UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended July 31, 2007

 

Commission file no: 1-4121

 

DEERE & COMPANY

 

 

One John Deere Place

Moline, Illinois 61265

(Address of principal executive offices)

Telephone Number:  (309) 765-8000

 

 

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  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o      No  x

 

At July 31, 2007, 221,878,063 shares of common stock, $1 par value, of the registrant were outstanding.

 

Index to Exhibits: Page 33

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

DEERE & COMPANY
STATEMENT OF CONSOLIDATED INCOME

For the Three Months Ended July 31, 2007 and 2006
(In millions of dollars and shares except per share amounts) Unaudited

		2007			2006
Net Sales and Revenues
Net sales		$	5,984.9		$	5,677.3
Finance and interest income		516.9			462.5
Other income		131.9			126.9
Total		6,633.7			6,266.7
Costs and Expenses
Cost of sales		4,542.9			4,398.8
Research and development expenses		204.3			175.9
Selling, administrative and general expenses		665.8			623.1
Interest expense		291.6			261.9
Other operating expenses		126.8			126.0
Total		5,831.4			5,585.7
Income of Consolidated Group Before Income Taxes		802.3			681.0
Provision for income taxes		272.2			247.6
Income of Consolidated Group		530.1			433.4
Equity in Income of Unconsolidated Affiliates
Credit		.1			.1
Other		7.0			2.2
Total		7.1			2.3
Income from Continuing Operations		537.2			435.7
Income from Discontinued Operations					.3
Net Income		$	537.2		$	436.0
Per Share Data
Basic:
Continuing operations		$	2.40		$	1.87
Discontinued operations
Net income		$	2.40		$	1.87
Diluted:
Continuing operations		$	2.37		$	1.85
Discontinued operations
Net income		$	2.37		$	1.85
Average Shares Outstanding:
Basic		223.8			233.7
Diluted		226.8			235.9

 

See Notes to Interim Financial Statements.

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DEERE & COMPANY
STATEMENT OF CONSOLIDATED INCOME

For the Nine Months Ended July 31, 2007 and 2006

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

		2007			2006
Net Sales and Revenues
Net sales		$	16,065.7		$	15,397.6
Finance and interest income		1,489.6			1,282.8
Other income		386.0			349.9
Total		17,941.3			17,030.3
Costs and Expenses
Cost of sales		12,198.6			11,837.8
Research and development expenses		585.4			524.8
Selling, administrative and general expenses		1,866.4			1,704.6
Interest expense		842.2			742.1
Other operating expenses		391.7			414.7
Total		15,884.3			15,224.0
Income of Consolidated Group Before Income Taxes		2,057.0			1,806.3
Provision for income taxes		680.3			633.6
Income of Consolidated Group		1,376.7			1,172.7
Equity in Income of Unconsolidated Affiliates
Credit		.3			.4
Other		22.5			3.5
Total		22.8			3.9
Income from Continuing Operations		1,399.5			1,176.6
Income from Discontinued Operations					239.9
Net Income		$	1,399.5		$	1,416.5
Per Share Data
Basic:
Continuing operations		$	6.20		$	5.01
Discontinued operations					1.02
Net income		$	6.20		$	6.03
Diluted:
Continuing operations		$	6.12		$	4.95
Discontinued operations					1.01
Net income		$	6.12		$	5.96
Average Shares Outstanding:
Basic		225.8			235.0
Diluted		228.6			237.5

 

See Notes to Interim Financial Statements.

3

DEERE & COMPANY
CONDENSED CONSOLIDATED BALANCE SHEET
(In millions of dollars) Unaudited

		July 31 2007			October 31 2006			July 31 2006
Assets
Cash and cash equivalents		$	1,773.2		$	1,687.5		$	1,285.9
Marketable securities		2,047.4			1,816.7			1,865.7
Receivables from unconsolidated affiliates		22.4			22.2			29.5
Trade accounts and notes receivable - net		3,753.7			3,037.7			3,859.5
Financing receivables - net		14,342.6			14,004.0			13,328.4
Restricted financing receivables - net		2,541.8			2,370.8			2,349.4
Other receivables		517.9			448.2			514.4
Equipment on operating leases - net		1,568.5			1,493.9			1,420.0
Inventories		2,473.7			1,957.3			2,404.3
Property and equipment - net		3,228.5			2,763.6			2,534.3
Investments in unconsolidated affiliates		140.0			124.0			112.1
Goodwill		1,249.4			1,110.0			1,117.5
Other intangible assets - net		71.9			56.4			51.5
Prepaid pension costs		2,638.1			2,642.4			2,639.7
Other assets		390.9			465.6			477.7
Deferred income taxes		729.8			582.2			628.8
Deferred charges		140.8			137.9			149.1
Total Assets		$	37,630.6		$	34,720.4		$	34,767.8
Liabilities and Stockholders’ Equity
Short-term borrowings		$	10,179.6		$	8,121.2		$	8,100.2
Payables to unconsolidated affiliates		120.7			31.0			186.2
Accounts payable and accrued expenses		5,103.3			4,482.8			4,617.9
Accrued taxes		274.4			152.5			260.2
Deferred income taxes		105.8			64.9			67.6
Long-term borrowings		11,096.1			11,584.0			11,240.3
Retirement benefit accruals and other liabilities		2,689.6			2,792.8			2,726.1
Total liabilities		29,569.5			27,229.2			27,198.5
Common stock, $1 par value (issued shares at July 31, 2007 — 268,215,602)		2,463.0			2,212.0			2,190.1
Common stock in treasury		(3,638.3		)	(2,673.4		)	(2,349.3		)
Unamortized restricted stock compensation		(7.6		)	(8.5		)	(10.5		)
Retained earnings		8,988.1			7,886.8			7,697.5
Total		7,805.2			7,416.9			7,527.8
Accumulated other comprehensive income		255.9			74.3			41.5
Stockholders’ equity		8,061.1			7,491.2			7,569.3
Total Liabilities and Stockholders’ Equity		$	37,630.6		$	34,720.4		$	34,767.8

 

See Notes to Interim Financial Statements.

 

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DEERE & COMPANY
STATEMENT OF CONSOLIDATED CASH FLOWS
For the Nine Months Ended July 31, 2007 and 2006
(In millions of dollars) Unaudited

		2007			2006
Cash Flows from Operating Activities
Net income		$	1,399.5		$	1,416.5
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Provision for doubtful receivables		48.1			36.0
Provision for depreciation and amortization		553.5			502.5
Share-based compensation expense		67.7			75.4
Gain on the sale of a business					(356.0		)
Undistributed earnings of unconsolidated affiliates		(12.4		)	(1.9		)
Credit for deferred income taxes		(83.9		)	(8.1		)
Changes in assets and liabilities:
Trade, notes and financing receivables related to sales		(574.8		)	(1,318.8		)
Inventories		(465.1		)	(433.3		)
Accounts payable and accrued expenses		356.3			326.4
Accrued income taxes payable/receivable		145.7			69.6
Retirement benefit accruals/prepaid pension costs		(132.9		)	(503.1		)
Other		(16.5		)	(143.1		)
Net cash provided by (used for) operating activities		1,285.2			(337.9		)
Cash Flows from Investing Activities
Collections of financing receivables		7,883.5			7,100.1
Proceeds from sales of financing receivables		78.4			60.7
Proceeds from maturities and sales of marketable securities		1,733.4			2,517.2
Proceeds from sales of equipment on operating leases		268.4			219.2
Proceeds from sales of businesses, net of cash sold					439.1
Cost of financing receivables acquired		(8,238.3		)	(7,763.2		)
Purchases of marketable securities		(1,953.0		)	(2,134.0		)
Purchases of property and equipment		(712.8		)	(500.3		)
Cost of equipment on operating leases acquired		(314.7		)	(288.8		)
Acquisitions of businesses, net of cash acquired		(144.9		)	(54.1		)
Other		75.8			(10.2		)
Net cash used for investing activities		(1,324.2		)	(414.3		)
Cash Flows from Financing Activities
Increase in short-term borrowings		1,030.5			840.3
Proceeds from long-term borrowings		2,373.3			2,182.4
Payments of long-term borrowings		(2,243.6		)	(2,438.5		)
Proceeds from issuance of common stock		246.4			304.2
Repurchases of common stock		(1,117.0		)	(955.0		)
Dividends paid		(288.4		)	(257.4		)
Excess tax benefits from share-based compensation		76.7			79.4
Other		(11.0		)	(9.8		)
Net cash provided by (used for) financing activities		66.9			(254.4		)
Effect of Exchange Rate Changes on Cash and Cash Equivalents		57.8			34.3
Net Increase (Decrease) in Cash and Cash Equivalents		85.7			(972.3		)
Cash and Cash Equivalents at Beginning of Period		1,687.5			2,258.2
Cash and Cash Equivalents at End of Period		$	1,773.2		$	1,285.9

 

See Notes to Interim Financial Statements.

 

5

Notes to Interim Financial Statements (Unaudited)

(1)                                  The consolidated financial statements of Deere & Company and consolidated subsidiaries have been prepared by the Company, without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the U.S. have been condensed or omitted as permitted by such rules and regulations. All adjustments, consisting of normal recurring adjustments, have been included. Management believes that the disclosures are adequate to present fairly the financial position, results of operations and cash flows at the dates and for the periods presented. It is suggested that these interim financial statements be read in conjunction with the financial statements and the notes thereto appearing in the Company’s latest annual report on Form 10-K. Results for interim periods are not necessarily indicative of those to be expected for the fiscal year.

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts and related disclosures. Actual results could differ from those estimates.

All cash flows from the changes in trade accounts and notes receivable are classified as operating activities in the Statement of Consolidated Cash Flows as these receivables arise from sales to the Company’s customers. Cash flows from financing receivables that are related to sales to the Company’s customers are also included in operating activities. The remaining financing receivables are related to the financing of equipment sold by independent dealers and are included in investing activities. The Company had non-cash operating and investing activities that were not included in the Statement of Consolidated Cash Flows for the transfer of inventory to equipment under operating leases of approximately $192 million and $182 million in the first nine months of 2007 and 2006, respectively. The Company also had non-cash transactions for accounts payable related to purchases of property and equipment of approximately $67 million and $25 million at July 31, 2007 and 2006, respectively.

(2)           The information in the notes and related commentary are presented in a format which includes data grouped as follows:

Equipment Operations — Includes the Company’s agricultural equipment, commercial and consumer equipment and construction and forestry operations with Financial Services reflected on the equity basis except for the health care operations, which are reported on a discontinued basis (see Note 13).

Financial Services — Includes the Company’s credit and certain miscellaneous service operations with the health care operations reported on a discontinued basis.

Consolidated — Represents the consolidation of the Equipment Operations and Financial Services with the health care operations (disposed of in February 2006) reported on a discontinued basis. References to “Deere & Company” or “the Company” refer to the entire enterprise.

6

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(3)           An analysis of the Company’s retained earnings in millions of dollars follows:

		Three Months Ended July 31						Nine Months Ended July 31
		2007			2006			2007			2006
Balance, beginning of period		$	8,549.3		$	7,353.0		$	7,886.8		$	6,556.1
Net income		537.2			436.0			1,399.5			1,416.5
Dividends declared		(98.4		)	(91.5		)	(298.2		)	(275.1		)
Balance, end of period		$	8,988.1		$	7,697.5		$	8,988.1		$	7,697.5

 

(4)

Most inventories owned by Deere & Company and its U.S. equipment subsidiaries are valued at cost on the “last-in, first-out” (LIFO) method. If all of the Company’s inventories had been valued on a “first-in, first-out” (FIFO) method, estimated inventories by major classification in millions of dollars would have been as follows:

 

		July 31 2007			October 31 2006			July 31 2006
Raw materials and supplies		$	814		$	712		$	698
Work-in-process		427			372			349
Finished goods and parts		2,400			2,013			2,481
Total FIFO value		3,641			3,097			3,528
Less adjustment to LIFO basis		1,167			1,140			1,124
Inventories		$	2,474		$	1,957		$	2,404

 

(5)           Contingencies:

The Company generally determines its total warranty liability by applying historical claims rate experience to the estimated amount of equipment that has been sold and is still under warranty (based on dealer inventories and retail sales).  The historical claims rate is primarily determined by a review of five-year claims costs and current quality developments.

A reconciliation of the changes in the warranty liability in millions of dollars follows:

		Three Months Ended July 31						Nine Months Ended July 31
		2007			2006			2007			2006
Balance, beginning of period		$	536		$	495		$	507		$	535
Payments		(134		)	(118		)	(341		)	(373		)
Accruals for warranties		149			135			385			350
Balance, end of period		$	551		$	512		$	551		$	512

 

At July 31, 2007, the Company had approximately $196 million of guarantees issued primarily to banks outside the U.S. and Canada related to third-party receivables for the retail financing of John Deere equipment.  The Company may recover a portion of any required payments incurred under these agreements from repossession of the equipment collateralizing the receivables.  At July 31, 2007, the Company had an accrued liability of approximately $6 million under these agreements.  The maximum remaining term of the receivables guaranteed at July 31, 2007 was approximately seven years.

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The credit operations’ subsidiary, John Deere Risk Protection, Inc., offers crop insurance products through a managing general agency agreement (Agreement) with an insurance company (Insurance Carrier) rated “Excellent” with A.M. Best Company.  As a managing general agent, John Deere Risk Protection, Inc. will receive commissions from the Insurance Carrier for selling crop insurance to producers.  The credit operations have guaranteed certain obligations under the Agreement, including the obligation to pay the Insurance Carrier for any uncollected premiums.  At July 31, 2007, the maximum exposure for uncollected premiums was approximately $72 million.  Substantially all of the credit operations’ crop insurance risk under the Agreement has been mitigated by a syndicate of private reinsurance companies.  These reinsurance companies are rated “Excellent” or higher by A.M. Best Company.  In the event of a widespread catastrophic crop failure throughout the U.S. and the default of these highly rated private reinsurance companies on their reinsurance obligations, the credit operations would be required to reimburse the Insurance Carrier for exposure under the Agreement of approximately $561 million at July 31, 2007.  The credit operations believe that the likelihood of the occurrence of events that give rise to the exposures under this Agreement is substantially remote and as a result, at July 31, 2007, the credit operations’ accrued liability under the Agreement was not material.

At July 31, 2007, the Company had commitments of approximately $310 million for the construction and acquisition of property and equipment.  At July 31, 2007, the Company had pledged assets of $49 million, outside the U.S., as collateral for borrowings.

The Company also had other miscellaneous contingent liabilities totaling approximately $25 million at July 31, 2007, for which it believes the probability for payment is substantially remote.  The Company’s accrued liability at July 31, 2007 related to these contingencies was not material.  See Note 6 for recourse on sales of receivables.

(6)           Securitization of financing receivables:

The Company, as a part of its overall funding strategy, periodically transfers certain financing receivables (retail notes) into special purpose entities (SPEs) as part of its asset-backed securities programs (securitizations) involving its retail notes.  For securitizations entered into prior to 2005, the structure of these transactions is such that the transfer of the retail notes met the criteria of sales in accordance with FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities.  Beginning in 2005, the transfer of retail notes into new securitization transactions did not meet the sales criteria of FASB Statement No. 140 and are, therefore, accounted for as secured borrowings.  SPEs utilized in securitizations of retail notes differ from other entities included in the Company’s consolidated statements because the assets they hold are legally isolated.  For bankruptcy analysis purposes, the Company has sold the receivables to the SPEs in a true sale and the SPEs are separate legal entities.  Use of the assets held by the SPEs is restricted by terms of the documents governing the securitization transactions.  Further information related to the secured borrowings and sales of retail notes is provided below.

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Secured Borrowings

In securitizations of retail notes related to secured borrowings, the retail notes are transferred to certain SPEs which in turn issue debt to investors.  The resulting secured borrowings are included in short-term borrowings on the balance sheet as shown in the following table.  The securitized retail notes are recorded as “Restricted financing receivables — net” on the balance sheet.  The total restricted assets on the balance sheet related to these securitizations include the restricted financing receivables less an allowance for credit losses, and other assets representing restricted cash as shown in the following table.  In addition to the restricted assets shown in the table, a reserve fund included in “Other receivables” related to retained interests for certain securitizations that qualified as sales of receivables is also available as a credit enhancement for securitizations related to certain secured borrowings.  The amounts of this reserve fund at July 31, 2007, October 31, 2006 and July 31, 2006 were $11 million, $22 million and $25 million, respectively.  The SPEs supporting the secured borrowings to which the retail notes are transferred are consolidated unless the Company is not the primary beneficiary or the SPE is a qualified special purpose entity as defined in FASB Statement No. 140.

The components of consolidated restricted assets related to secured borrowings in securitization transactions follow in millions of dollars:

		July 31 2007			October 31 2006			July 31 2006
Restricted financing receivables (retail notes)		$	2,557		$	2,382		$	2,362
Allowance for credit losses		(15		)	(11		)	(13		)
Other assets		44			82			117
Total restricted securitized assets		$	2,586		$	2,453		$	2,466

 

The components of consolidated secured borrowings and other liabilities related to securitizations follow in millions of dollars:

		July 31 2007			October 31 2006			July 31 2006
Short-term borrowings		$	2,581		$	2,403		$	2,365
Accrued interest on borrowings		5			5			4
Total liabilities related to restricted securitized assets		$	2,586		$	2,408		$	2,369

 

The secured borrowings related to these restricted securitized retail notes are obligations that are payable as the retail notes are liquidated.  Repayment of the secured borrowings depends primarily on cash flows generated by the restricted assets and the reserve fund mentioned above.  Due to the upgrade of John Deere Capital Corporation’s short-term debt credit rating, cash collections from these restricted assets do not need to be placed into a segregated collection account until immediately prior to the time payment is required to be made to the Company’s secured creditors.  Under FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, an SPE was consolidated that included assets (restricted retail notes) of $1,662 million, $1,147 million and $1,240 million at July 31, 2007, October 31, 2006 and July 31, 2006, respectively.  These restricted retail notes are included in the restricted financing receivables related to securitizations shown in the table above.  At July 31, 2007, the maximum remaining term of all restricted receivables was approximately six years.

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Sales of Receivables

The Company has certain recourse obligations on financing receivables that it has previously sold.  If the receivables sold are not collected, the Company would be required to cover those losses up to the amount of its recourse obligation.  At July 31, 2007, the maximum amount of exposure to losses under these agreements was $80 million.  The estimated credit risk associated with sold receivables totaled $1 million at July 31, 2007.  This risk of loss is recognized primarily in the interests that continue to be held by the Company and recorded on its balance sheet.  These interests are related to assets held by unconsolidated SPEs.  At July 31, 2007, the assets of these SPEs related to the Company’s securitization and sale of retail notes totaled approximately $450 million.  The Company may recover a portion of any required payments incurred under these agreements from the repossession of the equipment collateralizing the receivables.  At July 31, 2007, the maximum remaining term of the receivables sold was approximately three years.

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

 

10

(8)                                  Worldwide net sales and revenues, operating profit and identifiable assets by segment in millions of dollars follow:

 

		Three Months Ended July 31								Nine Months Ended July 31
		2007			2006			% Change		2007			2006			% Change
Net sales and revenues:
Agricultural equipment *		$	3,355		$	2,899		+16		$	8,934		$	7,862		+14
Commercial and consumer equipment		1,346			1,171			+15		3,305			3,119			+6
Construction and forestry *		1,284			1,607			-20		3,827			4,417			-13
Total net sales **		5,985			5,677			+5		16,066			15,398			+4
Credit revenues *		533			475			+12		1,527			1,316			+16
Other revenues		116			115			+1		348			316			+10
Total net sales and revenues **		$	6,634		$	6,267		+6		$	17,941		$	17,030		+5
Operating profit: ***
Agricultural equipment		$	431		$	249		+73		$	1,055		$	739		+43
Commercial and consumer equipment		127			78			+63		315			225			+40
Construction and forestry		150			256			-41		437			666			-34
Credit		141			135			+4		404			388			+4
Other		1			3			-67		2			4			-50
Total operating profit **		850			721			+18		2,213			2,022			+9
Interest, corporate expenses — net and income taxes		(313		)	(285		)	+10		(813		)	(846		)	-4
Income from continuing operations		537			436			+23		1,400			1,176			+19
Income from discontinued operations													240
Net income		$	537		$	436		+23		$	1,400		$	1,416		-1

 

Identifiable assets:
Agricultural equipment								$	4,184		$	3,719		+13
Commercial and consumer equipment								1,744			1,487			+17
Construction and forestry								2,412			2,394			+1
Credit								22,821			21,302			+7
Other								181			146			+24
Corporate								6,289			5,720			+10
Total assets								$	37,631		$	34,768		+8

 

*     Additional intersegment sales and revenues
Agricultural equipment sales		$	28		$	36		-22		$	82		$	112		-27
Construction and forestry sales		2			3			-33		7			9			-22
Credit revenues		76			77			-1		205			203			+1
**   Includes equipment operations outside the U.S. and    Canada as follows:
Net sales		$	2,221		$	1,709		+30		$	5,645		$	4,504		+25
Operating profit		229			146			+57		562			389			+44

 

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

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(9)                                  A reconciliation of basic and diluted net income per share in millions, except per share amounts, follows:

 

		Three Months Ended July 31						Nine Months Ended July 31
		2007			2006			2007			2006
Continuing Operations:
Income		$	537.2		$	435.7		$	1,399.5		$	1,176.6
Average shares outstanding		223.8			233.7			225.8			235.0
Basic income per share		$	2.40		$	1.87		$	6.20		$	5.01
Average shares outstanding		223.8			233.7			225.8			235.0
Effect of dilutive stock options		3.0			2.2			2.8			2.5
Total potential shares outstanding		226.8			235.9			228.6			237.5
Diluted income per share		$	2.37		$	1.85		$	6.12		$	4.95
Total Operations:
Net income		537.2			$	436.0		$	1,399.5		$	1,416.5
Average shares outstanding		223.8			233.7			225.8			235.0
Basic net income per share		$	2.40		$	1.87		$	6.20		$	6.03
Total potential shares outstanding		226.8			235.9			228.6			237.5
Diluted net income per share		$	2.37		$	1.85		$	6.12		$	5.96

 

No options were excluded from the above diluted per share computation during the third quarter and first nine months of 2007.  During the same periods in 2006, 3.4 million shares were excluded because the incremental shares related to the exercise of these options under the treasury stock method would have caused an antidilutive effect on net income per share.

 

(10)                            Comprehensive income, which includes all changes in the Company’s equity during the period except transactions with stockholders, was as follows in millions of dollars:

 

		Three Months Ended July 31						Nine Months Ended July 31
		2007			2006			2007			2006
Net income		$	537.2		$	436.0		$	1,399.5		$	1,416.5
Other comprehensive income (loss), net of tax:
Change in cumulative translation adjustment		76.6			(14.4		)	181.2			61.0
Unrealized gain (loss) on investments		.6			1.1			(.2		)	2.2
Unrealized gain (loss) on derivatives		(.8		)	.6			.6			4.7
Comprehensive income		$	613.6		$	423.3		$	1,581.1		$	1,484.4

 

(11)                            The Company is subject to various unresolved legal actions which arise in the normal course of its business, the most prevalent of which relate to product liability (including asbestos related liability), retail credit, software licensing, patent 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 statements.

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(12)                            The Company has several defined benefit pension plans covering its U.S. employees and employees in certain foreign countries.  The Company also has several defined benefit health care and life insurance plans for retired employees in the U.S. and Canada.

 

The components of net periodic pension cost consisted of the following in millions of dollars:

 

		Three Months Ended July 31						Nine Months Ended July 31
		2007			2006			2007			2006
Service cost		$	39		$	37		$	117		$	110
Interest cost		122			119			364			356
Expected return on plan assets		(173		)	(168		)	(512		)	(500		)
Amortization of actuarial loss		28			29			84			86
Amortization of prior service cost		7			10			21			31
Special early-retirement benefits											2
Curtailments											1
Net cost		$	23		$	27		$	74		$	86

 

The components of other net periodic postretirement benefits cost (health care and life insurance) consisted of the following in millions of dollars:

 

		Three Months Ended July 31						Nine Months Ended July 31
		2007			2006			2007			2006
Service cost		$	17		$	17		$	52		$	51
Interest cost		80			77			240			231
Expected return on plan assets		(39		)	(32		)	(117		)	(96		)
Amortization of actuarial loss		55			49			162			147
Amortization of prior service cost		(33		)	(33		)	(100		)	(99		)
Special early-retirement benefits											1
Curtailments											2
Net cost		$	80		$	78		$	237		$	237

 

During the first nine months of 2007, the Company contributed approximately $191 million to its pension plans and $251 million to its other postretirement benefit plans.  The Company presently anticipates contributing an additional $167 million to its pension plans and $26 million to its other postretirement benefit plans in the remainder of fiscal year 2007.  These contributions include payments from Company funds to either increase plan assets or to make direct payments to plan participants.

 

(13)                            In February 2006, the Company sold its wholly-owned subsidiary, John Deere Health Care, Inc. (health care operations), to UnitedHealthcare for $512 million and recognized a gain on the sale of $356 million pretax, or $223 million after-tax ($.94 per share diluted, $.95 per share basic).

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The amount of revenue of the discontinued operations included on the statement of consolidated income in the first nine months of 2006 was $621 million.  The income before income taxes in the first nine months of 2006 was $384 million.  The fees paid from the continuing operations to the discontinued health care operations for administering health care claims in the first nine months of 2006 was $7 million.  The Company continues to pay fees to UnitedHealthcare to administer health claims.  The accrued expenses for employee termination benefits related to the discontinued operations in the first nine months of last year was $8 million and was included in “Income from Discontinued Operations.”  At July 31, 2007, the remaining liabilities related to these expenses were $3 million.

 

(14)                            In January 2006, the Company decided to close its forestry manufacturing facility in Woodstock, Ontario, Canada and consolidate this manufacturing into the Company’s existing Davenport and Dubuque, Iowa facilities.  This restructuring was intended to reduce costs and further improve product delivery times.  This operation was included in the construction and forestry segment.  In the first nine months of 2006, the total expense recognized in cost of sales related to the closure was approximately $22 million, which included accrued termination benefit expenses of $9 million; impairments and write-downs for property, equipment and inventory of $7 million; pension and other postretirement benefit curtailment expenses of $3 million and relocation of production expenses of $3 million.  At July 31, 2007, there were no remaining significant liabilities related to the restructuring.  The annual increase in earnings and cash flows in 2007 due to this restructuring are estimated to be approximately $10 million.

 

(15)                            New accounting standards adopted, which were all adopted in the first quarter of 2007, were as follows:

 

The Company adopted FASB Statement No. 154, Accounting Changes and Error Corrections.  This Statement requires voluntary changes in accounting principles to be recorded retrospectively for prior periods presented rather than a cumulative adjustment in the current period.  This treatment would also be required for new accounting pronouncements if there are no specific transition provisions.  The accounting for changes in estimates in the current period and the accounting for errors as restatements of prior periods have not changed.  The Company adopted FASB Statement No. 155, Accounting for Certain Hybrid Financial Instruments.  This Statement primarily resolves certain issues addressed in the implementation of FASB Statement No. 133 concerning beneficial interests in securitized financial assets.  The Company adopted FASB Statement No. 156, Accounting for Servicing of Financial Assets.  This Statement clarifies the criteria for recognizing servicing assets and liabilities, requires these items to be initially measured at fair value and permits subsequent measurements on either an amortization or fair value basis.  The adoption of these Statements did not have a material effect on the Company’s financial statements.

 

New accounting standards to be adopted are as follows:

 

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements.  This Statement defines fair value and expands disclosures about fair value measurements.  These methods will apply to other accounting standards, which use fair value measurements and may change the application of certain measurements used in current practice.  The effective date is the beginning of fiscal year 2009.  The adoption is not expected to have a material effect on the Company’s consolidated financial statements.

 

In September 2006, the FASB issued Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.  This Statement requires retirement benefit accruals or prepaid benefit costs on the balance sheet to be adjusted to the difference between the benefit obligations and the plan assets at fair value.  The offset to the adjustment is recorded directly in stockholders’ equity net of tax.  The amount recorded in stockholders’ equity would represent the

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after-tax unrecognized actuarial gains or losses and unamortized prior service costs, which have previously been disclosed in the notes to the annual financial statements.  This Statement also requires all benefit obligations and plan assets to be measured at fiscal year end.  The effective date for the funded status adjustment is the end of fiscal year 2007 and for the year-end measurement date is fiscal year 2009.  Prospective application is required.  At October 31, 2006, the effect of adopting this Statement would have decreased assets by approximately $400 million, increased liabilities by approximately $1,800 million and decreased stockholders’ equity by approximately $2,200 million after-tax.  The Company does not expect violations of any credit agreement financial covenants as a result of adopting this new standard.

 

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities.  This Statement permits entities to measure most financial instruments at fair value if desired.  It may be applied on a contract by contract basis and is irrevocable once applied to those contracts.  The standard may be applied at the time of adoption of the Statement or initial recognition of the eligible items.  The unrealized gains or losses on these financial instruments are reported in earnings.  The items measured at fair value must be shown separately on the balance sheet along with other disclosures in the notes to the financial statements.  The effective date is the beginning of fiscal year 2009 with early adoption permitted at the beginning of a previous year.  The cumulative effect of adoption would be reported as an adjustment to beginning retained earnings.  The Company has currently not determined the potential effect on the consolidated financial statements.

 

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes.  This Interpretation clarifies that the recognition for uncertain tax positions should be based on a more-likely-than-not threshold that the tax position will be sustained upon audit.  The tax position is measured as the largest amount of benefit that has a greater than 50 percent probability of being realized upon settlement.  The effective date is the beginning of fiscal year 2008 with the cumulative effect reported as an adjustment to beginning retained earnings.  While the Company continues to evaluate the impact of this Interpretation on its consolidated financial statements, the Company expects the adoption will not have a material effect.

 

(16)                            In May 2007, the Company acquired LESCO, Inc. (LESCO) for a cost of approximately $150 million with a preliminary value of approximately $120 million of goodwill and other intangible assets.  LESCO, based in Cleveland, Ohio, is a leading supplier of consumable lawn care, landscape, golf course and pest control products.  LESCO has been included as part of the Company’s commercial and consumer equipment segment.

 

In May 2007, the Board of Directors authorized plans to repurchase up to 20 million additional shares of common stock.  The new repurchase plan will go into effect after the existing 26 million share repurchase plan, announced in November 2005, is completed.  There were .3 million shares remaining under the prior authorization on July 31, 2007.  Repurchases will be made at the Company’s discretion in the open market.

 

In August 2007, the Company acquired the Ningbo Benye Tractor & Automobile Manufacturing Co., Ltd. business for approximately $70 million.  This business, which is located in Ningbo, China, builds tractors mainly in the 20 to 50 horsepower range and is the largest tractor manufacturer in southern China.  It will be included as part of the Company’s agricultural equipment segment.

 

The Board of Directors at its meeting on August 29, 2007 announced its intention to declare a two-for-one split of the Company’s common stock, pending shareholder approval at a special meeting.  The meeting is expected to be held on November 14, 2007.  The stock split would be implemented in the form of a stock dividend of one additional share for each share outstanding.

 

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