Summary of DEERE & CO - Yahoo! Finance

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Overview

Organization

The Company's Equipment Operations generate revenues and cash primarily from the sale of equipment to John Deere dealers and distributors. The Equipment Operations manufacture and distribute a full line of agricultural equipment; a variety of commercial, consumer and landscapes equipment and products; and a broad range of equipment for construction and forestry. The Company's Financial Services primarily provide credit services, which mainly finance sales and leases of equipment by John Deere dealers and trade receivables purchased from the Equipment Operations. In addition, Financial Services offer certain crop risk mitigation products and invest in wind energy generation. The information in the following discussion is presented in a format that includes information grouped as consolidated, Equipment Operations and Financial Services. The Company also views its operations as consisting of two geographic areas, the U.S. and Canada, and outside the U.S. and Canada. The agricultural equipment segment and the commercial and consumer equipment segment were combined into the agriculture and turf segment at the beginning of the third quarter of 2009 (see Note 18). The Company's other operating segments will continue to be the construction and forestry segment and the credit segment.

Trends and Economic Conditions

Industry farm machinery sales for 2009 are forecast to be flat to down slightly for the year in the U.S. and Canada with support from an increase in four-wheel-drive tractors, combines, sprayers and seeding equipment. In other parts of the world, industry farm machinery sales are forecast to be down for the year. North American industry sales of turf equipment and compact utility tractors are expected to be down about 20 percent for the year. The Company's agricultural equipment sales were down 4 percent for the second quarter and up 4 percent for the first six months of 2009, while commercial and consumer equipment sales declined 24 percent for the second quarter and first six months. The Company's agriculture and turf sales, which combine agricultural equipment and commercial and consumer equipment sales, are forecast to decrease about 14 percent for the full year. This forecast includes a negative effect of about 6 percent for currency translation. The Company's construction and forestry sales declined 55 percent in the second quarter and 44 percent in the first six months of 2009. These sales are expected to decrease approximately 42 percent for the year, largely as a consequence of a declining global economy and historically low levels of construction activity in the U.S. Net income for the Company's credit operations in 2009 is forecast to decrease to approximately $250 million.

Items of concern include the sharp downturn in global economic activity, the turmoil in financial markets and the effectiveness of governmental policies to promote economic recovery and the availability of credit for the Company's customers. The ability of the Company's suppliers to access credit is a risk. Significant fluctuations in foreign currency exchange rates could also impact the Company's results. The volatility in the price of many commodities used in the Company's products is also a concern. The availability of certain components that could impact the Company's ability to meet production schedules continues to be monitored. Producing engines that continue to meet high performance standards, yet also comply with increasingly stringent emissions regulations, is one of the Company's major priorities.

Although the Company is benefitting from a strong market for large farm machinery in the U.S. and from continued focus on balancing production with retail activity, the global recession and volatile foreign exchange rates have put pressure on overall results. The Company's operations that are dependent on construction activity and consumer spending are being affected by the full impact of the sharp economic downturn. However, the Company has continued to benefit from a strong liquidity position and access to global capital markets on a competitive basis.

2009 Compared with 2008

Deere & Company's net income for the second quarter was $472.3 million, or $1.11 per share, compared with $763.5 million, or $1.74 per share, for the same period last year. For the first six months, net income was $676.2 million, or $1.60 per share, compared with $1,132.5 million, or $2.56 per share, last year.

Worldwide net sales and revenues declined 17 percent to $6,748 million for the second quarter of 2009, compared with $8,097 million a year ago, and were down 11 percent to $11,894 million for the first six months, compared with $13,298 million a year ago. Net sales of the Equipment Operations were $6,187 million for the second quarter and $10,747 million for the first six months, compared with $7,469 million and $11,999 million for the respective periods last year. Net sales of the worldwide Equipment Operations decreased 17 percent for the second quarter and 10 percent for the first six months. Sales for both periods included price increases of 6 percent offset by an unfavorable currency translation effect of 6 percent. Net sales in the U.S. and Canada decreased 8 percent for the current quarter and 5 percent for the first six months. Net sales outside the U.S. and Canada decreased 30 percent for the second quarter and 18 percent for the first six months with an unfavorable currency translation effect of 13 percent for both periods.

The Company's Equipment Operations reported operating profit of $628 million for the second quarter and $935 million for the first six months of 2009, compared with $1,102 million and $1,559 million for the same periods last year. The deterioration in both periods primarily was due to lower shipment and production volumes, higher raw material costs and the unfavorable effects of foreign currency exchange, partially offset by improved price realization. The Equipment Operations had net income of $406.1 million for the second quarter and $559.5 million for the first six months, compared with $665.5 million and $929.5 million for the same periods last year. The same operating factors mentioned above, as well as a lower effective tax rate this year, affected the results for both periods.

Trade receivables and inventories at the end of the second quarter were $7,924 million, or 32 percent of the last 12 months' net sales, compared with $8,200 million, or 35 percent of net sales, for the same period a year ago.

Net income of the Company's Financial Services operations for the second quarter and first six months of 2009 were $68.9 million and $115.8 million, respectively, compared to $86.4 million and $184.1 million for the same periods last year. The results were lower for both periods largely due to a higher provision for credit losses, lower commissions from crop insurance and narrower financing spreads. Benefits from investment tax credits related to wind energy projects partially offset these factors. See the following discussion for the credit operations.

Business Segment Results

† Agricultural Equipment. Segment sales decreased 4 percent for the second quarter of 2009 largely due to the unfavorable effects of currency translation and lower shipment volumes, partially offset by improved price realization. Segment sales were up 4 percent for the first six months this year primarily due to improved price realization and higher shipment volumes, partially offset by the effects of currency translation. Operating profit was $635 million for the second quarter and $983 million for the year to date, compared with $782 million and $1,114 million for the respective periods last year. Operating profit was lower in the second quarter primarily due to lower shipment and production volumes, higher raw material costs, unfavorable impacts of foreign exchange and higher research and development expenses, partially offset by improved price realization. The operating profit for the first six months was lower largely due to higher raw material costs, the unfavorable effects of foreign exchange and higher research and development expenses, partially offset by improved price realization.

† Commercial and Consumer Equipment. Sales for the commercial and consumer equipment segment declined 24 percent for both the second quarter and first six months this year. Operating profit was $68 million for the second quarter and $10 million for the first six months, compared with $154 million and $162 million in the same periods a year ago. The operating profit decline in both periods primarily was due to lower shipment and production volumes, the unfavorable effects of foreign exchange and higher raw material costs, partially offset by improved price realization and lower selling, administrative and general expenses.

† Construction and Forestry. Construction and forestry sales were down 55 percent for the second quarter and 44 percent for the first six months of 2009. The segment had an operating loss of $75 million in the second quarter and $58 million for the first six months, compared with an operating profit of $166 million and $283 million for the same periods last year. The profit decrease for both periods was primarily due to significantly lower shipment and production volumes and higher raw material costs, partially offset by improved price realization and lower selling, administrative and general expenses.

† Credit. The credit segment had an operating profit of $58 million for the second quarter and $111 million for the first six months, compared with $133 million and $265 million in the same periods last year. The decline was primarily due to a higher provision for credit losses, lower commissions from crop insurance and narrower financing spreads. Total revenues of the credit operations, including intercompany revenues, decreased 12 percent to $529 million in the current quarter from $603 million in the second quarter of 2008 and 12 percent in the first six months to $1,071 million this year from $1,217 million last year. The average balance of receivables and leases financed was 2 percent lower in the second quarter and the first six months of 2009, compared with the same periods last year. Interest expense decreased 4 percent in the current quarter and 5 percent in the first six months of 2009 as a result of lower average interest rates, partially offset by higher average borrowings. The credit operations' consolidated ratio of earnings to fixed charges was 1.24 to 1 for the second quarter this year, compared with 1.55 to 1 in the same period last year. The ratio was 1.22 to 1 for the first six months this year, compared to 1.53 to 1 last year.

The cost of sales to net sales ratios for the second quarter and first six months of 2009 were 76.9 percent and 77.2 percent, respectively, compared to 73.8 percent and 73.9 percent in the same periods last year. The deterioration was primarily due to lower shipment and production volumes, increased raw material costs and unfavorable effects of foreign currency exchange rates, partially offset by improved price realization.

Finance and interest income declined in both periods this year due to lower financing rates and a lower average portfolio. Other income decreased in the first six months this year primarily due to lower crop insurance commissions and decreased gains on sales of property. Research and development expenses increased in both periods primarily as a result of increased spending in support of new products. Selling, administrative and general expenses decreased in both periods primarily due to lower compensation expenses and the effect of currency translation. Interest expense decreased in both periods due to lower borrowing rates, partially offset by higher average borrowings. Other operating expenses were higher in both periods primarily due to foreign exchange losses. The effective tax rate for the provision for income taxes was lower in both periods primarily due to certain discrete items and benefits from investment tax credits related to wind energy projects.

Market Conditions and Outlook

The outlook for market conditions over the remainder of the year remains highly uncertain and the impact on the Company's sales and earnings difficult to assess.

The Company's equipment sales are projected to be down about 19 percent for the fiscal year and down about 26 percent for the third quarter, compared with the same periods last year. This includes a negative currency translation impact of about 5 percent for the year and about 6 percent for the third quarter. The Company's net income is expected to be about $1.1 billion for 2009, with more risk on the downside.

† Agriculture and Turf. Sales of the agriculture and turf segment for fiscal year 2009 are forecast to decrease by about 14 percent, including a negative currency translation impact of about 6 percent. The segment was created at the beginning of the third quarter of 2009 by combining the operations of the worldwide agricultural equipment and commercial and consumer equipment segments. Voluntary employee separations related to the new organizational structure are currently expected to result in pretax charges of approximately $50 million in the second half of 2009. Savings from the separations of about the same amount are expected to be realized in 2010.

On an industry basis, farm machinery sales in the U.S. and Canada are forecast to be flat to down slightly for the year, with support from an increase in four-wheel-drive tractors, combines, sprayers and seeding equipment. In other parts of the world, industry farm machinery sales in Western Europe are forecast to be down 10 to 15 percent for the year. Markets have continued to deteriorate in Central Europe and the CIS (Commonwealth of Independent States) countries where sales are expected to be sharply lower. In South America, industry sales are projected to decrease by 20 to 30 percent for the year. North American industry sales of turf equipment and compact utility tractors are expected to be down about 20 percent.

† Construction and Forestry. The Company's worldwide sales of construction and forestry equipment are forecast to decline by about 42 percent for the year, largely as a consequence of a declining global economy and historically low levels of construction activity in the U.S.

† Credit. Net income in 2009 for the Company's credit operations is forecast to be approximately $250 million. The forecast decrease from 2008 is primarily due to narrower financing spreads, a higher provision for credit losses and lower commissions from crop insurance, partially offset by benefits from investment tax credits related to wind energy projects.

Safe Harbor Statement

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: Statements under "Overview," "Market Conditions and Outlook" and other statements herein that relate to future operating periods are subject to important risks and uncertainties that could cause actual results to differ materially. Some of these risks and uncertainties could affect particular lines of business, while others could affect all of the Company's businesses.

Forward-looking statements involve certain factors that are subject to change, including for the Company's agricultural equipment the many interrelated factors that affect farmers' confidence. These factors include worldwide economic conditions, demand for agricultural products, world grain stocks, weather conditions, soil conditions, harvest yields, prices for commodities and livestock, crop and livestock production expenses, availability of transport for crops, the growth of non-food uses for some crops (including ethanol and biodiesel production), real estate values, available acreage for farming, the land ownership policies of various governments, changes in government farm programs and policies (including those in the U.S. and Brazil), international reaction to such programs, global trade agreements, animal diseases and their affects on poultry and beef consumption and prices (including avian flu and bovine spongiform encephalopathy, commonly known as "mad cow" disease), crop pests and diseases (including Asian rust), and the level of farm product exports (including concerns about genetically modified organisms).

Factors affecting the outlook for the Company's turf and utility equipment include general economic conditions, consumer confidence, weather conditions, customer profitability, consumer borrowing patterns, consumer purchasing preferences, housing starts, infrastructure investment, spending by municipalities and golf courses, and consumable input costs.

General economic conditions, consumer spending patterns, real estate and housing prices, the number of housing starts and interest rates are especially important to sales of the Company's construction and forestry equipment. The levels of public and non-residential construction also impact the results of the Company's

construction and forestry segment. Prices for pulp, lumber and structural panels are important to sales of forestry equipment.

All of the Company's businesses and its reported results are affected by general economic conditions in, and the political and social stability of, the global markets in which the Company operates, especially material changes in economic activity in these markets; customer confidence in the general economic conditions; foreign currency exchange rates, especially fluctuations in the value of the U.S. dollar, interest rates and inflation and deflation rates; capital market disruptions; significant changes in capital market liquidity, access to capital and associated funding costs; delays or disruptions in the Company's supply chain due to weather, natural disasters or financial hardship or the loss of liquidity by suppliers (including common suppliers with the automotive industry); changes in and the impact of governmental banking, monetary and fiscal policies and governmental programs in particular jurisdictions or for the benefit of certain sectors; actions by rating agencies; customer access to capital for purchases of the Company's products and borrowing and repayment practices, the number and size of customer loan delinquencies and defaults, and the sub-prime credit market crises; changes in the market values of investment assets; production, design and technological difficulties, including capacity and supply constraints and prices; the availability and prices of strategically sourced materials, components and whole goods; start-up of new plants and new products; the success of new product initiatives and customer acceptance of new products; oil and energy prices and supplies; the availability and cost of freight; trade, monetary and fiscal policies of various countries (including protectionist policies that disrupt international commerce); wars and other international conflicts and the threat thereof; actions by the U.S. Federal Reserve Board and other central banks; actions by the U.S. Securities and Exchange Commission; actions by environmental, health and safety regulatory agencies, including those related to engine emissions (in particular Tier 4 emission requirements), noise and the risk of climate change; actions by other regulatory bodies; 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; labor relations and regulations; changes to accounting standards; changes in tax rates and regulations; the effects of, or response to, terrorism; and changes in laws and regulations affecting the sectors in which the Company operates. The spread of major epidemics (including H1N1 and other influenzas, SARS, fevers and other viruses) also could affect Company results. Changes in weather patterns could impact customer operations and Company results. Company results are also affected by changes in the level of employee retirement benefits, changes in market values of investment assets and the level of interest rates, which impact retirement benefit costs, and significant changes in health care costs. Other factors that could affect results are acquisitions and divestitures of businesses, the integration of new businesses, the implementation of organizational changes such as combining of the agricultural and commercial and consumer equipment segments, changes in Company declared dividends and common stock issuances and repurchases.

With respect to the current global economic downturn, changes in governmental banking, monetary and fiscal policies to restore liquidity and increase the availability of credit may not be effective and could have a material impact on the Company's customers and markets. Recent significant changes in market liquidity conditions could impact access to funding and associated funding costs, which could reduce the Company's earnings and cash flows. The Company's investment management operations could be impaired by changes in the equity and bond markets, which would negatively affect earnings.

General economic conditions can affect the demand for the Company's equipment as well. Current negative economic conditions and outlook have dampened demand for certain equipment. Furthermore, governmental programs providing assistance to certain industries or sectors could negatively impact the Company's competitive position.

The current economic downturn and market volatility have adversely affected the financial industry in which John Deere Capital Corporation and other credit subsidiaries (Credit) operate. Credit's liquidity and ongoing profitability depend largely on timely access to capital to meet future cash flow requirements and fund operations and the costs associated with engaging in diversified funding activities and to fund purchases of the Company's products. If current levels of market disruption and volatility continue or worsen or access to governmental liquidity programs decreases, funding could be unavailable or

insufficient. Additionally, under current market conditions customer confidence levels may result in declines in credit applications and increases in delinquencies and default rates, which could materially impact Credit's 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 potentially could materially affect the Company's financial results, is included in the Company's most recent annual report on Form 10-K (including the factors discussed in Item 1A. Risk Factors) and other filings with the U.S. Securities and Exchange Commission.

Critical Accounting Policies

See the Company's critical accounting policies discussed in the Management's Discussion and Analysis of the most recent annual report filed on Form 10-K. There have been no material changes to these policies.

CAPITAL RESOURCES AND LIQUIDITY

The discussion of capital resources and liquidity has been organized to review separately, where appropriate, the Company's consolidated totals, Equipment Operations and Financial Services operations.

Consolidated

Negative cash flows from consolidated operating activities in the first six months of 2009 were $1,181 million. This resulted primarily from a seasonal increase in trade receivables and inventories, and a decrease in accounts payable and accrued expenses, which were partially offset by net income adjusted for non-cash provisions. Cash inflows from investing activities were $1,144 million in the first six months of this year, primarily due to proceeds from collections of financing receivables exceeding the cost of these receivables by $813 million and maturities and sales of marketable securities exceeding purchases of marketable securities by $798 million, partially offset by purchases of property and equipment of $449 million. Cash inflows from financing activities were $2,605 million in the first six months of 2009, primarily due to an increase in borrowings of $3,071 million, which were partially offset by dividends paid of $355 million. Cash and cash equivalents increased $2,586 million during the first six months this year.

Negative cash flows from consolidated operating activities in the first six months of 2008 were $523 million. This resulted primarily from a seasonal increase in inventories and trade receivables, and a decrease in retirement benefit accruals, which were partially offset by net income adjusted for non-cash provisions, an increase in accounts payable and accrued expenses and the change in accrued income taxes payable/receivable. Cash inflows from investing activities were $388 million in the first six months of last year, primarily due to proceeds from maturities and sales of marketable securities exceeding purchases of marketable securities by $610 million, collections of financing receivables exceeding the cost of these receivables by $154 million, partially offset by purchases of property and equipment of $429 million. Cash inflows from financing activities were $75 million in the first six months of 2008, primarily due to an increase in borrowings of $1,152 million, issuances of common stock of $100 million (resulting from the exercise of stock options) and excess tax benefits from share-based compensation of $54 million, which were partially offset by repurchases of common stock of $1,002 million and dividends paid of $220 million. Cash and cash equivalents increased $9 million during the first six months last year.

Given the downturn in global economic activity and the recent significant changes in credit market liquidity, sources of funds for the Company have been impacted. However, the Company expects to have sufficient sources of liquidity to meet its funding needs. Sources of liquidity for the Company include cash and cash

equivalents, marketable securities, funds from operations, the issuance of commercial paper and term debt, the securitization of retail notes (both public and private markets) and committed and uncommitted bank lines of credit. The Company's commercial paper outstanding at April 30, 2009, October 31, 2008 and April 30, 2008 was approximately $2.1 billion, $3.0 billion and $3.0 billion, respectively, while the total cash and cash equivalents and marketable securities position was approximately $5.0 billion, $3.2 billion and $3.3 billion, respectively.

On December 4, 2008, John Deere Capital Corporation (Capital Corporation) and FPC Financial, f.s.b., a wholly-owned subsidiary of Capital Corporation, elected to continue to participate in the debt guaranty program that is part of the Federal Deposit Insurance Corporation's (FDIC's) Temporary Liquidity Guarantee Program (TLGP). During December 2008, Capital Corporation issued $2.0 billion of fixed-rate medium-term notes due June 19, 2012 at a rate of 2.875%, which are guaranteed by the FDIC under the TLGP. The FDIC has notified Capital Corporation that it needs additional review and written determination from the FDIC prior to issuing additional guaranteed debt. Accordingly, Capital Corporation has submitted documentation to the FDIC and will continue to seek further guidance.

During January 2009, the Capital Corporation entered into a new revolving credit agreement to utilize bank conduit facilities to securitize retail notes (see Note 6). At April 30, 2009, this facility had a total capacity, or "financing limit," of up to $2,500 million of secured financings at any time. After a 364 . . .