatives - net



(6)






330



59

Other



(55)



(64)



(46)



(47)

Net cash used for investing activities



(652)



(812)



(858)



(4,339)














Cash Flows from Financing Activities













Increase (decrease) in total short-term borrowings



(32)



(119)



202



(217)

Change in intercompany receivables/payables



(1,468)



(683)



1,468



683

Proceeds from long-term borrowings



4,592



868



3,739



6,572

Payments of long-term borrowings



(179)



(194)



(5,618)



(4,162)

Proceeds from issuance of common stock



111



133







Repurchases of common stock



(263)



(880)







Dividends paid



(718)



(703)



(260)



(377)

Other



(86)



(52)



(11)



(22)

Net cash provided by (used for) financing activities



1,957



(1,630)



(480)



2,477














Effect of Exchange Rate Changes on Cash, Cash Equivalents, and Restricted Cash



95



(16)



(15)



(8)














Net Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash



4,255



(499)



89



(34)

Cash, Cash Equivalents, and Restricted Cash at Beginning of Period



3,196



3,202



760



813

Cash, Cash Equivalents, and Restricted Cash at End of Period


$

7,451


$

2,703


$

849


$

779


* Deere & Company with Financial Services on the equity basis.


The supplemental consolidating data is presented for informational purposes. Transactions between the "Equipment Operations" and "Financial Services" have been eliminated to arrive at the consolidated financial statements.

 

 

Deere & Company

Other Financial Information

For the Nine Months Ended


Equipment Operations*

Agriculture and Turf

Construction and Forestry*



August 2

July 28

August 2

July 28

August 2

July 28

Dollars in millions


2020

2019

2020

2019

2020

2019

Net Sales


$

22,612


$

26,182


$

16,127


$

17,909


$

6,485


$

8,273


Net Sales - excluding Roadbuilding


$

20,466


$

23,762


$

16,127


$

17,909


$

4,339


$

5,853


Average Identifiable Assets




















With Inventories at LIFO


$

19,865


$

20,984


$

10,530


$

10,880


$

9,335


$

10,104


With Inventories at LIFO - excluding Roadbuilding


$

13,936


$

14,603


$

10,530


$

10,880


$

3,406


$

3,723


With Inventories at Standard Cost


$

21,284


$

22,359


$

11,682


$

11,989


$

9,602


$

10,370


With Inventories at Standard Cost -
excluding Roadbuilding


$

15,355


$

15,977


$

11,682


$

11,989


$

3,673


$

3,988


Operating Profit


$

2,503


$

2,932


$

2,109


$

1,978


$

394


$

954


Operating Profit - excluding Roadbuilding


$

2,336


$

2,657


$

2,109


$

1,978


$

227


$

679


Percent of Net Sales - excluding Roadbuilding



11.4

%


11.2

%


13.1

%


11.0

%


5.2

%


11.6

%

Operating Return on Assets - excluding Roadbuilding




















With Inventories at LIFO - excluding Roadbuilding



16.8

%


18.2

%


20.0

%


18.2

%


6.7

%


18.2

%

With Inventories at Standard Cost -
excluding Roadbuilding



15.2

%


16.6

%


18.1

%


16.5

%


6.2

%


17.0

%

SVA Cost of Assets - excluding Roadbuilding


$

(1,382)


$

(1,437)


$

(1,051)


$

(1,078)


$

(331)


$

(359)


SVA


$

954


$

1,220


$

1,058


$

900


$

(104)


$

320






















For the Nine Months Ended


Financial Services















August 2

July 28













Dollars in millions



2020


2019













Net Income Attributable to Deere & Company


$

381


$

450














Average Equity


$

5,076


$

5,018














Return on Equity



7.5

%


9.0

%













Operating Profit


$

498


$

566














Cost of Equity


$

(501)


$

(478)














SVA


$

(3)


$

88















The Company evaluates its business results on the basis of accounting principles generally accepted in the United States. In addition, it uses a metric referred to as Shareholder Value Added (SVA), which management believes is an appropriate measure for the performance of its businesses. SVA is, in effect, the pretax profit left over after subtracting the cost of enterprise capital. The Company is aiming for a sustained creation of SVA and is using this metric for various performance goals. Certain compensation is also determined on the basis of performance using this measure. For purposes of determining SVA, each of the equipment segments is assessed a pretax cost of assets, which on an annual basis is approximately 12 percent of the segment's average identifiable operating assets during the applicable period with inventory at standard cost. Management believes that valuing inventories at standard cost more closely approximates the current cost of inventory and the Company's investment in the asset. The Financial Services segment is assessed an annual pretax cost of approximately 13 percent of the segment's average equity. The cost of assets or equity, as applicable, is deducted from the operating profit or added to the operating loss of each segment to determine the amount of SVA.

 

* The results and assets related to the Company's Roadbuilding product line are excluded from the calculation of SVA to allow time for integration and assimilation of the 2017 acquisition of Wirtgen Group Holding GmbH's operations.

 

 

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SOURCE Deere & Company