-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OrBetr6nYBG/F+rl6w5TEf9nptoc3BSJ2QaSroGA9kuoirvl0/+mM5PdcHzxBgbg B593lLsKDmjNGmqGxHC9xA== 0001047469-98-001932.txt : 19980126 0001047469-98-001932.hdr.sgml : 19980126 ACCESSION NUMBER: 0001047469-98-001932 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971031 FILED AS OF DATE: 19980123 SROS: CSE SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DEERE & CO CENTRAL INDEX KEY: 0000315189 STANDARD INDUSTRIAL CLASSIFICATION: FARM MACHINERY & EQUIPMENT [3523] IRS NUMBER: 362382580 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-04121 FILM NUMBER: 98512140 BUSINESS ADDRESS: STREET 1: JOHN DEERE RD CITY: MOLINE STATE: IL ZIP: 61265 BUSINESS PHONE: 3097658000 10-K405 1 FORM 10-K405 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K 405 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED OCTOBER 31, 1997 Commission file number 1-4121 DEERE & COMPANY (Exact name of registrant as specified in its charter) DELAWARE 36-2382580 (State of incorporation) (IRS Employer Identification No.) ONE JOHN DEERE PLACE, MOLINE, 61265 (309) 765-8000 ILLINOIS (Zip Code) (Telephone Number) (Address of principal executive offices) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED Common stock, $1 par value New York Stock Exchange Chicago Stock Exchange Frankfurt (Germany) Stock Exchange 5-1/2% Convertible Subordinated Debentures Due 2001 New York Stock Exchange 8.95% Debentures Due 2019 New York Stock Exchange 8-1/2% Debentures Due 2022 New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate quoted market price of voting stock of registrant held by nonaffiliates at December 31, 1997 was $14,500,896,140. At December 31, 1997, 249,668,012 shares of common stock, $1 par value, of the registrant were outstanding. DOCUMENTS INCORPORATED BY REFERENCE. Portions of the proxy statement for the annual meeting of stockholders to be held on February 25, 1998 are incorporated by reference in Part III. PART I ITEM 1. BUSINESS. PRODUCTS Deere & Company (Company) and its subsidiaries (collectively called John Deere) have operations which are categorized into six business segments. The worldwide AGRICULTURAL EQUIPMENT segment manufactures and distributes a full line of farm equipment -- including tractors; combine and cotton harvesters; tillage, seeding and soil preparation machinery; sprayers; hay and forage equipment; materials handling equipment; and integrated precision farming technology. The worldwide CONSTRUCTION EQUIPMENT segment, formerly the worldwide industrial equipment segment, manufactures and distributes a broad range of machines used in construction, earthmoving and forestry -- including backhoe loaders; crawler dozers and loaders; four-wheel-drive loaders; excavators; scrapers; motor graders; log skidders; and forestry harvesters. This segment also includes the manufacture and distribution of engines and drivetrain components for the original equipment manufacturer (OEM) market. The worldwide COMMERCIAL AND CONSUMER EQUIPMENT segment manufactures and distributes equipment for commercial and residential uses -- including small tractors for lawn, garden, commercial and utility purposes; riding and walk-behind mowers; golf course equipment; snowblowers; hand-held products such as chain saws, string trimmers and leaf blowers; skid-steer loaders; utility vehicles; and other outdoor power products. The products produced by the equipment segments are marketed primarily through independent retail dealer networks and major retail outlets. The CREDIT segment, which mainly operates in the United States and Canada, primarily finances sales and leases by John Deere dealers of new and used equipment and sales by non-Deere dealers of recreational products. In addition, it provides wholesale financing to dealers of the foregoing equipment and finances retail revolving charge accounts. The INSURANCE segment issues policies in the United States primarily for general and specialized lines of commercial property and casualty insurance; group accident and health insurance for employees of participating John Deere dealers and disability insurance for employees of John Deere. The HEALTH CARE segment provides health management programs and related administrative services in the United States to John Deere and commercial clients. 1 John Deere's worldwide agricultural, construction and commercial and consumer equipment operations and subsidiaries are sometimes referred to as the "Equipment Operations." The credit, insurance and health care subsidiaries are sometimes referred to as "Financial Services." The Company believes that its worldwide sales of agricultural equipment during recent years have been greater than those of any other business in its industry. It also believes that John Deere is an important provider of most of the types of construction equipment that it markets, and the leader in some size ranges. The Company also believes that it is the largest manufacturer of lawn and garden tractors and provides the broadest line of grounds care equipment in North America. The John Deere enterprise has manufactured agricultural machinery since 1837. The present Company was incorporated under the laws of Delaware in 1958. MARKET CONDITIONS AND OUTLOOK Worldwide demand for John Deere agricultural equipment remained at strong levels in 1997 as a result of favorable fundamentals in the farm economy. Increased acres planted and favorable weather conditions in major producing areas of North America resulted in historically high levels of production. However, strong domestic and export demand for grains and oilseeds are expected to hold carryover stocks relatively low. As a result, soybean prices have remained at favorable levels. Overseas demand for John Deere agricultural equipment also remained strong, reflecting good demand from the republics of the former Soviet Union and favorable market conditions in Latin America. Despite recent economic instability in the world's financial markets, current overall fundamentals are expected to remain favorable for farm equipment sales in 1998. Construction equipment demand rose in 1997 due to low interest rates, moderate economic growth and low inflation, all of which should continue in 1998. These factors promoted high levels of consumer confidence and housing activity this past year. Housing starts for next year are expected to approximate this year's level and expenditures on highways and streets are anticipated to grow in 1998 when a new federal highway bill is passed. These favorable economic conditions should promote good construction equipment demand next year. Sales of John Deere commercial and consumer equipment increased this year from the weather depressed levels of last year. With low unemployment rates, growing incomes, low interest rates, moderate economic growth and new product introductions, demand is anticipated to remain at favorable levels in 1998. Results for credit operations are expected to improve as a result of the expected strong demand for the Company's products and favorable economic conditions. The insurance operations expect the competitive environment in commercial lines to intensify and operating returns to be lower in 1998. Although the health care operations should continue to face margin pressures and a very competitive environment, substantially improved results are expected for next year. Based on these market conditions, John Deere's worldwide physical volume of sales is currently projected to increase by approximately 6 percent in 1998 compared to 1997. First quarter physical volumes are projected to be 15 percent higher than comparable levels in the first quarter of 1997. 2 Overall, the fundamentals of the Company's businesses remain favorable. Industry demand for the Company's products remains strong and operating margins are benefiting from continuous improvement initiatives. The Company's investment in the development of new products and markets should further its worldwide leadership position. Based on these factors and the Company's exceptional employees and dealer organization, another strong operating performance is expected next year. 1997 CONSOLIDATED RESULTS COMPARED WITH 1996 Deere & Company achieved record worldwide net income in 1997, totaling $960 million, or $3.78 per share, compared with last year's net income of $817 million, or $3.14 per share. The higher profit resulted from strong demand for the Company's products. Operating margins remained at strong levels as a result of the Company's continuous improvement and quality initiatives. Worldwide net sales and revenues increased 14 percent to $12,791 million in 1997 compared with $11,229 million in 1996. Net sales of the Equipment Operations increased 15 percent in 1997 to $11,082 million from $9,640 million last year. International demand remained at strong levels, with export sales from the United States totaling $2,013 million for 1997 compared with $1,584 million last year. Overseas sales for the year also increased, rising by 11 percent compared with a year ago. Overall, the Company's worldwide physical volume of sales (excluding the sales of the newly consolidated Mexican subsidiaries) increased 15 percent for the year, reflecting the strong worldwide demand for the Company's products. Finance and interest income increased 14 percent to $867 million in 1997 compared with $763 million last year, while insurance and health care premiums increased two percent to $668 million in the current year compared with $658 million in 1996. The Company's worldwide Equipment Operations, which exclude income from the credit, insurance and health care operations and unconsolidated affiliates, had record income of $817 million in 1997 compared with $610 million in 1996. The worldwide ratio of cost of goods sold to net sales was 76.7 percent in 1997 compared with 77.7 percent last year. The Equipment Operations' ratio of year-end assets to net sales decreased from 71 percent in 1996 to 70 percent in 1997. Net income of the Company's Financial Services operations in 1997 was $138 million compared with $197 million in 1996. Additional information is presented in the discussion of credit, insurance and health care operations on pages 27 through 29. EQUIPMENT OPERATIONS AGRICULTURAL EQUIPMENT Sales of agricultural equipment, particularly in the United States and Canada, are affected by total farm cash receipts, which reflect levels of farm commodity prices, acreage planted, crop yields and government payments. Sales are also influenced by general economic conditions, farm land prices, 3 farmers' debt levels, interest rates, agricultural trends and the levels of costs associated with farming. Weather and climatic conditions can also affect buying decisions of equipment purchasers. Innovations to machinery and technology also influence buying. Reduced tillage practices have been adopted by many farmers to control soil erosion and lower production costs. John Deere has responded to this shift by delivering leading edge planters, drills and tillage equipment. Additionally, the Company has developed a precision farming approach using advanced technology and satellite positioning that should enable farmers to better control input costs and yields and to improve environmental management. Large, cost-efficient, highly-mechanized agricultural operations account for an important share of total United States farm output. The large-size agricultural equipment used on such farms has been particularly important to John Deere. A large proportion of the Equipment Operations' total agricultural equipment sales in the United States is comprised of tractors over 100 horsepower, self-propelled combines and self-propelled cotton pickers. Seasonal patterns in retail demand for agricultural equipment result in substantial variations in the volume and mix of products sold to retail customers during various times of the year. Seasonal demand must be estimated in advance, and equipment must be manufactured in anticipation of such demand in order to achieve efficient utilization of manpower and facilities throughout the year. For certain equipment, the Company offers early order discounts to retail customers. Production schedules are based, in part, on these early order programs. The Equipment Operations incur substantial seasonal indebtedness with related interest expense to finance production and inventory of equipment, and to finance sales to dealers in advance of seasonal demand. The Equipment Operations often encourage early retail sales decisions for both new and used equipment, by waiving retail finance charges or offering low-rate financing, during off-season periods and in early order promotions. An important part of the competition within the agricultural equipment industry during the past decade has come from a diverse variety of short-line and specialty manufacturers with differing manufacturing and marketing methods. Because of industry conditions, especially acquisitions of short-line and specialty manufacturers by large integrated competitors, the competitive environment is undergoing significant change. In addition to the agricultural equipment manufactured by the Equipment Operations, a number of agricultural products are purchased from other manufacturers for resale by John Deere outside the United States and Canada, including three models of tractors sourced from a Czech manufacturer, six sourced from an affiliated manufacturer in Brazil, four sourced from a French manufacturer with John Deere engines and three models sourced from Italy. CONSTRUCTION EQUIPMENT The construction equipment industry is broadly defined as including construction, earthmoving and forestry equipment, as well as some materials handling equipment and a variety of machines for specialized construction applications, including uses in the mining industry. The Equipment Operations provide types and sizes of equipment that compete for approximately two-thirds of the 4 estimated total United States market for all types and sizes of construction equipment (other than the market for cranes and specialized mining equipment). Retail sales of John Deere construction equipment are influenced by prevailing levels of residential, industrial and public construction and the condition of the forest products industry. Sales are also influenced by general economic conditions and the level of interest rates. John Deere construction equipment falls into three broad categories: utility tractors and smaller earthmoving equipment, medium capacity construction and earthmoving equipment, and forestry machines. The Equipment Operations' construction equipment business began in the late 1940s with wheel and crawler tractors of a size and horsepower range similar to agricultural tractors, utilizing common components. Through the years, the Equipment Operations substantially increased production capacity for construction equipment, adding to the line larger machines such as crawler loaders and dozers, log skidders, motor graders, hydraulic excavators and four-wheel-drive loaders. These products incorporate technology and many major components similar to those used in agricultural equipment, including diesel engines, transmissions and sophisticated hydraulics and electronics. In addition to the construction equipment manufactured by the Equipment Operations, certain products are purchased from other manufacturers for resale by John Deere. The Company and Hitachi Construction Machinery Co., Inc. of Japan ("Hitachi") have a joint venture for the manufacture of hydraulic excavators in the United States and for the distribution of excavators in North, Central and South America. The Company also has supply agreements with Hitachi under which a broad range of construction products manufactured by John Deere in the United States, including four-wheel-drive loaders and small crawler dozers, are distributed by Hitachi in Japan and other Far East markets. The division has also taken a number of initiatives in the rental equipment market for construction machinery including specially designed rental programs for Deere dealers, expanded cooperation with major national equipment rental companies, such as Hertz, and direct participation in the rental market. In 1996, the Company acquired a minority ownership interest in Sunstate Equipment Corp., a regional rental company based in Phoenix, Arizona. The Equipment Operations also manufacture and distribute diesel engines and drivetrain components both for use in John Deere products and for sale to other original equipment manufacturers. COMMERCIAL AND CONSUMER EQUIPMENT John Deere commercial and consumer equipment includes rear-engine riding mowers, front-engine lawn tractors, lawn and garden tractors, compact utility tractors, utility tractors, skid steer loaders, front mowers, small utility vehicles, hand-held products such as chain saws, string trimmers and leaf blowers, and a broad line of associated implements for mowing, tilling, snow and debris handling, aerating, and many other residential, commercial, golf and sports turf care applications. The product line also includes walk-behind mowers, snow throwers and other outdoor power products. Retail sales of commercial and consumer equipment products are influenced by weather conditions, consumer spending patterns and general economic conditions. 5 The division sells entry-level lawn tractors and walk-behind mowers under the name "Sabre by John Deere" in North America and under the name "Europro" in Europe. The division also sells consumer products under the Homelite and Green Machine brand names and sells walk-behind mowers in Europe under the SABO brand name and commercial mowing equipment under the Roberine brand name. In addition to the equipment manufactured by the commercial and consumer division, certain products are purchased from other manufacturers for resale by John Deere. ENGINEERING AND RESEARCH John Deere makes large expenditures for engineering and research to improve the quality and performance of its products, and to develop new products. Such expenditures were $412 million, or 3.7 percent of net sales of equipment in 1997, and $370 million, or 3.8 percent in 1996. MANUFACTURING MANUFACTURING PLANTS. In the United States and Canada, the Equipment Operations own and operate 19 factory locations, which contain approximately 30.0 million square feet of floor space. Six of the factories are devoted primarily to the manufacture of agricultural equipment, two to construction equipment, one to engines, one to hydraulics and power train components, eight to commercial and consumer equipment, and one to power train components manufactured mostly for OEM markets. The Equipment Operations own and operate tractor factories in Germany and Mexico; agricultural equipment factories in France, Germany, Mexico and South Africa; engine factories in France, Mexico and Argentina; a component factory in Spain; an axle facility in Mexico; and two commercial and consumer facilities in Germany and the Netherlands. These overseas facilities contain approximately 7.9 million square feet of floor space. The Equipment Operations also have financial interests in other manufacturing organizations, which include agricultural equipment manufacturers in Brazil, China, and the United States and a joint venture which builds construction excavators in the United States. John Deere's facilities are well maintained, in good operating condition and are suitable for their present purposes. These facilities, together with planned capital expenditures, are expected to meet John Deere's manufacturing needs in the foreseeable future. The Equipment Operations manufacture many of the components included in their products. The principal raw materials required for the manufacture of products are purchased from numerous suppliers. Although the Equipment Operations depend upon outside sources of supply for a substantial number of components, manufacturing operations are extensively integrated. Similar or common manufacturing facilities and techniques are employed in the production of components for construction, agricultural and commercial and consumer equipment. The physical volume of sales in 1997 (excluding the sales of the newly-consolidated Mexican subsidiaries) was 15 percent higher than in 1996. Although demand for certain key products is nearing production capacity, in general, capacity is adequate to satisfy anticipated retail demand. 6 The Equipment Operations' manufacturing strategy involves the implementation of appropriate levels of technology and automation, so that manufacturing processes can remain viable at varying production levels and can be flexible enough to accommodate many of the product design changes required to meet market requirements. In order to utilize manufacturing facilities and technology more effectively, the Equipment Operations continue to pursue improvements in manufacturing processes. Manufacturing activities judged not competitively advantageous for the Equipment Operations on a long-term basis are being shifted to outside suppliers, while many of those manufacturing activities that do offer long-term competitive advantages are being restructured. Improvements include the creation of flow-through manufacturing cells which reduce costs and inventories, increase quality and require less space, and the establishment of flexible assembly lines which can handle a wider product mix and deliver products at the times when dealers and customers demand them. Additionally, considerable effort is being directed to manufacturing cost reduction through product design, the introduction of advanced manufacturing technology and improvements in compensation incentives related to productivity and organizational structure. The Equipment Operations are also pursuing the sale to other companies of selected parts and components which can be manufactured and supplied to third parties on a competitive basis. CAPITAL EXPENDITURES. The Equipment Operations' capital expenditures were $479 million in 1997 compared with $258 million in 1996 and $245 million in 1995. Provisions for depreciation applicable to the Equipment Operations' property, plant and equipment during these years were $253 million, $253 million and $243 million, respectively. The Equipment Operations' capital expenditures for 1998 are currently estimated to approximate $430 million. The 1998 expenditures will be associated with new product and operations improvement programs and the manufacture and marketing of products in new markets such as Mexico, India, China, Brazil and the former Soviet Union. Future levels of capital expenditures will depend on business conditions. PATENTS AND TRADEMARKS John Deere owns a significant number of patents, licenses and trademarks which have been obtained over a period of years. The Company believes that, in the aggregate, the rights under these patents, licenses and trademarks are generally important to its operations, but does not consider that any patent, license, trademark or group of them (other than its house trademarks) is of material importance in relation to John Deere's business. MARKETING In the United States and Canada, the Equipment Operations, excluding the Homelite and Green Machine product lines, distribute equipment and service parts through six agricultural equipment sales branches, one construction equipment sales and administration office and one commercial and consumer equipment sales and administration office (collectively called sales branches). In addition, the Equipment Operations operate a centralized parts distribution warehouse in coordination with several regional parts depots in the United States and Canada and have an agreement with a third party to operate a high-volume parts warehouse in Indiana. 7 The sales branches in the United States and Canada market John Deere products at approximately 3,400 dealer locations, all of which are independently owned except for one retail store owned and operated by the Company. Over 1,700 sell agricultural equipment, while over 400 sell construction equipment. Smaller construction equipment is sold by nearly all of the construction equipment dealers and larger construction equipment, forestry equipment and a line of light construction equipment are sold by most of these dealers. Commercial and consumer equipment is sold by most John Deere agricultural equipment dealers, a few construction equipment dealers, and about 1,300 commercial and consumer equipment dealers, many of whom also handle competitive brands and dissimilar lines of products. In addition, the Sabre, Homelite and Green Machine product lines are sold through independent dealers and various general and mass merchandisers. Outside North America, John Deere agricultural equipment is sold to distributors and dealers for resale in over 110 countries by sales branches located in five European countries, South Africa, Mexico, Argentina and Australia, by export sales branches in Europe and the United States, and by an associated company in Brazil. Commercial and consumer equipment sales overseas occur primarily in Europe and Australia. Outside North America, construction equipment is sold primarily by an export sales branch located in the United States. WHOLESALE FINANCING The Equipment Operations provide wholesale financing to dealers in the United States for extended periods, to enable dealers to carry representative inventories of equipment and to encourage the purchase of goods by dealers in advance of seasonal retail demand. Down payments are not required, and interest is not charged for a substantial part of the period for which the inventories are financed. A security interest is retained in dealers' inventories, and periodic physical checks are made of dealers' inventories. Generally, terms to dealers require payments as the equipment which secures the indebtedness is sold to retail customers. Variable market rates of interest are charged on balances outstanding after certain interest-free periods, which currently are one to twelve months for agricultural tractors, one to five months for construction equipment, and two to 24 months for most other equipment. Financing is also provided to dealers on used equipment accepted in trade, on repossessed equipment, and on approved equipment from other manufacturers. A security interest is obtained in such equipment. Dealer defaults in recent years have not been significant. In Canada, John Deere products (other than service parts and commercial and consumer equipment) in the possession of dealers are inventories of the Equipment Operations that are consigned to the dealers. Dealers are required to make deposits on consigned equipment remaining unsold after specified periods. Sales to overseas dealers are made by the Equipment Operations' overseas and export sales branches and are, for the most part, financed by John Deere in a manner similar to that provided for sales to dealers in the United States and Canada, although maturities tend to be shorter overseas and a security interest is not always retained in the equipment sold. Receivables from dealers, which largely represent dealer inventories, were $3.3 billion at October 31, 1997 compared with $3.2 billion at October 31, 1996 and $3.3 billion at October 31, 1995. At those dates, the ratios of worldwide net dealer receivables to fiscal year net sales, were 30 percent, 8 33 percent and 37 percent, respectively. The highest month-end balance of such receivables during each of the past two fiscal years was $3.6 billion at April 30, 1997 and $3.8 billion at April 30, 1996. Wholesale financing is also provided by the Company's credit segment. See "FINANCIAL SERVICES--Credit Operations" below. FINANCIAL SERVICES CREDIT OPERATIONS UNITED STATES, CANADA, MEXICO, AUSTRALIA, GERMANY AND THE UNITED KINGDOM. In the United States and Canada, the Company's credit subsidiaries provide and administer financing for retail purchases of new and used John Deere agricultural, construction and commercial and consumer equipment. The Company's credit subsidiaries include John Deere Capital Corporation (Capital Corporation) and its subsidiaries (Deere Credit, Inc., Farm Plan Corporation, Deere Credit Services, Inc., John Deere Receivables, Inc., John Deere Funding Corporation, Arrendadora John Deere, S.A. de C.V., and John Deere Credit Limited-Australia), and John Deere Credit Inc. (collectively referred to as the Credit Companies). Deere & Company and John Deere Construction Equipment Company are referred to as the "sales companies." The Capital Corporation purchases retail installment sales and loan contracts (retail notes) from the sales companies. These retail notes are acquired by the sales companies through John Deere retail dealers in the United States and Mexico. John Deere Credit Inc. purchases and finances retail notes through John Deere's equipment sales branches in Canada. The terms of retail notes and the basis on which the Credit Companies acquire retail notes from the sales companies are governed by agreements with the sales companies. Certain subsidiaries of the Capital Corporation lease John Deere agricultural, construction and commercial and consumer equipment to retail customers in the United States and Mexico. The credit subsidiaries also purchase and finance retail notes unrelated to John Deere, representing primarily recreational product notes acquired from independent dealers of recreational vehicles and from marine product mortgage service companies. The credit subsidiaries also finance and service unsecured revolving charge accounts through merchants in the agricultural and lawn and grounds care retail markets and, additionally, provide wholesale financing for wholesale inventories of recreational vehicles, manufactured housing units, yachts, John Deere engine inventories and John Deere agricultural and John Deere construction equipment owned by dealers of those products. The credit subsidiaries intend to continue to seek additional volumes and types of non-Deere financing with the objective of broadening their base of business. Retail notes acquired by the sales companies have been immediately sold to the Credit Companies. The Equipment Operations have been the Credit Companies' major source of business, but in some cases, retail purchasers of John Deere products finance their purchases outside the John Deere organization. The Credit Companies' terms for financing equipment retail sales (other than smaller items purchased through unsecured revolving charge accounts) provide for retention of a security interest in the equipment financed. The Credit Companies' guidelines for minimum down payments, which vary with the types of equipment and repayment provisions, are generally not less than 20 percent on agricultural and construction equipment, 10 percent on lawn and grounds care equipment used 9 for personal use, 10 percent for recreational vehicles and 20 percent for yachts. Finance charges are sometimes waived for specified periods or reduced on certain John Deere products sold or leased in advance of the season of use or in other sales promotions. The Credit Companies generally receive compensation from the Equipment Operations equal to a competitive interest rate for periods during which finance charges are waived or reduced on the retail notes or leases. The cost is accounted for as a deduction in arriving at net sales by the Equipment Operations. Retail leases are offered to equipment users in the United States and Mexico. A small number of leases are executed between Deere Credit, Inc. and units of local government. Leases are usually written for periods of one to six years, and in some cases contain an option permitting the customer to purchase the equipment at the end of the lease term. Retail leases are also offered in a generally similar manner to customers in Canada through John Deere Credit Inc. and the Company's Canadian subsidiary, John Deere Limited. The Company has an agreement with the Capital Corporation to make income maintenance payments to the Capital Corporation such that its ratio of earnings before fixed charges to fixed charges is not less than 1.05 to 1 for each fiscal quarter. For 1997 and 1996, the Capital Corporation's ratios were 1.64 to 1 and 1.75 to 1, respectively. Accordingly, no payments were made in 1997. The Company has also committed to own at least 51 percent of the voting shares of capital stock of the Capital Corporation and to maintain the Capital Corporation's consolidated tangible net worth at not less than $50 million. These arrangements are not intended to make the Company responsible for the payment of any indebtedness, obligation or liability of the Capital Corporation or any of its direct or indirect subsidiaries. Additional information on the Credit Companies appears under the caption "Credit Operations" on pages 27 and 28. OVERSEAS. John Deere Credit Limited, a joint venture, offers equipment financing products within the United Kingdom. John Deere Credit-Germany, a partnership, offers equipment financing within Germany. In addition, in October 1997, the Capital Corporation formed a subsidiary in Australia, John Deere Credit Limited, which will offer equipment financing products within Australia beginning in fiscal year 1998. Retail sales financing outside of the United States and Canada is affected by a diversity of customs and regulations. INSURANCE The Company's insurance subsidiaries consist of John Deere Insurance Group, Inc. and its subsidiaries. The insurance group's business focus is on marketing commercial property/casualty insurance services and coverages to selected market segments. Marketing efforts are directed through separate business units that specialize in a particular market segment. The Dealer Operations business unit insures dealership organizations in the United States, with primary focus on agricultural equipment, construction equipment and automobile dealerships. The Transportation business unit insures trucking operations, with primary focus on long-haul trucking firms. The Specialty Managers business unit provides insurance coverages for niche markets through contracted underwriting managers. Other specialty insurance business marketed through the different business units includes programs which provide insurance on equipment utilized in forestry, construction and agricultural operations, group accident and health insurance for 10 employees of participating John Deere dealers and a small amount of long-term disability insurance for John Deere employees. For additional financial information on insurance operations, see the material under the caption "Insurance Operations" on page 28. HEALTH CARE In 1985, the Company formed John Deere Health Care, Inc. to commercialize the Company's expertise in the field of health care, which had been developed from efforts to control its own health care costs. John Deere Health Care currently provides health management programs and related administrative services, either directly, through its practice management division, or through its health maintenance organization subsidiaries, Heritage National Healthplan, Inc., John Deere Family Healthplan, Inc. and John Deere Healthplan of Georgia, Inc. for companies located in Illinois, Iowa, Wisconsin, Kentucky, Tennessee, Virginia and Georgia. At October 31, 1997, approximately 432,000 individuals were enrolled in these programs, of which approximately 68,400 were John Deere employees, retirees and their dependents. For additional financial information on health care operations, see the material under the caption "Health Care Operations" on pages 28 and 29. ENVIRONMENTAL MATTERS The Company has been designated a potentially responsible party (PRP), in conjunction with other parties, in certain government actions associated with hazardous waste sites. As a PRP, the Company has been and will be required to pay a portion of the costs of evaluation and cleanup of these sites. The Company is also a defendant in private party cost recovery cases. Management does not expect that these matters will have a material adverse effect on the consolidated financial position or results of operations of the Company. EMPLOYEES At October 31, 1997, John Deere had approximately 34,400 full-time employees, including approximately 24,900 employees in the United States and Canada. From time to time, John Deere also retains consultants, independent contractors, and temporary and part-time workers. Unions are certified as bargaining agents for approximately 45 percent of John Deere's United States employees. Most of the Company's United States production and maintenance workers are covered by a collective bargaining agreement with the United Auto Workers (UAW), with an expiration date of September 30, 2003. The majority of employees at John Deere facilities overseas are also represented by unions. 11 EXECUTIVE OFFICERS OF THE REGISTRANT Following are the names and ages of the executive officers of the Company, their positions with the Company and summaries of their backgrounds and business experience. All executive officers are elected or appointed by the Board of Directors and hold office until the annual meeting of the Board of Directors following the annual meeting of stockholders in each year.
NAME, AGE AND OFFICE (AT DECEMBER 31, 1997), PRINCIPAL OCCUPATION DURING LAST FIVE YEARS OTHER AND YEAR ELECTED TO OFFICE THAN OFFICE OF THE COMPANY CURRENTLY HELD Hans W. Becherer 62 Chairman 1990 1990 and prior, President Bernard L. Hardiek 57 Division President 1995 1994-95 Executive Vice President; 1994 and prior, Senior Vice President Ferdinand F. Korndorf 48 Division President 1995 1994-95 Senior Vice President; 1991-94 Vice President; 1990 President of Deere-Hitachi Pierre E. Leroy 49 Division President 1996 1994-96 Senior Vice President; 1994 and prior, Vice President and Treasurer Michael P. Orr 50 Division President 1997 1997 and prior, President, John Deere Credit Joseph W. England 57 Senior Vice President 1981 Robert W. Lane 48 Senior Vice President 1996 1995-96 Senior Vice President, Ag Division; 1992-95 Director Latin America, the Far East, Australia and South Africa; 1988-92 Vice President, Credit Operations John K. Lawson 57 Senior Vice President 1995 1995-96 Division President; 1992-95 Senior Vice President; 1992 and prior, Vice President Frank S. Cottrell 55 Vice President, Secretary 1993 1991-93, Secretary and General Counsel; 1991 and prior, and General Counsel Secretary and Associate General Counsel
ITEM 2. PROPERTIES. See "Manufacturing" in Item 1. The Equipment Operations also own and operate buildings housing seven sales branches, one centralized parts depot, five regional parts depots and several transfer houses and warehouses throughout the United States and Canada. These facilities contain approximately 5.0 million square feet of floor space. The Equipment Operations also own and operate buildings housing three sales branches, one centralized parts depot and three regional parts depots in Europe. These facilities contain approximately 850,000 square feet of floor space. Deere & Company administrative offices, offices for insurance, research facilities and certain facilities for health care activities, all of which are owned by John Deere, together contain about 2.0 million square feet of floor space and miscellaneous other facilities total 1.4 million square feet. John Deere also leases space in various locations totaling about 2.1 million square feet. ITEM 3. LEGAL PROCEEDINGS. The Company is subject to various unresolved legal actions which arise in the normal course of its business, the most prevalent of which relate to product liability, retail credit matters, and patent and trademark matters. Although it is not possible to predict with certainty the outcome of these 12 unresolved legal actions or the range of possible loss, the Company believes these unresolved legal actions will not have a material effect on its financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's common stock is listed on the New York Stock Exchange, the Chicago Stock Exchange and the Frankfurt (Germany) Stock Exchange. See the information concerning quoted prices of the Company's common stock and the number of stockholders in the second table and the third paragraph, and the data on dividends declared and paid per share in the first table, under the caption "Supplemental Quarterly Information and Dividend (Unaudited)" on page 43. During the fourth quarter, the Company issued 299 shares of restricted stock as compensation to the Company's non-employee directors. These shares were not registered under the Securities Act of 1933 pursuant to an exemption from registration. ITEM 6. SELECTED FINANCIAL DATA. Financial Summary
(Millions of dollars except per share amounts) 1997 1996 1995 1994 1993 For the Year Ended October 31: Total net sales and revenues $ 12,791 $ 11,229 $ 10,291 $ 8,977 $ 7,696 Income before changes in accounting(1) $ 960 $ 817 $ 706 $ 604 $ 184 Net income (loss) $ 960 $ 817 $ 706 $ 604 $ (921) Income per share before changes in accounting - primary and fully diluted(1)(2) $ 3.78 $ 3.14 $ 2.71 $ 2.34 $ .80 Net income (loss) per share - primary and fully diluted(2) $ 3.78 $ 3.14 $ 2.71 $ 2.34 $ (3.97) Dividends declared per share(2) $ .80 $ .80 $ .75 $ .68-1/3 $ .66-2/3 At October 31: Total assets $ 16,320 $ 14,653 $ 13,847 $ 12,781 $ 11,467 Long-term borrowings $ 2,623 $ 2,425 $ 2,176 $ 2,054 $ 2,548 (1) In 1993, the Company adopted FASB Statements No. 106 and 112. (2) Adjusted for a three-for-one stock split effective November 17, 1995.
13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. See the information under the caption "Management's Discussion and Analysis" on pages 24 through 30. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. See the information under "Management's Discussion and Analysis" on page 30, the "Financial Instruments" note on page 42 and the supplementary data under "Financial Instrument Risk Information" on page 43. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See the consolidated financial statements and notes thereto and supplementary data on pages 18 through 43. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information regarding directors in the proxy statement dated January 16, 1998 (the "proxy statement"), under the captions "Election of Directors" and "Directors Continuing in Office", is incorporated herein by reference. Information regarding executive officers is presented in Item 1 of this report under the caption "Executive Officers of the Registrant". Information required under Item 405 of Regulation S-K is incorporated herein by reference from the proxy statement under the caption "Section 16(a) Beneficial Ownership Reporting Compliance." ITEM 11. EXECUTIVE COMPENSATION. The information in the proxy statement under the captions "Compensation of Executive Officers" and "Compensation of Directors" is incorporated herein by reference. 14 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. (a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS. The information on the security ownership of a certain beneficial owner in the proxy statement under the caption "Principal Holders of Voting Securities" is incorporated herein by reference. (b) SECURITY OWNERSHIP OF MANAGEMENT. The information on shares of common stock of the Company beneficially owned by, and under option to (i) each director and (ii) the directors and officers as a group, contained in the proxy statement under the captions "Election of Directors", "Directors Continuing in Office", "Summary Compensation Table" and "Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values" is incorporated herein by reference. (c) CHANGE IN CONTROL. None. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. None. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. PAGE (a) (1) FINANCIAL STATEMENTS Statement of Consolidated Income for the years ended October 31, 1997, 1996 and 1995 18 Consolidated Balance Sheet, October 31, 1997 and 1996 20 Statement of Consolidated Cash Flows for the years ended October 31, 1997, 1996 and 1995 22 Notes to Consolidated Financial Statements 31 (a) (2) SCHEDULE TO CONSOLIDATED FINANCIAL STATEMENTS Schedule II - Valuation and Qualifying Accounts for the years ended October 31, 1997, 1996 and 1995 48 15 (a) (3) EXHIBITS SEE THE "INDEX TO EXHIBITS" ON PAGES 49 AND 50 OF THIS REPORT. Certain instruments relating to long-term borrowings, constituting less than 10 percent of registrant's total assets, are not filed as exhibits herewith pursuant to Item 601(b)4(iii)(A) of Regulation S-K. Registrant agrees to file copies of such instruments upon request of the Commission. (b) REPORTS ON FORM 8-K. Current report on Form 8-K dated August 12, 1997 (Item 7). FINANCIAL STATEMENT SCHEDULES OMITTED The following schedules for the Company and consolidated subsidiaries are omitted because of the absence of the conditions under which they are required: I, III, IV and V. 16 (THIS PAGE INTENTIONALLY LEFT BLANK.) 17 DEERE & COMPANY STATEMENT OF CONSOLIDATED INCOME
CONSOLIDATED (DEERE & COMPANY AND CONSOLIDATED SUBSIDIARIES) ----------------------------------------------- YEAR ENDED OCTOBER 31 ------------------------------------- (IN MILLIONS OF DOLLARS EXCEPT PER SHARE AMOUNTS) 1997 1996 1995 - ------------------------------------------------- --------- --------- --------- NET SALES AND REVENUES Net sales of equipment................................... $11,081.7 $ 9,640.0 $ 8,830.2 Finance and interest income.............................. 867.4 763.4 660.4 Insurance and health care premiums....................... 668.1 658.1 627.6 Investment income ....................................... 67.2 66.2 95.4 Other Income............................................. 107.0 101.7 76.9 --------- --------- --------- Total.................................................. 12,791.4 11,229.4 10,290.5 --------- --------- --------- COSTS AND EXPENSES Cost of goods sold....................................... 8,481.1 7,460.2 6,922.1 Research and development expenses ....................... 412.3 370.3 327.4 Selling, administrative and general expenses............. 1,320.7 1,146.6 1,001.4 Interest expense......................................... 422.2 402.2 392.4 Insurance and health care claims and benefits ........... 554.0 502.1 499.2 Other operating expenses................................. 94.0 61.4 55.3 --------- --------- --------- Total.................................................. 11,284.3 9,942.8 9,197.8 --------- --------- --------- INCOME OF CONSOLIDATED GROUP BEFORE INCOME TAXES......... 1,507.1 1,286.6 1,092.7 Provision for income taxes .............................. 550.9 479.8 397.8 --------- --------- --------- INCOME OF CONSOLIDATED GROUP............................. 956.2 806.8 694.9 --------- --------- --------- EQUITY IN INCOME OF UNCONSOLIDATED SUBSIDIARIES AND AFFILIATES Credit .................................................. (1.4) Insurance................................................ .7 Health care.............................................. Other.................................................... 5.3 10.5 10.5 --------- --------- --------- Total.................................................. 3.9 10.5 11.2 --------- --------- --------- NET INCOME............................................... $ 960.1 $ 817.3 $ 706.1 ========= ========= ========= PER SHARE DATA Net income per share, primary and fully diluted ......... $ 3.78 $ 3.14 $ 2.71 Dividends declared....................................... $ .80 $ .80 $ .75
The "Consolidated" (Deere & Company and Consolidated Subsidiaries) data in this statement conform with the requirements of FASB Statement No. 94. In the supplemental consolidating data in this statement, "Equipment Operations" (Deere & Company with Financial Services on the Equity Basis) reflect the basis of consolidation described on page 31 of the notes to the consolidated financial statements. The consolidated group data in the "Equipment Operations" income statement reflect the results of the agricultural equipment, construction equipment and commercial and consumer equipment operations. The supplemental "Financial Services" consolidating data in this statement include Deere & Company's credit, insurance and health care subsidiaries. Transactions between the "Equipment Operations" and "Financial Services" have been eliminated to arrive at the "Consolidated" data. The information on pages 24 through 43 is an integral part of this statement. 18 DEERE & COMPANY STATEMENT OF CONSOLIDATED INCOME
EQUIPMENT OPERATIONS FINANCIAL SERVICES (DEERE & COMPANY WITH FINANCIAL SERVICES ON THE EQUITY BASIS) ------------------------------- ------------------------------- YEAR ENDED OCTOBER 31 YEAR ENDED OCTOBER 31 (IN MILLIONS OF DOLLARS EXCEPT PER SHARE AMOUNTS) 1997 1996 1995 1997 1996 1995 - ------------------------------------------------ --------- --------- --------- ------- ------- ------- NET SALES AND REVENUES Net sales of equipment................................... $11,081.7 $ 9,640.0 $ 8,830.2 Finance and interest income.............................. 114.8 120.5 105.3 $ 757.6 $ 648.5 $ 561.2 Insurance and health care premiums....................... 697.2 690.6 674.6 Investment income ....................................... 67.2 66.2 95.4 Other Income............................................. 47.6 28.8 28.4 63.1 76.2 52.0 --------- --------- --------- ------- ------- ------- Total.................................................. 11,244.1 9,789.3 8,963.9 1,585.1 1,481.5 1,383.2 --------- --------- --------- ------- ------- ------- COSTS AND EXPENSES Cost of goods sold....................................... 8,499.3 7,486.1 6,943.8 Research and development expenses ....................... 412.3 370.3 327.4 Selling, administrative and general expenses............. 940.3 817.7 707.7 388.9 337.1 305.9 Interest expense......................................... 80.8 107.4 126.7 346.4 300.3 271.7 Insurance and health care claims and benefits ........... 560.2 503.8 515.6 Other operating expenses................................. 19.5 24.3 25.5 74.4 37.1 30.0 --------- --------- --------- ------- ------- ------- Total.................................................. 9,952.2 8,805.8 8,131.1 1,369.9 1,178.3 1,123.2 --------- --------- --------- ------- ------- ------- INCOME OF CONSOLIDATED GROUP BEFORE INCOME TAXES......... 1,291.9 983.5 832.8 215.2 303.2 260.0 Provision for income taxes .............................. 475.2 373.5 303.8 75.7 106.4 94.1 --------- --------- --------- ------- ------- ------- INCOME OF CONSOLIDATED GROUP............................. 816.7 610.0 529.0 139.5 196.8 165.9 --------- --------- --------- ------- ------- ------- EQUITY IN INCOME OF UNCONSOLIDATED SUBSIDIARIES AND AFFILIATES Credit .................................................. 147.2 146.6 120.9 (1.4) Insurance................................................ 29.6 32.7 29.4 .7 Health care.............................................. (38.7) 17.5 16.3 Other.................................................... 5.3 10.5 10.5 --------- --------- --------- ------- ------- ------- Total.................................................. 143.4 207.3 177.1 (1.4) .7 --------- --------- --------- ------- ------- ------- NET INCOME............................................... $ 960.1 $ 817.3 $ 706.1 $ 138.1 $ 196.8 $ 166.6 ========= ========= ========= ======= ======= ======= PER SHARE DATA Net income per share, primary and fully diluted ......... Dividends declared.......................................
The "Consolidated" (Deere & Company and Consolidated Subsidiaries) data in this statement conform with the requirements of FASB Statement No. 94. In the supplemental consolidating data in this statement, "Equipment Operations" (Deere & Company with Financial Services on the Equity Basis) reflect the basis of consolidation described on page 31 of the notes to the consolidated financial statements. The consolidated group data in the "Equipment Operations" income statement reflect the results of the agricultural equipment, construction equipment and commercial and consumer equipment operations. The supplemental "Financial Services" consolidating data in this statement include Deere & Company's credit, insurance and health care subsidiaries. Transactions between the "Equipment Operations" and "Financial Services" have been eliminated to arrive at the "Consolidated" data. The information on pages 24 through 43 is an integral part of this statement. 19 DEERE & COMPANY CONSOLIDATED BALANCE SHEET
CONSOLIDATED (DEERE & COMPANY AND CONSOLIDATED SUBSIDIARIES) ----------------------------------------------- (IN MILLIONS OF DOLLARS EXCEPT PER SHARE AMOUNTS) OCTOBER 31 ASSETS 1997 1996 - ------------------------------------------------- --------- --------- Cash and short-term investments................................................. $ 330.0 $ 291.5 Cash deposited with unconsolidated subsidiaries................................. --------- --------- Cash and cash equivalents ................................................... 330.0 291.5 Marketable securities .......................................................... 819.6 869.4 Receivables from unconsolidated subsidiaries and affiliates .................... 14.6 13.1 Trade accounts and notes receivable - net ...................................... 3,333.8 3,152.7 Financing receivables - net .................................................... 6,404.7 5,912.2 Other receivables............................................................... 412.7 549.6 Equipment on operating leases - net............................................. 774.6 429.8 Inventories..................................................................... 1,072.7 828.9 Property and equipment - net ................................................... 1,524.1 1,351.7 Investments in unconsolidated subsidiaries and affiliates ...................... 149.9 127.4 Intangible assets - net ........................................................ 157.8 285.9 Prepaid pension costs .......................................................... 592.9 30.9 Other assets.................................................................... 107.2 75.6 Deferred income taxes........................................................... 543.6 653.0 Deferred charges................................................................ 81.6 81.0 --------- --------- Total .......................................................................... $16,319.8 $14,652.7 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Short-term borrowings........................................................... $ 3,774.6 $ 3,144.1 Payables to unconsolidated subsidiaries and affiliates.......................... 48.7 27.6 Accounts payable and accrued expenses .......................................... 2,839.7 2,676.2 Insurance and health care claims and reserves................................... 414.7 437.6 Accrued taxes .................................................................. 117.5 132.4 Deferred income taxes........................................................... 21.4 9.4 Long-term borrowings............................................................ 2,622.8 2,425.4 Retirement benefit accruals and other liabilities .............................. 2,333.2 2,242.8 --------- --------- Total liabilities ........................................................... 12,172.6 11,095.5 --------- --------- STOCKHOLDERS' EQUITY Common stock, $1 par value (authorized - 600,000,000 shares; issued - 263,849,303 shares in 1997 and 263,833,099 shares in 1996), at stated value.............................................................. 1,778.5 1,770.1 Retained earnings............................................................... 3,048.4 2,299.5 Minimum pension liability adjustment............................................ (14.0) (235.4) Cumulative translation adjustment .............................................. (57.4) (14.0) Unrealized gain on marketable securities........................................ 22.2 14.0 Unamortized restricted stock compensation....................................... (17.4) (11.1) Common stock in treasury,13,556,164 shares in 1997 and 6,567,007 shares in 1996, at cost ............................................................. (613.1) (265.9) Total stockholders' equity................................................... 4,147.2 3,557.2 --------- --------- Total .......................................................................... $16,319.8 $14,652.7 ========= ========= - --------------------- The "Consolidated" (Deere & Company and Consolidated Subsidiaries) data in this statement conform with the requirements of FASB Statement No. 94. In the supplemental consolidating data in this statement, "Equipment Operations" (Deere & Company with Financial Services on the Equity Basis) reflect the basis of consolidation described on page 31 of the notes to the consolidated financial statements. The supplemental "Financial Services" consolidating data in this statement include Deere & Company's credit, insurance and health care subsidiaries. Transactions between the "Equipment Operations" and "Financial Services" have been eliminated to arrive at the "Consolidated" data. The information on pages 24 through 43 is an integral part of this statement.
20
EQUIPMENT OPERATIONS FINANCIAL SERVICES (DEERE & COMPANY WITH FINANCIAL SERVICES ON THE EQUITY BASIS) ------------------------------- ------------------ (IN MILLIONS OF DOLLARS EXCEPT PER SHARE AMOUNTS) OCTOBER 31 OCTOBER 31 ASSETS 1997 1996 1997 1996 - ------------------------------------------------ ------------------------------- ------------------ Cash and short-term investments......................................... $ 61.2 $ 80.0 $ 268.8 $ 211.6 Cash deposited with unconsolidated subsidiaries......................... 350.0 544.8 -------- -------- -------- -------- Cash and cash equivalents ........................................... 411.2 624.8 268.8 211.6 Marketable securities .................................................. 819.6 869.4 Receivables from unconsolidated subsidiaries and affiliates ............ 57.3 105.3 6.1 Trade accounts and notes receivable - net .............................. 3,333.8 3,152.7 Financing receivables - net ............................................ 83.5 103.4 6,321.2 5,808.8 Other receivables....................................................... 2.1 56.6 410.6 492.9 Equipment on operating leases - net..................................... 193.9 152.9 580.7 276.8 Inventories............................................................. 1,072.7 828.9 Property and equipment - net ........................................... 1,479.1 1,301.3 45.0 50.4 Investments in unconsolidated subsidiaries and affiliates .............. 1,494.7 1,445.3 13.0 6.3 Intangible assets - net ................................................ 148.4 276.3 9.4 9.7 Prepaid pension costs .................................................. 592.9 30.9 Other assets............................................................ 66.6 34.1 40.6 41.5 Deferred income taxes................................................... 490.8 603.2 52.8 49.7 Deferred charges........................................................ 57.2 52.4 24.4 28.7 -------- -------- -------- -------- Total .................................................................. $9,484.2 $8,768.1 $8,592.2 $7,845.8 ======== ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Short-term borrowings................................................... $ 171.1 $ 223.6 $3,603.5 $2,920.6 Payables to unconsolidated subsidiaries and affiliates.................. 54.8 27.6 392.7 637.0 Accounts payable and accrued expenses .................................. 2,134.1 1,975.1 705.6 701.1 Insurance and health care claims and reserves........................... 414.7 437.6 Accrued taxes .......................................................... 114.2 130.3 3.2 2.1 Deferred income taxes................................................... 21.4 9.4 Long-term borrowings.................................................... 539.9 625.9 2,082.9 1,799.5 Retirement benefit accruals and other liabilities ...................... 2,301.5 2,219.0 31.8 23.7 -------- -------- -------- -------- Total liabilities ................................................... 5,337.0 5,210.9 7,234.4 6,521.6 -------- -------- -------- -------- STOCKHOLDERS' EQUITY Common stock, $1 par value (authorized - 600,000,000 shares; issued - 263,849,303 shares in 1997 and 263,833,099 shares in 1996), at stated value...................................................... 1,778.5 1,770.1 238.4 209.4 Retained earnings....................................................... 3,048.4 2,299.5 1,104.5 1,103.2 Minimum pension liability adjustment.................................... (14.0) (235.4) Cumulative translation adjustment ...................................... (57.4) (14.0) (7.3) (2.4) Unrealized gain on marketable securities................................ 22.2 14.0 22.2 14.0 Unamortized restricted stock compensation............................... (17.4) (11.1) Common stock in treasury,13,556,164 shares in 1997 and 6,567,007 shares (613.1) (265.9) in 1996, at cost ..................................................... -------- -------- -------- -------- Total stockholders' equity........................................... 4,147.2 3,557.2 1,357.8 1,324.2 -------- -------- -------- -------- Total .................................................................. $9,484.2 $8,768.1 $8,592.2 $7,845.8 ======== ======== ======== ========
- --------------------- The "Consolidated" (Deere & Company and Consolidated Subsidiaries) data in this statement conform with the requirements of FASB Statement No. 94. In the supplemental consolidating data in this statement, "Equipment Operations" (Deere & Company with Financial Services on the Equity Basis) reflect the basis of consolidation described on page 31 of the notes to the consolidated financial statements. The supplemental "Financial Services" consolidating data in this statement include Deere & Company's credit, insurance and health care subsidiaries. Transactions between the "Equipment Operations" and "Financial Services" have been eliminated to arrive at the "Consolidated" data. The information on pages 24 through 43 is an integral part of this statement. 21 DEERE & COMPANY STATEMENT OF CONSOLIDATED CASH FLOWS
CONSOLIDATED (DEERE & COMPANY AND CONSOLIDATED SUBSIDIARIES) ---------------------------------------------- YEAR ENDED OCTOBER 31 (IN MILLIONS OF DOLLARS) 1997 1996 1995 - ------------------------ ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income ...................................................................... $ 960.1 $ 817.3 $ 706.1 Adjustments to reconcile net income to net cash provided by operating activities: Provision for doubtful receivables .......................................... 51.0 59.9 39.6 Provision for depreciation .................................................. 365.6 311.4 283.1 Undistributed earnings of unconsolidated subsidiaries and affiliates...................................................................... (.3) (2.6) (9.2) Provision (credit) for deferred income taxes .................................... (6.9) (65.0) 75.5 Changes in assets and liabilities: Receivables................................................................ (175.2) 89.9 (355.4) Inventories ............................................................... (255.2) (75.1) (17.0) Accounts payable and accrued expenses ..................................... 186.3 162.1 218.4 Insurance and health care claims and reserves ............................. (22.9) (39.7) 38.0 Retirement benefit accruals ............................................... 41.0 72.0 (150.4) Other...................................................................... 13.2 14.2 10.7 ------- ------- ------- Net cash provided by operating activities................................ 1,156.7 1,344.4 839.4 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Collections of financing receivables............................................. 5,324.1 4,353.4 3,409.9 Proceeds from sales of financing receivables .................................... 968.0 960.3 837.3 Proceeds from maturities and sales of marketable securities ..................... 226.0 104.4 181.2 Proceeds from sales of equipment on operating leases ............................ 101.9 86.0 45.5 Proceeds from sales of businesses ............................................... 90.5 Cost of financing receivables acquired .......................................... (6,805.0) (5,902.6) (5,147.7) Purchases of marketable securities............................................... (166.7) (127.3) (194.1) Purchases of property and equipment.............................................. (484.9) (275.9) (262.4) Cost of operating leases acquired ............................................... (540.8 (299.4) (120.8) Acquisitions of businesses....................................................... (45.7) (112.4) Other............................................................................ 39.0 (2.0) (35.2) ------- ------- ------- Net cash used for investing activities .................................. (1,384.1) (1,215.5) (1,195.8) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in short-term borrowings..................................... 524.5 (283.2) 490.1 Change in intercompany receivables/payables...................................... Proceeds from long-term borrowings .............................................. 1,150.0 1,190.0 775.0 Principal payments on long-term borrowings....................................... (816.8) (661.4) (636.7) Proceeds from issuance of common stock .......................................... 34.8 39.0 43.6 Repurchases of common stock...................................................... (419.1) (274.7) (5.6) Dividends paid .................................................................. (204.3) (209.3) (190.5) Other............................................................................ (.2) (.4) (2.6) ------- ------- ------- Net cash provided by (used for) financing activities..................... 268.9 (200.0) 473.3 ------- ------- ------- EFFECT OF EXCHANGE RATE CHANGES ON CASH ......................................... (3.0) (1.1) 1.4 ------- ------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................. 38.5 (72.2) 118.3 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR................................... 291.5 363.7 245.4 ------- ------- ------- CASH AND CASH EQUIVALENTS AT END OF YEAR......................................... $ 330.0 $ 291.5 $ 363.7 ======= ======= =======
- --------------- The "Consolidated" (Deere & Company and Consolidated Subsidiaries) data in this statement conform with the requirements of FASB Statement No. 94. In the supplemental consolidating data in this statement, "Equipment Operations" (Deere & Company with Financial Services on the Equity Basis) reflect the basis of consolidation described on page 31 of the notes to the consolidated financial statements. The supplemental "Financial Services" consolidating data in this statement include Deere & Company's credit, insurance and health care subsidiaries. Transactions between the "Equipment Operations" and "Financial Services" have been eliminated to arrive at the "Consolidated" data. The information on pages 24 through 43 is an integral part of this statement. 22 DEERE & COMPANY STATEMENT OF CONSOLIDATED CASH FLOWS
CONSOLIDATED EQUIPMENT OPERATIONS FINANCIAL SERVICES (DEERE & COMPANY WITH FINANCIAL SERVICES ON THE EQUITY BASIS) ---------------------------------- ----------------------------- YEAR ENDED OCTOBER 31 YEAR ENDED OCTOBER 31 (IN MILLIONS OF DOLLARS) 1997 1996 1995 1997 1996 1995 - ----------------------- ---- ---- ---- ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income ................................................... $ 960.1 $ 817.3 $ 706.1 $ 138.1 $ 196.8 $ 166.6 Adjustments to reconcile net income to net cash provided by operating activities: Provision for doubtful receivables ....................... 12.8 17.2 3.5 38.2 42.7 36.1 Provision for depreciation ............................... 272.0 264.9 255.2 93.5 46.5 27.8 Undistributed earnings of unconsolidated subsidiaries and affiliates.................................. (3.0) (51.5) (82.6) 1.5 (.5) Provision (credit) for deferred income taxes ................. (4.6) (70.7) 77.0 (2.4) 5.6 (1.5) Changes in assets and liabilities: Receivables............................................. (232.8) 82.7 (311.2) 57.7 8.1 (44.3) Inventories ............................................ (255.2) (75.1) (17.0) Accounts payable and accrued expenses .................. 198.2 130.1 219.8 (11.9) 31.0 (1.3) Insurance and health care claims and reserves .......... (22.9) (39.7) 38.0 Retirement benefit accruals ............................ 26.7 70.9 (150.0) 14.2 1.1 (.4) Other................................................... 31.7 27.4 13.7 (18.4) (13.0) (3.0) ------- ------- ------- -------- -------- ------- Net cash provided by operating activities............. 1,005.9 1,213.2 714.5 287.6 279.1 217.5 ------- ------- ------- -------- -------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Collections of financing receivables.......................... 55.4 58.2 58.1 5,268.7 4,295.2 3,351.9 Proceeds from sales of financing receivables ................. .1 .3 .5 967.9 960.0 836.8 Proceeds from maturities and sales of marketable securities ................................... 226.0 104.4 181.2 Proceeds from sales of equipment on operating leases ......... 48.8 32.6 24.3 53.1 53.4 21.1 Proceeds from sales of businesses ............................ 90.5 Cost of financing receivables acquired ....................... (36.4) (41.3) (59.0) (6,768.6) (5,861.3) (5,088.7) Purchases of marketable securities............................ (166.7) (127.3) (194.1) Purchases of property and equipment........................... (473.8) (256.8) (244.6) (11.2) (19.2) (17.8) Cost of operating leases acquired ............................ (111.4) (76.6) (62.5) (429.4) (222.8) (58.3) Acquisitions of businesses.................................... (37.2) (106.2) (8.5) (6.2) Other......................................................... 2.0 6.2 (9.7) 8.0 (7.9) (25.5) ------- ------- ------- -------- -------- ------- Net cash used for investing activities ............... (552.5) (383.6) (292.9) (860.7) (831.7) (902.9) ------- ------- ------- -------- -------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in short-term borrowings.................. (2.8) 67.2 35.4 527.3 (350.4) 454.7 Change in intercompany receivables/payables................... 55.5 (39.0) 134.7 (250.4) 123.7 325.4 Proceeds from long-term borrowings ........................... 1,150.0 1,190.0 775.0 Principal payments on long-term borrowings.................... (128.0) (317.5) (10.9) (688.8) (344.0) (625.8) Proceeds from issuance of common stock ....................... 34.8 39.0 43.6 29.0 Repurchases of common stock................................... (419.1) (274.7) (5.6) Dividends paid ............................................... (204.3) (209.3) (190.5) (136.8) (147.8) (92.6) Other......................................................... (.2) (.4) (2.6) ------- ------- ------- -------- -------- -------- Net cash provided by (used for) financing activities................................ (664.1) (734.7) 4.1 630.3 471.5 836.7 ------- ------- ------- -------- -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH ...................... (2.9) (1.2) 1.4 ------- ------- ------- -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......... (213.6) 93.7 427.1 57.2 (81.1) 151.3 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR................ 624.8 531.1 104.0 211.6 292.7 141.4 ------- ------- ------- -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR...................... $ 411.2 $ 624.8 $ 531.1 $ 268.8 $ 211.6 $ 292.7 ======= ======= ======= ======== ======== ========
- --------------- The "Consolidated" (Deere & Company and Consolidated Subsidiaries) data in this statement conform with the requirements of FASB Statement No. 94. In the supplemental consolidating data in this statement, "Equipment Operations" (Deere & Company with Financial Services on the Equity Basis) reflect the basis of consolidation described on page 31 of the notes to the consolidated financial statements. The supplemental "Financial Services" consolidating data in this statement include Deere & Company's credit, insurance and health care subsidiaries. Transactions between the "Equipment Operations" and "Financial Services" have been eliminated to arrive at the "Consolidated" data. The information on pages 24 through 43 is an integral part of this statement. 23 M A N A G E M E N T ' S D I S C U S S I O N A N D A N A L Y S I S RESULTS OF OPERATIONS FOR THE YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995 (UNAUDITED) - ------------------------------------------ Deere & Company and its subsidiaries manufacture, distribute and finance a full line of agricultural equipment; a broad range of equipment for construction, forestry and public works; and a variety of commercial and consumer equipment. The company also provides credit, insurance and health care products for businesses and the general public. Additional information on these business segments is presented beginning on page 32. 1997 COMPARED WITH 1996 (UNAUDITED) - ---------------------------------- CONSOLIDATED RESULTS Deere & Company achieved record worldwide net income in 1997, totaling $960 million, or $3.78 per share, compared with last year's income of $817 million, or $3.14 per share. The higher profit resulted from strong worldwide demand for the company's products. Operating margins remained at strong levels as a result of the company's continuous improvement and quality initiatives. Worldwide net sales and revenues increased 14 percent to $12,791 million in 1997 compared with $11,229 million in 1996. Net sales of the Equipment Operations increased 15 percent in 1997 to $11,082 million from $9,640 million last year. International demand remained at strong levels, with export sales from the United States totaling $2,013 million for 1997 compared with $1,584 million last year. Overseas sales for the year also increased, rising by 11 percent compared with a year ago. Overall, the company's worldwide physical volume of sales (excluding the sales of the newly consolidated Mexican subsidiaries) increased 15 percent for the year, reflecting the strong worldwide demand for the company's products. Finance and interest income increased 14 percent to $867 million in 1997 compared with $763 million last year, while insurance and health care premiums increased 2 percent to $668 million in the current year compared with $658 million in 1996. The company's worldwide Equipment Operations, which exclude income from the credit, insurance and health care operations and unconsolidated affiliates, had record income of $817 million in 1997 compared with $610 million in 1996. The agricultural equipment and construction equipment operations both contributed to the improved results in 1997, as explained below. The worldwide ratio of cost of goods sold to net sales was 76.7 percent in 1997 compared with 77.7 percent last year. The Equipment Operations' ratio of year-end assets to net sales decreased from 71 percent in 1996 to 70 percent in 1997. Net income of the company's Financial Services operations was $138 million compared with $197 million in 1996. Additional information is presented in the discussion of credit, insurance and health care operations on pages 27 through 29. BUSINESS SEGMENT AND GEOGRAPHIC AREA RESULTS The following discussion of operating results by industry segment and geographic area relates to information beginning on page 32. Operating profit is income before interest expense, foreign exchange gains and losses, income taxes and certain corporate expenses. However, operating profit of the credit segment includes the effect of interest expense. 1997 NET SALES AND REVENUES BY BUSINESS SEGMENT - ------------------------------------------------------------------------------- Agricultural Equipment 56% Health Care 3% Construction Equipment 18% Insurance 3% Commercial and Consumer Equipment 14% Credit 6% WORLDWIDE AGRICULTURAL EQUIPMENT - ------------------------------------------------------------------------------- Operating Net Sales 95 96 97 Profit 95 96 97 (in billions) (in millions) $5.3 $6.1 $7.0 $643 $821 $1,072 Operating profit of the worldwide agricultural equipment segment increased significantly to $1,072 million in 1997 compared with $821 million in 1996, as a result of an increase in sales and production volumes and improved efficiencies, partially offset by higher selling, administrative and general expenses. Agricultural equipment sales increased 16 percent in 1997 compared with 1996. WORLDWIDE CONSTRUCTION EQUIPMENT - ------------------------------------------------------------------------------- Operating Net Sales 95 96 97 Profit 95 96 97 (in billions) (in millions) $1.9 $1.9 $2.3 $198 $186 $216 24 The worldwide construction equipment operations generated an operating profit of $216 million this year compared with $186 million in 1996. The increased operating profit in 1997 reflected higher sales and production volumes and improved efficiencies, partially offset by growth expenditures and start-up expenses primarily at the new engine facility in Torreon, Mexico. In 1997, construction equipment sales increased 18 percent compared with last year. WORLDWIDE COMMERCIAL AND CONSUMER EQUIPMENT - ------------------------------------------------------------------------------- Operating Net Sales 95 96 97 Profit 95 96 97 (in billions) (in millions) $1.7 $1.6 $1.8 $165 $118 $114 The worldwide commercial and consumer equipment operations had an operating profit of $114 million in 1997 compared with $118 million in 1996. The benefits from increased sales were offset by write-offs associated with the hand-held product line, start-up costs at new facilities and growth expenditures. Commercial and consumer equipment sales increased 9 percent in 1997 compared with 1996. FINANCIAL SERVICES - ------------------------------------------------------------------------------- Operating Revenues 95 96 97 Profit 95 96 97 (in billions) (in millions) $1.3 $1.4 $1.6 $261 $303 $214 The combined operating profit of the credit, insurance and health care business segments was $214 million in 1997 compared with $303 million in 1996 as discussed on pages 27 through 29. UNITED STATES AND CANADA EQUIPMENT OPERATIONS - ------------------------------------------------------------------------------- Operating Net Sales 95 96 97 Profit 95 96 97 (in billions) (in millions) $6.6 $6.9 $8.0 $839 $867 $1,101 On a geographic basis, the United States and Canadian equipment operations had an operating profit of $1,101 million in 1997 compared with $867 million last year as a result of higher sales and production volumes and improved efficiencies, which were partially offset by growth expenditures and write-offs associated with the hand-held product line. Sales increased 16 percent in 1997 and the physical volume of sales increased 15 percent compared with last year. OVERSEAS EQUIPMENT OPERATIONS - ------------------------------------------------------------------------------- Operating Net Sales 95 96 97 Profit 95 96 97 (in billions) (in millions) $2.2 $2.7 $3.1 $167 $258 $301 The overseas equipment operations generated a higher operating profit of $301 million in 1997 compared with $258 million last year, primarily due to the higher volumes of sales and production, which were partially offset by start-up expenses primarily at the Torreon engine facility. Overseas sales increased 11 percent and the physical volume of sales (excluding the newly consolidated Mexican subsidiaries) increased 15 percent in 1997 compared with 1996. MARKET CONDITIONS AND OUTLOOK Worldwide demand for John Deere agricultural equipment remained at strong levels this year as a result of favorable fundamentals in the farm economy. Increased acres planted and favorable weather conditions in major producing areas of North America resulted in historically high levels of production. However, strong domestic and export demand for grains and oilseeds are expected to hold carryover stocks relatively low. As a result, grain and soybean prices have remained at favorable levels. Overseas demand for John Deere agricultural equipment also remained strong, reflecting good demand from the republics of the former Soviet Union and favorable market conditions in Latin America. Despite recent economic instability in the world's financial markets, current overall fundamentals are expected to remain favorable for farm equipment sales in 1998. Construction equipment demand rose in 1997 due to low interest rates, moderate economic growth and low inflation, all of which should continue in 1998. These factors promoted high levels of consumer confidence and housing activity this past year. Housing starts for next year are expected to approximate this year's level and expenditures on highways and streets are anticipated to grow in 1998 when a new federal highway bill is passed. These favorable economic conditions should promote good construction equipment demand next year. 25 Sales of John Deere commercial and consumer equipment increased this year from the weather depressed levels of last year. With low unemployment rates, growing incomes, low interest rates, moderate economic growth and new product introductions, demand is anticipated to remain at favorable levels in 1998. The credit operations are expected to improve as a result of the strong demand for the company's products and favorable economic conditions. The insurance operations are expected to maintain reasonable operating returns despite the continued competitive environment in commercial lines. Although the health care operations should continue to face margin pressures and a very competitive environment, substantially improved results are expected for next year. Based on these market conditions, the company's worldwide physical volume of sales is currently projected to increase by approximately 6 percent in 1998 compared to 1997. First quarter physical volumes are projected to be 15 percent higher than comparable levels in the first quarter of 1997. Overall, the fundamentals of the company's businesses remain favorable. Industry demand for the company's products remains strong and operating margins are benefiting from continuous improvement initiatives. The company's investment in the development of new products and markets should further its worldwide leadership position. Based on these factors and the company's exceptional employees and dealer organization, another strong operating performance is expected next year. SAFE HARBOR STATEMENT SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: Statements under the "Market Conditions and Outlook" heading above and the "Supplemental Information (Unaudited)" on page 43 that relate to future operating periods are subject to important risks and uncertainties that could cause actual results to differ materially. The company's businesses include Equipment Operations (agricultural, construction and commercial and consumer) and Financial Services (credit, insurance and health care). Forward-looking statements relating to these businesses involve certain factors that are subject to change, including: the many interrelated factors that affect farmers' confidence, including worldwide demand for agricultural products, world grain stocks, commodities prices, weather, animal diseases, crop pests, harvest yields, real estate values and government farm programs; general economic conditions and housing starts; legislation, primarily legislation relating to agriculture, the environment, commerce and government spending on infrastructure; actions of competitors in the various industries in which the company competes; production difficulties, including capacity and supply constraints; dealer practices; labor relations; interest and currency exchange rates; accounting standards; and other risks and uncertainties. The company's outlook is based upon assumptions relating to the factors described in the preceding sentence. The importance of these assumptions differs from one business segment to another. For example, general economic conditions and housing starts affect retail sales of construction equipment and commercial and consumer equipment more than they affect retail sales of agricultural equipment. With respect to agricultural equipment, world weather conditions, such as El Nino, may affect crop production. The interest rate environment impacts all segments of the company's business by affecting the company's own borrowing costs, its lending spreads and the cost to the company's customers of company products. Instability in the world's financial markets could also impact the global economy, credit availability and world trade. Additional factors and assumptions affecting current expectations for the company's health care operations include competitive conditions in the industry, the company's ability to respond to changes in government regulations, the company's ability to control costs and the company's strategies concerning growth, among other factors. 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 filings with the Securities and Exchange Commission. 1996 COMPARED WITH 1995 (UNAUDITED) CONSOLIDATED RESULTS Deere & Company achieved record worldwide net income in 1996, totaling $817 million, or $3.14 per share, compared with income of $706 million, or $2.71 per share, in 1995. The earnings increase was primarily due to higher worldwide agricultural equipment production and sales levels, coupled with strong operating margins reflecting the company's continuous improvement and growth initiatives. Company results also continued to benefit from the improved performance of its Financial Services subsidiaries. Worldwide net sales and revenues increased 9 percent to $11,229 million in 1996 compared with $10,291 million in 1995. Net sales of the Equipment Operations increased 9 percent in 1996 to $9,640 million from $8,830 million in 1995. Export sales from the United States continued to grow, totaling $1,584 million for 1996 compared with $1,314 million in 1995, an increase of over 20 percent. Overseas sales for 1996 remained very strong, rising by 26 percent compared with 1995 and exceeding $2.5 billion for the first time in the company's history. Overall, the company's worldwide physical volume of sales increased 7 percent for 1996, reflecting the increased worldwide demand for the company's products. Finance and interest income increased 16 percent to $763 million in 1996 compared with $660 million in 1995, while insurance and health care premiums increased 5 percent to $658 million in 1996 compared with $628 million in 1995. The company's worldwide Equipment Operations, which exclude income from the credit, insurance and health care operations and unconsolidated affiliates, had record income of $610 million in 1996 compared with $529 million in 1995. The improved operating results in 1996 were a result of the worldwide agricultural equipment operations, as explained below. The worldwide ratio of cost of goods sold to net sales was 77.7 percent in 1996 compared with 78.6 percent in 1995. The Equipment Operations' ratio of year-end assets to net sales also improved, decreasing from 76 percent in 1995 to 71 percent in 1996. Net income of the company's Financial Services operations improved in 1996 totaling $197 million compared with $167 million in 1995. Additional information is presented in the discussion of credit, insurance and health care operations on pages 27 through 29. 26 BUSINESS SEGMENT AND GEOGRAPHIC AREA RESULTS The following discussion of operating results by industry segment and geographic area relates to information beginning on page 32. Operating profit of the worldwide agricultural equipment segment increased significantly to $821 million in 1996 compared with $643 million in 1995, as a result of an increase in sales and production volumes, substantially improved overseas results and lower relative sales incentive costs, partially offset by expenses for development of new markets and products. Agricultural equipment sales increased 16 percent in 1996 compared with 1995. The worldwide construction equipment operations generated an operating profit of $186 million in 1996 compared with $198 million in 1995. The lower operating profit in 1996 resulted mainly from increased development expenses associated with improving the fuel efficiency and emissions performance of new engines. In 1996, construction equipment sales increased 2 percent compared with 1995. The worldwide commercial and consumer equipment operations had an operating profit of $118 million in 1996 compared with $165 million in 1995. Operating profit decreased in 1996 due primarily to lower sales volume and increased promotional and growth expenditures associated with the division's new market initiatives. Commercial and consumer equipment sales decreased 3 percent in 1996 compared with 1995. The combined operating profit of the credit, insurance and health care business segments was $303 million in 1996 compared with $261 million in 1995 as discussed on pages 27 through 29. On a geographic basis, the United States and Canadian equipment operations had an operating profit of $867 million in 1996 compared with $839 million in 1995 as a result of higher production and sales volumes, which were partially offset by increased engine development expenses and higher promotional and growth expenditures. Sales increased 4 percent in 1996 and the physical volume of sales increased 1 percent compared with 1995. The overseas equipment operations generated a significantly higher operating profit of $258 million in 1996 compared with $167 million in 1995, primarily due to the higher volumes of production and sales, continued cost improvements and operating efficiencies. Overseas sales increased 26 percent and the physical volume of sales increased 24 percent in 1996 compared with 1995. Included in overseas sales in 1996 were $95 million of combine sales to Ukraine. CREDIT OPERATIONS - ---------------------------------------------------------------------------- Deere & Company's credit subsidiaries consist primarily of John Deere Credit Company and its subsidiaries in the United States and John Deere Credit Inc. in Canada. The credit operations primarily finance sales and leases by John Deere dealers of new and used equipment, and sales by non-Deere dealers of recreational products. In addition, these operations provide wholesale financing to dealers of the foregoing equipment and finance retail revolving charge accounts. Condensed combined financial information of the credit operations in millions of dollars follows: - ------------------------------------------------------------------------------- OCTOBER 31 FINANCIAL POSITION 1997 1996 - ------------------------------------------------------------------------------- Cash and cash equivalents ................... $ 205 $ 171 ------ ------ Financing receivables and leases: Equipment retail notes..................... 3,834 3,696 Recreational product retail notes.......... 1,015 883 Revolving charge accounts.................. 630 576 Wholesale notes ........................... 653 565 Financing leases........................... 283 182 Equipment on operating leases.............. 581 277 ------ ------ Total financing receivables and leases... 6,996 6,179 Less allowance for credit losses .......... 94 93 ------ ------ Total - net ............................. 6,902 6,086 ------ ------ Other receivables ........................... 170 200 ------ ------ Net property and other assets ............... 88 85 ------ ------ Total assets ............................ $7,365 $6,542 ====== ====== Short-term borrowings ....................... $3,603 $2,921 Payables to Deere & Company.................. 363 623 Deposits withheld from dealers and merchants 164 155 Other liabilities ........................... 238 198 Long-term borrowings......................... 2,083 1,799 Stockholder's equity ........................ 914 846 ------ ------ Total liabilities and stockholder's equity $7,365 $6,542 ====== ====== - ------------------------------------------------------------------------------- YEAR ENDED OCTOBER 31 SUMMARY OF OPERATIONS 1997 1996 1995 - ------------------------------------------------------------------------------- Revenues..................................... $ 820 $ 723 $612 ----- ----- ------ Expenses: Interest.................................... 346 301 271 Selling, administrative and general ........ 129 113 94 Provision for credit losses................. 38 43 36 Depreciation ............................... 74 37 22 ----- ----- ------ Total ................................... 587 494 423 ----- ----- ------ Income of consolidated group before income taxes ....................... 233 229 189 Provision for income taxes .................. 85 82 68 ----- ----- ------ Income of consolidated group ................ 148 147 121 Equity in loss of unconsolidated affiliate... (1) ----- ----- ------ Net income................................... $ 147 $ 147 $ 121 ===== ===== ===== Ratio of earnings to fixed charges........... 1.67 1.75 1.69 - ------------------------------------------------------------------------------ Total acquisition volumes of financing receivables and leases by the credit subsidiaries increased 18 percent during 1997 compared with 1996. The higher acquisitions this year resulted from an increased volume of retail notes, revolving charge accounts, wholesale notes and leases. During 1997, the volumes of retail notes acquired by the credit subsidiaries totaled $3,836 million, an 11 percent increase compared with $3,451 million in 1996. Volumes of recreational product retail notes accounted for 11 percent of total note volumes in 1997 and 8 percent in 1996. Volumes of John Deere equipment notes were 11 percent higher in the current year due primarily to increased retail sales of John Deere equipment. 27 The credit operations also sold retail notes which partially offset the increase in acquisition volumes, receiving proceeds of $968 million during 1997 compared with $960 million last year. At October 31, 1997 and 1996, net financing receivables and leases administered, which include receivables previously sold but still administered, were $8,416 million and $7,487 million, respectively. The discussion of "Financing Receivables" on pages 37 and 38 presents additional information. Net income of the credit operations was $147 million in 1997 and 1996 compared with $121 million in 1995. Net income in 1997 was approximately equal to 1996 due primarily to higher earnings from a larger average receivable and lease portfolio financed and higher gains from the sales of retail notes, which were offset by lower securitization and servicing fee income, narrower financing spreads and higher expenditures associated with several growth initiatives. Total revenues of the credit operations increased 13 percent in 1997, reflecting the larger average portfolio financed compared with 1996. The average balance of credit receivables and leases financed was 17 percent higher in 1997 compared with 1996. Higher average borrowings in 1997 resulted in a 15 percent increase in interest expense compared with 1996. Net income in 1996 was higher than in 1995 due primarily to higher earnings from a larger average receivable and lease portfolio financed and increased income from the securitization and sale of retail notes. Total revenues of the credit operations increased 18 percent in 1996, reflecting the larger average portfolio financed compared with 1995. The average balance of credit receivables and leases financed was 19 percent higher in 1996 compared with 1995. Higher average borrowings in 1996 resulted in an 11 percent increase in interest expense compared with 1995. INSURANCE OPERATIONS - --------------------------------------------------------------------------- Deere & Company's insurance subsidiaries consist of John Deere Insurance Group, Inc. and its subsidiaries in the United States, which mainly provide general and specialized commercial property and casualty coverages. Condensed combined financial information of the insurance operations in millions of dollars follows: - --------------------------------------------------------------------------- OCTOBER 31 FINANCIAL POSITION 1997 1996 - --------------------------------------------------------------------------- Cash and cash equivalents ...................... $ 45 $ 30 Marketable securities........................... 695 741 Other assets.................................... 254 297 ----- ------ Total assets.................................. $ 994 $1,068 ===== ====== Claims and reserves ............................ $ 348 $ 395 Unearned premiums .............................. 124 133 Other liabilities............................... 145 166 Stockholder's equity............................ 377 374 ----- ------ Total liabilities and stockholder's equity.... $ 994 $1,068 ===== ====== - --------------------------------------------------------------------------- (continued) YEAR ENDED OCTOBER 31 SUMMARY OF OPERATIONS 1997 1996 1995 - ------------------------------------------------------------------------------- Premiums* ............................................. $311 $345 $369 Investment income ..................................... 54 54 84 Other.................................................. 2 ----- --- ---- Total revenues ...................................... 365 401 453 ----- --- ---- Expenses: Claims and benefits................................... 223 255 297 Selling, administrative and general................... 101 100 102 Other................................................. 8 ----- --- ---- Total................................................ 324 355 407 ----- --- ---- Income of consolidated group before income taxes ......................................... 41 46 46 Provision for income taxes............................. 11 13 18 ----- --- ---- Income of consolidated group .......................... 30 33 28 ----- --- ---- Equity in income of unconsolidated affiliate........... 1 ----- --- ---- Net income............................................. $ 30 $ 33 $ 29 ===== === ==== *Includes revenues of $9 million in 1997, $4 million in 1996 and $20 million in 1995 related to coverages provided to Deere & Company and its subsidiaries. - -------------------------------------------------------------------------------- Net income of the insurance operations totaled $30 million in 1997 compared with $33 million in 1996 and $29 million in 1995. The decrease in 1997 net income compared with 1996 was due to lower underwriting results and a small gain from the sale of the personal lines business last year. Premiums decreased 10 percent in 1997, while total claims, benefits, and selling, administrative and general expenses decreased 9 percent from 1996. The increase in 1996 net income compared with 1995 was due to improved underwriting results and a lower effective tax rate, which were offset by lower investment income. Additionally, results in 1995 were affected by a loss on the sale of the John Deere Life Insurance Company. Primarily as a result of this sale, premiums decreased 6 percent in 1996, while total claims, benefits, and selling, administrative and general expenses decreased 11 percent from 1995. HEALTH CARE OPERATIONS - ----------------------------------------------------------------------------- John Deere Health Care, Inc., directly or through its health maintenance organizations and Deere & Company's insurance subsidiaries, provides administrative services and managed health care programs in the United States for Deere & Company and commercial clients. 28 Condensed combined financial information of the health care operations in millions of dollars follows: - ----------------------------------------------------------------------------- OCTOBER 31 FINANCIAL POSITION 1997 1996 - ----------------------------------------------------------------------------- Cash and cash equivalents ...................... $ 18 $ 10 Marketable securities........................... 125 128 Other assets.................................... 90 98 ----- ----- Total assets ................................. $233 $236 ===== ===== Claims and reserves ............................ $ 68 $ 44 Unearned premiums .............................. 16 12 Other liabilities............................... 82 76 Stockholder's equity............................ 67 104 ----- ----- Total liabilities and stockholder's equity.... $233 $236 ===== ===== - ------------------------------------------------------------------------------ YEAR ENDED OCTOBER 31 SUMMARY OF OPERATIONS 1997 1996 1995 - ------------------------------------------------------------------------------ Premiums and administrative services* .......... $387 $346 $306 Investment income .............................. 13 12 13 ----- --- ---- Total revenues ............................... 400 358 319 ----- --- ---- Expenses: Claims and benefits........................... 337 249 220 Selling, administrative and general........... 122 81 74 ----- --- ---- Total....................................... 459 330 294 ----- --- ---- Income (loss) of consolidated group before income taxes .................................. (59) 28 25 Provision (credit) for income taxes ............ (20) 11 9 ----- --- ---- Net income (loss) .............................. $(39) $ 17 $ 16 ====== ==== ==== Managed care membership (thousands)............. 432 389 311 ====== ==== ==== *Includes revenues of $20 million in 1997, $29 million in 1996 and $28 million in 1995 related to premiums and administrative services provided to Deere & Company and its subsidiaries. - ----------------------------------------------------------------------------- The health care operations incurred a net loss of $39 million in 1997 compared to net income of $17 million in 1996 and $16 million in 1995. The loss in 1997 reflected reduced margins caused by unusually competitive industry conditions, higher claims costs, strengthening of health care claims reserves and higher selling, administrative and general expenses. Additionally, charges for projected losses on certain insured contracts were recorded this year. Premium revenues increased 12 percent, while claims, benefits and selling, administrative and general expenses increased 39 percent from 1996. Net income in 1996 increased due to favorable settlements on cost-based contracts and increased managed care membership, partially offset by higher general expenses related to growth. Premium revenues increased 13 percent, while claims, benefits and selling, administrative and general expenses increased 12 percent from 1995. CAPITAL RESOURCES AND LIQUIDITY (UNAUDITED) - ----------------------------------------------------------------------------- The discussion of capital resources and liquidity has been organized to review separately, where appropriate, the company's Equipment Operations, Financial Services operations and the consolidated totals. EQUIPMENT OPERATIONS The company's equipment businesses are capital intensive and are subject to large seasonal variations in financing requirements for receivables from dealers and inventories. Accordingly, to the extent necessary, funds provided by operations are supplemented from external borrowing sources. $1,213 |------| | | $1,006 | | |----- | | | | | | | | | $715 | | | | |--- | | | | | $474 | | | | | | |--- | $419 | | | | $275 | | | | |--- | | | $245 | | $257 |---- | | | | | | | | | | --- | | | | --- | | | | | | | | | | | | | $6 | | | | | | | | | | | | | | | | | | | | | | | | | | | | - ------------------------------------------------------------------------------ EQUIPMENT 95 96 97 OPERATIONS (in millions) / /Cash Provided by Operations / /Purchases of Property and Equipment / /Repurchases of Common Stock The positive cash flows provided by operating activities in 1997 were primarily the result of the record net income, partially offset by an increase in trade receivables and company-owned inventories. The aggregate amount of these operating cash flows of $1,006 million and cash and cash equivalents at the beginning of the year were used primarily to fund purchases of property and equipment of $474 million, repurchases of common stock of $419 million, the payment of dividends to stockholders of $204 million and a decrease in borrowings of $131 million. Over the last three years, operating activities have provided an aggregate of $2,934 million in cash, including dividends received from the Financial Services subsidiaries of $377 million. In addition, receivables from Financial Services subsidiaries decreased $151 million. The aggregate amount of these cash flows was used mainly to fund purchases of property and equipment of $976 million, repurchases of common stock of $700 million, stockholders' dividends of $604 million, a decrease in borrowings of $357 million and acquisitions of businesses for $143 million. Cash and cash equivalents also increased $307 million. Net trade accounts and notes receivable result mainly from sales to dealers of equipment that is being carried in their inventories. Although trade receivables increased by $181 million during 1997, the ratios of worldwide net trade accounts and notes receivable at October 31 to fiscal year net sales were 30 percent in 1997 compared with 33 percent in 1996 and 37 percent in 1995. North American agricultural equipment trade receivables increased approximately $125 million and commercial and consumer receivables increased $35 million, while construction receivables decreased approximately $45 million. Total overseas dealer receivables were approximately $65 million higher than one year ago. The collection period for trade receivables averages less than 12 months. The percentage of receivables outstanding for 29 a period exceeding 12 months was 5 percent at October 31, 1997 compared with 8 percent at October 31, 1996 and 1995. Company-owned inventories increased by $244 million in 1997. Since most of these inventories are valued on the last-in, first-out (LIFO) method, lower prevailing costs from prior years are assigned to beginning inventories, which magnifies inventory increases that are valued at higher current costs. Inventories valued on an approximate current cost basis increased by only 12 percent during 1997 compared to an increase in net sales of 15 percent during the same period. Prepaid pension costs increased by $562 million in 1997. In prior years, the company recorded an additional minimum pension liability and a decrease in equity as required by FASB Statement No. 87 for an underfunded pension plan. However, in 1997, this entry was not required due to the improved funded status of this plan. Therefore, the prior year additional minimum liability was reversed resulting in a $489 million increase in prepaid pension costs in 1997. Total interest-bearing debt of the Equipment Operations was $711 million at the end of 1997 compared with $849 million at the end of 1996 and $1,099 million at the end of 1995. The ratio of total debt to total capital (total interest-bearing debt and stockholders' equity) at the end of 1997, 1996 and 1995 was 14.6 percent, 19.3 percent and 26.3 percent, respectively. During 1997, Deere & Company retired $60 million of adjustable rate senior notes due in 2002 and $68 million of medium-term notes. FINANCIAL SERVICES The Financial Services credit subsidiaries rely on their ability to raise substantial amounts of funds to finance their receivable and lease portfolios. Their primary sources of funds for this purpose are a combination of borrowings and equity capital. Additionally, the credit subsidiaries periodically sell substantial amounts of retail notes. The insurance and health care subsidiaries generate their funds through internal operations and intercompany loans. Cash flows from the company's Financial Services operating activities were $288 million in 1997. Cash provided by financing activities totaled $630 million in 1997, representing mainly an increase in total borrowings of $738 million, which was partially offset by $137 million of dividends paid to the Equipment Operations. The aggregate cash provided by operating and financing activities was used primarily to increase receivables. Cash used for investing activities totaled $861 million in 1997, primarily due to acquisitions of receivables and leases exceeding collections by $1,876 million, which was partially offset by proceeds of $968 million received from the sale of receivables. Cash and cash equivalents also increased $57 million. Over the past three years, the Financial Services operating activities have provided $784 million in cash. In addition, the sale of receivables and an increase in borrowings have provided $2,765 million and $2,287 million, respectively. These amounts have been used mainly to fund receivable and lease acquisitions, which exceeded collections by $5,386 million, and $377 million of dividend payments to the Equipment Operations. Cash and cash equivalents also increased $127 million. Marketable securities consist primarily of debt securities held by the insurance and health care operations in support of their obligations to policyholders. The $50 million decrease in 1997 compared with 1996 resulted from sales of securities by the insurance operations primarily for dividend payments to the parent. Financing receivables increased by $512 million in 1997 compared with 1996. The discussion of "Credit Operations" on pages 27 and 28, and the "Financing Receivables" note on pages 37 and 38 provide further information. Total outside interest-bearing debt of the credit subsidiaries was $5,686 million at the end of 1997 compared with $4,720 million at the end of 1996 and $4,217 million at the end of 1995. The credit subsidiaries' ratio of total interest-bearing debt to total stockholder's equity was 6.6 to 1 at the end of 1997 compared with 6.3 to1 at the end of 1996 and 6.1 to 1 at the end of 1995. During 1997, John Deere Capital Corporation issued $200 million of 6% notes and $200 million of 6.30% notes both due in 1999, and retired $100 million of 7.20% notes due in 1997. In 1997, the Capital Corporation also issued $750 million and retired $589 million of medium-term notes. CONSOLIDATED The company maintains unsecured lines of credit with various banks in North America and overseas. The discussion of "Short-Term Borrowings" on page 39 provides further information. The company is naturally exposed to various interest rate and foreign currency risks. As a result, the company enters into derivative transactions to hedge certain of these exposures that arise in the normal course of business, and not for the purpose of creating speculative positions or trading. Similar to other large credit companies, the company's credit subsidiaries actively manage the relationship of the types and amounts of their funding sources to their receivable and lease portfolio in an effort to diminish risk due to interest rate fluctuations, while responding to favorable financing opportunities. Accordingly, from time to time, these subsidiaries enter into interest rate swap and interest rate cap agreements to hedge their interest rate exposure in amounts corresponding to a portion of their borrowings. The company also has foreign currency exposures at some of its foreign and domestic operations related to buying, selling and financing in currencies other than the local currencies. The company has entered into agreements related to the management of these currency transaction risks. The credit and market risks under these interest rate and foreign currency agreements are not considered to be significant. Additional detailed information is included in the "Financial Instruments" note on page 42 and the "Supplemental Information (Unaudited)" on page 43. Stockholders' equity was $4,147 million at October 31, 1997 compared with $3,557 million and $3,085 million at October 31, 1996 and 1995, respectively. The increase in 1997 was caused primarily by net income of $960 million and a change of $221 million in the minimum pension liability adjustment due to the improved funded status of a pension plan, partially offset by an increase in common stock in treasury of $347 million related to the company's stock repurchase and employee benefit programs and cash dividends declared of $202 million. The company has developed plans for the completion of systems changes related to the year 2000. The cost is not expected to have a material effect on the company's financial position or results of operations. 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - ------------------------------------------------------------------------------- Following are significant accounting policies in addition to those included in other notes to the consolidated financial statements. The consolidated financial statements represent the consolidation of all companies in which Deere & Company has a majority ownership. Deere & Company records its investment in each unconsolidated affiliated company (20 to 50 percent ownership) at its related equity in the net assets of such affiliate. Other investments (less than 20 percent ownership) are recorded at cost. Consolidated retained earnings at October 31, 1997 include undistributed earnings of the unconsolidated affiliates of $38 million. Dividends from unconsolidated affiliates were $4 million in 1997, $8 million in 1996 and $2 million in 1995. The company's consolidated financial statements and some information in the notes and related commentary are presented in a format which includes data grouped as follows: EQUIPMENT OPERATIONS -- These data include the company's agricultural equipment, construction equipment and commercial and consumer equipment operations with Financial Services reflected on the equity basis. Data relating to the above equipment operations, including the consolidated group data in the income statement, are also referred to as "Equipment Operations" in this report. FINANCIAL SERVICES -- These data include the company's credit, insurance and health care subsidiaries. CONSOLIDATED -- These data represent the consolidation of the Equipment Operations and Financial Services in conformity with Financial Accounting Standards Board (FASB) Statement No. 94. References to "Deere & Company" or "the company" refer to the entire enterprise. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and related disclosures. Actual results could differ from those estimates. Sales of equipment and service parts are generally recorded by the company when they are shipped to independent dealers. Provisions for sales incentives and product warranty costs are recognized at the time of sale or at the inception of the incentive programs and are based on certain estimates the company believes are appropriate. In 1997, the company adopted FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. This Statement had no material effect on the company's financial position or results of operations. In 1997, the company adopted FASB Statement No. 123, Accounting for Stock-Based Compensation. This Statement defines a new "fair value" method of accounting for stock-based compensation expense and also allows the retention of the previous "intrinsic value" method. The company retained the intrinsic value method and, therefore, the new standard had no effect on the company's financial position or results of operations. See the "Stock Option and Restricted Stock Awards" note on page 41. In 1997, the company adopted FASB Statement No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This Statement had no material effect on the company's financial position or results of operations. In 1997, the FASB issued Statement No. 128, Earnings per Share, which the company will adopt in fiscal year 1998. This Statement will have no material effect on the company's primary or diluted net income per share. In 1997, the FASB also issued Statements No. 130, Reporting Comprehensive Income, and No. 131, Disclosures about Segments of an Enterprise and Related Information, which must be adopted by fiscal year 1999. These Statements will have no effect on the company's financial position or results of operations. In 1997, the Securities and Exchange Commission amended its rules to require certain disclosures concerning derivatives and other financial instruments. This information is included in "Management's Discussion and Analysis" on page 30, the "Financial Instruments" note on page 42 and the "Supplemental Information (Unaudited)" on page 43. In May 1997, the company acquired the assets of Maschinenfabrik Kemper GmbH for $36 million. Kemper, which is based in Stadtlohn, Germany, is a leading European producer of specialized corn headers for self-propelled forage harvesters. In May 1997, the company agreed to invest $13 million over the next few years to reach a 60 percent ownership interest in a combine factory in China ($2 million was invested in August 1997). Subsequent to year end, the company agreed to invest $39 million for a 49 percent interest in Cameco Industries, Inc., primarily a manufacturer of sugarcane harvesters and forestry equipment located in Thibodaux, Louisiana. The company has also agreed to purchase the remaining 51 percent interest for $40 million within 12 months of the first investment. In December 1997, the company announced the extension of its stock repurchase program. At the company's discretion, repurchases of an additional $1 billion of Deere & Company common stock will be made from time to time in the open market and through privately negotiated transactions. Certain amounts for prior years have been reclassified to conform with 1997 financial statement presentations. 31 - ------------------------------------------------------------------------------- INDUSTRY SEGMENT AND GEOGRAPHIC AREA DATA FOR THE YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995 - ------------------------------------------------------------------------------- The company's operations are categorized into six business segments described as follows. The company's worldwide agricultural equipment segment manufactures and distributes a full line of farm equipment - including tractors; combine and cotton harvesters; tillage, seeding and soil preparation machinery; sprayers; hay and forage equipment; materials handling equipment; and integrated precision farming technology. The company's worldwide construction equipment segment, formerly the industrial equipment segment, manufactures and distributes a broad range of machines used in construction, earthmoving and forestry - including backhoe loaders; crawler dozers and loaders; four-wheel-drive loaders; excavators; scrapers; motor graders; log skidders and forestry harvesters. This segment also includes the manufacture and distribution of engines and drivetrain components for the original equipment manufacturer (OEM) market. The company's worldwide commercial and consumer equipment segment manufactures and distributes equipment for commercial and residential uses - including small tractors for lawn, garden, commercial and utility purposes; riding and walk-behind mowers; golf course equipment; snowblowers; hand-held products such as chain saws, string trimmers and leaf blowers; skid-steer loaders; utility vehicles; and other outdoor power products. The products produced by the equipment segments are marketed primarily through independent retail dealer networks and major retail outlets. The company's credit segment, which mainly operates in the United States and Canada, primarily finances sales and leases by John Deere dealers of new and used equipment and sales by non-Deere dealers of recreational products. In addition, it provides wholesale financing to dealers of the foregoing equipment and finances retail revolving charge accounts. The company's insurance segment issues policies in the United States primarily for: general and specialized lines of commercial property and casualty insurance, group accident and health insurance for employees of participating John Deere dealers and disability insurance for employees of the company. The company's health care segment provides health management programs and related administrative services in the United States to the company and commercial clients. Because of integrated manufacturing operations and common administrative and marketing support, a substantial number of allocations must be made to determine industry segment and geographic area data. Intersegment sales and revenues represent sales of components, insurance premiums, health care administrative services and finance charges. Interarea sales represent sales of complete machines, service parts and components to units in other geographic areas. Intersegment sales and revenues and interarea sales are generally priced at market prices. Overseas operations are defined to include all activities of divisions, subsidiaries and affiliated companies conducted outside the United States and Canada. Information relating to operations by industry segment in millions of dollars follows with related comments included in Management's Discussion and Analysis. In addition to the following unaffiliated sales and revenues by segment, intersegment sales and revenues in 1997, 1996, and 1995 were as follows: agricultural equipment net sales of $126 million, $119 million and $117 million; construction equipment net sales of $33 million, $31 million and $26 million; credit revenues of $2 million, $3 million and $1 million; insurance revenues of $9 million, $4 million and $20 million; and health care revenues of $20 million, $29 million and $28 million, respectively. - ------------------------------------------------------------------------------- INDUSTRY SEGMENTS 1997 1996 1995 - ------------------------------------------------------------------------------- NET SALES AND REVENUES Unaffiliated customers: Agricultural equipment net sales............. $ 7,048 $ 6,097 $ 5,277 Construction equipment net sales ............ 2,262 1,919 1,875 Commercial and consumer equipment net sales ................................. 1,772 1,624 1,678 Credit revenues.............................. 818 720 611 Insurance revenues........................... 356 397 433 Health care revenues......................... 380 329 291 ------- ------- ------- Total .................................... 12,636 11,086 10,165 Other revenues ............................... 155 143 126 ------- ------- ------- NET SALES AND REVENUES ....................... $ 12,791 $11,229 $10,291 ======== ======= ======= OPERATING PROFIT Agricultural equipment ....................... $ 1,072 $ 821 $ 643 Construction equipment........................ 216 186 198 Commercial and consumer equipment ............ 114 118 165 Credit*....................................... 232 229 189 Insurance*.................................... 41 46 47 Health care*.................................. (59) 28 25 ------- ------- ------- Total operating profit ................... 1,616 1,428 1,267 ------- ------- ------- OTHER INCOME AND (EXPENSE) Interest income .............................. 4 7 4 Interest expense.............................. (79) (104) (124) Foreign exchange gain (loss).................. 7 (2) (9) Corporate expenses-net........................ (37) (32) (34) Income taxes.................................. (551) (480) (398) ------- ------- ------- Total..................................... (656) (611) (561) ------- ------- ------- NET INCOME ................................... $ 960 $ 817 $ 706 ======== ======= ======= *Operating profit of the credit business segment includes the effect of interest expense, which is the largest element of its operating costs. Operating profit of the insurance and health care business segments includes investment income. - ------------------------------------------------------------------------------- IDENTIFIABLE ASSETS Agricultural equipment ...................... $ 4,194 $ 3,851 $ 3,661 Construction equipment....................... 1,160 1,072 1,218 Commercial and consumer equipment ........... 1,232 1,129 1,141 Credit ...................................... 7,365 6,542 5,796 Insurance.................................... 994 1,068 1,127 Health care ................................. 233 236 237 Corporate.................................... 1,142 755 667 ------- ------- ------- Total ................................... $16,320 $14,653 $13,847 ======== ======= ======= - ------------------------------------------------------------------------------- (continued) 32 - ------------------------------------------------------------------------------- INDUSTRY SEGMENTS 1997 1996 1995 - ------------------------------------------------------------------------------- CAPITAL ADDITIONS Agricultural equipment................................ $ 241 $ 157 $ 150 Construction equipment................................ 123 49 47 Commercial and consumer equipment .................... 115 52 48 Credit................................................ 6 4 2 Insurance............................................. 1 2 2 Health care .......................................... 6 13 14 ----- ----- ----- Total............................................... $ 492 $ 277 $ 263 ===== ===== ===== - ------------------------------------------------------------------------------- DEPRECIATION EXPENSE Agricultural equipment................................ $ 166 $ 172 $ 168 Construction equipment................................ 45 41 38 Commercial and consumer equipment .................... 42 39 36 Credit................................................ 4 3 2 Insurance............................................. 1 1 2 Health care .......................................... 7 5 3 Corporate............................................. 1 1 ----- ----- ----- Total............................................... $ 265 $ 262 $ 250 ===== ===== ===== - ------------------------------------------------------------------------------- The company views and has historically disclosed its operations as consisting of two geographic areas, the United States and Canada, and overseas, shown below in millions of dollars. The percentages shown in the captions for net sales and revenues, operating profit and identifiable assets indicate the approximate proportion of each amount that relates to either the United States only or to the company's Europe, Africa and Middle East division, the only overseas area deemed to be significant for disclosure purposes. The percentages are based upon a three-year average for 1997, 1996 and 1995. In addition to the following geographic unaffiliated sales, interarea sales in 1997, 1996 and 1995 were as follows: United States and Canada equipment net sales of $1,235 million, $981 million and $763 million, and overseas net sales of $520 million, $415 million and $395 million, respectively. - ------------------------------------------------------------------------------- GEOGRAPHIC AREAS 1997 1996 1995 - ------------------------------------------------------------------------------- NET SALES AND REVENUES Unaffiliated customers: United States and Canada: Equipment operations net sales (90%)........... $ 8,018 $ 6,886 $ 6,648 Financial Services revenues (95%) ............. 1,554 1,446 1,335 ------- ------- ------- Total ....................................... 9,572 8,332 7,983 Overseas net sales (72%)......................... 3,064 2,754 2,182 ------- ------- ------- Total ....................................... 12,636 11,086 10,165 Other revenues .................................. 155 143 126 ------- ------- ------- NET SALES AND REVENUES........................... $12,791 $11,229 $10,291 ======= ======= ======= - ------------------------------------------------------------------------------- OPERATING PROFIT United States and Canada: Equipment operations (94%) ..................... $ 1,101 $ 867 $ 839 Financial Services (92%) ....................... 214 303 261 ------- ------- ------- Total ....................................... 1,315 1,170 1,100 Overseas equipment operations (77%) ............ 301 258 167 ------- ------- ------- Total operating profit....................... $ 1,616 $ 1,428 $ 1,267 ======= ======= ======= - ------------------------------------------------------------------------------- (continued) - ------------------------------------------------------------------------------- GEOGRAPHIC AREAS 1997 1996 1995 - ------------------------------------------------------------------------------- IDENTIFIABLE ASSETS United States and Canada: Equipment operations (90%).................... $ 4,969 $ 4,689 $ 4,607 Financial Services (92%)...................... 8,592 7,846 7,160 ------- ------- ------- Total...................................... 13,561 12,535 11,767 Overseas equipment operations (67%)............ 1,617 1,363 1,413 Corporate...................................... 1,142 755 667 ------- ------- ------- Total...................................... $16,320 $14,653 $13,847 ======= ======= ======= - ------------------------------------------------------------------------------- CAPITAL ADDITIONS United States and Canada: Equipment operations.......................... $ 331 $ 204 $ 197 Financial Services............................ 13 19 18 ------- ------- ------- Total....................................... 344 223 215 Overseas equipment operations.................. 148 54 48 ------- ------- ------- Total....................................... $ 492 $ 277 $ 263 ======= ======= ======= - ------------------------------------------------------------------------------- DEPRECIATION EXPENSE United States and Canada: Equipment operations.......................... $ 192 $ 183 $ 177 Financial Services............................ 12 9 7 ------- ------- ------- Total........ 204 192 184 Overseas equipment operations.................. 61 69 65 Corporate...................................... 1 1 ------- ------- ------- Total...................................... $ 265 $ 262 $ 250 ======= ======= ======= - ------------------------------------------------------------------------------- NUMBER OF EMPLOYEES United States and Canada: Equipment operations.......................... 22,400 22,600 23,600 Financial Services............................ 2,600 2,600 2,400 ------- ------- ------- Total...................................... 25,000 25,200 26,000 Overseas equipment operations ................. 9,400 8,700 7,400 ------- ------- ------- Total...................................... 34,400 33,900 33,400 ======= ======= ======= - ------------------------------------------------------------------------------- Total exports from the United States were $2,013 million in 1997, $1,584 million in 1996 and $1,314 million in 1995. Exports from the Europe, Africa and Middle East division were $563 million in 1997, $522 million in 1996 and $510 million in 1995. Most of these exports were to the United States and Canada. REINSURANCE - ------------------------------------------------------------------------------- The company's insurance subsidiaries utilize reinsurance to limit their losses and reduce their exposure to large claims. Although reinsurance contracts permit recovery of certain claims from reinsurers, the insurance subsidiaries are not relieved of their primary obligations to the policyholders. The financial condition of the reinsurers is evaluated to minimize any exposure to losses from insolvencies. 33 Insurance and health care premiums earned consisted of the following in millions of dollars: 1997 1996 1995 ---- ---- ---- Premiums earned: Direct from policyholders............................ $711 $706 $686 Reinsurance assumed.................................. 5 19 44 Reinsurance ceded ................................... (19) (34) (55) ---- ---- ---- Financial Services premiums........................ 697 691 675 Intercompany premiums.................................. (29) (33) (47) ---- ---- ---- PREMIUMS............................................... $668 $658 $628 ==== ==== ==== The difference between premiums earned and written is not material. Reinsurance recoveries on ceded reinsurance contracts during 1997, 1996 and 1995 totaled $13 million, $6 million and $36 million, respectively, and are deducted from "Insurance and Health Care Claims and Benefits" expense. At October 31, 1997 and 1996, reinsurance receivables of $38 million and $66 million and prepaid insurance premiums of $10 million and $21 million, respectively, were associated with a single reinsurer. PENSION BENEFITS The company has several pension plans covering substantially all of its United States employees and employees in certain foreign countries. The United States plans and significant foreign plans in Canada, Germany and France are defined benefit plans in which the benefits are based primarily on years of service and employee compensation. It is the company's policy to fund its United States plans according to the 1974 Employee Retirement Income Security Act (ERISA) and income tax regulations. In Canada, the company's funding is in accordance with local laws and income tax regulations, while the pension plans in Germany and France are unfunded. Plan assets in the United States and Canada consist primarily of common stocks, common trust funds, government securities and corporate debt securities. Pension cost for United States plans is based on the 1983 Group Annuity Mortality Table. The components of net periodic pension cost and the significant assumptions for the United States plans consisted of the following in millions of dollars and in percents: 1997 1996 1995 ---- ---- ---- Service cost .......................................... $ 88 $ 86 $ 73 Interest cost ......................................... 339 322 308 Return on assets: Actual gain.......................................... (749) (733) (659) Deferred gain ....................................... 350 363 322 Net amortization....................................... 75 58 49 ---- ---- ---- NET COST .............................................. $103 $ 96 $ 93 ==== ==== ==== Discount rates for obligations......................... 7.5% 7.5% 7.5% Discount rates for expenses............................ 7.5% 7.5% 8.0% Assumed rates of compensation increases................ 5.0% 5.0% 5.0% Expected long-term rate of return ..................... 9.7% 9.7% 9.7% A reconciliation of the funded status of the United States plans at October 31 in millions of dollars follows:
1997 1996 ------------------------- ------------------------- Assets Accumulated Assets Accumulated Exceed Benefits Exceed Benefits Accumulated Exceed Accumulated Exceed Benefits Assets Benefits Assets ----------- ----------- ----------- ----------- ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATIONS Vested benefit obligation ............. $(3,940) $ (65) $(1,702) $(2,104) Nonvested benefit obligation .......... (532) (14) (105) (324) ------- ----- ------- ------- Accumulated benefit obligation......... (4,472) (79) (1,807) (2,428) Excess of projected benefit obligation over accumulated benefit obligation................... (389) (9) (400) (20) ------- ----- ------- ------- Projected benefit obligation ............ (4,861) (88) (2,207) (2,448) Plan assets at fair value................ 5,259 11 2,299 2,378 ------- ----- ------- ------- Projected benefit obligation (in excess of) or less than plan assets............................ 398 (77) 92 (70) Unrecognized net (gain) loss ............ (184) 28 (176) 388 Prior service cost not yet recognized in net periodic pension cost........................... 245 21 4 140 Remaining unrecognized transition net (asset) liability from November 1, 1985.................. (46) 3 (53) (4) Adjustment required to recognize minimum liability............ (43) (512) ------- ----- ------- ------- PREPAID PENSION COST (PENSION LIABILITY) RECOGNIZED IN THE CONSOLIDATED BALANCE SHEET ............ $ 413 $ (68) $ (133) $ (58) ======= ===== ====== =======
The components of net periodic pension cost and the significant assumptions for the foreign plans consisted of the following in millions of dollars and in percents: 1997 1996 1995 ---- ---- ---- Service cost.................................... $ 9 $ 9 $ 9 Interest cost .................................. 27 28 27 Return on assets: Actual gain .................................. (35) (18) (12) Deferred gain................................. 23 7 1 Net amortization................................ 7 7 2 ---- ---- ---- NET COST........................................ $ 31 $ 33 $ 27 ---- ---- ---- Discount rates for obligations ................. 6.5-8.3% 7.0-8.3% 7.0-8.3% Discount rates for expenses .................... 7.0-8.3% 7.0-8.3% 7.0-8.3% Assumed rates of compensation increases......... 2.5-5.8% 4.0-7.0% 4.0-7.0% Expected long-term rate of return............... 8.3% 8.3% 8.3% 34 A reconciliation of the funded status of the foreign plans at October 31 in millions of dollars follows:
1997 1996 ------------------------- ------------------------- Assets Accumulated Assets Accumulated Exceed Benefits Exceed Benefits Accumulated Exceed Accumulated Exceed Benefits Assets Benefits Assets ----------- ----------- ----------- ----------- ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATIONS Vested benefit obligation ............ $(85) $(266) $ (82) $(269) Nonvested benefit obligation.......... (3) (3) ----- ------ ------ ------ Accumulated benefit obligation........ (85) (269) (82) (272) Excess of projected benefit obligation over accumulated benefit obligation ................. (11) (29) (11) (41) ----- ------ ------ ------ Projected benefit obligation ........... (96) (298) (93) (313) Plan assets at fair value .............. 181 160 ----- ------ ------ ------ Projected benefit obligation (in excess of) or less than plan assets.................. 85 (298) 67 (313) Unrecognized net gain ................... (44) (2) (27) (7) Prior service cost not yet recognized in net periodic pension cost .......... 1 1 2 2 Remaining unrecognized transition net (asset) obligation from November 1, 1987.................. (9) 16 (11) 23 ----- ------ ------ ------ PREPAID PENSION COST (PENSION LIABILITY) RECOGNIZED IN THE CONSOLIDATED BALANCE SHEET............................ $ 33 $(283) $ 31 $(295) ==== ===== ==== =====
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The company generally provides defined benefit health care and life insurance plans for retired employees in the United States and Canada. Provisions of the benefit plans for hourly employees are, in large part, subject to collective bargaining. The plans for salaried employees include certain cost-sharing provisions. It is the company's policy to fund a portion of its obligations for the United States postretirement health care benefit plans under provisions of Internal Revenue Code Section 401(h). Plan assets consist primarily of common stocks, common trust funds, government securities and corporate debt securities. The components of net periodic postretirement benefits cost and the significant assumptions for the United States and Canadian plans consisted of the following in millions of dollars and in percents: 1997 1996 1995 ---- ---- ---- HEALTH CARE Service cost ................................... $ 69 $ 61 $ 55 Interest cost................................... 148 135 122 Return on assets: Actual gain ................................. (45) (37) (30) Deferred gain................................ 18 17 15 Net amortization............................... (10) (23) (40) ---- ---- ---- Net cost .................................... 180 153 122 ---- ---- ---- LIFE INSURANCE Service cost .................................. 3 3 3 Interest cost.................................. 18 17 16 Net amortization............................... 1 1 ---- ---- ---- Net cost .................................... 22 21 19 ---- ---- ---- TOTAL NET COST ................................ $202 $174 $141 ==== ==== ==== (continued) 1997 1996 1995 ---- ---- ---- Discount rate for obligations.................. 7.75% 7.75% 7.75% Discount rates for expense .................... 7.75% 7.75% 8.25% Expected long-term rate of return ............. 9.7% 9.7% 9.7% A reconciliation of the funded status of the United States and Canadian plans at October 3l in millions of dollars follows: 1997 1996 ----------------- ----------------- Health Life Health Life Care Insurance Care Insurance ------ --------- ------ --------- ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATIONS Retirees................................. $(1,407) $(157) $(1,279) $(147) Fully eligible active plan participants.. (254) (37) (226) (34) Other active plan participants .......... (399) (54) (365) (54) ------- ----- ------- ----- Total.................................... (2,060) (248) (1,870) (235) Plan assets at fair value.................. 316 271 ------- ----- ------- ----- Accumulated postretirement benefit obligation in excess of plan assets...... (1,744) (248) (1,599) (235) Unrecognized net loss ..................... 181 34 108 33 Prior service credit not yet recognized in net periodic postretirement benefits cost............................ (19) (30) (1) ------- ----- ------- ----- POSTRETIREMENT BENEFIT LIABILITY RECOGNIZED IN THE CONSOLIDATED BALANCE SHEET ........................... $(1,582) $(214) $(1,521) $(203) ======= ===== ======= ===== The annual rate of increase in the per capita cost of covered health care benefits (the health care cost trend rate) used to determine 1997 cost was assumed to be 9.0 percent for 1998, decreasing gradually to 4.5 percent by the year 2003. The rate used to determine 1996 cost was assumed to be 9.2 percent for 1997, decreasing gradually to 4.5 percent by the year 2003. The rate used to determine 1995 cost was assumed to be 9.1 percent for 1996, decreasing gradually to 4.5 percent by the year 2001. An increase of one percentage point in the assumed health care cost trend rate would increase the accumulated postretirement benefit obligations at October 31, 1997 by $240 million and the net periodic postretirement benefits cost for the year then ended by $30 million. INCOME TAXES The provision for income taxes by taxing jurisdiction and by significant component consisted of the following in millions of dollars: 1997 1996 1995 ---- ---- ---- Current: United States: Federal ..................................... $434 $406 $253 State........................................ 37 42 17 Foreign........................................ 88 98 55 ---- ---- ---- Total current.............................. 559 546 325 ---- ---- ---- Deferred: United States: Federal ..................................... (22) (51) 70 State........................................ (7) 4 Foreign........................................ 14 (8) (1) ---- ---- ---- Total deferred............................... (8) (66) 73 ---- ---- ---- PROVISION FOR INCOME TAXES ...................... $551 $480 $398 ==== ==== ==== 35 Based upon location of the company's operations, the consolidated income before income taxes in the United States in 1997, 1996 and 1995 was $1,057 million, $929 million and $881 million, respectively, and in foreign countries was $450 million, $358 million and $212 million, respectively. Certain foreign operations are branches of Deere & Company and are, therefore, subject to United States as well as foreign income tax regulations. The pretax income by location and the preceding analysis of the income tax provision by taxing jurisdiction are, therefore, not directly related. A comparison of the statutory and effective income tax provision and reasons for related differences in millions of dollars follows: 1997 1996 1995 ---- ---- ---- UNITED STATES FEDERAL INCOME TAX PROVISION AT A STATUTORY RATE OF 35 PERCENT..................... $527 $450 $382 INCREASE (DECREASE) RESULTING FROM: State and local income taxes, net of federal income tax benefit.......................... 25 23 14 Taxes on foreign income which differ from the United States statutory rate ................... 12 24 11 Realization of benefits of tax loss and tax credit carryforwards........................ (7) (9) (1) Tax exempt income..................................... (4) (4) (5) Other adjustments - net .............................. (2) (4) (3) ---- ---- ---- PROVISION FOR INCOME TAXES ........................... $551 $480 $398 ==== ==== ==== Deferred income taxes arise because there are certain items that are treated differently for financial accounting than for income tax reporting purposes. An analysis of the deferred income tax assets and liabilities at October 31 in millions of dollars follows:
1997 1996 ------------------- -------------------- Deferred Deferred Deferred Deferred Tax Tax Tax Tax Assets Liabilities Assets Liabilities -------- ----------- -------- ----------- Deferred installment sales income..... $ 346 $ 327 Tax over book depreciation ........... 113 100 Accrual for retirement and postemployment benefits............. $ 580 $ 573 Minimum pension liability adjustment.......................... 7 140 Accrual for sales allowances ......... 246 211 Accrual for vacation pay.............. 46 43 Allowance for doubtful receivables.... 52 52 Tax loss and tax credit carryforwards. 12 15 Claims and reserves .................. 19 17 Unearned premiums..................... 8 10 Other items .......................... 114 91 111 85 Less valuation allowance.............. (12) (16) ------ ----- ------ ----- DEFERRED INCOME TAX ASSETS AND LIABILITIES.............. $1,072 $ 550 $1,156 $ 512 ====== ===== ====== =====
At October 31, 1997, accumulated earnings in certain overseas subsidiaries totaled $564 million for which no provision for United States income taxes or foreign withholding taxes has been made, because it is expected that such earnings will be reinvested overseas indefinitely. Determination of the amount of unrecognized deferred tax liability on these unremitted earnings is not practical. Deere & Company files a consolidated federal income tax return in the United States, which includes the wholly-owned Financial Services subsidiaries. These subsidiaries account for income taxes generally as if they filed separate income tax returns. At October 31, 1997, certain foreign tax loss and tax credit carryforwards were available. The expiration dates and amounts in millions of dollars are as follows: 2001 - $4 and unlimited - $8. MARKETABLE SECURITIES Marketable securities are held by the insurance and health care subsidiaries. All marketable securities are classified as available-for-sale under FASB Statement No. 115, with unrealized gains and losses shown as a component of stockholders' equity. Realized gains or losses from the sales of marketable securities are based on the specific identification method. The amortized cost and fair value of marketable securities in millions of dollars follow: Amortized Gross Gross Cost Unrealized Unrealized Fair or Cost Gains Losses Value --------- ---------- ---------- ----- OCTOBER 31, 1997 Equity securities............... $ 3 $ 2 $ 5 U.S. government and agencies ... 160 5 165 States and municipalities ...... 160 11 171 Corporate ...................... 237 9 $ 1 245 Mortgage-backed securities...... 224 8 232 Other .......................... 2 2 ----- ---- --- ----- MARKETABLE SECURITIES........... $ 786 $ 35 $ 1 $ 820 ===== ==== === ===== OCTOBER 31, 1996 Equity securities............... $ 5 $ 2 $ 7 U.S. government and agencies.... 225 5 $ 1 229 States and municipalities ...... 163 9 1 171 Corporate ...................... 265 6 1 270 Mortgage-backed securities...... 188 5 3 190 Other .......................... 2 2 ----- ---- --- ----- MARKETABLE SECURITIES........... $ 848 $ 27 $ 6 $ 869 ===== ==== === ===== The contractual maturities of debt securities at October 31, 1997 in millions of dollars follow: Amortized Fair Cost Value --------- ----- Due in one year or less ......................... $ 40 $ 40 Due after one through five years ................ 239 243 Due after five through 10 years ................. 156 165 Due after 10 years............................... 346 365 ---- ---- DEBT SECURITIES.................................. $781 $813 ==== ==== Actual maturities may differ from contractual maturities because some borrowers have the right to call or prepay obligations. Proceeds from the sales of available-for-sale securities were $114 million in 1997, $11 million in 1996 and $79 million in 1995. Gross realized gains and losses on those sales were not significant. The increase in the net unrealized holding gain after income taxes was $8 million, $11 million and $3 million during 1997, 1996 and 1995, respectively. 36 TRADE ACCOUNTS AND NOTES RECEIVABLE Trade accounts and notes receivable at October 31 consisted of the following in millions of dollars: 1997 1996 ---- ---- Trade accounts and notes: Agricultural ................................ $2,137 $2,009 Construction ................................ 388 422 Commercial and consumer...................... 624 593 ------ ------ Total........................................ 3,149 3,024 Other receivables ............................. 220 164 ------ ------ Total........................................ 3,369 3,188 Less allowance for doubtful receivables........ 35 35 ------ ------ TRADE ACCOUNTS AND NOTES RECEIVABLE-NET ........ $3,334 $3,153 ====== ====== At October 31, 1997 and 1996, dealer notes included above were $788 million and $638 million, respectively. Trade accounts and notes receivable arise from sales to dealers of John Deere agricultural, construction and commercial and consumer equipment. The company generally retains as collateral a security interest in the equipment associated with these receivables. Generally, terms to dealers require payments as the equipment which secures the indebtedness is sold to retail customers. Interest is charged on balances outstanding after certain interest-free periods, which range from one to 12 months for agricultural tractors, one to five months for construction equipment, and from two to 24 months for most other equipment. Trade accounts and notes receivable have significant concentrations of credit risk in the agricultural, construction and commercial and consumer business sectors as shown in the previous table. On a geographic basis, there is not a disproportionate concentration of credit risk in any area. FINANCING RECEIVABLES Financing receivables at October 31 consisted of the following in millions of dollars: 1997 1996 ---- ---- Retail notes: Equipment: Agricultural................................. $3,412 $3,273 Construction................................. 877 903 Commercial and consumer ..................... 282 245 Recreational products ......................... 1,606 1,394 ------ ------ Total........................................ 6,177 5,815 Revolving charge accounts ....................... 630 577 Financing leases................................. 331 223 Wholesale notes.................................. 653 566 ------ ------ Total credit receivables....................... 7,791 7,181 ====== ====== Less: Unearned finance income: Equipment notes ............................. 654 634 Recreational product notes .................. 590 511 Financing leases............................. 48 31 ------ ------ Total ..................................... 1,292 1,176 ------ ------ Allowance for doubtful receivables............. 94 93 ------ ------ FINANCING RECEIVABLES - NET ..................... $6,405 $5,912 ====== ====== Financing receivables have significant concentrations of credit risk in the agricultural, construction, commercial and consumer, and recreational product business sectors as shown in the previous table. On a geographic basis, there is not a disproportionate concentration of credit risk in any area. The company retains as collateral a security interest in the equipment associated with retail notes, wholesale notes and financing leases. Financing receivable installments, including unearned finance income, at October 31 are scheduled as follows in millions of dollars: 1997 1996 ---- ---- Due in months: 0 - 12...................................... $2,765 $2,569 13 - 24 ..................................... 1,685 1,530 25 - 36...................................... 1,186 1,113 37 - 48...................................... 782 767 49 - 60...................................... 471 463 Thereafter................................... 902 739 ------ ------ TOTAL........................................... $7,791 $7,181 ====== ====== The maximum terms for retail notes are generally eight years for agricultural equipment, five years for construction equipment, six years for commercial and consumer equipment and 20 years for recreational products. The maximum term for financing leases is six years, while the maximum term for wholesale notes is generally 12 months. The company's United States and Canadian credit subsidiaries received proceeds of $968 million in 1997, $960 million in 1996 and $837 million in 1995 from the sale of retail notes. Certain other foreign subsidiaries had insignificant sales of retail notes. At October 31, 1997 and 1996, the unpaid balances of retail notes previously sold were $1,514 million and $1,391 million, respectively. The company's maximum exposure under all retail note recourse provisions at October 31, 1997 and 1996 was $177 million and $196 million, respectively. There is no anticipated credit risk related to nonperformance by the counterparties. The retail notes sold are collateralized by security interests in the related equipment sold to customers. At October 31, 1997 and 1996, worldwide financing receivables administered, which include financing receivables previously sold but still administered, totaled $7,919 million and $7,303 million, respectively. Total financing receivable amounts 60 days or more past due were $24 million at October 31, 1997 compared with $22 million at October 31, 1996. These past-due amounts represented .38 percent of the receivables financed at October 31, 1997 and .36 percent at October 31, 1996. The allowance for doubtful financing receivables represented 1.44 percent and 1.56 percent of financing receivables outstanding at October 31, 1997 and 1996, respectively. In addition, at October 31, 1997 and 1996, the company's credit subsidiaries had $164 million and $155 million, respectively, of deposits withheld from dealers 37 and merchants available for potential credit losses. An analysis of the allowance for doubtful credit receivables follows in millions of dollars: - ------------------------------------------------------------ 1997 1996 1995 - ------------------------------------------------------------ Balance, beginning of the year ............. $ 93 $ 88 $ 86 Provision charged to operations............. 38 43 36 Amounts written off......................... (31) (32) (25) Transfers related to retail note sales ..... (6) (6) (9) ---- ---- ---- BALANCE, END OF THE YEAR ................... $ 94 $ 93 $ 88 ==== ==== ==== - ----------------------------------------------------------- OTHER RECEIVABLES Other receivables at October 31 consisted of the following in millions of dollars: - ------------------------------------------------------------- 1997 1996 - ------------------------------------------------------------- Insurance and health care premiums receivable...... $ 90 $127 Reinsurance receivables ........................... 91 119 Receivables relating to asset backed securitizations................................... 165 196 Other.............................................. 67 108 ---- ---- OTHER RECEIVABLES ................................. $413 $550 ==== ==== - ------------------------------------------------------------- Other receivables are primarily held by the Financial Services subsidiaries. The credit subsidiaries' receivables related to asset backed securitizations are equal to the present value of payments to be received for retained interests and deposits made with other entities for recourse provisions under the retail note sales agreements. EQUIPMENT ON OPERATING LEASES Operating leases arise from the leasing of John Deere equipment to retail customers in the United States and Canada. Initial lease terms range from 12 to 72 months. The net value of equipment on operating leases was $775 million and $430 million at October 31, 1997 and 1996, respectively. Of these leases, at October 31, 1997, $194 million was financed by the Equipment Operations and $581 million by the credit subsidiaries. The equipment is depreciated on a straight-line basis over the terms of the leases. The accumulated depreciation on this equipment was $140 million and $86 million at October 31, 1997 and 1996, respectively. The corresponding depreciation expense was $95 million in 1997, $53 million in 1996 and $35 million in 1995. Future payments to be received on operating leases totaled $398 million at October 31, 1997 and are scheduled as follows: 1998 - $159, 1999 - $124, 2000 - - $70, 2001 - $36 and 2002 - $9. INVENTORIES Substantially all inventories owned by Deere & Company and its United States equipment subsidiaries are valued at cost, on the "last-in, first-out" (LIFO) basis. Remaining inventories are generally valued at the lower of cost, on the "first-in, first-out" (FIFO) basis, or market. The value of gross inventories on the LIFO basis represented 85 percent and 83 percent of worldwide gross inventories at FIFO value on October 31, 1997 and 1996, respectively. If all inventories had been valued on a FIFO basis, estimated inventories by major classification at October 31 in millions of dollars would have been as follows: - -------------------------------------------------------------- 1997 1996 - -------------------------------------------------------------- Raw materials and supplies....................... $ 228 $ 228 Work-in-process.................................. 427 397 Finished machines and parts ..................... 1,430 1,232 ------ ----- Total FIFO value .............................. 2,085 1,857 Adjustment to LIFO basis ........................ 1,012 1,028 ------ ----- INVENTORIES...................................... $1,073 $ 829 ====== ===== - --------------------------------------------------------------- PROPERTY AND DEPRECIATION A summary of property and equipment at October 31 in millions of dollars follows: - --------------------------------------------------------------- 1997 1996 - --------------------------------------------------------------- Land ............................................ $ 54 $ 46 Buildings and building equipment................. 958 914 Machinery and equipment ......................... 2,099 2,157 Dies, patterns, tools, etc ...................... 555 561 All other........................................ 557 518 Construction in progress......................... 157 109 ------ ------ Total at cost.................................. 4,380 4,305 Less accumulated depreciation.................... 2,856 2,953 ------ ------ PROPERTY AND EQUIPMENT - NET .................... $1,524 $1,352 ====== ====== - --------------------------------------------------------------- Leased property under capital leases amounting to $3 million and $4 million at October 31, 1997 and 1996, respectively, is included primarily in machinery and equipment. Property and equipment additions and depreciation are reported on page 33. Property and equipment expenditures for new and revised products, increased capacity and the replacement or major renewal of significant items of property and equipment are capitalized. Expenditures for maintenance, repairs and minor renewals are generally charged to expense as incurred. Most of the company's property and equipment is depreciated using the straight-line method for financial accounting purposes. Depreciation for United States federal income tax purposes is computed using accelerated depreciation methods. It is not expected that the cost of compliance with foreseeable environmental requirements will have a material effect on the company's financial position or results of operations. INTANGIBLE ASSETS Net intangible assets totaled $158 million and $286 million at October 31, 1997 and 1996, respectively. The Equipment Operations' balance of $148 million at October 31, 1997 consisted primarily of unamortized goodwill, which resulted from the purchase cost of assets acquired exceeding their fair value, and an intangible asset of $24 million related to the additional minimum pension liability required by FASB Statement No. 87. The intangible pension asset decreased by $119 million during 1997 due to a reduction in the minimum pension liability. Intangible assets, excluding the intangible pension asset, are being amortized over 25 years or less, and the accumulated amortization was $58 million and $39 million at October 31, 1997 and 1996, respectively. The intangible pension asset is remeasured and adjusted annually. The unamortized goodwill is reviewed periodically for potential impairment. 38 SHORT-TERM BORROWINGS Short-term borrowings at October 31 consisted of the following in millions of dollars: - ----------------------------------------------------------------- 1997 1996 - ----------------------------------------------------------------- EQUIPMENT OPERATIONS Commercial paper................................... $ 98 $ 106 Notes payable to banks .. 35 38 Long-term borrowings due within one year........... 38 79 ------ ------ Total ........................................... 171 223 ------ ------ FINANCIAL SERVICES Commercial paper................................... 2,559 2,030 Notes payable to banks ............................ 2 27 Long-term borrowings due within one year........... 1,043 864 ------ ------ Total .......................................... . 3,604 2,921 ------ ------ SHORT-TERM BORROWINGS.............................. $3,775 $3,144 ====== ====== - ----------------------------------------------------------------- The weighted average interest rates on total short-term borrowings, excluding current maturities of long-term borrowings, at October 31, 1997 and 1996 were 5.2 percent and 5.1 percent, respectively. All of the Financial Services' short-term borrowings represent obligations of the credit subsidiaries. Unsecured lines of credit available from United States and foreign banks were $4,412 million at October 31, 1997. Some of these credit lines are available to both the Equipment Operations and certain credit subsidiaries. At October 31, 1997, $1,699 million of the worldwide lines of credit were unused. For the purpose of computing the unused credit lines, total short-term borrowings, excluding the current maturities of long-term borrowings, were considered to constitute utilization. Included in the above lines of credit is a long-term committed credit agreement expiring on February 25, 2002 for $3,500 million. The agreement is mutually extendable and the annual facility fee is not significant. The credit agreement has various requirements of John Deere Capital Corporation, including the maintenance of its consolidated ratio of earnings to fixed charges at not less than 1.05 to 1 for each fiscal quarter and the ratio of senior debt to total stockholder's equity plus subordinated debt at not more than 8 to 1 at the end of any fiscal quarter. Deere & Company has a separate contractual agreement to conduct business with the Capital Corporation on such terms that the Capital Corporation will continue to satisfy the ratio requirement for earnings to fixed charges, the Capital Corporation's tangible net worth will be maintained at not less than $50 million and Deere & Company will own at least 51 percent of Capital Corporation's voting capital stock. These arrangements are not intended to make Deere & Company responsible for the payment of obligations of this credit subsidiary. The credit agreement also contains a provision requiring Deere & Company to maintain consolidated tangible net worth of $500 million according to United States generally accepted accounting principles in effect at October 31, 1994. Under this provision, the company's total retained earnings balance was free of restriction at October 31, 1997. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses at October 31 consisted of the following in millions of dollars: - ------------------------------------------------------------------- 1997 1996 - ------------------------------------------------------------------- EQUIPMENT OPERATIONS Accounts payable: Trade ............................................. $ 967 $ 882 Dividends payable.................................. 50 52 Other.............................................. 37 37 Accrued expenses: Employee benefits ................................. 160 151 Dealer commissions ................................ 201 178 Other.............................................. 719 675 ------ ------ Total............................................ 2,134 1,975 ------ ------ FINANCIAL SERVICES Accounts payable: Deposits withheld from dealers and merchants....... 164 155 Other.............................................. 140 132 Accrued expenses: Unearned premiums ................................. 141 145 Unpaid loss adjustment expenses.................... 92 88 Interest payable .................................. 49 44 Other.............................................. 120 137 ------ ------ Total............................................ 706 701 ------ ------ Accounts payable and accrued expenses................ $2,840 $2,676 ====== ====== - ------------------------------------------------------------------- LONG-TERM BORROWINGS Long-term borrowings at October 31 consisted of the following in millions of dollars: - ------------------------------------------------------------------- 1997 1996 - ------------------------------------------------------------------- EQUIPMENT OPERATIONS Notes and debentures: Medium-term notes due 2000 - 2006: Average interest rate of 8.9% as of year end 1997 and 1996 .................................... $ 134 $ 171 Adjustable rate senior notes due 2002: Interest rate of 7.8% as of year end 1996 ......... 50 8.95% debentures due 2019............................ 200 200 8-1/2% debentures due 2022........................... 200 200 Other................................................ 6 5 ------ ------ Total........................................ $ 540 $ 626 ====== ====== - ------------------------------------------------------------------- (continued) 39 - ------------------------------------------------------------------- 1997 1996 - ------------------------------------------------------------------- FINANCIAL SERVICES Notes and debentures: Medium-term notes due 1998 - 2007: Average interest rate of 6.7% as of year end 1997 and 1996..................................... $1,286 $1,402 Floating rate notes due 1998 (federal funds rate): Swapped to an alternative variable interest rate of 5.6% as of year end 1996....................... 150 5% Swiss franc bonds due 1999: Swapped to U.S. dollars and a variable interest rate of 6.1% as of year end 1997 and 6.0% as of year end 1996 ........ 97 97 6% Notes due 1999 .................................. 200 6.30% Notes due 1999 ............................... 200 ------ ------ Total notes and debentures...................... 1,783 1,649 ------ ------ Subordinated debt: 9-5/8% subordinated notes due 1998: Swapped to variable interest rate of 6.1% as of year end 1997 and 6.0% as of year end 1996........... 150 150 8-5/8% subordinated debentures due 2019* ........... 150 ------ ------ Total subordinated debt ...................... 300 150 ------ ------ Total ...................................... 2,083 1,799 ------ ------ LONG-TERM BORROWINGS................................ $2,623 $2,425 ====== ====== *Reclassified to short-term borrowings in 1996 because the obligation was callable by the creditors in 1997. Swapped to variable interest rate of 5.3% as of year end 1996. - ------------------------------------------------------------------- All of the Financial Services' long-term borrowings represent obligations of John Deere Capital Corporation. The approximate amounts of the Equipment Operations' long-term borrowings maturing and sinking fund payments required in each of the next five years in millions of dollars are as follows: 1998 - $38, 1999 - $200, 2000 - $5, 2001 - - $68 and 2002 - $23. The approximate amounts of the Capital Corporation's long-term borrowings maturing and sinking fund payments required in each of the next five years in millions of dollars are as follows: 1998 - $1,043, 1999 - $1,048, 2000 - $365, 2001 - $140 and 2002 - $280. LEASES At October 31, 1997, future minimum lease payments under capital leases totaled $1 million. Total rental expense for operating leases during 1997 was $61 million compared with $56 million in 1996 and $50 million in 1995. At October 31, 1997, future minimum lease payments under operating leases amounted to $112 million as follows: 1998 - $38, 1999 - $25, 2000 - $14, 2001 - - $9, 2002 - $6 and later years - $20. COMMITMENTS AND CONTINGENT LIABILITIES On October 31, 1997, the company's maximum exposure under all credit receivable recourse provisions was $177 million for retail notes sold by both the Financial Services subsidiaries and the Equipment Operations. Also, at October 31, 1997, the company had commitments of approximately $102 million for construction and acquisition of property and equipment. The company is subject to various unresolved legal actions which arise in the normal course of its business, the most prevalent of which relate to product liability, retail credit matters, and patent and trademark matters. Although it is not possible to predict with certainty the outcome of these unresolved legal actions or the range of possible loss, the company believes these unresolved legal actions will not have a material effect on its financial position or results of operations. CAPITAL STOCK Changes in the common stock account in 1995, 1996 and 1997 were as follows: - ------------------------------------------------------------------------------- Number of Amount Shares Issued (in millions) - ------------------------------------------------------------------------------- Balance at October 31, 1994 ............ 259,915,584 $1,491 Transfer from retained earnings for three-for-one stock split (see below). 175 Stock options exercised with newly issued shares......................... 2,604,114 44 Debenture conversions .................. 4,386 Other................................... 19 ----------- ------ Balance at October 31, 1995............. 262,524,084 1,729 Stock options exercised with newly issued shares......................... 1,305,541 26 Debenture conversions .................. 3,474 Other................................... 15 ----------- ------ Balance at October 31, 1996............. 263,833,099 1,770 Debenture conversions .................. 16,204 Other................................... 9 ----------- ------ BALANCE AT OCTOBER 31, 1997 ............ 263,849,303 $1,779 =========== ====== - ------------------------------------------------------------------------------- On November 15, 1995, the company declared a three-for-one stock split effected in the form of a 200 percent stock dividend to stockholders of record on November 17, 1995. This stock split was recorded as of October 31, 1995 by a transfer of $175 million from retained earnings to common stock, representing a $1 par value for each additional share issued. All prior references to shares and per share amounts have been restated. The number of common shares the company is authorized to issue was also increased from 200 million to 600 million and the number of authorized preferred shares, none of which has been issued, was increased from three million to nine million. As of October 31, 1997, the company had completed the repurchase of $500 million of Deere & Company common stock under the program announced on February 28, 1996. However, in December 1997, the company announced it would repurchase up to $1 billion of additional common stock from time to time. The major changes during 1997 affecting common stock in treasury included the repurchase of 6,330,731 shares of common stock at a cost of $300 million related to the repurchase program and 2,415,704 shares at a cost of $119 million for ongoing stock option and restricted stock plans. In addition, 1,757,278 shares of treasury stock at original cost of $72 million were issued under these plans. 40 The calculation of net income per share is based on the average number of shares outstanding during the year. The calculation of net income per share, assuming full dilution, recognizes the dilutive effect of the assumed exercise of stock appreciation rights and stock options, contingent shares and conversion of convertible debentures. The calculation also reflects adjustment for interest expense relating to the convertible debentures, net of applicable income taxes. STOCK OPTION AND RESTRICTED STOCK AWARDS The company issues stock options and restricted stock to key employees under plans approved by stockholders. Restricted stock is also issued to nonemployee directors. Options are generally awarded with the exercise price equal to the market price and become exercisable in one year. Certain other options are awarded with the exercise prices greater than the market price and become exercisable in four to nine and one-half years, depending on the achievement of company performance goals. All options expire 10 years after the date of grant. The periods of restriction for restricted stock issued to employees range from four to eight years depending on the achievement of company performance goals. If the company exceeds these goals, additional shares could be granted at the end of the restricted periods. The restrictions for nonemployee directors end when a director retires from the Board. At October 31, 1997, the shares remaining available for the granting of options and restricted stock were 14.8 million and 3.5 million, respectively. In 1997, the company adopted the disclosure provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation. The company retained the "intrinsic value" method of accounting for its plans in accordance with APB Opinion No. 25, and, therefore, recognized no compensation expense for stock options. For disclosure purposes only, the Black-Scholes option pricing model was used to calculate the "fair values" of stock options. Based on this model, the weighted-average fair values of stock options awarded during 1997 and 1996 were $13.70 and $9.40 per option, respectively. Pro forma net income and earnings per share, as if the fair value method in FASB Statement No. 123 had been used to account for stock-based compensation, and the assumptions used are as follow: - ------------------------------------------------------------------- 1997 1996 - ------------------------------------------------------------------- Net income (in millions) As reported................................ $ 960 $ 817 Pro forma ................................. $ 948 $ 808 Net income per share As reported................................ $ 3.78 $ 3.14 Pro forma ................................. $ 3.74 $ 3.10 Black-Scholes assumptions* Risk-free interest rate ................... 6.2% 5.6% Dividend yield............................. 1.9% 2.3% Stock volatility .......................... 30.0% 25.2% Expected option life ...................... 5.3 years 5.9 years *Weighted-averages - ------------------------------------------------------------------- The pro forma stock-based compensation expense included in net income above may not be representative of future years since only awards of stock options and restricted stock after November 1, 1995 have been included in accordance with FASB Statement No. 123. During the last three fiscal years, changes in shares under option in millions were as follows: - ------------------------------------------------------------------------------ 1997 1996 1995 --------------- --------------- --------------- Exercise Exercise Exercise Shares Price* Shares Price* Shares Price* - ------------------------------------------------------------------------------ Outstanding at beginning of year........ 6.3 26.54 6.9 22.33 5.4 17.47 Granted ................... 1.5 42.69 1.8 34.90 4.2 25.13 Exercised ................. (1.5) 24.23 (2.0) 19.98 (2.6) 16.93 Expired or forfeited ...... (.1) 28.70 (.4) 25.10 (.1) 20.59 ----- ----- ----- Outstanding at end of year.............. 6.2 30.90 6.3 26.54 6.9 22.33 Exercisable at end of year.............. 3.1 24.70 3.1 19.35 2.6 17.79 *Weighted-averages - ------------------------------------------------------------------------------ Options outstanding and exercisable in millions at October 31, 1997 were as follows: - ------------------------------------------------------------------------------ Options Outstanding Options Exercisable --------------------------- -------------------- Remaining Range of Contractual Exercise Exercise Exercise Prices Shares Life (yrs)* Price* Shares Price* - ------------------------------------------------------------------------------ $12.25 - $15.60 ...... .6 4.3 14.01 .6 14.01 $20.02 - $23.56 ...... 1.4 6.6 21.73 1.4 21.73 $28.39 - $34.13 ...... 2.6 7.5 32.48 1.1 34.10 $40.60 - $47.36 ...... 1.6 9.0 42.81 ---- ---- Total................. 6.2 3.1 *Weighted-averages - ------------------------------------------------------------------------------ In 1997 and 1996, the company granted 292,681 and 95,016 shares of restricted stock with weighted-average fair values of $43.14 and $41.17 per share, respectively. The total compensation expense for restricted stock and additional shares, which is being amortized over the restricted periods, was $15 million in 1997 and $9 million in 1996. EMPLOYEE STOCK PURCHASE AND SAVINGS PLANS The company maintains the following significant plans for eligible employees: John Deere Savings and Investment Plan, for salaried employees John Deere Stock Purchase Plan, for salaried employees John Deere Tax Deferred Savings Plan, for hourly and incentive paid employees Company contributions under these plans were $41 million in 1997, $35 million in 1996 and $30 million in 1995. RETAINED EARNINGS An analysis of the company's retained earnings follows in millions of dollars: - -------------------------------------------------------------------------- 1997 1996 1995 - -------------------------------------------------------------------------- Balance, beginning of the year ..................... $ 2,300 $1,690 $1,354 Net income ......................................... 960 817 706 Dividends declared ................................. (202) (207) (195) Transfer to capital stock for three-for-one stock split ........................ (175) Other .............................................. (10) ------- ------ ----- BALANCE, END OF THE YEAR............................ $ 3,048 $2,300 $1,690 ======= ====== ====== - ---------------------------------------------------------------------------- 41 CUMULATIVE TRANSLATION ADJUSTMENT An analysis of the company's cumulative translation adjustment follows in millions of dollars: 1997 1996 1995 ---- ---- ---- Balance, beginning of the year........................... $(14) $(12) $(18) Translation adjustments for the year..................... (37) 1 6 Income taxes applicable to translation adjustments....... (6) (3) ---- ---- ---- BALANCE, END OF THE YEAR ................................ $(57) $(14) $(12) ---- ---- ---- ---- ---- ---- FINANCIAL INSTRUMENTS The fair values of financial instruments which do not approximate the carrying values in the financial statements at October 31 in millions of dollars follow:
1997 1996 ------------------ --------------------- Carrying Fair Carrying Fair Value Value Value Value ------- ------- ------- ------- Financing receivables....................... $ 6,405 $ 6,381 $ 5,912 $ 5,896 ------- ------- ------- ------- ------- ------- ------- ------- Long-term borrowings and related swaps: Equipment Operations borrowings ......... $ 540 $ 629 $ 626 $ 694 Financial Services borrowings............ 2,089 2,127 1,816 1,844 Interest rate and foreign currency swaps ................ (6) (19) (17) (30) ------- ------- ------- ------- Total ................................ $ 2,623 $ 2,737 $ 2,425 $ 2,508 ------- ------- ------- ------- ------- ------- ------- -------
FAIR VALUE ESTIMATES Fair values of the long-term financing receivables with fixed rates were based on the discounted values of their related cash flows at current market interest rates. The fair values of the remaining financing receivables approximated the carrying amounts. Fair values of long-term borrowings with fixed rates were based on the discounted values of their related cash flows at current market interest rates. Certain long-term borrowings of the John Deere Capital Corporation have been swapped to current variable interest rates and United States dollars. Fair values of these swaps were based on quotes from dealers. Fair values and carrying values of the company's other interest rate swaps and caps associated with short-term borrowings, foreign exchange forward contracts and options were not material. DERIVATIVES The company enters into derivative transactions only to hedge exposures arising in the normal course of business, and not for the purpose of creating speculative positions or trading. The following notional or contract amounts do not represent amounts exchanged by the parties and, therefore, are not representative of the company's risk. The net amounts exchanged are calculated on the basis of the notional amounts and other terms of the derivatives such as interest rates and exchange rates, and represent only a small portion of the notional amounts. The credit and market risks under these agreements are not considered to be significant since the counterparties have high credit ratings and the fair values and carrying values are not material. INTEREST RATE SWAPS AND CAPS The company's credit subsidiaries enter into interest rate swap and interest rate cap agreements related to their borrowings in order to more closely match the type of interest rates of the borrowings to those of the assets being funded. The differential to be paid or received on all swap and cap agreements is accrued as interest rates change and is recognized over the lives of the agreements in interest expense. Premiums are amortized to interest expense over the lives of the agreements. At October 31, 1997 and 1996, the total notional principal amounts of interest rate swap agreements related to short-term borrowings were $795 million and $346 million, having rates of 3.4 to 6.3 percent and 5.2 to 7.4 percent, terminating in up to 36 months and 12 months, respectively. There were no interest rate cap agreements at October 31, 1997 or 1996. The Capital Corporation has entered into interest rate swap agreements with independent parties that change the effective rate of interest on certain long-term borrowings. The "Long-Term Borrowings" table on pages 39 and 40 reflects the effective year-end variable interest rates relating to these swap agreements. The notional principal amounts and maturity dates of these swap agreements are the same as the principal amounts and maturities of the related borrowings. The Capital Corporation also has interest rate swap agreements associated with medium-term notes. The "Long-Term Borrowings" table reflects the interest rates relating to these swap agreements. At October 31, 1997 and 1996, the total notional principal amounts of these swap agreements were $380 million and $520 million, terminating in up to 116 months and 113 months, respectively. FOREIGN EXCHANGE FORWARD CONTRACTS, SWAPS AND OPTIONS The company has entered into foreign exchange forward contracts, swaps and purchased options in order to hedge the currency exposure of certain receivables, liabilities and expected inventory purchases. The foreign exchange forward contract and swap gains or losses are accrued as foreign exchange rates change for hedges of receivables and liabilities or deferred until expiration of the contract for hedges of future commitments. The contract premiums are either amortized or deferred over the terms of the contracts depending on the items being hedged. The contract gains or losses and premiums are recognized in other operating expenses. The foreign exchange purchased option premiums and any gains are deferred and recognized in cost of sales as part of the cost of future inventory purchases. At October 31, 1997 and 1996, the company had foreign exchange forward contracts maturing in up to 12 months and 11 months for $415 million and $390 million, respectively, and a foreign currency swap agreement maturing in up to 15 months and 27 months, respectively, for $97 million. At October 31, 1997 and 1996, the company had purchased options maturing in up to 23 months and 21 months for $280 million and $164 million, respectively. The total deferred gains or losses on these foreign exchange hedges were not material at October 31, 1997 and 1996. CASH FLOW INFORMATION For purposes of the statement of consolidated cash flows, the company considers investments with original maturities of three months or less to be cash equivalents. Substantially all of the company's short-term borrowings mature within three months or less. 42 Cash payments for interest and income taxes consisted of the following in millions of dollars: 1997 1996 1995 ---- ---- ---- Interest: Equipment Operations....................... $ 83 $120 $129 Financial Services ........................ 366 298 262 Intercompany eliminations ................. (5) (6) (6) ---- ---- ---- CONSOLIDATED ................................. $444 $412 $385 ---- ---- ---- ---- ---- ---- Income taxes: Equipment Operations....................... $522 $513 $297 Financial Services ........................ 112 104 99 Intercompany eliminations ................. (97) (92) (88) ---- ---- ---- CONSOLIDATED ................................. $537 $525 $308 ---- ---- ---- ---- ---- ---- SUPPLEMENTAL INFORMATION (UNAUDITED) Quarterly information with respect to net sales and revenues and earnings is shown in the following schedule. Such information is shown in millions of dollars except for per share amounts. First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- 1997 Net sales and revenues .................. $2,396 $3,521 $3,430 $3,444 Income before income taxes............... 285 508 400 314 Net income .............................. 177 319 253 211 Net income per share..................... .69 1.25 1.00 .84 Dividends declared per share ............ .20 .20 .20 .20 Dividends paid per share................. .20 .20 .20 .20 1996 Net sales and revenues .................. $2,318 $3,089 $2,905 $2,917 Income before income taxes............... 258 425 317 287 Net income .............................. 166 273 204 174 Net income per share..................... .63 1.04 .79 .68 Dividends declared per share ............ .20 .20 .20 .20 Dividends paid per share................. .20 .20 .20 .20 Common stock per share sales prices from New York Stock Exchange composite transactions quotations follow: First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- 1997 MARKET PRICE High .................................... $47.13 $46.75 $60.50 $59.00 Low...................................... $39.13 $40.88 $44.38 $48.75 1996 MARKET PRICE High .................................... $37.13 $45.00 $43.38 $44.88 Low...................................... $28.33 $35.63 $34.50 $34.75 At October 31, 1997, there were 31,748 holders of record of the company's $1 par value common stock and 15 holders of record of the company's 5-1/2 % convertible subordinated debentures due 2001. DIVIDEND A quarterly cash dividend of $.22 per share was declared at the Board of Directors' meeting held on December 3, 1997, payable on February 2, 1998. This represents an increase of 10 percent. FINANCIAL INSTRUMENT RISK INFORMATION (UNAUDITED) SENSITIVITY ANALYSIS The following is a sensitivity analysis for the company's derivatives and other financial instruments which have interest rate risk. These instruments are held for other than trading purposes. The gains or losses in the table below represent the changes in the financial instrument's fair values which would be caused by increasing the interest rates by 10 percent of the current market rates at October 31, 1997. The fair values were determined based on the discounted values of their related cash flows. The gains or losses in fair values at October 31, 1997 would have been as follows in millions of dollars: Fair Value Gains (Losses) --------------- Marketable securities....................... $(14) Financing receivables....................... (39) Long-term borrowings and related swaps: Equipment Operations borrowings ........ 30 Financial Services borrowings .......... 27 Interest rate and foreign currency swaps.............. (7) ----- Total............................... $ (3) ----- ----- TABULAR INFORMATION The following foreign exchange forward contracts were held by the company to hedge certain currency exposures. All contracts have maturity dates in fiscal year 1998. The notional amounts and fair values at October 31, 1997 in millions of dollars follow: Average Contractual Notional Fair Rate* Amount Value ----------- -------- ------ Buy US$ / Sell Canadian dollar............. 1.3758 $ 144 $ 2.9 Buy Deutsche Mark / Sell US$ .............. 1.7337 113 1.8 Buy British Pound / Sell US$............... .5991 47 .1 Buy Australian dollar / Sell US$........... 1.4266 22 Buy French Franc / Sell US$ ............... 5.9095 20 .5 Buy Spanish Peseta / Sell US$.............. 148.53 19 .4 Other contracts............................ 50 2.0 ----- ---- Total ................................ $ 415 $ 7.7 ----- ---- ----- ---- *Currency per United States dollar (US$) At October 31, 1997, the company had $280 million of foreign exchange purchased options with a deferred premium of $3 million. The premium is the maximum potential loss on these options, which are held as hedges of expected inventory purchases. See pages 30 and 42 for further discussion of financial instruments including derivatives. 43 (THIS PAGE INTENTIONALLY LEFT BLANK.) 44 INDEPENDENT AUDITORS' REPORT Deere & Company: We have audited the accompanying consolidated balance sheets of Deere & Company and subsidiaries as of October 31, 1997 and 1996 and the related statements of consolidated income and of consolidated cash flows for each of the three years in the period ended October 31, 1997. Our audits also included the financial statement schedule listed in the Index under Part IV, Item 14(a)(2). These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Deere & Company and subsidiaries at October 31, 1997 and 1996 and the results of their operations and their cash flows for each of the three years in the period ended October 31, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Chicago, Illinois November 25, 1997 45 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Each person signing below also hereby appoints Hans W. Becherer, Robert W. Lane and John K. Lawson, and each of them singly, his or her lawful attorney-in-fact with full power to execute and file any and all amendments to this report together with exhibits thereto and generally to do all such things as such attorney-in-fact may deem appropriate to enable Deere & Company to comply with the provisions of the Securities Exchange Act of 1934 and all requirements of the Securities and Exchange Commission. DEERE & COMPANY By: /s/ Hans W. Becherer -------------------- Hans W. Becherer Chairman and Chief Executive Date: 22 January 1998 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Signature Title Date /s/ Hans W. Becherer Chairman, Director and ) ---------------- ) Hans W. Becherer Chief Executive Officer ) ) /s/ John R. Block Director ) 22 January 1998 ------------- ) John R. Block ) ) /s/ Leonard A. Hadley Director ) ----------------- ) Leonard A. Hadley ) ) /s/ Regina E. Herzlinger Director ) -------------------- ) Regina E. Herzlinger ) ) 46 Signature Title Date /s/ Samuel C. Johnson Director ) ----------------- ) Samuel C. Johnson ) ) /s/ Arthur L. Kelly Director ) --------------- ) Arthur L. Kelly ) ) /s/ Robert W. Lane Senior Vice President, ) 22 January 1998 -------------- ) Robert W. Lane Principal Financial Officer ) Principal Accounting Officer ) ) /s/ Antonio Madero B. Director ) ---------------- ) Antonio Madero B. ) ) /s/ Agustin Santamarina Director ) ------------------- ) Agustin Santamarina ) ) /s/ William A. Schreyer Director ) ------------------- ) William A. Schreyer ) ) /s/ John R. Stafford Director ) ---------------- ) John R. Stafford ) ) /s/ David H. Stowe, Jr. Director ) ------------------ ) David H. Stowe, Jr. ) ) /s/ John R. Walter Director ) -------------- ) John R. Walter ) ) /s/ Arnold R. Weber Director ) --------------- ) Arnold R. Weber ) 47 DEERE & COMPANY AND CONSOLIDATED SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS For the Years Ended October 31, 1997, 1996 and 1995 (In thousands of dollars)
Column A Column B Column C Column D Column E - ---------------------------- ---------- ----------------------------------------- ------------------------------- -------- Additions ----------------------------------------- Balance at Charged to Charged to other accounts Deductions Balance beginning costs and ---------------------------- ------------------------------- at end Description of period expenses Description Amount Description Amount of period - ---------------------------- --------- ---------- ------------------- ------- -------------------- ------- --------- YEAR ENDED OCTOBER 31, 1997 Allowance for doubtful receivables: EQUIPMENT OPERATIONS Dealer receivable Dealer receivable allowances $ 34,850 $ 12,768 Bad debt recoveries $ 1,419 write-offs $14,236 $ 34,801 FINANCIAL SERVICES Transfers related to retail note sales 6,157 Credit receivable Credit receivable allowances 93,498 38,206 write-offs 31,891 93,656 -------- -------- ------- ------- -------- Consolidated receivable allowances $128,348 $ 50,974 $ 1,419 $52,284 $128,457 ======== ======== ======= ======= ======== YEAR ENDED OCTOBER 31, 1996 Allowance for doubtful receivables: EQUIPMENT OPERATIONS Dealer receivable Dealer receivable allowances $ 24,012 $ 17,210 Bad debt recoveries $ 1,306 write-offs $ 8,112 $ 34,850 Purchase of Mexico operations 434 FINANCIAL SERVICES Transfers related to retail note sales 6,316 Credit receivable Credit receivable allowances 87,715 42,715 write-offs 30,616 93,498 -------- -------- ------- ------- -------- Consolidated receivable allowances $111,727 $ 59,925 $ 1,740 $45,044 $128,348 ======== ======== ======= ======= ======== YEAR ENDED OCTOBER 31, 1995 Allowance for doubtful receivables: EQUIPMENT OPERATIONS Dealer receivable Dealer receivable allowances $ 23,003 $ 3,487 Bad debt recoveries $ 1,645 write-offs $ 4,123 $ 24,012 FINANCIAL SERVICES Transfers related to retail note sales 9,138 Credit receivable Credit receivable allowances 85,791 36,125 write-offs 25,063 87,715 -------- -------- ------- ------- -------- Consolidated receivable allowances $108,794 $ 39,612 $ 1,645 $38,324 $111,727 ======== ======== ======= ======= ========
48 INDEX TO EXHIBITS 2. Not applicable 3.1 Certificate of incorporation, as amended (Exhibit 3.1 to Form 10-K of registrant for the year ended October 31, 1995*) 3.2 Certificate of Designation Preferences and Rights of Series A Participating Preferred Stock (Exhibit 3.2 to Form 10-Q of registrant for the period ended April 30, 1993*) 3.3 By-laws, as amended 4.1 Indenture dated February 15, 1991 between registrant and Citibank, N.A., as Trustee (Exhibit 4.1 to Form 10-Q of registrant for the quarter ended April 30, 1993*) 4.2 Credit agreements among registrant, John Deere Capital Corporation, various financial institutions, and Chemical Bank, The Chase Manhattan Bank (National Association), Bank of Americas National Trust and Savings Association, Deutsche Bank AG, and The Toronto Dominion Bank, as Managing Agents, dated as of April 5, 1995 (Exhibit 4.1(a) and 4.1(b) to 1993 Form 10-Q of registrant for the period ended April 30, 1995*) 4.3 Credit agreements among John Deere Limited, John Deere Finance Limited, various financial institutions and The Toronto-Dominion Bank as agent, dated as of April 5, 1995 (Exhibit 4.2(a) and 4.2(b) to Form 10-Q of registrant for the quarter ended April 30, 1995*) 4.4 Form common stock certificates (Exhibit 4.4 to Form 10-Q of registrant for the quarter ended April 30, 1993*) 4.5 Rights Agreement dated as of December 3, 1997 between registrant and The Bank of New York (Exhibit 1 to the registration statement on Form 8-A of registrant filed December 10, 1997*)Certain instruments relating to long-term debt constituting less than 10% of the registrant's total assets, are not filed as exhibits herewith pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K. The registrant will file copies of such instruments upon request of the Commission. 9. Not applicable 10.1 Agreement dated May 11, 1993 between registrant and John Deere Capital Corporation concerning agricultural retail notes (Exhibit 10.1 to Form 10-Q of registrant for the quarter ended April 30, 1993*) 10.2 Agreement dated May 11, 1993 between registrant and John Deere Capital Corporation relating to commercial and consumer retail notes (Exhibit 10.2 to Form 10-Q of registrant for the quarter ended April 30, 1993*) 10.3 Agreement dated May 11, 1993 between John Deere Industrial Equipment Company, a wholly-owned subsidiary of registrant and John Deere Capital Corporation concerning construction retail notes (Exhibit 10.3 to Form 10-Q of registrant for the quarter ended April 30, 1993*) 10.4 Agreement dated January 26, 1983 between registrant and John Deere Capital Corporation relating to agreements on retail notes with United States sales branches (Exhibit 10.4 to Form 10-Q of registrant for the quarter ended April 30, 1993*) 10.5 Agreement dated July 14, 1997 between the John Deere Construction Equipment Company and John Deere Capital Corporation concerning construction retail notes (Exhibit 10.8 to John Deere Capital Corporation Form 10-K for the year ended October 31, 1997 Securities and Exchange Commission file number 1-6458*) 49 10.6 John Deere Supplemental Pension Benefit Plan, as amended December 4, 1996 (Exhibit 10.5 to Form 10-K of registrant for the year ended October 31, 1996*)** 10.7 1986 John Deere Stock Option Plan (Exhibit 10.7 to Form 10-Q of registrant for the quarter ended April 30, 1993*)** 10.8 1991 John Deere Stock Option Plan (Appendix to Notice and Proxy Statement of registrant for the annual shareholder meeting on February 28, 1996*)** 10.9 Deere & Company Voluntary Deferred Compensation Plan (Exhibit 10.9 to Form 10-Q of registrant for the quarter ended April 30, 1993*)** 10.10 John Deere Restricted Stock Plan (Appendix to Notice and Proxy Statement of registrant for the annual shareholder meeting on February 28, 1996*)** 10.11 1993 Nonemployee Director Stock Ownership Plan (Exhibit to Notice and Proxy Statement of registrant for the annual shareholder meeting on February 24, 1993*)** 10.12 John Deere Performance Bonus Plan (Exhibit A to Notice and Proxy Statement of registrant for the annual shareholder meeting on February 22, 1995*)** 10.13 John Deere Equity Incentive Plan (Exhibit B to Notice and Proxy Statement of registrant for the annual shareholder meeting on February 22, 1995*)** 10.14 Deere & Company Nonemployee Director Deferred Compensation Plan (Exhibit 10.13 to Form 10-K of registrant for the year ended October 31, 1996*)** 10.15 John Deere Defined Contribution Restoration Plan 10.16 Agreement dated October 15, 1996 between registrant and John Deere Capital Corporation relating to fixed charges ratio, ownership and minimum net worth of John Deere Capital Corporation. (Exhibit 10.7 to John Deere Capital Corporation Form 10-K for the year ended October 31, 1996 Securities and Exchange Commission file number 1-6458*) 11. Computation of net income per share 12. Computation of ratio of earnings to fixed charges 13. Not applicable 16. Not applicable 18. Not applicable 21. Subsidiaries 22. Not applicable 23. Consent of Deloitte & Touche llp 24. Not applicable 27. Financial Data Schedule _____________________________ * Incorporated by reference. Copies of these exhibits are available from the Company upon request. ** Compensatory plan or arrangement filed as an exhibit pursuant to Item 14(c) of Form 10-K. 50 EX-3.3 2 BYLAWS OF DEERE & COMPANY EXHIBIT 3.3 BYLAWS of DEERE & COMPANY (Adopted July 30, 1958; Amended May 28, 1997) ARTICLE I - IDENTIFICATION SECTION 1. NAME. The name of the Company is Deere & Company (hereinafter referred to as the "Company"). SECTION 2. OFFICES. The principal office of the Company in Delaware shall be in the City of Wilmington, County of New Castle, State of Delaware. The Company may maintain, change or discontinue its other offices, including its principal business office in the County of Rock Island, State of Illinois, and may have such other offices both within and outside of the State of Delaware as its business may require. SECTION 3. SEAL. The seal of the Company shall be circular in form and mounted upon a metal die, suitable for impressing the same upon paper. About the upper periphery of the seal shall appear the words "Deere & Company" and about the lower periphery thereof the word "Delaware". In the center of the seal shall appear a representation of a leaping deer. SECTION 4. FISCAL YEAR. The fiscal year of the Company shall begin on the first day of November in each calendar year and end on the last day of October in the following calendar year. ARTICLE II - THE STOCKHOLDERS SECTION 1. PLACE OF MEETINGS. Annual meetings of the stockholders for the election of directors shall be held at the principal business office of the Company in Rock Island County, State of Illinois. Meetings of the stockholders for any other purpose may be held at such place within the State of Delaware or the State of Illinois as may be specified by the Chairman or the Board of Directors. SECTION 2. ANNUAL MEETING. The annual meeting of the stockholders, at which they shall elect directors by ballot and by plurality vote and may transact such other business as may properly be brought before the meeting in accordance with Section 3 of Article II of these Bylaws, shall be held at ten o'clock in the morning, local time, on the last Wednesday in February of each year or on such business day and at such time and at such place as may be designated by the Board of Directors. If the date designated for the annual meeting is a legal holiday then the annual meeting shall be held on the first following day that is not a legal holiday. SECTION 3. NOMINATION OF DIRECTORS AND OTHER BUSINESS. (a) Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors. Nominations of persons for election as directors may be made at a meeting of stockholders only (i) by or at the direction of the Board of Directors, (ii) by any person or persons authorized to do so by the Board or (iii) by any 51 stockholder of the Company entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 3. Such nomination, other than those made by or at the direction of the Board or by persons authorized by the Board, shall be made pursuant to timely notice in writing to the Secretary of the Company. Such stockholder's notice to the Secretary of a proposed nomination shall set forth, as to each person whom the stockholder proposes to nominate for election or re-election as a director, (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class and number of shares of capital stock of the Company which are beneficially owned by the person, and (iv) any other information relating to the person that is required to be disclosed in solicitations for proxies for election of directors pursuant to Regulation 14A under the Securities Exchange Act of 1934, as now or hereafter amended; such notice shall further set forth, as to the stockholder giving the notice, (i) the name and record address of such stockholder and (ii) the class and number of shares of the Company which are beneficially owned by such stockholder. The Company may require any proposed nominee to furnish such other information as may reasonably be required by the Company to determine the eligibility of such proposed nominee to serve as director. No person shall be eligible for election as a director of the Company unless nominated in accordance with the procedures set forth herein and unless qualified under the other provisions of these bylaws. If the Chairman of the meeting determines that a nomination was not made in accordance with the foregoing procedure, he shall so declare to the meeting and the defective nomination shall be disregarded. (b) To be properly brought before any annual or special meeting of stockholders, business must be either (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board, (ii) otherwise properly brought before the meeting by or at the direction of the Board, or (iii) otherwise properly brought before the meeting by a stockholder. In addition to any other applicable requirements, for business to be properly brought before a meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Company. A stockholder's notice to the Secretary shall set forth with respect to each matter the stockholder proposes to bring before the meeting (i) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (ii) the name and record address of the stockholder proposing such business, (iii) the class and number of shares of the Company which are beneficially owned by the stockholder, and (iv) any material interest of the stockholder in such business. Notwithstanding anything in these bylaws to the contrary, no business shall be conducted at any meeting of stockholders except in accordance with the procedures set forth in this Section 3, PROVIDED, HOWEVER, that nothing in this Section 3 shall be deemed to preclude discussion by any stockholder of any business properly brought before the meeting. If the Chairman of the meeting determines that such business was not properly brought before the meeting in accordance with the foregoing procedure, he shall so declare to the meeting, any such business not properly brought before the meeting shall not be transacted. (c) To be timely, a stockholder's notice of nomination or other business must be delivered to, or mailed and received at, the principal executive offices of the Company, not less than 90 days nor more than 120 days prior to the meeting; PROVIDED, HOWEVER, that in the event that less than 105 days' notice or prior public disclosure of the date of the 52 meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 15th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made, whichever first occurs. SECTION 4. SPECIAL MEETINGS. Special meetings of the stockholders may be called by the Chairman or the Board of Directors. The business transacted at any special meeting of the stockholders shall be limited to the purposes stated in the notice for the meeting. SECTION 5. NOTICE OF MEETINGS. Written notice of each meeting of stockholders, stating the place, day and hour of the meeting and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten nor more than sixty days before the date of the meeting, either personally or by mail, by or at the direction of the Chairman or the Secretary to each stockholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail addressed to the stockholder at his address as it appears on the stock transfer books of the Company, with postage thereon prepaid. SECTION 6. FIXING OF RECORD DATES. In order that the Company may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. SECTION 7. VOTING LIST. The Secretary shall prepare and make, or cause to be prepared and made, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at such meeting, arranged in alphabetical order, showing the address of and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of meeting, or, if not so specified, at the place where the meeting is to be held, and the list shall be produced and kept at the time and place of the meeting during the whole time thereof, and subject to the inspection of any stockholder who may be present. SECTION 8. QUORUM AND ADJOURNED MEETINGS. The holders of a majority of the shares entitled to vote at any meeting of stockholders, present in person or by proxy, shall constitute a quorum at such meeting except as otherwise provided by statute. Whenever a quorum shall be present at any meeting all matters shall be decided by vote of the holders of a majority of the shares present, unless otherwise provided by statute, the certificate of incorporation, or by these bylaws. Meetings of stockholders may be adjourned from time to time for any reason and, if a quorum shall not be present, the holders of the shares entitled to vote present in person or by proxy, 53 may so adjourn the meeting. When a meeting is adjourned to another time or place, unless the bylaws otherwise require, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken except that, if the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. At the adjourned meeting the Company may transact any business which might have been transacted at the original meeting. If a quorum shall not be present at any meeting of the Board of Directors the directors present thereat may adjourn the meeting from time to time, without notice other than at the meeting, until a quorum shall be present. SECTION 9. VOTING AT MEETINGS. Unless otherwise required by law, the certificate of incorporation or these bylaws, each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock having voting power held by such stockholder, but no proxy shall be voted after three years from its date, unless the proxy provides for a longer period. SECTION 10. ORGANIZATION. The Chairman shall preside at all meetings of the stockholders. In the absence or inability to act of the Chairman, the Vice Chairman, the President or an Executive Vice President (in that order) shall preside, and in their absence or inability to act another person designated by one of them shall preside. The Secretary of the Company shall act as secretary of each meeting of the stockholders. In the event of his absence or inability to act, the chairman of the meeting shall appoint a person who need not be a stockholder to act as secretary of the meeting. SECTION 11. INSPECTORS OF VOTING. Except as otherwise provided by statute, the Chairman or in his absence the chairman of the meeting, shall appoint inspectors of voting for each meeting of stockholders. SECTION 12. MEETING PROCEDURES. Meetings of the stockholders shall be conducted in a fair manner but need not be governed by any prescribed rules of order. The presiding officer's rulings on procedural matters shall be final. The presiding officer is authorized to impose reasonable time limits on the remarks of individual stockholders and may take such steps as such officer may deem necessary or appropriate to assure that the business of the meeting is conducted in a fair and orderly manner. ARTICLE III - THE BOARD OF DIRECTORS SECTION 1. NUMBER AND QUALIFICATIONS. The business and affairs of the Company shall be under the direction of or managed by a Board of Directors who need not be residents of the State of Delaware or stockholders of the Company. The number of directors may be increased or decreased from time to time by resolution of the Board of Directors, provided no decrease shall have the effect of shortening the term of any incumbent director. Persons who are or have been officers of the Company, other than persons who hold or have held either or both of the office of Chairman and Chief Executive Officer and the office of President, shall not be elected directors of the Company for terms beginning after the date they retire from active employment with the Company. No candidate shall be elected director of the Company for a term beginning after his or her 70th birthday. 54 SECTION 2. ELECTION. Directors shall be elected by class for three year terms as specified in the Certificate of Incorporation at the annual meeting of stockholders, except as provided in Section 3 of this Article and except as required under the terms of any preferred shares, and each director elected shall hold office during the term for which he is elected and until his successor is elected and qualified. A director may be removed only for cause. SECTION 3. VACANCIES. Any vacancies occurring in the Board of Directors and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the remaining directors though less than a quorum of the Board of Directors, or by the sole remaining director, and any director so chosen shall hold office until the next election of the class for which he was chosen and until his successor is duly elected and qualified. SECTION 4. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held at nine-thirty o'clock in the morning, local time, or at such other time as may be established from time to time by resolution of the Board of Directors, on the last Wednesday of May and August, and the first Wednesday in December, and immediately following the adjournment of the Annual Meeting of stockholders on the last Wednesday in February in each year. Should any of such days be a legal holiday, the meeting shall be held at the same time on the first following day that is not a legal holiday. The February meeting shall be held at the same place as the annual meeting of stockholders. All other regular meetings shall be held at the principal business office of the Company in Rock Island County, Illinois, or at any other place either within or outside the State of Delaware approved in writing not less than ten days in advance of the meeting by a majority of the number of directors then in office or approved at the last preceding regular meeting of the Board of Directors. SECTION 5. SPECIAL MEETINGS. Special meetings of the Board of Directors may be held upon call of the Chairman at any time; special meetings also shall be called by the Chairman or by the Secretary whenever requested by one-third of the directors then in office. Such meetings shall be held at the principal business office of the Company in Rock Island County, Illinois, or at any other place either within or outside the State of Delaware as is designated in the call and notice for the meeting. SECTION 6. NOTICE OF MEETINGS. No notice of any kind shall be necessary for regular meetings of the Board of Directors to be held at the principal business office of the Company in Rock Island County, Illinois. Notice of special meetings of the Board of Directors wherever held in the United States other than Alaska or Hawaii, and notice of regular meetings of the Board of Directors to be held at a place in the United States other than at the principal business office of the Company and other than in Alaska or Hawaii shall be given by letter, telegram, cable or radiogram addressed to each director's regular business office and delivered for transmission not later than during the second day immediately preceding the day for such meeting. One day personal, telegraphic or telephonic notice given by the Chairman, Secretary or any other officer, shall be sufficient notice of the calling of a special meeting; provided that such persons may give shorter notice if that is deemed necessary or appropriate under the circumstances provided that the shorter notice is actually received by the director prior to the meeting and provision is made at the meeting for participation by means of telecommunication, as permitted by Section 10 of this Article. 55 Notice of special meetings and of regular meetings of the Board of Directors to be held at a place in Alaska or Hawaii or outside the United States shall be given by letter, telegram, cable or radiogram addressed to each director's regular business office and delivered for transmission not later than during the tenth day immediately preceding the day for such meeting. Notice of any meeting of the Board of Directors for which a notice is required may be waived in writing signed by the person or persons entitled to such notice, whether before or after the time of such meeting, and such waiver shall be equivalent to the giving of such notice. Attendance of a director at any such meeting shall constitute a waiver of notice thereof, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because such meeting is not lawfully convened. Neither the business to be transacted at nor the purpose of any meeting of the Board of Directors for which a notice is required need be specified in the notice, or waiver of notice, of such meeting. SECTION 7. QUORUM. A majority of the number of directors in office shall constitute a quorum for the transaction of business. The act of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors except as otherwise provided by law or these bylaws. [During an emergency period following a national catastrophe, due to enemy attack, a majority of the surviving members of the Board of Directors who have not been rendered incapable of acting as the result of physical or mental incapacity or the difficulty of transportation to the place of the meeting shall constitute a quorum for the purpose of filling vacancies in the Board of Directors and among the elected officers of the Company.] SECTION 8. ORGANIZATION. The Chairman shall preside at all meetings of the Board of Directors. In the absence or inability to act of the Chairman, the Vice Chairman, the President or an Executive Vice President (in that order) shall preside, and in their absence or inability to act another director designated by one of them shall preside. SECTION 9. ACTIONS BY WRITTEN CONSENT. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if prior to such action a written consent thereto is signed by all members of the Board or of such committee as the case may be, and such written consent is filed with the minutes of proceedings of the Board or such committee. SECTION 10. MEETINGS BY MEANS OF TELECOMMUNICATION. Members of the Board of Directors of the Company, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors or such committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 10 shall constitute presence in person at such meeting. SECTION 11. INTERESTED DIRECTORS: QUORUM. (a) No contract or transaction between the Company and one or more of its directors or officers, or between the Company and any other corporation, partnership, association or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or 56 solely because the director or officer is present at or participates in the meeting of the Board or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if: (1) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (2) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the shareholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the shareholders; or (3) The contract or transaction is fair as to the Company as of the time it is authorized, approved, or ratified by the Board of Directors, a committee thereof or the shareholders. (b) Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. SECTION 12. COMPENSATION. The Board of Directors, by the affirmative vote of a majority of the whole Board, and irrespective to any personal interest of its members, shall provide reasonable compensation of all directors for services, ordinary or extraordinary, to the Company as directors, officers or otherwise. Directors shall be paid their actual expenses of attendance at each meeting of the Board of Directors and committees thereof. ARTICLE IV - EXECUTIVE COMMITTEE SECTION 1. DESIGNATION AND MEMBERS. During the intervals between meetings of the Board of Directors and subject to such limitations as may be imposed by law and these bylaws, an Executive Committee shall have and may exercise all of the authority of the Board of Directors in the management of the business and affairs of the Company. The membership of such Executive Committee shall include the Chairman and such other directors as are designated by the Board of Directors at the recommendation of the Chairman. This designation of the Executive Committee and the delegation of authority granted to it shall not operate to relieve the Board of Directors, or any director, of any responsibility imposed upon it or him by law. No member of the Executive Committee shall continue to be a member thereof after he ceases to be a director of the Company. SECTION 2. LIMITATION OF POWERS. Neither the Executive Committee, nor any other Board Committee, shall have the authority of the Board of Directors in reference to amending the certificate of incorporation; adopting an agreement of merger or consolidation with another corporation or corporations; amending, altering or repealing the bylaws; electing or removing the Chairman, Vice Chairman, President, any Executive Vice President or any Senior Vice President; declaring dividends; or amending, altering or repealing any resolution of the Board of 57 Directors which by its terms provides that it shall not be amended, altered or repealed by the Executive Committee. Nor, unless specifically authorized by the Board of Directors, shall the Executive Committee have the authority of the Board of Directors in reference to incurring indebtedness for a term of longer than one year except that this limitation shall not apply to indebtedness of up to five years which (i) do not involve registration with the Securities & Exchange Commission and (ii) do not result in a total of indebtedness of $50,000,000 for a term longer than one year to any one lender, nor shall this limitation apply to the guaranty of an indebtedness which runs longer than one year. In any resolution of the Board of Directors providing for action to be taken or approval to be given by, or a report to be made to, the Board, the term "Board of Directors" standing alone shall not be deemed to mean the Executive Committee. All minutes of meetings of the Executive Committee shall be submitted to the next succeeding meeting of the Board of Directors, provided that no rights other than those of the Company shall be affected by any revision or alteration by the Board of Directors of actions of the Executive Committee. SECTION 3. PROCEDURE, MEETINGS, QUORUM. The Chairman shall preside at all meetings of the Executive Committee. In the absence or inability to act of the Chairman, the Vice Chairman, the President or an Executive Vice President (in that order) shall preside, and in their absence or inability to act another member designated by one of them shall preside. The Executive Committee shall keep a record of its acts and proceedings. Meetings of the Executive Committee shall be called at the request of any member of the Committee with the concurrence of the Chairman, or in the event of his absence or inability to act, the Vice Chairman, or in the event of the Vice Chairman's absence or inability to act, the President or an Executive Vice President of the Company, in the order of their availability. Such meeting shall be held at such location as shall be stated in the notice for such meetings. Meetings of the Executive Committee may be held upon notice given by word of mouth or written notice delivered during regular business hours to the office of each member or at other times to his residence. In the case of a meeting held at the principal business office of the Company in Rock Island County, Illinois, such notice may be given at any time prior to said meeting. In the case of a meeting held at any place in the United States other than the principal business office and other than Alaska or Hawaii, such notice may be given 48 hours prior to said meeting. In the case of a meeting held in Alaska or Hawaii or elsewhere outside the United States, such notice may be given four days prior to said meeting. A majority of the members of the Executive Committee shall constitute a quorum for the transaction of any business, and the act of a majority of the members present at a meeting at which a quorum is present shall be the act of the Executive Committee. ARTICLE V - BOARD COMMITTEES OTHER THAN THE EXECUTIVE COMMITTEE SECTION 1. GENERAL PROVISIONS. The Board of Directors may from time to time establish such committees of the Board as it shall deem appropriate in addition to the Executive Committee. The resolution establishing each such committee shall state its powers and duties 58 and the number of directors who shall be members. The membership of and committee chairman of each such committee shall be designated by the Board of Directors upon the recommendation of the Chairman. No such committee of the Board shall exercise any of the powers of the Board other than those set forth in such resolution establishing the committee, as such resolution may be amended from time to time. SECTION 2. PROCEDURES, MEETINGS, QUORUM. Meetings of such Board committees may be held on call of the Chairman of the committee or upon call issued by the Secretary of the Company at the request of a majority of the committee. Unless stated otherwise in the resolution establishing a committee, a majority of the members shall constitute a quorum for the conduct of business. Meetings of such Board committees may be held at such place as may be designated in the notice of meeting. Notice of meetings shall be given by the Secretary of the Company and shall be by word of mouth delivered to the office of the committee member not later than the third day before the meeting or in writing or by telegram mailed or sent not later than the fourth day before the meeting. The notice need not specify the business to be conducted at a meeting. ARTICLE VI - THE OFFICERS SECTION 1. NUMBER AND QUALIFICATIONS. The principal corporate officers of the Company shall consist of a Chairman, a President, a Secretary, and a Treasurer; and the Company may have a Vice Chairman, one or more Executive Vice Presidents, one or more Senior Vice Presidents, one or more Vice Presidents, a General Counsel, a Comptroller and such other corporate officers and assistant officers as may be elected or appointed pursuant to these Bylaws. The Chairman, Vice Chairman and President shall be chosen from among the directors, but no other officer need be a director. The Company may also have such divisional officers as may be elected or appointed pursuant to these Bylaws. Any number of offices may be held by the same person. SECTION 2. GENERAL DUTIES. All corporate and any divisional officers so designated by the Board of Directors or the Chairman ("Designated Divisional Officers"), shall have such authority and perform such duties as officers of the Company as may be provided by or delegated in accordance with Sections 7 through 16 of these Bylaws, or as may be determined by resolution of the Board of Directors not inconsistent with these bylaws. All agents and employees of the Company not elected by the Board of Directors may be appointed by the Chairman or by persons authorized by him to do so, to serve for such time and to have such duties as the appointing authority may determine from time to time. SECTION 3. ELECTION AND TERM OF OFFICE. All corporate officers and each Designated Divisional Officer shall be elected annually by the Board of Directors at its regular meeting in February of each year. Each such corporate and divisional officer shall hold office for one year and until his successor is elected and qualified, or until he shall have resigned, or shall have been removed in the manner provided in Section 4. SECTION 4. REMOVAL. Any corporate or divisional officer may be removed by the Board of Directors, and any corporate officer below the rank of Senior Vice President or divisional officer other than a Designated Divisional Officer may be removed by the Chairman, whenever in the 59 judgment of the Board or the Chairman, respectively, the interests of the Company will be served thereby. Such removal shall be without prejudice to the contract rights, if any, of the person removed. Election of an officer shall not of itself create contract rights. SECTION 5. RESIGNATIONS. Any officer may resign at any time by giving written notice to the Board of Directors or to the Chairman. Such resignation shall take effect at the time specified therein and, unless specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 6. VACANCIES. The Board of Directors may at any time create and fill new offices and may at any time fill the unexpired portion of the term of any vacant office. In addition, as to any corporate office below the rank of Senior Vice President, or any divisional office below the rank of Designated Divisional Officer, the Chairman may at any time create and fill new offices and may at any time fill the unexpired term of any such office. SECTION 7. CHAIRMAN. The Chairman shall be the chief executive officer of the Company and as such shall have the active executive management of the operations of the Company, and shall see that the orders and resolutions of the Board of Directors and of the Executive Committee are carried into effect. He shall have power to execute in the name of the Company all bonds, contracts, other obligations and property conveyances which are duly authorized, and he shall have all the powers and perform all duties devolving upon him by law and as head of the Company. He may call special meetings of the stockholders and of the Board of Directors. From time to time he shall bring to the attention of the Board of Directors such information or recommendations concerning the business and affairs of the Company as he may deem necessary or appropriate. When present he shall preside at all meetings of the stockholders, of the Board of Directors and of the Executive Committee. SECTION 8. VICE CHAIRMAN. The Vice Chairman shall be the second ranking officer of the Company. He shall have such powers and perform such duties as the Board of Directors may from time to time prescribe or as the Chairman may from time to time delegate to him. In the absence or inability to act of the Chairman, the Vice Chairman shall act as the chief executive officer of the Company and shall perform the duties of the Chairman. SECTION 9. PRESIDENT. The President shall have such powers and perform such duties as the Board of Directors may from time to time prescribe or as the Chief Executive Officer may from time to time delegate to him. In the absence or inability to act of the Chairman and the Vice Chairman, the President shall perform the duties of Chairman. SECTION 10. EXECUTIVE VICE PRESIDENTS. Each Executive Vice President shall have such powers and perform such duties as the Board of Directors may from time to time prescribe or as the Chairman may from time to time delegate to him. In the absence or inability to act of the Chairman, the Vice Chairman and the President, an Executive Vice President present shall act as the chief executive officer of the Company and shall perform the duties of the Chairman. SECTION 11. SENIOR VICE PRESIDENTS. Each Senior Vice President shall have such powers and perform such duties as the Board of Directors may from time to time prescribe or as the Chairman may from time to time delegate to him. In the absence or inability to act of the Chairman, the Vice Chairman, the President and Executive Vice Presidents, the duties of the 60 Chairman shall be performed by a Senior Vice President present, acting in such order of priority as shall be designated by the Chairman. SECTION 12. VICE PRESIDENTS. Each Vice President shall have such powers and perform such duties as the Board of Directors may from time to time prescribe or as the Chairman may from time to time delegate to him. SECTION 13. SECRETARY. The Secretary shall act as secretary of all meetings of the stockholders, the Board of Directors and the Executive Committee. He shall prepare and keep or cause to be kept in books provided for the purpose minutes of all meetings of the stockholders, the Board of Directors and the Executive Committee; shall see that all notices are duly given in accordance with the provisions of these bylaws and as required by law, shall be custodian of the records and of the seal of the Company and see that the seal is affixed to all documents, the execution of which on behalf of the Company under its seal is duly authorized and, in general, he shall perform all duties incident to the office of Secretary and as required by law and such other duties as may be assigned to him from time to time by the Board of Directors or by the Chairman. Each Assistant Secretary (if one or more Assistant Secretaries be elected) shall assist the Secretary in his duties and shall perform such other duties as the Board of Directors may prescribe from time to time, or the Chairman or the Secretary may delegate to him from time to time. In the event of the absence or inability to act of the Secretary, his duties shall be performed by an Assistant Secretary designated by the Chairman. SECTION 14. TREASURER. The Treasurer shall have charge and custody of, and be responsible for, all moneys, notes and securities in the possession of the Company, and deposit all funds in the name of the Company in such banks, trust companies or other depositories as he may select; shall receive, and give receipts for, moneys due and payable to the Company from any source whatsoever; and, in general, he shall perform all the duties incident to the office of Treasurer and as required by law and such other duties as may be assigned to him from time to time by the Board of Directors or by the Chairman. Each Assistant Treasurer (if one or more Assistant Treasurers be elected) shall assist the Treasurer in his duties and shall perform such other duties as the Board of Directors may prescribe from time to time, or the Chairman or the Treasurer may delegate to him from time to time. In the event of the absence or inability to act of the Treasurer, his duties shall be performed by an Assistant Treasurer designated by the Chairman. SECTION 15. GENERAL COUNSEL. The General Counsel shall be the chief legal advisor of the Company as to all matters affecting the Company and its business and, in general, he shall perform all the duties incident to the office of General Counsel and such other duties as may be assigned to him from time to time by the Board of Directors or by the Chairman. SECTION 16. COMPTROLLER. The Comptroller shall direct the preparation and maintenance, on a current basis, of such accounting books, records and reports as may be necessary to permit the directors, officers and executives of the Company to exercise adequate planning and control of the business of the Company or as may be required by law; and in general, he shall perform all the duties incident to the office of Comptroller and such other duties as may be assigned to him from time to time by the Board of Directors or by the Chairman. 61 ARTICLE VII - ACTS WITH RESPECT TO SECURITIES OWNED SECTION 1. ACTS WITH RESPECT TO SECURITIES OWNED. Subject always to the specific directions of the Board of Directors, the Chairman, the Vice Chairman, the President, an Executive Vice President, a Senior Vice President, a Vice President, or the Treasurer on behalf of the Company may exercise all the rights, powers and privileges of ownership, including the right to vote, by proxy or otherwise, any security or securities owned by the Company (including reacquired shares of capital stock of the Company). The endorsement of such officers may be attested by the Secretary or an Assistant Secretary either with or without affixing thereto the corporate seal. ARTICLE VIII - OTHER PROVISIONS SECTION 1. CERTIFICATES OF STOCK. The shares of the corporation may be represented by a certificate or may be uncertificated. Certificates to evidence ownership of stock of the Company shall be in such form as the Board of Directors shall from time to time approve. The Chairman, President, Chief Financial Officer or the Treasurer is authorized to appoint a transfer agent and registrar for the stock of the Company and to make all other appointments of agents related to the stock of the Company. The Chairman, President, Chief Financial Officer or the Treasurer may adopt such regulations concerning the authority and duties of the transfer agent and registrar, the transfer and registration of certificates of stock and the substitution or replacement of lost, stolen, destroyed or mutilated certificates as such officer shall see fit. SECTION 2. LOANS. The Company may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the Company or of any of its subsidiaries, including any officer or employee who is a director of the Company or of any of its subsidiaries, whenever, in the judgment of the Board of Directors, such loan, guaranty or assistance may reasonably be expected to benefit the Company. The loan, guaranty or other assistance may be with or without interest and may be unsecured or secured in such manner as the Board of Directors shall approve including, without limitation, a pledge of shares of stock of the Company. SECTION 3. AMENDMENT OF BYLAWS. In addition to such power of amendment as is vested by law in the shareholders, the Board of Directors is authorized to alter, amend or repeal the bylaws at any meeting of the Board of Directors by the affirmative vote of a majority of the number of directors then in office. 62 EX-10.15 3 JOHN DEERE CONTRIBUTION RESTORATION PLAN EXHIBIT 10.15 JOHN DEERE DEFINED CONTRIBUTION RESTORATION PLAN EFFECTIVE 1 JANUARY 1997 63 TABLE OF CONTENTS Page ARTICLE I. ESTABLISHMENT, PURPOSE AND CONSTRUCTION 1.1 Establishment 65 1.2 Purpose 65 1.3 Effective Date and Plan Year 65 1.4 Application of Plan 65 1.5 Construction 65 ARTICLE II. PARTICIPATION 2.1 Eligibility to Participate 66 2.2 Effect of Transfer 66 2.3 Beneficiaries 66 ARTICLE III. CONTRIBUTIONS 3.1 Salary Deferral Allocations 66 3.2 Employer Matching Allocations 66 3.3 Deferral Elections 66 3.4 FICA Tax 67 ARTICLE IV. ACCOUNTS AND RATE OF RETURN 4.1 Participant Accounts 67 4.2 Rate of Return 67 4.3 Electing a Rate of Return 67 4.4 Qualified Domestic Relations Orders 67 ARTICLE V. VESTING 5.1 Vested Interest 67 5.2 Forfeiture of Non-Vested Balances 67 5.4 Forfeiture Account 68 ARTICLE VI. DISTRIBUTIONS 6.1 Time and Manner 68 6.2 Election 68 6.3 form of Distribution 68 ARTICLE VII. ADMINISTRATION, AMENDMENT AND TERMINATION 7.1 Employment Rights 69 7.2 Applicable Law 69 7.3 Non-Alienation 69 7.4 Withholding of Taxes 69 7.5 Unsecured Interest., Funding and Rights Against Assets 69 7.6 Effect on Other Benefit Plans 69 7.7 Administration 69 7.8 Amendment, Modification or Termination 70 64 JOHN DEERE DEFINED CONTRIBUTION RESTORATION PLAN ARTICLE I. ESTABLISHMENT, PURPOSE AND CONSTRUCTION 1.1 ESTABLISHMENT. Effective 1 January 1997, Deere & Company established the John Deere Restoration Plan (the "Plan") for the benefit of the salaried employees on its United States payroll and the salaried employees of its United States subsidiaries or affiliates that have adopted the John Deere Savings and Investment Plan (the "SIP"). Deere & Company and its United States subsidiaries and affiliates that have adopted the SIP (jointly the "Company") are also deemed to have adopted this Plan. 1.2 PURPOSE. The Company maintains a defined contribution plan, known as the John Deere Savings and Investment Plan, which is intended to be a qualified defined contribution plan which meets the requirements of Section 401(a) and 401(k) of the Internal Revenue Code of 1986 (the "Code"). Section 401(a)(17) of the Code limits the amount of compensation paid to a participant in a qualified defined contribution plan which may be taken into account in determining contributions under such a plan. Section 402(g) of the Code limits the amount of compensation a participant may defer in a qualified defined contribution plan. Section 415 of the Code limits the amount which may be contributed under a qualified defined contribution plan. This Plan is intended to restore contributions which, when combined with the amount actually contributed under the SIP, are reasonably comparable to the contributions which participants in the SIP would have received under such plan if there were no limitations imposed by Sections 401(a)(17), 402(g) and 415 of the Code. When restoring contributions limited by Sections 401(a)(17) and 402(g) of the Code, the Plan is intended to qualify as an unfunded deferred compensation plan for a select group of management or highly compensated employees, within the meaning of Sections 201(2), 301(a)(3), and 401(a)(1) of the Employee Retirement Income Security Act of 1974 ("ERISA"). When restoring contributions limited by Section 415 of the Code, the Plan is intended to qualify as an unfunded "excess benefit plan," as defined in section 3(36) of ERISA and within the meaning of Section 415 of the Code. 1.3 EFFECTIVE DATE AND PLAN YEAR. This Plan shall be effective 1 January 1997. The Plan Year shall be the twelve-month period beginning on 1 November of each year and ending on 31 October of the following year with the exception of the first Plan Year which will start 1 January 1997 and end 31 October 1997. 1.4 APPLICATION OF PLAN. The terms of this Plan are applicable only to eligible employees of the Company as described in Section 2.1 below who become eligible to defer compensation hereunder on or after 1 January 1997. 1.5 CONSTRUCTION. Unless the context clearly indicates otherwise or unless specifically defined herein, all operative terms used in this Plan shall have the meanings specified in the SIP and the words in the masculine gender shall 65 be deemed to include the feminine and neuter genders and the singular shall be deemed to include the plural and vice versa. ARTICLE II. PARTICIPATION 2.1 ELIGIBILITY TO PARTICIPATE. Any employee participating in the Contemporary SIP under Article III of the SIP whose salary deferral and matching contribution under such plan are reduced by the limitation imposed by Sections 401(a)(17), 402(g) and 415 of the Code shall be eligible to participate in the Plan. 2.2 EFFECT OF TRANSFER. An employee who is a participant in this Plan and who ceases to be an eligible employee as described in Section 2.1 above shall cease participation in the Plan; however, any past contributions and applicable matching contributions will continue to be accounted for as elected by the employee subject to Section 4.2 of this Plan provided such employee continues as an employee on the United States payroll of the Company. 2.3 BENEFICIARIES. Beneficiaries under this Plan shall be determined in accordance with Section 8.6 of the SIP, however, beneficiaries for this Plan shall be designated on a separate form and may be an individual or individuals other than beneficiaries designated under the SIP. ARTICLE III. CONTRIBUTIONS 3.1 SALARY DEFERRAL ALLOCATIONS. Pursuant to a salary deferral agreement in force under the SIP any amount of contribution up to 6% of compensation that is restricted by Section 401(a)(17), 402(g) and 415 of the Code shall be allocated to a salary deferral account under this Plan. 3.2 EMPLOYER MATCHING ALLOCATIONS. Employer matching contributions, if any, corresponding to salary deferral allocations under Section 3.1 above shall be allocated to a matching account under this Plan. Employer matching contributions under this Plan will be determined as shown in Article IV, Section 4.1 of the SIP. 3.3 DEFERRAL ELECTIONS. Effective 1 January 1997 or the first day of any subsequent month, an eligible employee may elect to defer compensation by completing a written election no later than the last work day of any month authorizing the Company to defer a percentage of compensation under Section 4.8 of the SIP provided however that such employee is participating in the Contemporary SIP. Such election will remain in force until changed or revoked by the employee or the employee ceases to be eligible to participate according to Article II of this Plan. 66 3.4 FICA TAX. All salary deferral allocations are subject to FICA tax in the payroll period in which they are deferred. Such FICA taxes will be withheld as necessary from the participant's compensation prior to any compensation deferral under this Plan or the SIP. ARTICLE IV. ACCOUNTS AND RATE OF RETURN 4.1 PARTICIPANT ACCOUNTS. Bookkeeping accounts will be maintained for each participant under the Plan and shall be credited with a rate of return as provided in Section 4.2 below. Such rate of return shall be credited as of the end of each business day. 4.2 RATE OF RETURN. The rate of return for a Participant's account shall be the average of Prime Rate plus two percent as determined by the Federal Reserve statistical release for the month immediately preceding the month for which such rate shall be credited to account balances for deferrals and Employer matching allocations under this Plan. Alternatively, a Participant may elect a rate of return equal to the average of the S & P 500 Index for the month immediately preceding the month for which such rate shall be credited to account balances for deferrals and Employer matching allocations under this Plan. 4.3 ELECTING A RATE OF RETURN. A Participant may elect a rate of return for existing and future account balances by directing the Recordkeeper between the 1st and the 20th day of the month prior to the beginning of the calendar quarter for which the election is effective. A Participant may choose either of the above rates of return for any portion of the account in whole percentage increments as long as the minimum value of transfer is $250 or more. The sum of all such portions must equal 100%. 4.4 QUALIFIED DOMESTIC RELATIONS ORDERS. In the event of a Qualified Domestic Relations Order, a separate account will be established for any qualified alternate payee subject to Article V with the same rights under this Article IV as a participant. ARTICLE V. VESTING 5.1 VESTED INTEREST. Pursuant to Section 4.4 above a Participant shall be fully vested in the portion of the account comprised of Salary Deferral Allocations and growth additions thereon. Furthermore, the Participant shall be 100% vested after attaining 3 years of service credit on the Employer Matching Allocations and the growth additions thereon. In the event of a Qualified Domestic Relations Order, no portion of unvested Employer Matching Allocations or the growth additions thereon may be assigned to the alternate payee. 5.2 FORFEITURE OF NON-VESTED BALANCES. The Participant whose employment is terminated prior to 3 years of service credit shall forfeit all Employer Matching Allocations and the growth additions thereon. Provided however, that such forfeiture shall be reinstated if the participant is reemployed 67 within 5 years following such termination and completes vesting requirements in 5.1 above. 5.4 FORFEITURE ACCOUNT. The forfeiture provided in 5.2 above shall be suspended and held in a forfeiture account for 5 years following the Participants termination. During this suspension, the forfeiture account shall be credited with the Prime plus 2 % rate of return. Following the end of this 5 year period the balance of the forfeiture account will revert to the Company to offset Employer Matching allocations for other Participants. ARTICLE VI. DISTRIBUTIONS 6.1 TIME AND MANNER. Distribution of a Participant's account shall commence as soon as practicable after the valuation date at the end of the month following 30 days after the Participant's termination of employment or 60 days following a Participant's death in accordance with the election in 6.2 below and form of distribution shown in 6.3. Distribution must begin no later than 1 January of the year following the year the Participant reaches age 75. 6.2 ELECTION. A Participant shall make an irrevocable election regarding the time and manner of distribution no later than 30 days following termination of employment. If the Participant's employment is terminated by death, any eligible beneficiary shall make such irrevocable election within 60 days following the Participant's death. In the event of a Qualified Domestic Relations Order, an alternate payee shall make such irrevocable election no later than 30 days following the earliest to occur of the Participant's termination of employment or attainment of age 50. 6.3 FORM OF DISTRIBUTION. a. A single lump sum payment b. A specified dollar amount each month until account balance reaches zero. c. A decrementing withdrawal over a specific period of time which results in a zero account balance. In the event of the death of the Participant, such beneficiaries may elect the above forms of distribution so long as the account balance is zero at the end of 5 years following the end of the month of Participant's death. In the event of a Qualified Domestic Relations Order, the alternate payee may elect the above forms of distribution so long as the account balance is zero at the end of 5 years following the earliest to occur of the Participant's termination of employment or attainment of age 50. 68 ARTICLE VII. ADMINISTRATION, AMENDMENT AND TERMINATION 7.1. EMPLOYMENT RIGHTS. Nothing under this Plan shall be construed to give any employee the right to continue employment with the Company or to any benefits not specifically provided herein. 7.2 APPLICABLE LAW. This Plan, to the extent it is not exempt therefrom, shall be governed and construed in accordance with the applicable provisions of ERISA. To the extent not governed by ERISA, this Plan shall be governed and construed in accordance with the laws of the State of Illinois, exclusive of conflict laws. 7.3 NON-ALIENATION. Except as provided in Section 10.5 of the SIP and Section 4.4 of this Plan, no right or benefit under this Plan shall be subject to anticipation, alienation, sale, assignment, pledge, encumbrance or charge. No right or benefit under this Plan shall in any manner be liable for or subject to the debts, contracts, liabilities or torts of the person entitled to such benefits except for such claims as may be made by the Company. 7.4 WITHHOLDING OF TAXES. The Company, or its designee, may withhold from any payment of benefits under this Plan any income, employment or other taxes required to be withheld, including any taxes for which the Company or its designee may be liable with respect to the payment of such benefits. 7.5 UNSECURED INTEREST, FUNDING AND RIGHTS AGAINST ASSETS. No participant, surviving spouse, beneficiaries, or qualified alternate payee shall have any interest whatsoever in any specific asset of the Company. To the extent that any person acquires a right to receive payments under this Plan, such rights shall be no greater than the right of any unsecured general creditor of the Company. Account balances shall not be financed through a trust fund or insurance contracts or otherwise unless owned by the Company. Payment of account balances shall be paid in cash from the general funds of the Company. All expenses of administering this Plan shall be borne by the Company. 7.6 EFFECT ON OTHER BENEFIT PLANS. Amounts payable under this Plan, including Employer matching allocations and growth additions, shall not be considered compensation for purpose of any qualified or non-qualified retirement plan maintained by the Company. The treatment of such amounts under any other plan of the Company shall be determined under the provisions of such plan. 7.7 ADMINISTRATION. This Plan shall be administered by the Company (the "Administrator"). The Administrator shall have the power to construe and interpret this Plan, decide all questions of eligibility and determine the amount, manner, and time of payment of any benefits hereunder. All determinations of the Administrator shall be final, binding, and conclusive on all persons. 69 7.8 AMENDMENT, MODIFICATION OR TERMINATION. The Board of Directors of the Company, or, by delegation, the Compensation Committee of the Company, may at any time amend or modify this Plan in their sole discretion, provided that this Plan shall not be amended or modified so as to reduce or diminish the accounts of participant's or benefits then currently being paid to any participant, surviving spouse, beneficiary, or former participant without such person's consent. The power to terminate this Plan shall be reserved to the Board of Directors of Deere & Company. The procedure for amendment or modification of the Plan by either the Board of Directors, or, to the extent so authorized, the Compensation Committee of the Company, as the case may be, shall consist of: the lawful adoption of a written amendment or modification to the Plan by majority vote at a validly held meeting or by unanimous written consent, followed by the filing of such duly adopted amendment or modification by the Secretary with the official records of the Company. If a subsidiary or affiliate of Deere & Company which is covered by this Plan ceases to be a subsidiary or affiliate, the participation in this Plan by the employees of such subsidiary or affiliate shall terminate, and no employees of such former affiliate or subsidiary shall accrue or be entitled to a benefit under this Plan on and after the date such company ceases to be a subsidiary or affiliate of Deere & Company (other than former employees who were receiving benefit payments as of such date). 70 EX-11 4 COMPUTATION NET INCOME PER SHARE
EXHIBIT 11 DEERE & COMPANY AND CONSOLIDATED SUBSIDIARIES COMPUTATION OF NET INCOME PER SHARE For the Five Years Ended October 31, 1997 (All amounts other than per share data are stated in thousands) Year Ended October 31 -------------------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- -------- -------- ---------- 1. Net income (loss)..................... $960,116 $817,286 $706,105 $603,563 $(920,860) 2. Adjustment - Interest expense, after income tax benefit, applicable to convertible debentures outstanding.............. 12 20 22 35 60 -------- -------- -------- -------- ---------- 3. Net income (loss) applicable to common stock - before interest applicable to convertible debentures.......... $960,128 $817,306 $706,127 $603,598 $ (920,800) -------- -------- -------- -------- ---------- -------- -------- -------- -------- ---------- PRIMARY NET INCOME PER COMMON SHARE: Shares: 4. Weighted average number of common shares outstanding................. 253,723 260,547 260,494 258,438 231,847 -------- -------- -------- -------- ---------- -------- -------- -------- -------- ---------- 5. Incremental shares: Dilutive common stock options....... 2,794 2,370 1,647 1,359 3,000 Dilutive stock appreciation rights.. 18 44 58 144 66 Dilutive contingent shares.......... 174 122 -------- -------- -------- -------- ---------- Total incremental shares.......... 2,986 2,536 1,705 1,503 3,066 -------- -------- -------- -------- ---------- -------- -------- -------- -------- ---------- 6. Primary net income (loss) per common share (1 divided by 4).............. $ 3.78* $ 3.14* $ 2.71* $ 2.34* $ (3.97)* -------- -------- -------- -------- ---------- -------- -------- -------- -------- ---------- FULLY DILUTED NET INCOME PER COMMON SHARE: Shares: 7. Weighted average number of common shares outstanding.................. 253,723 260,547 260,494 258,438 231,874 8. Incremental shares: Dilutive common stock options....... 2,794 2,497 1,833 1,503 3,378 Dilutive stock appreciation rights.. 19 45 67 147 126 Dilutive contingent shares.......... 174 122 9. Common equivalent shares from assumed conversion of convertible debentures: 5-1/2% debentures due 2001........ 34 51 54 57 150 -------- -------- -------- -------- ---------- 10. Total............................. 256,744 263,262 262,448 260,145 235,528 -------- -------- -------- -------- ---------- -------- -------- -------- -------- ---------- 11. Fully diluted net income (loss) per common share (3 divided by 10)...... $ 3.78* $ 3.14* $ 2.71* $ 2.34* $ (3.97)* -------- -------- -------- -------- ---------- -------- -------- -------- -------- ---------- - ----------------- * Net income per common share outstanding was used in the designated calculations since the dilutive effect of common stock options, stock appreciation rights, contingent shares and assumed conversion of convertible debentures was either immaterial or antidilutive. All share and per share amounts have been adjusted retroactively for a three-for-one stock split effective November 17, 1995.
71 EX-12 5 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
EXHIBIT 12 DEERE & COMPANY AND CONSOLIDATED SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (In thousands of dollars) Year Ended October 31 -------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- -------- Earnings: Income of consolidated group before income taxes and changes in accounting.............. $1,507,070 $1,286,634 $1,092,751 $ 920,920 $272,345 Dividends received from less than fifty percent owned affiliates....................... 3,591 7,937 2,023 2,329 1,706 Fixed charges net of capitalized interest................... 433,673 410,764 399,056 310,047 375,238 ---------- ---------- ---------- ---------- -------- Total earnings......................... $1,944,334 $1,705,335 $1,493,830 $1,233,296 $649,289 ---------- ---------- ---------- ---------- -------- ---------- ---------- ---------- ---------- -------- Fixed charges: Interest expense of consolidated group (includes capitalized interest).................. $ 422,588 $ 402,168 $ 392,408 $ 303,080 $369,325 Portion of rental charges deemed to be interest.................. 11,497 8,596 6,661 7,008 6,127 ---------- ---------- ---------- ---------- -------- Total fixed charges.................... $ 434,085 $ 410,764 $ 399,069 $ 310,088 $375,452 ---------- ---------- ---------- ---------- -------- ---------- ---------- ---------- ---------- -------- Ratio of earnings to fixed charges*........................... 4.48 4.15 3.74 3.98 1.73 ---------- ---------- ---------- ---------- -------- ---------- ---------- ---------- ---------- -------- - ---------------- The computation of the ratio of earnings to fixed charges is based on applicable amounts of the Company and its consolidated subsidiaries plus dividends received from less than fifty percent owned affiliates. "Earnings" consist of income before income taxes, changes in accounting and fixed charges excluding capitalized interest. "Fixed charges" consist of interest on indebtedness, amortization of debt discount and expense, an estimated amount of rental expense which is deemed to be representative of the interest factor, and capitalized interest. * The Company has not issued preferred stock. Therefore, the ratios of earnings to combined fixed charges and preferred stock dividends are the same as the ratios presented above.
72 EX-21 6 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 DEERE & COMPANY AND CONSOLIDATED SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT As of October 31, 1997 Subsidiary companies of Deere & Company are listed below. Except where otherwise indicated, 100 percent of the voting securities of the companies named is owned directly or indirectly by Deere & Company. Organized under the Name of subsidiary laws of - ------------------ --------- Subsidiaries included in consolidated financial statements * John Deere Construction Equipment Company Delaware John Deere Agricultural Holdings, Inc. Delaware John Deere Construction Holdings, Inc. Delaware John Deere Lawn and Grounds Care Holdings, Inc. Delaware John Deere Turf Care, Inc. Delaware John Deere Commercial Worksite Products, Inc. Tennessee John Deere Limited Canada John Deere - Lanz Verwaltungs A.G. (99.9% owned) Germany John Deere S.A. France John Deere Iberica S.A. Spain John Deere Intercontinental GmbH (Germany) Germany Chamberlain Holdings Limited (Australia) Australia John Deere Limited Australia Australia John Deere Power Products, Inc. Tennessee John Deere Foreign Sales Corporation Limited Jamaica John Deere Credit Company Delaware John Deere Capital Corporation Delaware John Deere Credit Inc. Canada John Deere Receivables, Inc. Nevada John Deere Funding Corporation Nevada Deere Receivables Corporation Nevada Deere Credit, Inc. Delaware Deere Credit Services, Inc. Delaware Arrendadora John Deere S.A. de C.V. (99.9% owned) Mexico John Deere Insurance Group, Inc. Delaware John Deere Insurance Company of Canada Canada Rock River Insurance Company Illinois John Deere Insurance Company Illinois John Deere Casualty Company Illinois John Deere Health Care, Inc. Delaware Heritage National Healthplan of Tennessee, Inc. Tennessee John Deere Healthcare of Georgia, Inc. Georgia John Deere Family Healthplan, Inc. Illinois - --------- * Thirty-five consolidated subsidiaries and sixteen unconsolidated affiliates whose names are omitted, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary. 73 EX-23 7 CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 2-62630, 2-76637, 2-90384, 33-15949, 33-17990, 33-24397, 33-44294, 33-49740, 33-49742, 33-49762, 33-55551, 33-55549, and 33-57897 of Deere & Company on Form S-8 and in Registration Statement Nos. 33-54165, 33-39006, 33-54149, and 33-66134 of Deere & Company on Form S-3 of our report dated November 25, 1997, appearing in this Annual Report on Form 10-K of Deere & Company for the year ended October 31, 1997, and to the reference to us under the heading "Experts" in the Prospectuses, which are part of such Registration Statements. DELOITTE & TOUCHE LLP Chicago, Illinois January 21, 1998 74 EX-27 8 EXHIBIT 27
5 This schedule contains summary financial information extracted from Form 10-K and is qualified in its entirety by reference to such financial statements. 0000315189 DEERE & COMPANY 1,000,000 U.S. DOLLARS 12-MOS OCT-31-1997 NOV-1-1996 OCT-31-1997 1 330 820 10,294 128 1,073 0 4,380 2,856 16,320 0 2,623 0 0 1,779 2,368 16,320 11,082 12,791 8,481 9,541 0 51 422 1,507 551 960 0 0 0 960 3.78 3.78
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