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 extended equipment warranties. The information in the following discussion is presented in a format that includes information grouped as consolidated, equipment operations and financial services. The Company also views its operations as consisting of two geographic areas, the U.S. and Canada, and outside the U.S. and Canada. The Company's operating segments consist of agriculture and turf, construction and forestry, and financial services.

Trends and Economic Conditions

Industry sales of agricultural machinery in the U.S. and Canada are forecast to increase by more than 10 percent for 2012. Industry sales in the European Union (EU)27 nations of Western and Central Europe are forecast to be about the same as last year. Sales in the Commonwealth of Independent States are expected to increase strongly in 2012, while industry sales in Asia are projected to decrease moderately for the fiscal year. South American industry sales are projected to decrease 5 to 10 percent. Industry sales of turf and utility equipment in the U.S. and Canada are expected to be about the same to 5 percent higher in 2012. The Company's agriculture and turf segment sales increased 14 percent for the third quarter and 11 percent for the first nine months of 2012. These sales are forecast to increase by about 13 percent for fiscal year 2012. While construction equipment markets in the U.S. continue to show a strong recovery, the Company has experienced slower than expected sales in some international markets. World forestry markets are projected to be about the same in comparison to 2011. The Company's construction and forestry sales increased 23 percent in the third quarter and 24 percent for the first nine months of 2012. These sales are forecast to rise by about 17 percent for 2012. Net income attributable to Deere & Company for the Company's financial services operations is forecast to be approximately $450 million in 2012, somewhat lower than the prior year.

Items of concern include the uncertainty of the global economic recovery, the impact of sovereign and state debt, capital market disruptions, the availability of credit for the Company's customers and suppliers, the effectiveness of governmental actions in respect to monetary policies, general economic conditions and financial regulatory reform. The widespread drought affecting the mid-section of the U.S. and significant volatility in the price of many commodities could also impact the Company's results. The availability of certain components that could impact the Company's ability to meet production schedules continues to be monitored. Designing and producing products with engines that continue to meet high performance standards and increasingly stringent emissions regulations is one of the Company's major priorities.

Weakening in certain international markets, short-term manufacturing inefficiencies resulting from the introduction of new products and dryness in several key markets have impacted near term results. However, the new products and increased focus on improved execution position the Company well to capitalize on favorable global agricultural trends over the long term.

2012 Compared with 2011

Net income attributable to Deere & Company for the third quarter was $788.0 million, or $1.98 per share, compared with $712.3 million, or $1.69 per share, for the same period last year. For the first nine months, net income attributable to Deere & Company was $2,377 million, or $5.88 per share, compared with $2,130 million, or $5.01 per share, last year.

Worldwide net sales and revenues increased 15 percent to $9,590 million for the third quarter of 2012, compared with $8,372 million a year ago, and increased 13 percent to $26,365 million for the first nine months, compared with $23,401 million a year ago. Net sales of the equipment operations were $8,930 million for the third quarter and $24,454 million for the first nine months, compared with $7,722 million and $21,563 million for the respective periods last year. Net sales of the worldwide equipment operations increased 16 percent for the third quarter and 13 percent for the first nine months. Sales included price realization of 5 percent for the third quarter and 4 percent year to date and an unfavorable foreign currency translation effect of 5 percent for the third quarter and 3 percent for the first nine months. Equipment net sales in the U.S. and Canada increased 28 percent for the current quarter and 18 percent year to date. Outside the U.S. and Canada, net sales were essentially the same for the third quarter and increased 7 percent for the first nine months with unfavorable foreign currency translation effects of 11 percent and 6 percent for these periods.

The Company's equipment operations reported operating profit of $1,127 million for the third quarter and $3,347 million for the first nine months, compared with $969 million and $2,883 million for the same periods last year. The improvement for both periods was primarily due to the impact of price realization and higher shipment volumes. These factors were partially offset by higher production costs and raw material costs, unfavorable effects of foreign currency exchange, as well as increased research and development expenses. The increase in production costs primarily related to new products and engine emission requirements. Net income of the Company's equipment operations was $678 million for the third quarter and $2,040 million for the first nine months, compared with $584 million and $1,777 million for the respective periods last year. The same operating factors mentioned above affected quarterly and nine-month results.

Financial services reported net income attributable to Deere & Company of $110.4 million for the third quarter and $338.6 million for the first nine months, compared with $125.6 million and $348.9 million for the same periods last year. Results were lower for both periods primarily due to increased selling, administrative and general expenses, narrower financing spreads and higher reserves for crop insurance claims. These factors were partially offset by growth in the credit portfolio and a lower provision for credit losses.

Business Segment Results

† Agriculture and Turf. Agriculture and turf sales increased 14 percent for the third quarter and 11 percent for the first nine months this year largely due to higher shipment volumes and price realization, partially offset by the unfavorable effects of currency translation. Operating profit was $1,014 million for the quarter and $2,991 million year to date, compared with $859 million and $2,579 million, respectively, last year. The results increased in both periods primarily driven by the impact of price realization and higher shipment volumes. These factors were partially offset by increased production and raw material costs, unfavorable effects of foreign currency exchange and higher research and development expenses. The increase in production costs primarily related to new products and engine emission requirements.

† Construction and Forestry. Construction and forestry sales increased 23 percent for the third quarter and 24 percent for the first nine months this year, mainly due to higher shipment volumes and price realization. Operating profit was $113 million for the quarter and $356 million for nine months, compared with $110 million and $304 million for the same periods last year. Results improved for both periods primarily due to the impact of price realization and higher shipment volumes. These factors were partially offset by increased production and raw material costs, as well as higher research and development expenses and selling, administrative and general expenses. The increased production costs primarily related to new products and engine emission requirements.

† Financial Services. The financial services segment had an operating profit of $170 million for the third quarter and $520 million for the first nine months, compared with $194 million and $529 million in the same periods last year. Operating profit for both periods was lower primarily due to increased selling, administrative and general expenses, narrower financing spreads and higher reserves for crop insurance claims. These factors were partially offset by growth in the credit portfolio and a lower provision for credit losses. Total revenues of the financial services operations, including intercompany revenues, increased 2 percent to $618 million in the current quarter from $607 million in the third quarter of 2011 and increased 4 percent in the first nine months to $1,773 million this year, compared to $1,712 million last year. The average balance of receivables and leases financed was 9 percent higher in the third quarter and 8 percent higher in the first nine months of 2012, compared with the same periods last year. Interest expense was approximately the same for the third quarter and 2 percent lower in the first nine months as a result of lower average interest rates, largely offset by higher average borrowings. The financial services operations' consolidated ratio of earnings to fixed charges was 2.21 to 1 for the third quarter this year, compared with 2.38 to 1 in the same period last year. The ratio was 2.18 to 1 for the first nine months this year and last year.

The cost of sales to net sales ratios for the third quarter and first nine months of 2012 were 75.7 percent and 74.3 percent, respectively, compared to 75.0 percent and 74.2 percent in the same periods last year. Both periods increased primarily due to higher production costs, increased raw material costs and unfavorable effects of foreign currency exchange, partially offset by improved price realization. The higher ratios were partially offset by lower postretirement health care benefits cost related to the decreases in amortization of net actuarial losses (see Note 7).

Finance and interest income increased in the first nine months of this year due to growth in the credit portfolio, partially offset by lower average financing rates. Other income increased in the first nine months this year primarily as a result of higher crop insurance revenues. Research and development costs increased in the third quarter and first nine months primarily due to increased spending in support of new products and more stringent emission requirements. Selling, administrative and general expenses were higher in both periods primarily due to growth. Interest expense increased in the third quarter due to higher average borrowings, partially offset by lower average borrowing rates. Other operating expenses increased in the first nine months primarily due to higher reserves for crop insurance claims and costs.

Market Conditions and Outlook

Company equipment sales are projected to increase by about 13 percent for fiscal year 2012 and the fourth quarter, compared with the same periods a year ago. Included is an unfavorable currency translation impact of about 3 percent for the year and about 4 percent for the fourth quarter. For the fiscal year, net income attributable to Deere & Company is anticipated to be approximately $3,100 million.

† Agriculture and Turf. Worldwide sales of the Company's agriculture and turf segment are forecast to increase by about 13 percent for fiscal year 2012, including a negative currency translation impact of about 4 percent. Industry sales for agricultural machinery in the U.S. and Canada are forecast to increase more than 10 percent for 2012. Fiscal year industry sales in the EU27 are now forecast to be about the same as last year as strength in the northern European market offsets weakness in the South. Sales in the Commonwealth of Independent States are expected to increase strongly in 2012. Industry sales in Asia are projected to decrease moderately for the fiscal year due to softening in India and China. In South America, industry sales are projected to decrease 5 to 10 percent as a result of uncertainty in Argentina and drought conditions earlier in the year in parts of the region. As a result of dry weather, global grain supplies are expected to further tighten. This supports higher commodity prices and should result in robust field activity in the 2013 crop year in markets throughout the world. U.S. and Canada industry sales of turf and utility equipment are expected to be about the same to 5 percent higher for 2012, reflecting the drought conditions in the U.S.

† Construction and Forestry. The Company's worldwide sales of construction and forestry equipment are forecast to increase by about 17 percent for 2012. While construction equipment sales in the U.S. continue to show strong recovery, the Company has experienced slower than expected sales activity in some international markets. World forestry markets are projected to be about the same in comparison to 2011.

† Financial Services. Fiscal year 2012 net income attributable to Deere & Company for the financial services operations is expected to be approximately $450 million, somewhat lower than the prior year. The forecast decline is primarily due to an anticipated increase in selling, administrative and general expenses, narrower financing spreads and higher reserves for crop insurance claims, partially offset by growth in the credit portfolio.

Safe Harbor Statement

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

The Company's agricultural equipment business is subject to a number of uncertainties including the many interrelated factors that affect farmers' confidence. These factors include worldwide economic conditions, demand for agricultural products, world grain stocks, weather conditions (including its effects on timely planting and harvesting), 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 Argentina, Brazil, China, the European Union, India, Russia and the U.S.), international reaction to such programs, changes in and effects of crop insurance programs, global trade agreements, animal diseases and their effects on poultry, beef and pork consumption and prices, crop pests and diseases, and the level of farm product exports (including concerns about genetically modified organisms).

Factors affecting the outlook for the Company's turf and utility equipment include 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, paper, 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 the global markets in which the Company operates, especially material changes in economic activity in these markets; customer confidence in general economic conditions; foreign currency exchange rates and their volatility, especially fluctuations in the value of the U.S. dollar; interest rates; and inflation and deflation rates. General economic conditions can affect demand for the Company's equipment as well.

Customer and Company operations and results could be affected by changes in weather patterns (including the effects of drought conditions in parts of the U.S. and dryer than normal conditions in certain other markets); 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 and the threat thereof; and the spread of major epidemics.

Significant changes in market liquidity conditions 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. The sovereign 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, and Company operations and results. State debt crises also could negatively impact customers, suppliers, demand for equipment, and Company operations and results. The Company's investment management activities could be impaired by changes in the equity and bond markets, which would negatively affect earnings.

Additional factors that could materially affect the Company's operations, access to capital, expenses and results include changes in 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 in particular jurisdictions or for the benefit of certain industries or sectors (including protectionist policies and trade and licensing restrictions that could disrupt international commerce); actions by the U.S. Federal Reserve Board and other central banks; actions by the U.S. Securities and Exchange Commission (SEC), the U.S. Commodity Futures Trading Commission and other financial regulators; actions by environmental, health and safety regulatory agencies, including those related to engine emissions (in particular Interim Tier 4, Final Tier 4 and Stage IIIb non-road diesel emission requirements), carbon and other greenhouse gas emissions, noise and the risk of climate change; changes in labor regulations; changes to accounting standards; changes in tax rates, estimates, and regulations; compliance with U.S. and foreign laws when expanding to new markets; and actions by other regulatory bodies including changes in laws and regulations affecting the sectors in which the Company operates. Customer and Company operations and results also could be affected by changes to GPS radio frequency bands or their permitted uses.

Other factors that could materially affect results include production, design and technological innovations and difficulties, including capacity and supply constraints and prices; the availability and prices of strategically sourced materials, components and whole goods; delays or disruptions in the Company's supply chain or the loss of liquidity by suppliers; start-up of new plants and new products; the success of new product initiatives and customer acceptance of new products; changes in customer product preferences and sales mix whether as a result of changes in equipment design to meet government regulations or for other reasons; oil and energy prices and supplies; 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; labor relations; acquisitions and divestitures of businesses, the integration of new businesses; the implementation of organizational changes; difficulties related to the conversion and implementation of enterprise resource planning systems that disrupt business, negatively impact supply or distribution relationships or create higher than expected costs; security breaches and other disruptions to the Company's information technology infrastructure; changes in Company declared dividends and common stock issuances and repurchases.

Company results are also affected by changes in the level and funding 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 including those which may result from governmental action.

The liquidity and ongoing profitability of John Deere Capital Corporation (Capital Corporation) and other credit subsidiaries 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 market uncertainty increases and general economic conditions worsen, 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 potentially 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).

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 nine months of 2012 were $1,135 million. This resulted primarily from a seasonal increase in trade receivables and inventories along with an increase in overall demand and a decrease in the retirement benefit liability. These items were partially offset by net income adjusted for non-cash provisions, an increase in accounts payable and accrued expenses and a change in accrued income taxes payable/receivable. Cash outflows from investing activities were $2,415 million in the first nine months of this year, primarily due to the cost of receivables (excluding receivables related to sales) and the cost of leased equipment exceeding the collections of these receivables

and proceeds from sales of leased equipment by $886 million, purchases of property and equipment of $808 million, and purchases of marketable securities exceeding sales and maturities of marketable securities by $757 million. Cash inflows from financing activities were $3,354 million in the first nine months of 2012, primarily due to an increase in borrowings of $5,095 million, which were partially offset by repurchases of common stock of $1,225 million and dividends paid of $516 million. Cash and cash equivalents decreased $250 million during the first nine months this year.

Positive cash flows from consolidated operating activities in the first nine months of 2011 were $636 million. This resulted primarily from net income adjusted for non-cash provisions, an increase in accounts payable and accrued expenses, an increase in the net retirement benefits liability and a change in accrued income taxes payable/receivable. These items were partially offset by a seasonal increase in inventories and trade receivables along with an increase in overall demand. Cash outflows from investing activities were $1,067 million in the first nine months of last year, primarily due to the cost of receivables (excluding receivables related to sales) and the cost of leased equipment exceeding the collections of these receivables and proceeds from sales of leased equipment by $844 million, purchases of property and equipment of $682 million, and purchases of marketable securities exceeding sales and maturities of marketable securities by $232 million. The investing cash outflows were partially offset by proceeds from sales of businesses of $894 million. Cash inflows from financing activities were $245 million in the first nine months of 2011, primarily due to an increase in borrowings of $1,564 million and proceeds from issuance of common stock of $166 million (resulting from the exercise of stock options), which were partially offset by repurchases of common stock of $1,093 million and dividends paid of $422 million. Cash and cash equivalents decreased $172 million during the first nine months of 2011.

Given the continued uncertainty in the global economy, there has been a reduction in liquidity in some global markets that continues to affect the funding activities of the Company. However, the Company has access to most global markets at a reasonable cost and expects to have sufficient sources of global funding and liquidity to meet its funding needs. The Company's exposures to receivables from customers in European countries experiencing economic strains are not significant. Sources of liquidity for the Company include cash and cash equivalents, marketable securities, funds from operations, the issuance of commercial paper and term debt, the securitization of retail notes (both public and private markets) and committed and uncommitted bank lines of credit. The Company's commercial paper outstanding at July 31, 2012, October 31, 2011 and July 31, 2011 was $2,152 million, $1,279 million and $2,830 million, respectively, while the total cash and cash equivalents and marketable securities position was $4,943 million, $4,435 million and $4,078 million, respectively. The total cash and cash equivalents and marketable securities held by foreign subsidiaries, in which earnings are considered indefinitely reinvested, was approximately $780 million, $720 million and $725 million at July 31, 2012, October 31, 2011 and July 31, 2011, respectively. . . .