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DEERE & CO - Quarter Report: 2020 August (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 2, 2020

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____ to ____

 

Commission file no: 1-4121

 

DEERE  &  COMPANY

(Exact name of registrant as specified in its charter)

Delaware
(State of incorporation)

36-2382580
(IRS employer identification no.)

One John Deere Place

Moline, Illinois 61265

(Address of principal executive offices)

Telephone Number: (309) 765-8000

Securities Registered Pursuant to Section 12(b) of the Act:

Title of each class

Trading symbol

Name of each exchange on which registered

Common stock, $1 par value

DE

New York Stock Exchange

8½% Debentures Due 2022

DE22

New York Stock Exchange

6.55% Debentures Due 2028

DE28

New York Stock Exchange

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  No 

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes  No 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

Yes  No 

 

At August 2, 2020, 313,374,767 shares of common stock, $1 par value, of the registrant were outstanding.

PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

DEERE & COMPANY

STATEMENT OF CONSOLIDATED INCOME

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

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

2020

2019

 

Net Sales and Revenues

Net sales

$

7,859

$

8,969

Finance and interest income

838

 

884

Other income

228

 

183

Total

8,925

 

10,036

Costs and Expenses

Cost of sales

5,835

 

6,870

Research and development expenses

370

 

431

Selling, administrative and general expenses

752

 

896

Interest expense

290

 

374

Other operating expenses

408

 

352

Total

7,655

 

8,923

Income of Consolidated Group before Income Taxes

1,270

 

1,113

Provision for income taxes

457

 

221

Income of Consolidated Group

813

 

892

Equity in income (loss) of unconsolidated affiliates

(2)

 

7

Net Income

811

 

899

Less: Net income attributable to noncontrolling interests

 

Net Income Attributable to Deere & Company

$

811

$

899

Per Share Data

Basic

$

2.59

$

2.84

Diluted

$

2.57

$

2.81

Average Shares Outstanding

Basic

313.0

315.9

Diluted

315.8

319.8

See Condensed Notes to Interim Consolidated Financial Statements.

2

DEERE & COMPANY

STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME

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

(In millions of dollars) Unaudited

    

2020

    

2019

 

 

Net Income

 

$

811

$

899

Other Comprehensive Income (Loss), Net of Income Taxes

Retirement benefits adjustment

51

 

15

Cumulative translation adjustment

331

 

26

Unrealized gain (loss) on derivatives

4

 

(22)

Unrealized gain on debt securities

10

 

10

Other Comprehensive Income (Loss), Net of Income Taxes

396

 

29

Comprehensive Income of Consolidated Group

1,207

 

928

Less: Comprehensive income attributable to noncontrolling interests

 

Comprehensive Income Attributable to Deere & Company

 

$

1,207

$

928

See Condensed Notes to Interim Consolidated Financial Statements.

3

DEERE & COMPANY

STATEMENT OF CONSOLIDATED INCOME

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

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

    

2020

    

2019

 

Net Sales and Revenues

Net sales

 

$

22,612

$

26,182

Finance and interest income

2,584

 

2,537

Other income

613

 

643

Total

25,809

 

29,362

Costs and Expenses

Cost of sales

17,206

 

20,056

Research and development expenses

1,201

 

1,295

Selling, administrative and general expenses

2,467

 

2,607

Interest expense

969

 

1,078

Other operating expenses

1,199

 

1,063

Total

23,042

 

26,099

Income of Consolidated Group before Income Taxes

2,767

 

3,263

Provision for income taxes

752

 

748

Income of Consolidated Group

2,015

 

2,515

Equity in income (loss) of unconsolidated affiliates

(20)

 

20

Net Income

1,995

 

2,535

Less: Net income attributable to noncontrolling interests

2

 

3

Net Income Attributable to Deere & Company

 

$

1,993

$

2,532

Per Share Data

Basic

 

$

6.36

$

7.98

Diluted

 

$

6.30

$

7.87

Average Shares Outstanding

Basic

313.3

 

317.3

Diluted

316.4

 

321.5

See Condensed Notes to Interim Consolidated Financial Statements.

4

DEERE & COMPANY

STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME

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

(In millions of dollars) Unaudited

    

2020

    

2019

 

 

Net Income

 

$

1,995

$

2,535

Other Comprehensive Income (Loss), Net of Income Taxes

Retirement benefits adjustment

338

 

84

Cumulative translation adjustment

(67)

 

(218)

Unrealized loss on derivatives

(4)

 

(37)

Unrealized gain on debt securities

21

 

25

Other Comprehensive Income (Loss), Net of Income Taxes

288

 

(146)

Comprehensive Income of Consolidated Group

2,283

 

2,389

Less: Comprehensive income attributable to noncontrolling interests

2

 

3

Comprehensive Income Attributable to Deere & Company

 

$

2,281

$

2,386

See Condensed Notes to Interim Consolidated Financial Statements.

5

DEERE & COMPANY

CONDENSED CONSOLIDATED BALANCE SHEET

(In millions of dollars) Unaudited

    

August 2

    

November 3

    

July 28

 

2020

2019

2019

 

Assets

Cash and cash equivalents

 

$

8,190

$

3,857

$

3,383

Marketable securities

640

 

581

 

565

Receivables from unconsolidated affiliates

26

 

46

 

54

Trade accounts and notes receivable – net

5,473

 

5,230

 

6,758

Financing receivables – net

27,814

 

29,195

 

27,049

Financing receivables securitized – net

5,469

 

4,383

 

5,200

Other receivables

1,217

 

1,487

 

1,535

Equipment on operating leases – net

7,158

 

7,567

 

7,269

Inventories

5,650

 

5,975

 

6,747

Property and equipment – net

5,754

 

5,973

 

5,798

Investments in unconsolidated affiliates

199

 

215

 

219

Goodwill

2,984

 

2,917

 

3,013

Other intangible assets – net

1,301

 

1,380

 

1,444

Retirement benefits

1,031

 

840

 

1,431

Deferred income taxes

1,534

 

1,466

 

1,088

Other assets

2,824

 

1,899

 

1,977

Total Assets

 

$

77,264

$

73,011

$

73,530

Liabilities and Stockholders’ Equity

Liabilities

Short-term borrowings

$

9,075

$

10,784

$

11,142

Short-term securitization borrowings

5,361

 

4,321

 

5,048

Payables to unconsolidated affiliates

80

 

142

 

136

Accounts payable and accrued expenses

9,565

 

9,656

 

9,390

Deferred income taxes

479

 

495

 

507

Long-term borrowings

34,037

 

30,229

 

29,242

Retirement benefits and other liabilities

5,776

 

5,953

 

5,781

Total liabilities

64,373

 

61,580

 

61,246

Commitments and contingencies (Note 16)

Redeemable noncontrolling interest (Note 20)

14

14

Stockholders’ Equity

Common stock, $1 par value (issued shares at August 2, 2020 – 536,431,204)

4,750

 

4,642

 

4,599

Common stock in treasury

(17,671)

 

(17,474)

 

(17,121)

Retained earnings

31,128

 

29,852

 

29,369

Accumulated other comprehensive income (loss)

(5,319)

 

(5,607)

 

(4,581)

Total Deere & Company stockholders’ equity

12,888

 

11,413

 

12,266

Noncontrolling interests

3

 

4

 

4

Total stockholders’ equity

12,891

 

11,417

 

12,270

Total Liabilities and Stockholders’ Equity

$

77,264

$

73,011

$

73,530

See Condensed Notes to Interim Consolidated Financial Statements.

6

DEERE & COMPANY

STATEMENT OF CONSOLIDATED CASH FLOWS

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

(In millions of dollars) Unaudited

    

2020

    

2019

 

Cash Flows from Operating Activities

              

              

Net income

 

$

1,995

$

2,535

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

Provision for credit losses

123

 

58

Provision for depreciation and amortization

1,614

 

1,522

Impairment charges

147

 

Share-based compensation expense

63

 

63

Undistributed earnings of unconsolidated affiliates

(5)

 

10

Credit for deferred income taxes

(160)

 

(332)

Changes in assets and liabilities:

Trade, notes, and financing receivables related to sales

626

 

(2,206)

Inventories

(1)

 

(1,168)

Accounts payable and accrued expenses

(572)

 

(306)

Accrued income taxes payable/receivable

4

 

253

Retirement benefits

88

 

40

Other

135

 

(65)

Net cash provided by operating activities

4,057

 

404

Cash Flows from Investing Activities

Collections of receivables (excluding receivables related to sales)

13,237

 

12,685

Proceeds from maturities and sales of marketable securities

70

 

72

Proceeds from sales of equipment on operating leases

1,310

 

1,171

Cost of receivables acquired (excluding receivables related to sales)

(14,449)

 

(13,662)

Purchases of marketable securities

(91)

 

(110)

Purchases of property and equipment

(594)

 

(756)

Cost of equipment on operating leases acquired

(1,312)

 

(1,462)

Collateral on derivatives – net

324

59

Other

(12)

 

(126)

Net cash used for investing activities

(1,517)

 

(2,129)

Cash Flows from Financing Activities

Increase (decrease) in total short-term borrowings

170

 

(336)

Proceeds from long-term borrowings

8,331

 

7,440

Payments of long-term borrowings

(5,797)

 

(4,356)

Proceeds from issuance of common stock

111

 

133

Repurchases of common stock

(263)

 

(880)

Dividends paid

(718)

 

(703)

Other

(110)

 

(82)

Net cash provided by financing activities

1,724

 

1,216

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

80

 

(24)

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

4,344

(533)

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

3,956

 

4,015

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

$

8,300

$

3,482

See Condensed Notes to Interim Consolidated Financial Statements.

7

DEERE & COMPANY

STATEMENT OF CHANGES IN CONSOLIDATED STOCKHOLDERS’ EQUITY

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

(In millions of dollars) Unaudited

Total Stockholders’ Equity

Deere & Company Stockholders

 

Accumulated

Total

Other

Redeemable

Stockholders’

Common

Treasury

Retained

Comprehensive

Noncontrolling

Noncontrolling

  

Equity

  

Stock

  

Stock

  

Earnings

  

Income (Loss)

  

Interests

  

  

Interest

 

 

Three Months Ended July 28, 2019

Balance April 28, 2019

    

$

11,924

$

4,559

$

(16,739)

$

28,709

$

(4,610)

$

5

$

14

Net income

 

899

899

Other comprehensive income

 

29

29

Repurchases of common stock

 

(400)

(400)

Treasury shares reissued

 

18

18

Dividends declared

 

(241)

(240)

(1)

Stock options and other

 

41

40

1

Balance July 28, 2019

$

12,270

$

4,599

$

(17,121)

$

29,369

$

(4,581)

$

4

$

14

Nine Months Ended July 28, 2019

 

 

Balance October 28, 2018

    

$

11,291

$

4,474

$

(16,312)

$

27,553

$

(4,427)

$

3

$

14

 

ASU No. 2016-01 adoption

8

(8)

Net income

 

2,535

2,532

3

Other comprehensive loss

 

(146)

(146)

Repurchases of common stock

 

(880)

(880)

Treasury shares reissued

 

71

71

Dividends declared

 

(727)

(725)

(2)

Stock options and other

 

126

125

1

Balance July 28, 2019

$

12,270

$

4,599

$

(17,121)

$

29,369

$

(4,581)

$

4

$

14

Three Months Ended August 2, 2020

Balance May 3, 2020

$

11,865

$

4,713

$

(17,690)

$

30,556

$

(5,715)

$

1

Net income

811

811

Other comprehensive income

396

396

Treasury shares reissued

19

19

Dividends declared

(239)

(239)

Stock options and other

39

37

2

Balance August 2, 2020

$

12,891

$

4,750

$

(17,671)

$

31,128

$

(5,319)

$

3

Nine Months Ended August 2, 2020

Balance November 3, 2019

$

11,417

$

4,642

$

(17,474)

$

29,852

$

(5,607)

$

4

$

14

Net income

1,994

1,993

1

1

Other comprehensive income

288

288

Repurchases of common stock

(263)

(263)

Treasury shares reissued

66

66

Dividends declared

(719)

(716)

(3)

(1)

Noncontrolling interest redemption (Note 20)

(14)

Stock options and other

108

108

(1)

1

Balance August 2, 2020

$

12,891

$

4,750

$

(17,671)

$

31,128

$

(5,319)

$

3

See Condensed Notes to Interim Consolidated Financial Statements.

8

Condensed Notes to Interim Consolidated Financial Statements (Unaudited)

(1)  Organization and Consolidation

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

Equipment OperationsIncludes the Company’s agriculture and turf operations and construction and forestry operations with financial services reflected on the equity basis.

Financial ServicesIncludes primarily the Company’s financing operations.

ConsolidatedRepresents the consolidation of the equipment operations and financial services. References to “Deere & Company” or “the Company” refer to the entire enterprise.

The Company uses a 52/53 week fiscal year with quarters ending on the last Sunday in the reporting period. The third quarter ends for fiscal year 2020 and 2019 were August 2, 2020 and July 28, 2019, respectively. Both periods contained 13 weeks.

Variable Interest Entities

The Company consolidates certain Variable Interest Entities (VIEs) related to retail note securitizations (see Note 12).

The Company also has an interest in a joint venture that manufactures construction equipment in Brazil for local and overseas markets. The joint venture is a VIE; however, the Company is not the primary beneficiary. Therefore, the entity’s financial results are not fully consolidated in the Company’s consolidated financial statements, but are included on the equity basis. The maximum exposure to loss was $13 million, $22 million, and $23 million at August 2, 2020, November 3, 2019, and July 28, 2019, respectively.

(2)  Summary of Significant Accounting Policies and Cash Flow Information

The interim consolidated financial statements of Deere & Company have been prepared by the Company, without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC). 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 consolidated financial statements be read in conjunction with the consolidated 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. The COVID-19 (COVID) pandemic has resulted in uncertainties in the Company’s business, which may result in actual outcomes differing significantly from those estimates.

Cash Flow Information

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 the following non-cash operating and investing activities that were not included in the statement of consolidated cash flows. The Company transferred inventory to equipment on operating leases of approximately $388 million and $498 million in the first nine months of 2020 and 2019, respectively. The Company also had accounts payable related to purchases of property and equipment of approximately $51 million and $70 million at August 2, 2020 and July 28, 2019, respectively.

9

The Company’s restricted cash held at August 2, 2020, November 3, 2019, July 28, 2019, and October 28, 2018 was as follows in millions of dollars:

August 2

November 3

July 28

October 28

2020

2019

2019

2018

Equipment operations

$

11

$

21

$

9

$

7

Financial services

99

78

90

104

Total

$

110

$

99

$

99

$

111

The equipment operations’ restricted cash relates to miscellaneous operational activities. The financial services restricted cash primarily relates to securitization of financing receivables (see Note 12). The restricted cash is recorded in “Other assets” in the consolidated balance sheet.

(3)     New Accounting Standards

New Accounting Standards Adopted

In the first quarter of 2020, the Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), which supersedes Accounting Standards Codification (ASC) 840, Leases. This ASU was adopted using a modified-retrospective approach. The ASU’s primary change is the requirement for lessee entities to recognize a lease liability for payments and a right of use asset during the term of operating lease arrangements. The ASU did not significantly change the lessee’s recognition, measurement, and presentation of expenses and cash flows from the previous accounting standard. Lessors’ accounting under the ASC is largely unchanged from the previous accounting standard. The ASU adds new disclosures about the Company’s leasing activities. The Company elected the optional practical expedients to not reassess whether existing contracts contain leases, not reassess lease classification, and not reassess initial direct costs for existing leases. The Company did not elect the hindsight practical expedient. In addition, the Company elected to combine lease and nonlease components for all asset classes and to not recognize a right of use asset or lease liability for arrangements that qualify as short-term leases.

The operating lease liabilities are recorded in “Accounts payable and accrued expenses” and the operating lease right of use assets are recorded in “Other assets.” The finance lease liabilities are recorded in “Short-term borrowings” or “Long-term borrowings” based on the remaining lease term, and the finance lease right of use assets are recorded in “Property and equipment - net.” In addition to the lease liabilities and right of use assets, land use rights were reclassified from “Other intangible assets - net” to “Other assets” and finance lease liabilities were reclassified from “Accounts payable and accrued expenses” to “Short-term borrowings” and “Long-term borrowings.” The effect of adopting the ASU on the consolidated balance sheet follows in millions of dollars:

November 3, 2019

Cumulative Effect
from Adoption

November 4, 2019

Assets

Other intangible assets - net

$

1,380

$

(23)

$

1,357

Other assets

1,899

402

2,301

Liabilities

Short-term borrowings

$

10,784

$

11

$

10,795

Accounts payable and accrued expenses

9,656

348

10,004

Long-term borrowings

30,229

20

30,249

The Company implemented a new system for lessee accounting with new processes and controls at the time of adopting the ASU. The adoption did not have a material effect on the Company’s operating results or cash flows. See Note 15 for additional information.

10

The Company also adopted the following standards in 2020, none of which had a material effect on the Company’s consolidated financial statements:

Accounting Standards Updates

2017-08

Premium Amortization on Purchased Callable Debt Securities, which amends ASC 310-20, Receivables – Nonrefundable Fees and Other Costs

2018-07

Improvements to Nonemployee Share-Based Payment Accounting, which amends ASC 718, Compensation – Stock Compensation

2019-04

Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The adoption was for clarifications to ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities

2020-04

Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which establishes ASC 848, Reference Rate Reform

New Accounting Standards to be Adopted

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, which establishes ASC 326, Financial Instruments – Credit Losses. The ASU revises the measurement of credit losses for financial assets measured at amortized cost from an incurred loss to an expected loss methodology. The ASU affects receivables, debt securities, net investment in leases, and most other financial assets that represent a right to receive cash. Additional disclosures about significant estimates and credit quality are also required. The effective date will be the first quarter of fiscal year 2021. The ASU will be adopted using a modified-retrospective approach. The Company is testing and validating models developed to estimate expected credit losses, assessing appropriate assumptions, designing new procedures and controls, and evaluating the potential effects on the consolidated financial statements.

The Company will also adopt the following standards in future periods, none of which are expected to have a material effect on the Company’s consolidated financial statements:

Accounting Standards Updates

2018-15

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which amends ASC 350-40, Intangibles – Goodwill and Other – Internal-Use Software

2019-04

Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments

2019-12

Simplifying the Accounting for Income Taxes, which amends ASC 740, Income Taxes

11

(4)  Revenue Recognition

The Company’s revenue by primary geographical market, major product line, and timing of revenue recognition in millions of dollars follow:

Three Months Ended August 2, 2020

    

Agriculture
and Turf

    

Construction
and Forestry

    

Financial
Services

    

Total

Primary geographical markets:

             

             

United States

$

2,845

$

1,048

$

632

$

4,525

Canada

295

194

 

146

 

635

Western Europe

1,103

376

 

22

 

1,501

Central Europe and CIS

319

178

 

9

 

506

Latin America

602

124

 

51

 

777

Asia, Africa, Australia, New Zealand, and Middle East

631

318

32

981

Total

$

5,795

$

2,238

$

892

$

8,925

Major product lines:

             

             

Large Agriculture

$

2,893

$

2,893

Small Agriculture

2,021

 

 

2,021

Turf

651

 

 

651

Construction

$

817

 

 

817

Compact Construction

303

303

Roadbuilding

818

 

 

818

Forestry

241

 

 

241

Financial Products

24

5

$

892

 

921

Other

206

54

 

 

260

Total

$

5,795

$

2,238

$

892

$

8,925

Timing of revenue recognition:

             

             

Revenue recognized at a point in time

$

5,739

$

2,210

$

28

$

7,977

Revenue recognized over time

56

28

864

948

Total

$

5,795

$

2,238

$

892

$

8,925

    

Nine Months Ended August 2, 2020

Agriculture
and Turf

Construction
and Forestry

Financial
Services

Total

Primary geographical markets:

United States

$

8,725

$

3,331

$

1,880

$

13,936

Canada

699

532

 

453

 

1,684

Western Europe

2,992

1,073

 

66

 

4,131

Central Europe and CIS

877

477

 

27

 

1,381

Latin America

1,515

418

 

177

 

2,110

Asia, Africa, Australia, New Zealand, and Middle East

1,646

825

96

2,567

Total

$

16,454

$

6,656

$

2,699

$

25,809

Major product lines:

             

             

Large Agriculture

$

8,106

$

8,106

Small Agriculture

5,762

 

 

5,762

Turf

1,925

 

 

1,925

Construction

$

2,535

 

 

2,535

Compact Construction

930

930

Roadbuilding

2,146

 

 

2,146

Forestry

769

 

769

Financial Products

72

18

$

2,699

 

2,789

Other

589

258

 

 

847

Total

$

16,454

$

6,656

$

2,699

$

25,809

Timing of revenue recognition:

             

             

Revenue recognized at a point in time

$

16,294

$

6,576

$

80

$

22,950

Revenue recognized over time

160

80

2,619

2,859

Total

$

16,454

$

6,656

$

2,699

$

25,809

12

Three Months Ended July 28, 2019

    

Agriculture
and Turf

    

Construction
and Forestry

    

Financial
Services

    

Total

Primary geographical markets:

             

             

United States

$

2,870

$

1,594

$

632

$

5,096

Canada

299

260

 

148

 

707

Western Europe

1,154

458

 

22

 

1,634

Central Europe and CIS

324

229

 

10

 

563

Latin America

708

171

 

66

 

945

Asia, Africa, Australia, New Zealand, and Middle East

684

375

32

1,091

Total

$

6,039

$

3,087

$

910

$

10,036

Major product lines:

             

             

Large Agriculture

$

2,985

$

2,985

Small Agriculture

2,172

 

 

2,172

Turf

704

 

 

704

Construction

$

1,319

 

 

1,319

Compact Construction

320

320

Roadbuilding

1,008

 

 

1,008

Forestry

333

 

 

333

Financial Products

25

7

$

910

 

942

Other

153

100

 

 

253

Total

$

6,039

$

3,087

$

910

$

10,036

Timing of revenue recognition:

             

             

Revenue recognized at a point in time

$

5,988

$

3,055

$

9,043

Revenue recognized over time

51

32

$

910

993

Total

$

6,039

$

3,087

$

910

$

10,036

Nine Months Ended July 28, 2019

    

Agriculture
and Turf

    

Construction
and Forestry

    

Financial
Services

    

Total

Primary geographical markets:

United States

$

9,411

$

4,495

$

1,810

$

15,716

Canada

784

773

 

458

 

2,015

Western Europe

3,362

1,174

 

63

 

4,599

Central Europe and CIS

865

555

 

28

 

1,448

Latin America

2,028

515

 

199

 

2,742

Asia, Africa, Australia, New Zealand, and Middle East

1,784

966

92

2,842

Total

$

18,234

$

8,478

$

2,650

$

29,362

Major product lines:

             

             

Large Agriculture

$

8,647

$

8,647

Small Agriculture

6,613

 

 

6,613

Turf

2,199

 

 

2,199

Construction

$

3,806

 

 

3,806

Compact Construction

904

904

Roadbuilding

2,420

 

 

2,420

Forestry

1,023

 

1,023

Financial Products

69

20

$

2,650

 

2,739

Other

706

305

 

 

1,011

Total

$

18,234

$

8,478

$

2,650

$

29,362

Timing of revenue recognition:

             

             

Revenue recognized at a point in time

$

18,088

$

8,402

$

26,490

Revenue recognized over time

146

76

$

2,650

2,872

Total

$

18,234

$

8,478

$

2,650

$

29,362

Following is a description of the Company’s major product lines:

Large Agriculture – Includes net sales of tractors with more than approximately 200 horsepower and associated attachments, combines, cotton pickers, cotton strippers, self-propelled forage harvesters and related attachments, and sugarcane harvesters, harvesting front-end equipment, sugarcane loaders and pull behind scrapers, tillage, seeding, and application equipment, including sprayers, nutrient management and soil preparation machinery, and related attachments and service parts.

13

Small Agriculture – Includes net sales of medium and utility tractors with less than approximately 200 horsepower, hay and forage equipment, balers, mowers, and related attachments and service parts.

Turf – Includes net sales of turf and utility equipment, including riding lawn equipment and walk-behind mowers, golf course equipment, utility vehicles, and commercial mowing equipment, along with a broad line of associated implements, other outdoor power products, and related attachments and service parts.

Construction – Includes net sales of a broad range of machines used in construction, earthmoving, and material handling, including backhoe loaders, crawler dozers and loaders, four-wheel-drive loaders, excavators, motor graders, articulated dump trucks, and related attachments and service parts.

Compact Construction – Includes net sales of smaller construction equipment, including compact excavators, compact track loaders, compact wheel loaders, skid steers, landscape loaders, and related attachments and service parts.

Roadbuilding – Includes net sales of equipment used in roadbuilding and renovation, including milling machines, recyclers, slipform pavers, surface miners, asphalt pavers, compactors, tandem and static rollers, mobile crushers and screens, mobile and stationary asphalt plants, and related attachments and service parts.

Forestry – Includes net sales of equipment used in timber harvesting, including log skidders, feller bunchers, log loaders, log forwarders, log harvesters, and related attachments and service parts.

Financial Products – Includes finance and interest income primarily from retail notes related to sales of John Deere equipment to end customers, wholesale financing to dealers of John Deere equipment, and revolving charge accounts; lease income from retail leases of John Deere equipment; and revenue from extended warranties.

Other – Includes sales of certain components to other equipment manufacturers, revenue earned over time from precision guidance, telematics, and other information enabled solutions, revenue from service performed at company owned dealerships and service centers, gains on disposition of property and businesses, trademark licensing revenue, and other miscellaneous revenue items.

The Company invoices in advance of recognizing the sale of certain products and the revenue for certain services. These items are primarily for premiums for extended warranties, advance payments for future equipment sales, and subscription and service revenue related to precision guidance and telematic services. These advanced customer payments are presented as deferred revenue, a contract liability, in “Accounts payable and accrued expenses” in the consolidated balance sheet. The deferred revenue received, but not recognized in revenue, including extended warranty premiums also shown in Note 16, was $1,115 million, $1,010 million and $1,022 million at August 2, 2020, November 3, 2019, and July 28, 2019, respectively. The contract liability is reduced as the revenue is recognized. During the three months ended August 2, 2020 and July 28, 2019, $97 million and $101 million, respectively, of revenue was recognized from deferred revenue that was recorded as a contract liability at the beginning of the respective fiscal year. During the nine months ended August 2, 2020 and July 28, 2019, $375 million and $360 million, respectively, of revenue was recognized from deferred revenue that was recorded as a contract liability at the beginning of the respective fiscal year.

The Company entered into contracts with customers to deliver equipment and services that have not been recognized at August 2, 2020 because the equipment or services have not been provided. These contracts primarily relate to extended warranty and certain precision guidance and telematic services. The amount of unsatisfied performance obligations for contracts with an original duration greater than one year is $920 million at August 2, 2020. The estimated revenue to be recognized by fiscal year follows in millions of dollars: remainder of 2020 - $88, 2021 - $385, 2022 - $240, 2023 - $132, 2024 - $56, 2025 - $16 and later years - $3. The Company discloses unsatisfied performance obligations with an original contract duration greater than one year. The contracts with an expected duration of one year or less are generally for sales to dealers and end customers for equipment, service parts, repair services, and certain telematics services.

As explained in the 2019 Form 10-K, the Company’s policy on trade accounts and notes receivables is to not extend interest-free periods nor to forgive interest charged. During the second and third quarters of 2020, the Company provided short-term payment relief on trade accounts and notes receivables to independent dealers and certain other customers (customers) that are negatively affected by the economic effects of COVID. The relief was provided both in regional programs and case-by-case situations with creditworthy customers. This relief generally included payment deferrals not exceeding three months, extending interest-free periods for up to an additional three months with the total interest-free period not to exceed one year, or reducing interest rates for a maximum of three months. The trade receivable balance granted relief in the second or third quarter that remained outstanding at August 2, 2020 was $234 million or approximately 4 percent of the trade receivable portfolio. These actions were taken in response to the economic effects of COVID on customers. Outside of these actions, the Company is not modifying its normal sales terms with customers that are outlined in the 2019 Form 10-K.

14

For customers who obtained payment relief, subsequent sales transactions are evaluated to confirm the revenue recognition criteria are met, including the sales price is determinable and collectability of the payments is probable based on the terms outlined in the contract.

(5)Other Comprehensive Income Items

The after-tax changes in accumulated other comprehensive income (loss) in millions of dollars follow:

    

    

    

    

    

Total

 

Unrealized

Unrealized

Accumulated

Retirement

Cumulative

Gain (Loss)

Gain (Loss)

Other

Benefits

Translation

on

on

Comprehensive

Adjustment

Adjustment

Derivatives

Debt Securities

Income (Loss)

Balance October 28, 2018

$

(3,237)

$

(1,203)

 

$

15

$

(2)

$

(4,427)

ASU No. 2016-01 adoption

(8)

(8)

Other comprehensive income (loss) items before reclassification

 

30

(218)

(33)

26

 

(195)

Amounts reclassified from accumulated other comprehensive income

 

54

(4)

(1)

 

49

Net current period other comprehensive income (loss)

 

84

 

(218)

 

(37)

 

25

 

(146)

Balance July 28, 2019

$

(3,153)

$

(1,421)

$

(22)

$

15

$

(4,581)

Balance November 3, 2019

$

(3,915)

$

(1,651)

 

$

(60)

$

19

$

(5,607)

Other comprehensive income (loss) items before reclassification

179

(75)

(14)

22

112

Amounts reclassified from accumulated other comprehensive income

159

8

10

(1)

176

Net current period other comprehensive income (loss)

338

(67)

(4)

21

288

Balance August 2, 2020

$

(3,577)

 

$

(1,718)

 

$

(64)

 

$

40

 

$

(5,319)

15

Following are amounts recorded in and reclassifications out of other comprehensive income (loss), and the income tax effects, in millions of dollars:

    

Before

    

Tax

    

After

 

Tax

(Expense)

Tax

 

Three Months Ended August 2, 2020

Amount

Credit

Amount

 

Cumulative translation adjustment:

Unrealized gain (loss) on translation adjustment

$

321

$

2

$

323

Reclassification of (gain) loss to Other operating expenses

8

8

Net unrealized gain (loss) on translation adjustment

 

329

2

331

Unrealized gain (loss) on derivatives:

Unrealized hedging gain (loss)

(1)

(1)

Reclassification of realized (gain) loss to:

Interest rate contracts – Interest expense

7

(2)

5

Net unrealized gain (loss) on derivatives

6

(2)

4

Unrealized gain (loss) on debt securities:

Unrealized holding gain (loss)

13

(2)

11

Reclassification of realized (gain) loss – Other income

(1)

(1)

Net unrealized gain (loss) on debt securities

12

(2)

10

Retirement benefits adjustment:

Pensions

Net actuarial gain (loss)

(9)

2

(7)

Reclassification to Other operating expenses through amortization of: *

Actuarial (gain) loss

62

(15)

47

Prior service (credit) cost

3

(1)

2

Settlements

6

(2)

4

OPEB

Reclassification to Other operating expenses through amortization of: *

Actuarial (gain) loss

7

(2)

5

Prior service (credit) cost

(1)

1

Net unrealized gain (loss) on retirement benefits adjustment

68

(17)

51

Total other comprehensive income (loss)

 

$

415

$

(19)

$

396

16

    

Before

    

Tax

    

After

 

Tax

(Expense)

Tax

 

Nine Months Ended August 2, 2020

Amount

Credit

Amount

 

Cumulative translation adjustment:

 

Unrealized gain (loss) on translation adjustment

$

(77)

$

2

$

(75)

Reclassification of (gain) loss to Other operating expenses

8

8

Net unrealized gain (loss) on translation adjustment

(69)

2

(67)

Unrealized gain (loss) on derivatives:

Unrealized hedging gain (loss)

(18)

4

(14)

Reclassification of realized (gain) loss to:

Interest rate contracts – Interest expense

13

(3)

10

Net unrealized gain (loss) on derivatives

(5)

1

(4)

Unrealized gain (loss) on debt securities:

Unrealized holding gain (loss)

27

(5)

22

Reclassification of realized (gain) loss – Other income

(1)

(1)

Net unrealized gain (loss) on debt securities

26

(5)

21

Retirement benefits adjustment:

Pensions

Net actuarial gain (loss)

(36)

8

(28)

Reclassification to Other operating expenses through amortization of: *

Actuarial (gain) loss

186

(57)

129

Prior service (credit) cost

9

(2)

7

Settlements

12

(3)

9

OPEB

Net actuarial gain (loss)

274

(67)

207

Reclassification to Other operating expenses through amortization of: *

Actuarial (gain) loss

21

(5)

16

Prior service (credit) cost

(3)

1

(2)

Net unrealized gain (loss) on retirement benefits adjustment

463

(125)

338

Total other comprehensive income (loss)

 

$

415

$

(127)

$

288

 

    

Before

    

Tax

    

After

 

Tax

(Expense)

Tax

 

Three Months Ended July 28, 2019

Amount

Credit

Amount

 

Cumulative translation adjustment

 

$

27

$

(1)

$

26

Unrealized gain (loss) on derivatives:

Unrealized hedging gain (loss)

(27)

6

(21)

Reclassification of realized (gain) loss to:

Interest rate contracts – Interest expense

(1)

(1)

Net unrealized gain (loss) on derivatives

(28)

6

(22)

Unrealized gain (loss) on debt securities:

Unrealized holding gain (loss)

13

(2)

11

Reclassification of realized (gain) loss – Other income

(1)

(1)

Net unrealized gain (loss) on debt securities

12

(2)

10

Retirement benefits adjustment:

Pensions

Net actuarial gain (loss)

(3)

1

(2)

Reclassification to Other operating expenses through amortization of: *

Actuarial (gain) loss

35

(9)

26

Prior service (credit) cost

2

2

Settlements

1

1

OPEB

Reclassification to Other operating expense through amortization of: *

Actuarial (gain) loss

4

(1)

3

Prior service (credit) cost

(19)

4

(15)

Net unrealized gain (loss) on retirement benefits adjustment

20

(5)

15

Total other comprehensive income (loss)

 

$

31

$

(2)

$

29

In the third quarter of 2020 and 2019, the noncontrolling interests’ comprehensive income was none in both periods.

17

    

Before

    

Tax

    

After

 

Tax

(Expense)

Tax

 

Nine Months Ended July 28, 2019

Amount

Credit

Amount

 

Cumulative translation adjustment

 

$

(217)

 

$

(1)

$

(218)

Unrealized gain (loss) on derivatives:

Unrealized hedging gain (loss)

(42)

9

(33)

Reclassification of realized (gain) loss to:

Interest rate contracts – Interest expense

(6)

2

(4)

Net unrealized gain (loss) on derivatives

(48)

11

(37)

Unrealized gain (loss) on debt securities:

Unrealized holding gain (loss)

32

(6)

26

Reclassification of realized (gain) loss – Other income

(1)

(1)

Net unrealized gain (loss) on debt securities

31

(6)

25

Retirement benefits adjustment:

Pensions

Net actuarial gain (loss)

(21)

5

(16)

Reclassification to Other operating expenses through amortization of: *

Actuarial (gain) loss

106

(26)

80

Prior service (credit) cost

8

(2)

6

Settlements

1

1

OPEB

Net actuarial gain (loss)

60

(14)

46

Reclassification to Other operating expenses through amortization of: *

Actuarial (gain) loss

12

(3)

9

Prior service (credit) cost

(55)

13

(42)

Net unrealized gain (loss) on retirement benefits adjustment

111

(27)

84

Total other comprehensive income (loss)

 

$

(123)

$

(23)

$

(146)

*These accumulated other comprehensive income amounts are included in net periodic pension and OPEB costs. See Note 8 for additional detail.

In the first nine months of 2020 and 2019, the noncontrolling interests’ comprehensive income was $2 million and $3 million, respectively, which consisted of net income.

(6)Dividends Declared and Paid

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

Three Months Ended 

Nine Months Ended 

 

August 2

July 28

August 2

July 28

 

2020

2019

2020

2019

 

Dividends declared

    

$

.76

    

$

.76

    

$

2.28

    

$

2.28

Dividends paid

$

.76

$

.76

$

2.28

$

2.21

 

18

(7)Earnings Per Share

A reconciliation of basic and diluted net income per share attributable to Deere & Company follows in millions, except per share amounts:

  

Three Months Ended 

Nine Months Ended

 

August 2

July 28

August 2

July 28

 

2020

2019

2020

2019

 

Net income attributable to Deere & Company

    

$

811

    

$

899

    

$

1,993

    

$

2,532

Average shares outstanding

313.0

 

315.9

313.3

 

317.3

Basic per share

$

2.59

$

2.84

$

6.36

$

7.98

Average shares outstanding

313.0

 

315.9

313.3

 

317.3

Effect of dilutive share-based compensation

2.8

 

3.9

3.1

 

4.2

Total potential shares outstanding

315.8

 

319.8

316.4

 

321.5

Diluted per share

$

2.57

$

2.81

$

6.30

$

7.87

During the third quarter and first nine months of 2020, 1.2 million shares and .8 million shares, respectively, were excluded from the computation because the incremental shares would have been antidilutive. During the third quarter and first nine months of 2019, .9 million shares and .7 million shares, respectively, were excluded from the above per share computation.

(8)Pension and Other Postretirement Benefits

The Company has several defined benefit pension plans and postretirement benefit (OPEB) plans, primarily health care and life insurance plans, covering its U.S. employees and employees in certain foreign countries.

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

 

Three Months Ended

Nine Months Ended

 

August 2

July 28

August 2

July 28

 

2020

2019

2020

2019

 

Service cost

    

$

80

    

$

65

    

$

241

    

$

197

Interest cost

86

 

112

260

 

334

Expected return on plan assets

(204)

 

(200)

(613)

 

(600)

Amortization of actuarial loss

62

 

35

186

 

106

Amortization of prior service cost

3

 

2

9

 

8

Settlements

6

 

1

12

 

1

Net cost

$

33

$

15

$

95

$

46

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

 

Three Months Ended

Nine Months Ended

 

August 2

July 28

August 2

July 28

 

2020

2019

2020

2019

 

Service cost

    

$

12

    

$

11

    

$

36

    

$

31

Interest cost

34

 

53

106

 

160

Expected return on plan assets

(12)

 

(8)

(36)

 

(26)

Amortization of actuarial loss

7

 

4

21

 

12

Amortization of prior service credit

(1)

 

(19)

(3)

 

(55)

Curtailments

21

Net cost

$

40

$

41

$

145

$

122

The components of net periodic pension and OPEB costs excluding the service cost component are included in the line item “Other operating expenses” in the statement of consolidated income.

In the first quarter of 2020, the Company remeasured the U.S. OPEB health care plans. The wage plan was remeasured due to the U.S. enactment of the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) that repealed the health insurance provider fee effective in 2021. The salary plans were remeasured due to the first quarter U.S. voluntary employee-separation program (see Note 20), which resulted in a $21 million curtailment loss. The combined effect of the remeasurements was to reduce the benefit obligation by $245 million.

19

In August 2020, a committee of the Company’s Board of Directors approved a voluntary contribution to a U.S. OPEB plan for up to $700 million. During the first nine months of 2020, the Company contributed approximately $66 million to its pension plans and $87 million to its OPEB plans. The Company presently anticipates contributing an additional $26 million to its pension plans and $648 million to its OPEB plans during the remainder of fiscal year 2020. The anticipated OPEB contributions include a voluntary $600 million to a U.S. plan, which will increase plan assets. The pension and OPEB contributions exceeding the voluntary amount primarily include direct benefit payments from Company funds.

(9)  Income Taxes

The three-month effective tax rate increased from the third quarter of 2019 primarily due to unfavorable discrete adjustments related to finalizing estimated U.S. income tax on non-U.S. income from 2019, favorable discrete adjustments recorded in the third quarter of 2019, and a change in the 2020 forecasted geographic income.

The nine-month effective tax rate was also higher than 2019 due to the same items, partially offset by two discrete adjustments. In January 2020, the Company changed the corporate structure of two foreign holding subsidiaries to be indirect branches of Deere & Company. The change in tax status generated a capital loss that was carried back in the Company’s U.S. income tax return resulting in a $43 million benefit. In addition, a discrete benefit of $35 million was recognized in 2020 for the excess tax benefits related to vesting or exercise of share-based compensation awards.

The Company’s unrecognized tax benefits at August 2, 2020, November 3, 2019, and July 28, 2019 were $657 million, $553 million, and $630 million. The liability at August 2, 2020, November 3, 2019, and July 28, 2019 consisted of approximately $141 million, $153 million, and $274 million, respectively, which would affect the effective tax rate if the tax benefits were recognized. The remaining liability was related to tax positions for which there are offsetting tax receivables, or the uncertainty was only related to timing. The Company expects that any reasonably possible change in the amounts of unrecognized tax benefits in the next 12 months would not be significant.

20

(10)  Segment Reporting

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

 

Three Months Ended 

Nine Months Ended 

 

 

August 2

July 28

%

August 2

July 28

%

 

  2020   

  2019   

Change

   2020   

   2019   

Change

 

Net sales and revenues:

 

 

 

    

 

    

 

 

    

 

    

Agriculture and turf

 

$

5,672

$

5,946

-5

 

$

16,127

$

17,909

-10

Construction and forestry

2,187

 

3,023

-28

6,485

 

8,273

-22

Total net sales

7,859

 

8,969

-12

22,612

 

26,182

-14

Financial services

892

 

910

-2

2,699

 

2,650

+2

Other revenues

174

 

157

+11

498

 

530

-6

Total net sales and revenues

 

$

8,925

$

10,036

-11

 

$

25,809

$

29,362

-12

Operating profit: *

Agriculture and turf

 

$

942

$

612

+54

 

$

2,109

$

1,978

+7

Construction and forestry

205

 

378

-46

394

 

954

-59

Financial services

243

 

204

+19

498

 

566

-12

Total operating profit

1,390

 

1,194

+16

3,001

 

3,498

-14

Reconciling items **

(122)

 

(74)

+65

(256)

 

(218)

+17

Income taxes

(457)

 

(221)

+107

(752)

 

(748)

+1

Net income attributable to Deere & Company

 

$

811

$

899

-10

 

$

1,993

$

2,532

-21

Intersegment sales and revenues:

Agriculture and turf net sales

 

$

5

$

9

-44

 

$

20

$

27

-26

Construction and forestry net sales

 

1

Financial services

59

 

93

-37

218

 

261

-16

Equipment operations outside the U.S. and Canada:

Net sales

 

$

3,557

$

4,026

-12

 

$

9,563

$

10,985

-13

Operating profit

524

 

430

+22

932

 

1,088

-14

 

 

    

August 2

    

November 3

 

2020

2019

            

 

Identifiable assets:

Agriculture and turf

 

$

10,124

$

10,379

  

-2

Construction and forestry

9,105

 

9,387

-3

Financial services

48,869

 

48,483

+1

Corporate

9,166

 

4,762

+92

Total assets

 

$

77,264

$

73,011

+6

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

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

(11)  Financing Receivables

Past due balances of financing receivables still accruing finance income represent the total balance held (principal plus accrued interest) with any payment amounts 30 days or more past the contractual payment due date. Non-performing financing receivables represent loans for which the Company has ceased accruing finance income. The Company ceases accruing finance income when these receivables are generally 90 days delinquent. Generally, when receivables are 120 days delinquent the estimated uncollectible amount, after charging the dealer’s withholding account, if any, is written off to the allowance for credit losses. Finance income for non-performing receivables is recognized on a cash basis. Accrual of finance income is generally resumed when the receivable becomes contractually current and collections are reasonably assured.

21

Due to the significant, negative effects of COVID on dealers and retail customers, the Company provided short-term payment relief to dealers and retail customers on financing receivables, which includes retail notes, wholesale notes, revolving charge accounts, and sales-type and direct financing leases. The relief was provided in regional programs and case-by-case situations with customers that were generally current in their payment obligations. This relief generally included payment deferrals or reduced financing rates of three months or less. The balance of financing receivables granted relief was approximately 5 percent of the total financing receivable balance at August 2, 2020. The delinquency status of receivables granted relief is based on the modified payment schedule.

An age analysis of past due financing receivables that are still accruing interest and non-performing financing receivables in millions of dollars follows:

 

August 2, 2020

    

    

    

90 Days

    

 

30-59 Days

60-89 Days

or Greater

Total

Past Due

Past Due

Past Due

Past Due

Retail Notes:

Agriculture and turf

 

$

131

 

$

63

 

$

2

 

$

196

Construction and forestry

65

22

12

99

Other:

Agriculture and turf

37

17

2

56

Construction and forestry

28

19

47

Total

 

$

261

 

$

121

 

$

16

 

$

398

    

 

Total

Total

         Total         

Financing

Past Due

Non-Performing

Current

Receivables

Retail Notes:

Agriculture and turf

 

$

196

 

$

306

 

$

19,255

 

$

19,757

Construction and forestry

99

102

3,748

3,949

Other:

Agriculture and turf

56

81

8,161

8,298

Construction and forestry

47

40

1,392

1,479

Total

 

$

398

 

$

529

 

$

32,556

33,483

Less allowance for credit losses

200

Total financing receivables – net

 

$

33,283

 

22

November 3, 2019

    

    

    

90 Days

    

 

30-59 Days

60-89 Days

or Greater

Total

Past Due

Past Due

Past Due

Past Due

 

Retail Notes:

Agriculture and turf

$

138

$

73

$

1

$

212

Construction and forestry

 

79

29

 

4

 

112

 

Other:

Agriculture and turf

 

39

19

 

1

 

59

 

Construction and forestry

 

26

7

 

 

33

 

Total

$

282

$

128

$

6

$

416

 

Total

 

Total

         Total         

Financing

 

Past Due

Non-Performing

Current

Receivables

 

Retail Notes:

Agriculture and turf

$

212

$

268

$

18,931

$

19,411

Construction and forestry

112

 

127

 

3,450

 

3,689

 

Other:

Agriculture and turf

59

 

28

 

8,986

 

9,073

 

Construction and forestry

33

 

26

 

1,496

 

1,555

 

Total

$

416

$

449

$

32,863

33,728

 

Less allowance for credit losses

150

 

Total financing receivables – net

$

33,578

 

July 28, 2019

    

    

    

90 Days

    

 

30-59 Days

60-89 Days

or Greater

Total

Past Due

Past Due

Past Due

Past Due

Retail Notes:

Agriculture and turf

    

$

136

$

63

    

$

3

    

$

202

 

Construction and forestry

87

35

 

2

124

Other:

Agriculture and turf

38

22

 

60

Construction and forestry

17

7

 

24

Total

$

278

$

127

$

5

$

410

Total

Total

         Total         

Financing

Past Due

Non-Performing

Current

Receivables

Retail Notes:

Agriculture and turf

$

202

$

301

$

18,038

$

18,541

Construction and forestry

124

 

135

 

3,249

3,508

Other:

Agriculture and turf

60

 

37

 

8,833

8,930

Construction and forestry

24

 

14

 

1,417

1,455

Total

$

410

$

487

$

31,537

32,434

Less allowance for credit losses

185

Total financing receivables – net

$

32,249

23

An analysis of the allowance for credit losses and investment in financing receivables in millions of dollars during the periods follows:

 

Revolving

Retail

Charge

Notes

Accounts

Other

Total

Three Months Ended August 2, 2020

Allowance:

    

 

    

    

 

    

    

 

    

    

 

Beginning of period balance

 

$

119

 

$

43

$

33

$

195

Provision (credit)

5

14

(1)

18

Write-offs

(7)

(22)

(2)

(31)

Recoveries

6

8

1

15

Translation adjustments

2

1

3

End of period balance *

 

$

125

 

$

43

$

32

$

200

Nine Months Ended August 2, 2020

Allowance:

    

Beginning of period balance

 

$

89

 

$

40

$

21

$

150

Provision

79

32

13

124

Write-offs

(47)

(51)

(6)

(104)

Recoveries

10

22

2

34

Translation adjustments

(6)

2

(4)

End of period balance *

 

$

125

 

$

43

$

32

$

200

Financing receivables:

End of period balance

 

$

23,706

 

$

3,997

$

5,780

$

33,483

Balance individually evaluated **

 

$

160

 

$

1

$

67

$

228

* Individual allowances were not significant.

** Remainder is collectively evaluated.

The negative economic effects related to COVID and other macroeconomic issues have significantly affected certain retail borrowers, particularly of construction equipment. As a result, the allowance for credit losses increased $50 million in the first nine months of 2020 reflecting estimated credit losses inherent in the financing receivables.

 

Revolving

 

Retail

Charge

 

Notes

Accounts

Other

Total

Three Months Ended July 28, 2019

Allowance:

    

    

    

    

    

    

    

    

Beginning of period balance

$

115

 

$

43

$

24

$

182

Provision

 

7

18

1

 

26

Write-offs

 

(9)

(26)

(1)

 

(36)

Recoveries

 

5

8

 

13

Translation adjustments

 

2

(2)

 

End of period balance *

$

120

$

43

$

22

$

185

Nine Months Ended July 28, 2019

Allowance:

    

 

    

    

 

    

    

 

        

    

Beginning of period balance

$

113

 

$

43

$

22

$

178

Provision

 

21

34

7

 

62

Write-offs

 

(29)

(51)

(5)

 

(85)

Recoveries

 

15

17

1

 

33

Translation adjustments

(3)

 

(3)

End of period balance *

$

120

$

43

$

22

$

185

Financing receivables:

End of period balance

$

22,049

 

$

3,877

$

6,508

$

32,434

Balance individually evaluated **

$

145

 

$

10

$

155

*Individual allowances were not significant.

**Remainder is collectively evaluated.

24

Financing receivables are considered impaired when it is probable the Company will be unable to collect all amounts due according to the contractual terms. Receivables reviewed for impairment generally include those that are either past due, or have provided bankruptcy notification, or require significant collection efforts. Receivables that are impaired are generally classified as non-performing.

An analysis of the impaired financing receivables in millions of dollars follows:

 

    

    

Unpaid

    

    

Average

 

Recorded

Principal

Specific

Recorded

Investment

Balance

Allowance

Investment

August 2, 2020*

Receivables with specific allowance ***

 

$

92

 

$

91

 

$

23

$

106

Receivables without a specific allowance **

36

33

38

Total

 

$

128

 

$

124

 

$

23

$

144

Agriculture and turf

 

$

106

 

$

103

 

$

17

$

117

Construction and forestry

 

$

22

 

$

21

$

6

 

$

27

November 3, 2019*

Receivables with specific allowance **

$

40

$

39

$

13

$

40

Receivables without a specific allowance **

 

32

 

31

 

37

Total

$

72

 

$

70

 

$

13

$

77

Agriculture and turf

$

49

$

48

$

8

$

52

Construction and forestry

$

23

$

22

$

5

$

25

July 28, 2019*

Receivables with specific allowance **

$

37

 

$

36

 

$

13

$

37

Receivables without a specific allowance **

 

35

33

39

Total

$

72

 

$

69

 

$

13

$

76

Agriculture and turf

$

51

 

$

50

 

$

9

$

52

Construction and forestry

$

21

 

$

19

$

4

 

$

24

*  Finance income recognized was not material.

**Primarily retail notes.

***  Primarily retail notes and wholesale receivables.

A troubled debt restructuring is generally the modification of debt in which a creditor grants a concession it would not otherwise consider to a debtor that is experiencing financial difficulties. These modifications may include a reduction of the stated interest rate, an extension of the maturity dates, a reduction of the face amount or maturity amount of the debt, or a reduction of accrued interest. During the first nine months of 2020, the Company identified 413 receivable contracts, primarily wholesale receivables in Argentina, as troubled debt restructurings with aggregate balances of $99 million pre-modification and $88 million post-modification. The short-term payment relief related to COVID, mentioned earlier, did not meet the definition of a troubled debt restructuring. During the first nine months of 2019, there were 416 financing receivable contracts, primarily retail notes, identified as troubled debt restructurings with aggregate balances of $34 million pre-modification and $33 million post-modification. During these same periods, there were no significant troubled debt restructurings that subsequently defaulted and were written off. At August 2, 2020, the Company had commitments to lend approximately $16 million to borrowers whose accounts were modified in troubled debt restructurings.

(12)  Securitization of Financing Receivables

The Company, as a part of its overall funding strategy, periodically transfers certain financing receivables (retail notes) into VIEs that are special purpose entities (SPEs), or non-VIE banking operations, as part of its asset-backed securities programs (securitizations). The structure of these transactions is such that the transfer of the retail notes did not meet the accounting criteria for sales of receivables, and is, therefore, accounted for as a secured borrowing. 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. Use of the assets held by the SPEs or the non-VIEs is restricted by terms of the documents governing the securitization transactions.

In these securitizations, the retail notes are transferred to certain SPEs or to non-VIE banking operations, which in turn issue debt to investors. The debt securities issued to the third party investors resulted in secured borrowings, which are recorded as “Short-term securitization borrowings” on the balance sheet. The securitized retail notes are recorded as “Financing receivables securitized – net” on the balance sheet. The total restricted assets on the consolidated balance sheet related to these

25

securitizations include the financing receivables securitized less an allowance for credit losses, and other assets primarily representing restricted cash. Restricted cash results from contractual requirements in securitized borrowing arrangements and serves as a credit enhancement. The restricted cash is used to satisfy payment deficiencies, if any, in the required payments on secured borrowings. The balance of restricted cash is contractually stipulated and is either a fixed amount as determined by the initial balance of the financing receivables securitized or a fixed percentage of the outstanding balance of the securitized financing receivables. The restriction is removed either after all secured borrowing payments are made or proportionally as these receivables are collected and borrowing obligations reduced. For those securitizations in which retail notes are transferred into SPEs, the SPEs supporting the secured borrowings are consolidated unless the Company does not have both the power to direct the activities that most significantly impact the SPEs’ economic performance and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the SPEs. No additional support to these SPEs beyond what was previously contractually required has been provided during the reporting periods.

In certain securitizations, the Company consolidates the SPEs since it has both the power to direct the activities that most significantly impact the SPEs’ economic performance through its role as servicer of all the receivables held by the SPEs and the obligation through variable interests in the SPEs to absorb losses or receive benefits that could potentially be significant to the SPEs. The restricted assets (retail notes securitized, allowance for credit losses, and other assets) of the consolidated SPEs totaled $3,342 million, $2,895 million, and $3,425 million at August 2, 2020, November 3, 2019, and July 28, 2019, respectively. The liabilities (short-term securitization borrowings and accrued interest) of these SPEs totaled $3,259 million, $2,847 million, and $3,316 million at August 2, 2020, November 3, 2019, and July 28, 2019, respectively. The credit holders of these SPEs do not have legal recourse to the Company’s general credit.

In certain securitizations, the Company transfers retail notes to non-VIE banking operations, which are not consolidated since the Company does not have a controlling interest in the entities. The Company’s carrying values and interests related to the securitizations with the unconsolidated non-VIEs were restricted assets (retail notes securitized, allowance for credit losses, and other assets) of $680 million, $491 million, and $587 million at August 2, 2020, November 3, 2019, and July 28, 2019, respectively. The liabilities (short-term securitization borrowings and accrued interest) were $643 million, $465 million, and $546 million at August 2, 2020, November 3, 2019, and July 28, 2019, respectively.

In certain securitizations, the Company transfers retail notes into bank-sponsored, multi-seller, commercial paper conduits, which are SPEs that are not consolidated. The Company does not service a significant portion of the conduits’ receivables, and therefore, does not have the power to direct the activities that most significantly impact the conduits’ economic performance. These conduits provide a funding source to the Company (as well as other transferors into the conduit) as they fund the retail notes through the issuance of commercial paper. The Company’s carrying values and variable interest related to these conduits were restricted assets (retail notes securitized, allowance for credit losses, and other assets) of $1,551 million, $1,079 million, and $1,286 million at August 2, 2020, November 3, 2019, and July 28, 2019, respectively. The liabilities (short-term securitization borrowings and accrued interest) related to these conduits were $1,463 million, $1,015 million, and $1,190 million at August 2, 2020, November 3, 2019, and July 28, 2019, respectively.

The Company’s carrying amount of the liabilities to the unconsolidated conduits, compared to the maximum exposure to loss related to these conduits, which would only be incurred in the event of a complete loss on the restricted assets, was as follows in millions of dollars:

 

    

August 2

 

2020

Carrying value of liabilities

 

$

1,463

Maximum exposure to loss

1,551

The total assets of unconsolidated VIEs related to securitizations were approximately $41 billion at August 2, 2020.

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

 

    

August 2

    

November 3

    

July 28

 

2020

2019

2019

 

Financing receivables securitized (retail notes)

 

$

5,484

$

4,395

$

5,214

Allowance for credit losses

(15)

 

(12)

 

(14)

Other assets

104

 

82

 

98

Total restricted securitized assets

 

$

5,573

$

4,465

$

5,298

26

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

 

    

August 2

    

November 3

    

July 28

 

2020

2019

2019

 

Short-term securitization borrowings

 

$

5,361

$

4,321

$

5,048

Accrued interest on borrowings

4

 

6

 

4

Total liabilities related to restricted securitized assets

 

$

5,365

$

4,327

$

5,052

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. Due to the Company’s short-term credit rating, cash collections from these restricted assets are not required to be placed into a segregated collection account until immediately prior to the time payment is required to the secured creditors. At August 2, 2020, the maximum remaining term of all securitized retail notes was approximately seven years.

(13)  Inventories

Most inventories owned by Deere & Company and its U.S. equipment subsidiaries and certain foreign 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:

    

August 2

    

November 3

    

July 28

 

2020

2019

2019

 

Raw materials and supplies

 

$

2,101

$

2,285

$

2,365

Work-in-process

696

 

747

 

815

Finished goods and parts

4,427

 

4,613

 

5,345

Total FIFO value

7,224

 

7,645

 

8,525

Less adjustment to LIFO value

1,574

 

1,670

 

1,778

Inventories

 

$

5,650

$

5,975

$

6,747

(14)  Goodwill and Other Intangible AssetsNet

The changes in amounts of goodwill by operating segments were as follows in millions of dollars:

 

    

Agriculture

    

Construction

    

 

and Turf

and Forestry

Total

 

Goodwill at October 28, 2018

$

583

$

2,518

$

3,101

Translation adjustments and other

 

(1)

(87)

(88)

Goodwill at July 28, 2019

$

582

$

2,431

$

3,013

Goodwill at November 3, 2019

$

574

$

2,343

$

2,917

Translation adjustments and other

2

65

67

Goodwill at August 2, 2020

$

576

$

2,408

$

2,984

There were no accumulated impairment losses in the reported periods.

27

The components of other intangible assets were as follows in millions of dollars:

 

    

August 2

    

November 3

    

July 28

 

2020

2019

2019

 

Amortized intangible assets:

Customer lists and relationships

$

515

$

511

$

525

Technology, patents, trademarks, and other

1,021

 

1,028

 

1,057

Total at cost

1,536

 

1,539

 

1,582

Less accumulated amortization *

358

 

282

 

261

Total

1,178

1,257

1,321

Unamortized intangible assets:

In-process research and development

123

123

123

Other intangible assets – net

$

1,301

$

1,380

$

1,444

*  Accumulated amortization at August 2, 2020, November 3, 2019, and July 28, 2019 for customer lists and relationships totaled $103 million, $77 million, and $71 million and technology, patents, trademarks, and other totaled $255 million, $205 million, and $190 million, respectively.

The amortization of other intangible assets in the third quarter and the first nine months of 2020 was $26 million and $76 million and for 2019 was $27 million and $82 million, respectively. The estimated amortization expense for the next five years is as follows in millions of dollars: remainder of 2020 – $25, 2021 – $101, 2022 – $100, 2023 – $99, 2024 – $96, and 2025 –$95.

As outlined in the 2019 Form 10-K, goodwill is tested for impairment annually and when events or circumstances change such that it is more likely than not that the fair value of a reporting unit is reduced below its carrying value. The annual measurement date is the end of the third quarter. In the second and third quarters of 2020, for each significant reporting unit the Company reviewed previous fair value analyses considering the uncertain and unknown economic effects of COVID. The Company concluded that an impairment was not required.

The intangible assets subject to amortization were also considered to determine if the carrying amount may not be recoverable. Except as identified in Note 20, the Company concluded the carrying amount would be recovered based on current estimates. These positions will be evaluated in future quarters, as necessary.

(15)  Leases

The Company is both a lessee and a lessor. The Company leases for its own use, under leases with expected use periods generally ranging from less than one year to 20 years, primarily warehouse facilities, office space, production equipment, information technology equipment, and vehicles. The Company’s financial services segment leases to users equipment produced or sold by the Company, and a limited amount of other equipment. These leases are usually written for periods of less than one year to seven years.

The Company determines if an arrangement is or contains a lease at the contract inception.

Lessee

The Company recognizes on the balance sheet a lease liability and a right of use asset for leases with a term greater than 12 months for both operating and finance leases.

The amounts of the lease liability and right of use asset are determined at lease commencement and are based on the present value of the lease payments over the lease term. The lease payments are discounted using the Company’s incremental borrowing rate since the rate implicit in the lease is generally not readily determinable. The Company determines the incremental borrowing rate for each lease based primarily on the lease term and the economic environment of the country where the asset will be used, adjusted as if the borrowings were collateralized. Leases with contractual periods greater than 12 months and that do not meet the finance lease criteria are classified as operating leases.

Certain real estate leases contain one or more options to terminate or renew, with terms that can generally extend the lease term from one to 10 years. Options that the Company is reasonably certain to exercise are included in the lease term.

The Company has elected to combine lease and nonlease components, such as maintenance and utilities costs included in a lease contract, for all asset classes. Leases with an initial term of 12 months or less are expensed on a straight-line basis over the lease term and recorded in short-term lease expense. Variable lease expense primarily includes warehouse facilities leases

28

with payments based on utilization exceeding contractual minimum amounts and leases with payments indexed to inflation when the index changes after lease commencement.

The lease expense by type consisted of the following in millions of dollars:

Three Months Ended

Nine Months Ended

August 2, 2020

August 2, 2020

Operating lease expense

$

29

$

92

Short-term lease expense

8

18

Variable lease expense

8

28

Finance lease:

Depreciation expense

3

10

Interest on lease liabilities

1

2

Total lease expense

$

49

$

150

Operating and finance lease right of use assets and liabilities follow in millions of dollars:

August 2, 2020

Operating leases:

Other assets

$

341

Accounts payable and accrued expenses

318

Finance leases:

Property and equipment - net

$

56

Short-term borrowings

$

18

Long-term borrowings

33

Total finance lease liabilities

$

51

The weighted-average remaining lease term in years and discount rates follows:

August 2, 2020

Weighted-average remaining lease terms:

Operating leases

7

Finance leases

3

Weighted-average discount rate:

Operating leases

2.2%

Finance leases

2.4%

Lease payment amounts in each of the next five years at August 2, 2020 follow in millions of dollars:

Operating

Finance

Due in:

Leases

Leases

Remainder of 2020

$

30

$

5

2021

83

18

2022

71

15

2023

50

10

2024

39

3

2025

22

1

Later years

43

2

Total lease payments

338

54

Less imputed interest

20

3

Total lease liabilities

$

318

$

51

29

Future minimum lease payments under the previous lease standard for operating and capital leases at November 3, 2019 follow in millions of dollars:

Operating

Capital

Due in:

Leases

Leases

2020

$

111

$

12

2021

77

10

2022

56

6

2023

39

2

2024

28

1

Later years

26

1

Total minimum lease payments

$

337

$

32

Cash paid for amounts included in the measurement of lease liabilities:

Nine Months Ended

August 2, 2020

Operating cash flows from operating leases

$

92

Operating cash flows from finance leases

2

Financing cash flows from finance leases

16

Right of use assets obtained in exchange for lease liabilities:

Nine Months Ended

August 2, 2020

Operating leases

$

27

Finance leases

37

Lessor

The Company leases equipment manufactured or sold by the Company and a limited amount of non-Deere equipment to retail customers through sales-type, direct financing, and operating leases. Sales-type and direct financing leases are reported in “Financing receivables - net” on the consolidated balance sheet. Operating leases are reported in “Equipment on operating leases - net” on the consolidated balance sheet.

Leases offered by the Company may include early termination and renewal options. At the end of a lease, the lessee generally has the option to purchase the underlying equipment for a fixed price or return it to the dealer. If the equipment is returned to the dealer, the dealer also has the option to purchase the equipment or return it to the Company for remarketing.

The Company estimates the residual values for operating leases at lease inception based on several factors, including lease term, expected hours of usage, historical wholesale sale prices, return experience, intended use of the equipment, market dynamics and trends, and dealer residual guarantees. The Company reviews residual value estimates during the lease term and tests the carrying value of its operating lease assets for impairment when events or circumstances necessitate. The depreciation is adjusted on a straight-line basis over the remaining lease term if residual value estimates decline. Lease agreements include usage limits and specifications on machine condition, which allow the Company to assess lessees for excess use or damages to the underlying equipment. In the second quarter of 2020, the Company recorded impairment losses on operating leases of $22 million due to higher expected equipment return rates and lower estimated values of used construction equipment. Operating lease impairments are recorded in “Other operating expenses.”

The Company has elected to combine lease and nonlease components. The nonlease components primarily relate to preventative maintenance and extended warranty agreements financed by the retail customer. The Company has also elected to report consideration related to sales and value added taxes net of the related tax expense. Property taxes on leased assets are recorded on a gross basis in “Finance and interest income” and “Other operating expenses” on the statement of consolidated income. Variable lease revenues primarily relate to property taxes on leased assets in certain markets and late fees.

Due to the significant, negative effects of COVID, the Company provided short-term relief to lessees during the second and third quarters of 2020. The relief, which included payment deferrals of three months or less, was provided in regional programs and on a case-by-case basis and primarily related to construction accounts. The operating leases granted relief

30

represented approximately 4 percent of the Company’s operating lease portfolio at August 2, 2020. See Note 11 for sales-type and direct financing leases provided payment relief.

Lease revenues earned by the Company were as follows in millions of dollars:

Three Months Ended

Nine Months Ended

August 2, 2020

August 2, 2020

Sales-type and direct financing lease revenues

$

33

$

101

Operating lease revenues

361

1,104

Variable lease revenues

6

17

Total lease revenues

$

400

$

1,222

At the time of accepting a lease that qualifies as a sales-type or direct financing lease, the Company records the gross amount of lease payments receivable, estimated residual value of the leased equipment, and unearned finance income. The unearned finance income is recognized as revenue over the lease term using the interest method.

Sales-type and direct financing lease receivables by product category were as follows in millions of dollars:

August 2

November 3

2020

2019

Agriculture and turf

$

902

$

897

Construction and forestry

979

1,033

Total

1,881

1,930

Guaranteed residual values

238

232

Unguaranteed residual values

80

101

Less unearned finance income

223

212

Financing leases receivables

$

1,976

$

2,051

Scheduled payments, including guaranteed residual values, on sales-type and direct financing lease receivables at August 2, 2020 follow in millions of dollars:

August 2

Due in:

2020

Remainder of 2020

$

296

2021

850

2022

488

2023

281

2024

146

2025

46

Later years

12

Total

$

2,119

Scheduled payments on financing lease receivables under the previous lease standard at November 3, 2019 follow in millions of dollars:

November 3

Due in:

2019

2020

$

833

2021

557

2022

321

2023

153

2024

53

Later years

13

Total

$

1,930

31

Lease payments from operating leases are recorded as income on a straight-line method over the lease terms. Operating lease assets are recorded at cost and depreciated to their estimated residual value on a straight-line method over the terms of the leases.

The cost of equipment on operating leases by product category was as follows in millions of dollars:

August 2

November 3

2020

2019

Agriculture and turf

$

7,162

$

7,257

Construction and forestry

2,013

2,165

Total

9,175

9,422

Less accumulated depreciation

2,017

1,855

Equipment on operating leases - net

$

7,158

$

7,567

The total operating lease residual values at August 2, 2020 and November 3, 2019 were $5,167 million and $5,259 million, respectively. Certain operating leases are subject to residual value guarantees. The total residual value guarantees were $691 million and $647 million at August 2, 2020 and November 3, 2019, respectively.

Lease payments for equipment on operating leases at August 2, 2020 were scheduled as follows in millions of dollars:

August 2

Due in:

2020

Remainder of 2020

$

300

2021

993

2022

633

2023

324

2024

140

2025

15

Total

$

2,405

Rental payments for equipment on operating leases under the previous lease standard at November 3, 2019 were scheduled as follows in millions of dollars:

November 3

Due in:

2019

2020

$

1,086

2021

759

2022

419

2023

193

2024

41

Total

$

2,498

The Company discusses with lessees and dealers options to purchase the equipment or extend the lease prior to lease maturity. Equipment returned to the Company upon termination of leases is remarketed by the Company. The matured operating lease inventory balances at August 2, 2020 and November 3, 2019 were $106 million and $163 million, respectively. In the second quarter of 2020, the Company recorded impairment losses on matured operating lease inventory of $10 million due to lower estimated values of used construction equipment. Impairment losses on matured operating lease inventory are included in “Other operating expenses.”

(16)  Commitments and 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.

The premiums for extended warranties are primarily recognized in income in proportion to the costs expected to be incurred over the contract period. These unamortized extended warranty premiums (deferred revenue) included in the following table totaled $621 million and $542 million at August 2, 2020 and July 28, 2019, respectively.

32

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

 

Three Months Ended

Nine Months Ended

 

August 2

July 28

August 2

July 28

 

2020

2019

2020

2019

 

Beginning of period balance

    

$

1,767

    

$

1,714

    

$

1,800

    

$

1,652

Payments

(250)

 

(252)

(703)

 

(714)

Amortization of premiums received

(58)

 

(57)

(168)

 

(168)

Accruals for warranties

177

 

263

609

 

772

Premiums received

68

 

75

202

 

209

Foreign exchange

27

 

3

(9)

 

(5)

End of period balance

$

1,731

$

1,746

$

1,731

$

1,746

At August 2, 2020, the Company had approximately $343 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 August 2, 2020, the Company had accrued losses of approximately $14 million under these agreements. The maximum remaining term of the receivables guaranteed at August 2, 2020 was approximately six years.

At August 2, 2020, the Company had commitments of approximately $257 million for the construction and acquisition of property and equipment. Also, at August 2, 2020, the Company had restricted assets of $67 million, primarily as collateral for borrowings and restricted other assets. See Note 12 for additional restricted assets associated with borrowings related to securitizations.

The Company also had other miscellaneous contingent liabilities totaling approximately $50 million at August 2, 2020. The accrued liability for these contingencies was not material at August 2, 2020.

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, employment, patent, and trademark matters. The Company believes the reasonably possible range of losses for these unresolved legal actions would not have a material effect on its consolidated financial statements.

(17)  Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To determine fair value, the Company uses various methods including market and income approaches. The Company utilizes valuation models and techniques that maximize the use of observable inputs. The models are industry-standard models that consider various assumptions including time values and yield curves as well as other economic measures. These valuation techniques are consistently applied.

Level 1 measurements consist of quoted prices in active markets for identical assets or liabilities. Level 2 measurements include significant other observable inputs such as quoted prices for similar assets or liabilities in active markets; identical assets or liabilities in inactive markets; observable inputs such as interest rates and yield curves; and other market-corroborated inputs. Level 3 measurements include significant unobservable inputs.

33

The fair values of financial instruments that do not approximate the carrying values in millions of dollars follow:

 

August 2, 2020

November 3, 2019

July 28, 2019

 

Carrying
Value

Fair
Value *

Carrying
Value

Fair
Value *

Carrying
Value

Fair
Value *

 

Financing receivables – net:

   

   

   

Equipment operations

$

111

$

102

$

65

$

61

$

100

$

93

Financial services

27,703

27,929

29,130

29,106

   

26,949

26,921

Total

$

27,814

$

28,031

$

29,195

$

29,167

$

27,049

$

27,014

Financing receivables securitized – net:

 

Equipment operations

$

37

$

34

$

44

$

43

$

54

$

52

Financial services

5,432

5,544

4,339

4,362

5,146

5,154

Total

$

5,469

$

5,578

$

4,383

$

4,405

$

5,200

$

5,206

Short-term
securitization borrowings:

 

Equipment operations

$

37

$

37

$

44

$

45

$

53

$

54

Financial services

5,324

5,381

4,277

4,302

4,995

5,017

Total

$

5,361

$

5,418

$

4,321

$

4,347

$

5,048

$

5,071

Long-term borrowings due within one year: **

Equipment operations

$

507

$

504

$

642

 

$

645

$

1,009

$

1,013

Financial services

6,114

6,168

 

6,786

 

6,788

 

6,922

6,914

Total

$

6,621

$

6,672

$

7,428

$

7,433

$

7,931

$

7,927

Long-term borrowings: **

Equipment operations

$

10,184

$

12,163

$

5,415

 

$

6,138

$

5,364

$

6,017

Financial services

23,820

24,464

 

24,814

 

25,122

 

23,878

24,143

Total

$

34,004

$

36,627

$

30,229

$

31,260

$

29,242

$

30,160

*Fair value measurements above were Level 3 for all financing receivables, Level 3 for equipment operations short-term securitization borrowings, and Level 2 for all other borrowings.

** Carrying values exclude finance lease liabilities that are presented as borrowings beginning in 2020 (see Notes 3 and 15).

Fair values of the financing receivables that were issued long-term were based on the discounted values of their related cash flows at interest rates currently being offered by the Company for similar financing receivables. The fair values of the remaining financing receivables approximated the carrying amounts.

Fair values of long-term borrowings and short-term securitization borrowings were based on current market quotes for identical or similar borrowings and credit risk, or on the discounted values of their related cash flows at current market interest rates. Certain long-term borrowings have been swapped to current variable interest rates. The carrying values of these long-term borrowings included adjustments related to fair value hedges.

34

Assets and liabilities measured at fair value on a recurring basis in millions of dollars follow*:

 

    

August 2

    

November 3

    

July 28

 

2020

2019

2019

 

Level 1:

Marketable securities

International equity securities ***

$

2

Equity fund ***

68

$

59

$

59

U.S. government debt securities

50

 

50

 

49

Total Level 1 marketable securities

120

109

108

Level 2:

Marketable securities

U.S. government debt securities

105

81

73

Municipal debt securities

64

 

60

 

57

Corporate debt securities

185

 

165

 

156

International debt securities

2

5

9

Mortgage-backed securities **

159

 

160

 

158

Total Level 2 marketable securities

515

 

471

 

453

Other assets

Derivatives:

Interest rate contracts

895

 

363

 

265

Foreign exchange contracts

57

 

20

 

53

Cross-currency interest rate contracts

9

 

1

 

2

Total Level 2 other assets

 

961

384

320

Accounts payable and accrued expenses

Derivatives:

Interest rate contracts

 

115

65

99

Foreign exchange contracts

55

 

71

 

45

Cross-currency interest rate contracts

3

2

Total Level 2 accounts payable and accrued expenses

 

170

139

146

Level 3:

Marketable securities

International debt securities

 

5

1

4

*Excluded from this table were the Company’s cash equivalents, which were carried at cost that approximates fair value. The cash equivalents consist primarily of money market funds and time deposits.

**  Primarily issued by U.S. government sponsored enterprises.

***During the third quarter of 2020 and 2019, net unrealized gains on equity securities of $10 million and $1 million, respectively, were recorded in “Other income.” During the first nine months of 2020 and 2019, net unrealized gains on equity securities were $8 million and $7 million, respectively.

The contractual maturities of debt securities at August 2, 2020 in millions of dollars are shown below. Actual maturities may differ from those scheduled as a result of prepayments by the issuers. Because of the potential for prepayment on mortgage-backed securities, they are not categorized by contractual maturity.

 

Amortized

Fair

Cost

Value

Due in one year or less

 

$

27

$

24

Due after one through five years

89

95

Due after five through 10 years

102

114

Due after 10 years

160

178

Mortgage-backed securities

150

159

Debt securities

 

$

528

 

$

570

35

Fair value, recurring Level 3 measurements from available-for-sale marketable securities in millions of dollars follow:

    

Three Months Ended 

Nine Months Ended 

August 2

July 28

August 2

July 28

2020

2019

2020

2019

Beginning of period balance

 

$

1

$

4

$

1

$

8

Purchases

5

5

Principal payments

(1)

(1)

(5)

Other

1

End of period balance

$

5

 

$

4

$

5

$

4

Fair value, nonrecurring measurements from impairments in millions of dollars follow:

Fair Value *

Losses *

Three Months Ended 

Nine Months Ended 

August 2

November 3

July 28

August 2

July 28

August 2

July 28

  

2020

  

2019

  

2019

  

2020

  

2019

  

2020

  

2019

 

Other receivables

$

1

$

2

$

2

Equipment on operating leases – net

$

855

$

22

Property and equipment – net

$

8

$

5

$

67

Investments in unconsolidated affiliates

$

20

Other intangible assets – net

$

2

$

2

Other assets

$

19

$

142

$

24

$

34

*  See financing receivables with specific allowances in Note 11. The fair value measurement for the investment in unconsolidated affiliates was Level 1. The other fair value measurements were Level 3.

The following is a description of the valuation methodologies the Company uses to measure certain financial instruments on the balance sheet at fair value:

Marketable SecuritiesThe portfolio of investments, except for the Level 3 measurement international debt securities, is primarily valued on a market approach (matrix pricing model) in which all significant inputs are observable or can be derived from or corroborated by observable market data such as interest rates, yield curves, volatilities, credit risk, and prepayment speeds. Funds are primarily valued using the fund’s net asset value, based on the fair value of the underlying securities. The Level 3 measurement international debt securities are primarily valued using an income approach based on discounted cash flows using yield curves derived from limited, observable market data.

DerivativesThe Company’s derivative financial instruments consist of interest rate swaps and caps, foreign currency futures, forwards and swaps, and cross-currency interest rate swaps. The portfolio is valued based on an income approach (discounted cash flow) using market observable inputs, including swap curves and both forward and spot exchange rates for currencies.

Financing Receivables – Specific reserve impairments are based on the fair value of the collateral, which is measured using a market approach (appraisal values or realizable values). Inputs include a selection of realizable values.

Other Receivables – The impairment was based on the expected realization of value-added tax receivables related to a closed factory operation (see Note 20).

Equipment on Operating Leases – Net – The impairments are based on an income approach (discounted cash flow), using the contractual payments, plus estimates of return rates and equipment sale price at lease maturity. Inputs include historic return rates and realized sales values (see Note 20).

Property and Equipment – Net – The impairments are measured at the lower of the carrying amount, or fair value. The valuations were based on a cost approach. The inputs include replacement cost estimates adjusted for physical deterioration and economic obsolescence (see Note 20).

Investment in Unconsolidated Affiliates – Other than temporary impairments for investments measured as the difference between the implied fair value and the carrying value of the investments. The fair value for publicly traded entities is the share price multiplied by the shares owned (see Note 20).

36

Other Intangible Assets – Net – The impairment was measured at the remaining net book value of customer relationships related to a closed factory operation (see Note 20).

Other Assets – The impairments of matured operating lease inventory are measured at the fair value of that inventory. The valuations were based on a market approach. The inputs include sales of comparable assets (see Note 20). The impairment of the German lawn mower business recorded in other assets was measured at the realizable value. Fair value was based on the probable sale price. The inputs included estimates of the final sale price (see Note 20).

(18)  Derivative Instruments

It is the Company’s policy that derivative transactions are executed only to manage exposures arising in the normal course of business and not for the purpose of creating speculative positions or trading. The Company’s financial services operations 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 and foreign currency fluctuations, while responding to favorable financing opportunities. 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 functional currencies. In addition, the Company has interest rate exposure at certain equipment operations units for below market retail financing programs that are used as sales incentives and are offered for extended periods.

All derivatives are recorded at fair value on the balance sheet. Cash collateral received or paid is not offset against the derivative fair values on the balance sheet. Each derivative is designated as a cash flow hedge, a fair value hedge, or remains undesignated. All designated hedges are formally documented as to the relationship with the hedged item as well as the risk-management strategy. Both at inception and on an ongoing basis the hedging instrument is assessed as to its effectiveness. If and when a derivative is determined not to be highly effective as a hedge, the underlying hedged transaction is no longer likely to occur, the hedge designation is removed, or the derivative is terminated, hedge accounting is discontinued.

Cash Flow Hedges

Certain interest rate contracts (swaps) were designated as hedges of future cash flows from borrowings. The total notional amounts of the receive-variable/pay-fixed interest rate contracts at August 2, 2020, November 3, 2019, and July 28, 2019 were $1,900 million, $3,150 million, and $2,750 million, respectively. Fair value gains or losses on cash flow hedges were recorded in OCI and are subsequently reclassified into interest expense in the same periods during which the hedged transactions affected earnings. These amounts offset the effects of interest rate changes on the related borrowings. The cash flows from these contracts were recorded in operating activities in the statement of consolidated cash flows.

The amount of loss recorded in OCI at August 2, 2020 that is expected to be reclassified to interest expense or other operating expenses in the next twelve months if interest rates or exchange rates remain unchanged is approximately $14 million after-tax. No gains or losses were reclassified from OCI to earnings based on the probability that the original forecasted transaction would not occur.

Fair Value Hedges

Certain interest rate contracts (swaps) were designated as fair value hedges of borrowings. The total notional amounts of the receive-fixed/pay-variable interest rate contracts at August 2, 2020, November 3, 2019, and July 28, 2019 were $8,850 million, $8,717 million, and $9,245 million, respectively. The fair value gains or losses on these contracts were generally offset by fair value gains or losses on the hedged items (fixed-rate borrowings) with both items recorded in interest expense.

37

The amounts recorded in the consolidated balance sheet related to borrowings designated in fair value hedging relationships in millions of dollars follow:

 

Cumulative Increase (Decrease) of Fair

 

Value Hedging Adjustments Included in

the Carrying Amount

Carrying

Active

 

Amount of

Hedging

Discontinued

Hedged Item

Relationships

Relationships

Total

 

August 2, 2020

Long-term borrowings due within one year*

    

$

480

    

$

6

    

$

2

    

$

8

Long-term borrowings

9,140

754

40

794

November 3, 2019

Long-term borrowings due within one year*

$

412

$

(1)

$

(4)

$

(5)

Long-term borrowings

8,532

295

(32)

263

July 28, 2019

Long-term borrowings due within one year*

$

187

$

1

$

(5)

$

(4)

Long-term borrowings

9,154

 

184

(50)

 

134

*Presented in short-term borrowings

Derivatives not designated as hedging instruments

The Company has certain interest rate contracts (swaps), foreign exchange contracts (futures, forwards, and swaps), and cross-currency interest rate contracts (swaps), which were not formally designated as hedges. These derivatives were held as economic hedges for underlying interest rate or foreign currency exposures, primarily for certain borrowings, purchases or sales of inventory, and below market retail financing programs. The total notional amounts of these interest rate swaps at August 2, 2020, November 3, 2019, and July 28, 2019 were $7,522 million, $9,166 million, and $7,607 million, the foreign exchange contracts were $4,790 million, $4,962 million, and $6,362 million, and the cross-currency interest rate contracts were $125 million, $92 million, and $90 million, respectively. The fair value gains or losses from the interest rate contracts were recognized currently in interest expense and the gains or losses from foreign exchange contracts in cost of sales or other operating expenses, generally offsetting over time the expenses on the exposures being hedged. The cash flows from these non-designated contracts were recorded in operating activities in the statement of consolidated cash flows.

38

Fair values of derivative instruments in the condensed consolidated balance sheet in millions of dollars follow:

 

    

August 2

    

November 3

    

July 28

 

Other Assets

2020

2019

2019

 

Designated as hedging instruments:

Interest rate contracts

 

$

806

$

332

$

232

Total designated

806

 

332

 

232

 

Not designated as hedging instruments:

Interest rate contracts

89

 

31

 

33

Foreign exchange contracts

57

 

20

 

53

Cross-currency interest rate contracts

9

 

1

 

2

Total not designated

155

 

52

 

88

 

Total derivative assets

 

$

961

$

384

$

320

 

Accounts Payable and Accrued Expenses

Designated as hedging instruments:

Interest rate contracts

 

$

24

$

28

$

55

Total designated

24

28

55

 

Not designated as hedging instruments:

Interest rate contracts

91

37

44

Foreign exchange contracts

55

 

71

 

45

Cross-currency interest rate contracts

 

3

 

2

Total not designated

146

 

111

 

91

 

Total derivative liabilities

 

$

170

$

139

$

146

The classification and gains (losses) including accrued interest expense related to derivative instruments on the statement of consolidated income consisted of the following in millions of dollars:

Three Months Ended

Nine Months Ended

 

August 2

July 28

August 2

July 28

 

2020

2019

2020

2019

 

Fair Value Hedges:

  

 

    

  

  

 

    

  

 

Interest rate contracts - Interest expense

 

$

78

$

193

 

$

589

$

468

 

Cash Flow Hedges:

Recognized in OCI

Interest rate contracts - OCI (pretax)

(1)

 

(27)

(18)

 

(42)

 

Reclassified from OCI

Interest rate contracts - Interest expense

(7)

 

1

(13)

 

6

 

Not Designated as Hedges:

Interest rate contracts - Net sales

$

(2)

$

(6)

$

(26)

$

(23)

Interest rate contracts - Interest expense *

 

(1)

(7)

 

2

(25)

Foreign exchange contracts - Cost of sales

(28)

 

(8)

64

(1)

Foreign exchange contracts - Other operating *

(49)

 

(12)

125

 

88

Total not designated

 

$

(80)

$

(33)

 

$

165

$

39

*Includes interest and foreign exchange gains (losses) from cross-currency interest rate contracts.

Counterparty Risk and Collateral

Derivative instruments are subject to significant concentrations of credit risk to the banking sector. The Company manages individual counterparty exposure by setting limits that consider the credit rating of the counterparty, the credit default swap spread of the counterparty, and other financial commitments and exposures between the Company and the counterparty banks. All interest rate derivatives are transacted under International Swaps and Derivatives Association (ISDA) documentation.

39

Some of these agreements include credit support provisions. Each master agreement permits the net settlement of amounts owed in the event of default or termination.

Certain of the Company’s derivative agreements contain credit support provisions that may require the Company to post or receive collateral based on the size of the net liability or net asset positions, credit ratings, and market conventions. The aggregate fair value of all derivatives with credit-risk-related contingent features that were in a net liability position at August 2, 2020, November 3, 2019, and July 28, 2019, was $115 million, $68 million, and $101 million, respectively. Based on net asset positions and in accordance with the limits established in these agreements, the Company received $332 million in cash collateral at August 2, 2020. No cash collateral was posted or received at November 3, 2019 or July 28, 2019. In addition, the Company paid $8 million of collateral that was outstanding at August 2, 2020 to participate in an international futures market to hedge currency exposure, which is not included in the table below.

Derivatives are recorded without offsetting for netting arrangements or collateral. The impact on the derivative assets and liabilities related to netting arrangements and any collateral received or paid in millions of dollars follows:

Gross Amounts

Netting

Collateral

 

August 2, 2020

    

Recognized

    

Arrangements

    

Received

    

Net Amount

 

Assets

 

$

961

 

$

(120)

 

$

(332)

 

$

509

Liabilities

170

(120)

50

Gross Amounts

Netting

Collateral

 

November 3, 2019

    

Recognized

    

Arrangements

    

Received

    

Net Amount

 

Assets

$

384

 

$

(70)

 

$

314

Liabilities

139

(70)

69

    

Gross Amounts

    

Netting

    

Collateral

    

 

July 28, 2019

Recognized

Arrangements

Received

Net Amount

 

Assets

$

320

$

(70)

$

250

Liabilities

 

146

 

(70)

 

76

(19)  Stock Option and Restricted Stock Awards

In December 2019, the Company granted stock options to employees for the purchase of 495 thousand shares of common stock at an exercise price of $169.70 per share and a binomial lattice model fair value of $35.83 per share at the grant date. At August 2, 2020, options for 6.1 million shares were outstanding with a weighted-average exercise price of $100.84 per share. The Company also granted 362 thousand restricted stock units to employees and nonemployee directors in the first nine months of 2020, of which 295 thousand are subject to service based only conditions and 67 thousand are subject to performance/service based conditions. The weighted-average fair value of the service based only units at the grant date was $168.73 per unit based on the market price of a share of underlying common stock. The fair value of the performance/service based units at the grant date was $160.81 per unit based on the market price of a share of underlying common stock excluding dividends. At August 2, 2020, the Company was authorized to grant an additional 18.5 million shares related to stock option and restricted stock awards.

(20)  Special Items

Employee-Separation Programs

During the first quarter of 2020, the Company announced a broad voluntary employee-separation program for the U.S. salaried workforce that continues the efforts to create a more efficient organization structure and reduce operating costs. The program provided for cash payments based on years of service. The expense was recorded primarily in the period in which the employees irrevocably accepted the separation offer. The program’s total pretax expenses were approximately $138 million with the final $2 million recorded in the third quarter. The payments for the program were also substantially made in the first quarter of 2020. Included in the total pretax expense is a non-cash charge of $21 million resulting from a curtailment in certain OPEB plans (see Note 8), which was recorded outside of operating profit in “Other operating expense.” The first nine months of 2020 expenses that are included in operating profit of $115 million are allocated 36 percent “Cost of sales,” 16 percent “Research and development,” and 48 percent “Selling, administrative and general.” In addition, the expenses are allocated 74 percent to the agriculture and turf operations, 23 percent to the construction and forestry operations, and 3 percent to the financial services operations. Annual savings from these programs are estimated to be approximately $85 million with about $65 million in 2020.

40

During the third and early fourth quarter of 2020, the Company announced additional employee-separation programs as part of an initiative to improve organizational efficiency. The programs will provide for cash payments based on years of service. The expenses will generally be recorded in the period the employees irrevocably accept the separation offer, which is expected to be primarily in the fourth quarter of 2020. The programs’ total pretax expenses are estimated to be about $175 million with annual savings of about $175 million.

Impairments and Other Charges

In the second quarter of 2020, the Company recorded non-cash impairment charges as outlined below.

The fixed assets in an asphalt plant factory in Germany were impaired by $62 million pretax and after-tax. The impairment is the result of a decline in forecasted financial performance that indicated it was probable future cash flows would not cover the carrying amount of the net assets. The assets are included in the Company’s construction and forestry operations with the impairment recorded in “Cost of sales.”

The equipment on operating leases and matured operating lease inventory recorded in “Other assets” were impaired by $22 million and $10 million pretax, respectively, with an income tax benefit of approximately $9 million. The impairments were the result of higher expected equipment return rates and lower estimated values of used construction equipment than originally estimated with the probable effect that the future cash flows will not cover the carrying amount of the net assets. The assets are included in the financial services operations with the impairments recorded in “Other operating expenses.”

A minority investment in a construction equipment company headquartered in South Africa was impaired by $20 million pretax and after-tax. The impairment was the result of an other than temporary decline in value and was recorded in “Equity loss of unconsolidated affiliates.”

In the third quarter of 2020, the Company recorded impairment and other charges as outlined below.

The Company reached a definitive agreement to sell its German walk-behind lawn mower business in the third quarter of 2020, which is expected to close in the fourth quarter. As a result, a non-cash charge of $24 million pretax and after-tax was recorded in “Other operating expenses” for an impairment to write the operations down to realizable value. The total assets of $19 million were reclassified to “Other assets” and liabilities of $25 million were recorded in “Accounts payable and accrued expenses.” This business is included in the agriculture and turf operations.

The Company closed a factory producing small agricultural equipment in China at the end of the third quarter. In connection with this closure, a non-cash impairment of other receivables, property, and intangible assets of $9 million pretax and after-tax was recorded and $4 million pretax and after-tax for severance payments. The charges were recorded in “Cost of sales” in the agriculture and turf operations.

Redeemable Noncontrolling Interest

In the second quarter of 2020, the minority interest holder in Hagie Manufacturing Company, LLC exercised its right to sell the remaining 20 percent interest to the Company for $14 million. The arrangement was accounted for as an equity transaction with no gain or loss recorded in the statement of consolidated income. This operation is included in the Company’s agriculture and turf segment.

41

(21) SUPPLEMENTAL CONSOLIDATING DATA

STATEMENT OF INCOME

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

(In millions of dollars) Unaudited

EQUIPMENT OPERATIONS*

FINANCIAL SERVICES

 

2020

2019

2020

2019

 

Net Sales and Revenues

    

 

    

    

 

    

Net sales

$

7,859

$

8,969

Finance and interest income

25

 

30

$

878

$

952

Other income

206

 

185

73

 

51

Total

8,090

 

9,184

951

 

1,003

Costs and Expenses

Cost of sales

5,836

 

6,871

Research and development expenses

370

 

431

Selling, administrative and general expenses

616

 

751

137

 

147

Interest expense

91

 

67

206

 

311

Interest compensation to Financial Services

58

 

93

Other operating expenses

94

 

64

363

 

339

Total

7,065

 

8,277

706

 

797

Income of Consolidated Group before Income Taxes

1,025

 

907

245

 

206

Provision for income taxes

395

 

190

62

 

31

Income of Consolidated Group

630

 

717

183

 

175

Equity in Income (Loss) of Unconsolidated Subsidiaries and Affiliates

Financial Services

183

 

175

 

Other

(2)

 

7

Total

181

 

182

 

Net Income

811

 

899

183

 

175

Less: Net income attributable to noncontrolling interests

 

Net Income Attributable to Deere & Company

$

811

$

899

$

183

$

175

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

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

42

SUPPLEMENTAL CONSOLIDATING DATA (Continued)

STATEMENT OF INCOME

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

(In millions of dollars) Unaudited

EQUIPMENT OPERATIONS*

FINANCIAL SERVICES

 

2020

2019

2020

2019

 

Net Sales and Revenues

Net sales

$

22,612

$

26,182

Finance and interest income

75

 

79

$

2,720

$

2,727

Other income

597

 

614

196

 

184

Total

23,284

 

26,875

2,916

 

2,911

Costs and Expenses

Cost of sales

17,208

 

20,058

Research and development expenses

1,201

 

1,295

Selling, administrative and general expenses

1,989

 

2,191

483

 

422

Interest expense

237

 

182

747

 

910

Interest compensation to Financial Services

195

 

254

Other operating expenses

186

 

203

1,187

 

1,008

Total

21,016

 

24,183

2,417

 

2,340

Income of Consolidated Group before Income Taxes

2,268

 

2,692

499

 

571

Provision for income taxes

632

 

625

120

 

123

Income of Consolidated Group

1,636

 

2,067

379

 

448

Equity in Income (Loss) of Unconsolidated Subsidiaries and Affiliates

Financial Services

381

 

450

2

 

2

Other

(22)

 

18

Total

359

 

468

2

 

2

Net Income

1,995

 

2,535

381

 

450

Less: Net income attributable to noncontrolling interests

2

 

3

Net Income Attributable to Deere & Company

$

1,993

$

2,532

$

381

$

450

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

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

43

SUPPLEMENTAL CONSOLIDATING DATA (Continued)

CONDENSED BALANCE SHEET

(In millions of dollars) Unaudited

EQUIPMENT OPERATIONS*

FINANCIAL SERVICES

 

August 2

November 3

July 28

August 2

November 3

July 28

 

2020

2019

2019

2020

2019

2019

 

Assets

  

               

  

    

  

               

  

               

   

    

  

               

Cash and cash equivalents

$

7,440

$

3,175

$

2,694

$

750

$

682

$

689

Marketable securities

8

 

1

 

5

632

 

580

 

560

Receivables from unconsolidated subsidiaries and affiliates

3,619

 

2,017

 

2,395

Trade accounts and notes receivable – net

1,251

 

1,482

 

1,606

5,595

 

5,153

 

6,807

Financing receivables – net

111

 

65

 

100

27,703

 

29,130

 

26,949

Financing receivables securitized – net

37

44

54

5,432

 

4,339

 

5,146

Other receivables

1,083

 

1,376

 

1,428

162

 

116

 

126

Equipment on operating leases – net

7,158

 

7,567

 

7,269

Inventories

5,650

 

5,975

 

6,747

Property and equipment – net

5,711

 

5,929

 

5,753

43

 

44

 

45

Investments in unconsolidated subsidiaries and affiliates

5,383

 

5,326

 

5,309

19

 

16

 

16

Goodwill

2,984

 

2,917

 

3,013

Other intangible assets – net

1,301

 

1,380

 

1,444

 

 

Retirement benefits

972

 

836

 

1,374

59

 

58

 

57

Deferred income taxes

1,865

 

1,896

 

1,579

56

 

57

 

72

Other assets

1,566

 

1,158

 

1,269

1,260

 

741

 

708

Total Assets

$

38,981

$

33,577

$

34,770

$

48,869

$

48,483

$

48,444

Liabilities and Stockholders’ Equity

Liabilities

Short-term borrowings

$

853

$

987

$

1,372

$

8,222

$

9,797

$

9,770

Short-term securitization borrowings

37

44

53

5,324

 

4,277

 

4,995

Payables to unconsolidated subsidiaries and affiliates

80

 

142

 

136

3,593

 

1,970

 

2,341

Accounts payable and accrued expenses

8,834

 

9,232

 

9,422

2,134

 

1,836

 

1,641

Deferred income taxes

398

 

414

 

454

468

 

568

 

616

Long-term borrowings

10,217

 

5,415

 

5,364

23,820

 

24,814

 

23,878

Retirement benefits and other liabilities

5,671

 

5,912

 

5,685

105

 

94

 

97

Total liabilities

26,090

22,146

22,486

43,666

43,356

43,338

Commitments and contingencies (Note 16)

Redeemable noncontrolling interest (Note 20)

14

14

Stockholders’ Equity

Common stock, $1 par value (issued shares at August 2, 2020 – 536,431,204)

4,750

 

4,642

 

4,599

2,121

 

2,107

 

2,107

Common stock in treasury

(17,671)

 

(17,474)

 

(17,121)

Retained earnings

31,128

 

29,852

 

29,369

3,498

 

3,378

 

3,338

Accumulated other comprehensive income (loss)

(5,319)

 

(5,607)

 

(4,581)

(416)

 

(358)

 

(339)

Total Deere & Company stockholders’ equity

12,888

 

11,413

 

12,266

5,203

5,127

5,106

Noncontrolling interests

3

 

4

 

4

Total stockholders’ equity

12,891

 

11,417

 

12,270

5,203

 

5,127

 

5,106

Total Liabilities and Stockholders’ Equity

$

38,981

$

33,577

$

34,770

$

48,869

$

48,483

$

48,444

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

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

44

SUPPLEMENTAL CONSOLIDATING DATA (Continued)

STATEMENT OF CASH FLOWS

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

(In millions of dollars) Unaudited

EQUIPMENT OPERATIONS*

FINANCIAL SERVICES

2020

2019

2020

2019

Cash Flows from Operating Activities

    

    

    

    

    

    

    

    

Net income

$

1,995

$

2,535

$

381

$

450

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

Provision for credit losses

 

6

 

1

 

117

 

57

Provision for depreciation and amortization

 

787

 

782

 

925

 

836

Impairment charges

115

 

 

32

 

Undistributed earnings of unconsolidated subsidiaries and affiliates

 

(124)

 

(62)

 

(1)

 

(1)

Credit for deferred income taxes

 

(57)

 

(123)

 

(103)

 

(209)

Changes in assets and liabilities:

Trade receivables and Equipment Operations' financing receivables

 

116

 

(248)

Inventories

 

387

 

(670)

Accounts payable and accrued expenses

 

(567)

 

50

 

(38)

 

23

Accrued income taxes payable/receivable

 

(25)

 

(282)

 

29

 

535

Retirement benefits

 

77

 

35

 

11

 

5

Other

 

145

 

(59)

 

89

 

140

Net cash provided by operating activities

 

2,855

 

1,959

 

1,442

 

1,836

Cash Flows from Investing Activities

Collections of receivables (excluding trade and wholesale)

 

14,352

 

13,807

Proceeds from maturities and sales of marketable securities

 

 

9

 

70

 

63

Proceeds from sales of equipment on operating leases

 

1,310

 

1,171

Cost of receivables acquired (excluding trade and wholesale)

 

(15,367)

 

(14,597)

Purchases of marketable securities

 

(3)

 

(91)

 

(107)

Purchases of property and equipment

 

(591)

 

(754)

 

(3)

 

(2)

Cost of equipment on operating leases acquired

 

(1,836)

 

(2,135)

Decrease (increase) in trade and wholesale receivables

 

423

 

(2,551)

Collateral on derivatives – net

(6)

330

59

Other

 

(55)

 

(64)

 

(46)

 

(47)

Net cash used for investing activities

 

(652)

 

(812)

 

(858)

 

(4,339)

Cash Flows from Financing Activities

Increase (decrease) in total short-term borrowings

 

(32)

 

(119)

 

202

 

(217)

Change in intercompany receivables/payables

 

(1,468)

 

(683)

 

1,468

 

683

Proceeds from long-term borrowings

 

4,592

 

868

 

3,739

 

6,572

Payments of long-term borrowings

 

(179)

 

(194)

 

(5,618)

 

(4,162)

Proceeds from issuance of common stock

 

111

 

133

Repurchases of common stock

 

(263)

 

(880)

Dividends paid

 

(718)

 

(703)

 

(260)

(377)

Other

 

(86)

 

(52)

 

(11)

 

(22)

Net cash provided by (used for) financing activities

 

1,957

 

(1,630)

 

(480)

 

2,477

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

 

95

 

(16)

 

(15)

 

(8)

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

 

4,255

 

(499)

 

89

 

(34)

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

 

3,196

 

3,202

 

760

 

813

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

$

7,451

$

2,703

$

849

$

779

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

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

45

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

RESULTS OF OPERATIONS

Overview

Organization

The Company’s equipment operations generate revenues and cash primarily from the sale of equipment to John Deere dealers and distributors. The equipment operations manufacture and distribute a full line of agricultural equipment; a variety of commercial and consumer equipment; and a broad range of equipment for construction, roadbuilding, and forestry. The Company’s financial services primarily provide credit services, which mainly finance sales and leases of equipment by John Deere dealers and trade receivables purchased from the equipment operations. In addition, financial services offers extended equipment warranties. The information in the following discussion is presented in a format that includes information grouped as consolidated, equipment operations, and financial services. The Company also views its operations as consisting of two geographic areas, the U.S. and Canada, and outside the U.S. and Canada. The Company’s operating segments consist of agriculture and turf, construction and forestry, and financial services.

Trends and Economic Conditions

Industry sales of agricultural machinery in the U.S. and Canada are expected to be down 5 to 10 percent for fiscal year 2020 compared to the prior year. Industry sales in Europe are also forecast to be 5 to 10 percent lower in 2020. South American industry sales of tractors and combines are projected to be down 10 to 15 percent. Asian industry sales are forecast to be down slightly in 2020. Industry sales of turf and utility equipment in the U.S. and Canada are expected to be about 5 percent lower in 2020. The Company’s agriculture and turf segment sales decreased 5 percent in the third quarter and 10 percent for the first nine months. Construction equipment industry sales in North America for 2020 are expected to decline about 20 percent. In forestry, global industry sales are expected to be 20 to 25 percent lower. The Company’s construction and forestry segment sales decreased 28 percent in the third quarter and 22 percent in the first nine months.

Unsettled market conditions and related customer uncertainty are expected to have a moderating effect on key markets in the near term. The Company believes it is well positioned to support customers’ efforts for more profitable and sustainable operations. As the Company begins the process of implementing the recently announced smart industrial operating model, management believes the model will help accelerate the ability to deliver differentiated solutions to customers, while contributing to improved efficiencies across the Company. As part of the model implementation process, the Company will continue to evaluate the organizational design, product portfolio, and production footprint in future periods.

COVID Effects and Actions

During the first nine months of 2020, the effects of COVID and the related actions of governments and other authorities to contain COVID, have affected the Company’s operations, results, cash flows, and forecasts.

The Company’s first priority in addressing the effects of COVID continues to be the health, safety, and overall welfare of its employees. The Company effectively activated previously established business continuity plans and proactively implemented health and safety measures at its operations around the world.

The economic effects of COVID have reduced customer demand for some of the Company’s products and services, particularly construction, forestry, and roadbuilding equipment (see Note 4), which resulted in lower shipment volumes. During most of the third quarter of 2020, all of the Company’s factories have operated, some at reduced capacity due to component shortages or lower demand. The measures taken beginning in the second quarter to aggressively decrease operational and selling, administrative, and general expenses have been effective. Additional information is presented in the “Business Segment and Geographic Results.”

In addition, the Company’s actions taken in the second quarter, along with cash from operations, provided a strong financial position. Cash and cash equivalents were $8,190 million at August 2, 2020 and the Company’s revolving credit facilities were undrawn. The Company’s share repurchase programs remained suspended during the third quarter. Additional information is presented in the “Capital Resources and Liquidity” section.

The Company continued to work closely with distribution channel and equipment user customers during the third quarter, and, if necessary, provided short-term payment relief on obligations owed to the Company. The payment

46

relief provided on balances of trade receivables, financing receivables, and operating lease payments outstanding at August 2, 2020 was about 4 percent, 5 percent, and 4 percent of the portfolio balances, respectively. Additional information is presented in Notes 4, 11, and 15.

The future financial effects of COVID are unknown due to many factors. These factors and other market variabilities include uncertainty of the effectiveness of governmental actions to address COVID, including health, monetary, and fiscal policies, the effect of elevated levels of sovereign and state debt, capital market disruptions, changes in demand and pricing for new and used equipment, trade agreements, other geopolitical events, significant fluctuations in foreign currency exchange rates, and volatility in the price of many commodities. As a result, predicting the Company’s forecasted financial performance is difficult and subject to many assumptions.

2020 Compared with 2019

The following table provides the net income attributable to Deere & Company in millions of dollars and diluted earnings per share in dollars:

Three Months Ended

Nine Months Ended

August 2

July 28

August 2

July 28

2020

2019

2020

2019

Net income attributable to Deere & Company

$

811

$

899

$

1,993

$

2,532

Diluted earnings per share

2.57

2.81

6.30

7.87

In the third quarter of 2020, the Company recorded impairment and other charges totaling $37 million pretax and after-tax related to an agreement to sell its German turf business and a factory closure in China. In the second quarter of 2020, the Company recorded impairments totaling $114 million pretax and approximately $105 million after-tax related to certain fixed assets, operating lease equipment, and a minority investment in a construction equipment company headquartered in South Africa (see Note 20).

The first quarter of 2020 voluntary employee-separation program’s total pretax expenses were $2 million and $138 million recognized in the third quarter and first nine months of 2020, respectively. Included in first nine months of 2020 expense was $23 million for items excluded from operating profit and $3 million recorded by the financial services operations. Annual estimated savings from the separation program are approximately $85 million, with about $65 million expected in 2020. In addition, the Company has announced broad employee-separation programs that will be substantially completed during the fourth quarter of 2020 in support of its strategy to create a leaner, more agile organization. These programs’ forecast total pretax expense is about $175 million with estimated annual savings of $175 million (see Note 20). The total estimated annual pretax savings from separation programs expected to be completed in 2020 is $260 million. Discrete income tax adjustments also unfavorably affected the third quarter and first nine months’ net income (see Note 9).

The worldwide net sales and revenue, price realization, and the effect of currency translation for worldwide, U.S. and Canada, and outside U.S. and Canada in millions of dollars follows:

Three Months Ended

Nine Months Ended

August 2

July 28

%

August 2

July 28

%

2020

2019

Change

2020

2019

Change

Worldwide net sales and revenues

$

8,925

$

10,036

-11

$

25,809

$

29,362

-12

Worldwide equipment operations net sales

7,859

8,969

-12

22,612

26,182

-14

Price realization

+4

+2

Currency translation (unfavorable)

-3

-2

U.S. and Canada equipment operations net sales

4,302

4,943

-13

13,049

15,197

-14

Price realization

+4

+2

Outside U.S. and Canada equipment operations net sales

3,557

4,026

-12

9,563

10,985

-13

Price realization

+4

+3

Currency translation (unfavorable)

-5

-4

47

The Company’s equipment operations operating profit and net income and financial services operations net income follow in millions of dollars:

Three Months Ended

Nine Months Ended

August 2

July 28

%

August 2

July 28

%

2020

2019

Change

2020

2019

Change

Equipment operations operating profit

$

1,147

$

990

+16

$

2,503

$

2,932

-15

Equipment operations net income

630

717

-12

1,636

2,067

-21

Financial services net income

183

175

+5

381

450

-15

The discussion on net sales and operating profit are included in the Business Segment Results below.

Business Segment Results

Agriculture and Turf. The agriculture and turf segment results in millions of dollars follow:

Three Months Ended

Nine Months Ended

August 2

July 28

%

August 2

July 28

%

2020

2019

Change

2020

2019

Change

Net sales

$

5,672

$

5,946

-5

$

16,127

$

17,909

-10

Operating profit

942

612

+54

2,109

1,978

+7

Operating margin

16.6%

10.3%

13.1%

11.0%

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

Graphic

48

Sales for the first nine months decreased mainly as a result of lower shipment volumes and the unfavorable effects of currency translation, partially offset by price realization. Operating profit for the first nine months increased primarily resulting from price realization, decreased selling, administrative, and general expenses, reduced research and development expenses, and lower production costs. Partially offsetting these factors were lower shipment volumes / sales mix, voluntary employee-separation expenses, impairments, and closure costs (see Note 20).

Graphic

Construction and Forestry. The construction and forestry segment results in millions of dollars follow:

Three Months Ended

Nine Months Ended

August 2

July 28

%

August 2

July 28

%

2020

2019

Change

2020

2019

Change

Net sales

$

2,187

$

3,023

-28

$

6,485

$

8,273

-22

Operating profit

205

378

-46

394

954

-59

Operating margin

9.4%

12.5%

6.1%

11.5%

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

Graphic

49

The segment’s nine-month sales also decreased due to lower shipment volumes and the unfavorable effects of currency translation, partially offset by price realization. The first nine-month’s operating profit moved lower mainly due to reduced shipment volumes / sales mix, impairments in certain fixed assets and a minority investment in a construction equipment company, and voluntary employee-separation expenses (see Note 20), partially offset by price realization, and lower production costs.

Graphic

Financial Services. The financial services segment revenue, interest expense, and operating profit in millions of dollars follows:

Three Months Ended

Nine Months Ended

August 2

July 28

%

August 2

July 28

%

2020

2019

Change

2020

2019

Change

Revenue (including intercompany revenue)

$

951

$

1,003

-5

$

2,916

$

2,911

Interest expense

206

311

-34

747

910

-18

Operating profit

243

204

+19

498

566

-12

Financial services operating profit increased for the quarter primarily due to lower losses on operating lease residual values, decreased selling, administrative, and general expenses, and a reduced provision for credit losses. Operating profit decreased for the first nine months primarily due to a higher provision for credit losses, unfavorable financing spreads, and increased losses and impairments on lease residual values, partially offset by income earned on a higher average portfolio. The average balance of receivables and leases financed was 1 percent lower in the third quarter and 3 percent higher in the first nine months of 2020, compared with the same periods last year. Interest expense decreased in the third quarter and first nine months of 2020 primarily as a result of lower average borrowing rates, partially offset by higher average borrowings.

The cost of sales to net sales ratio and other significant statement of consolidated income changes not previously discussed follow:

Three Months Ended

Nine Months Ended

August 2

July 28

%

August 2

July 28

%

2020

2019

Change

2020

2019

Change

Cost of sales to net sales

74.2%

76.6%

76.1%

76.6%

Research and development expenses

$

370

$

431

-14

$

1,201

$

1,295

-7

Selling, administrative and general expenses

752

896

-16

2,467

2,607

-5

Other operating expenses

408

352

+16

1,199

1,063

+13

The cost of sales to net sales ratio decreased in the third quarter primarily due to price realization, a favorable product mix, and lower warranty expenses, partially offset by the unfavorable effects of foreign currency exchange. In addition to the previously mentioned factors, lower production costs also decreased this ratio in the first nine months, which were partially offset by the previously mentioned impairments and voluntary employee-separation

50

expenses (see Note 20). Research and development expenses decreased in both periods with targeted project reductions related to COVID spending adjustments. Selling, administrative and general expenses decreased in both periods primarily due to spending reductions. For the first nine months, the selling, administrative and general expense decreases were partially offset by an increase in the provision for credit losses (see Note 11) and voluntary employee-separation expenses (see Note 20). Other operating expenses increased in both periods primarily due to higher depreciation on operating leases and impairments related to an agreement to sell its German turf business. For the first nine months, other operating expenses also increased due to impairments on operating lease residual values.

Market Conditions

Agriculture and Turf. Industry sales of agricultural equipment are expected to decrease 5 to 10 percent from 2019 for the U.S. and Canada, while sales in Europe are also expected to be down 5 to 10 percent. South American industry sales of tractors and combines are projected to be down 10 to 15 percent. Asian industry sales are forecast to decrease slightly. Industry sales of turf and utility equipment in the U.S. and Canada are expected to be down about 5 percent for 2020.
Construction and Forestry. Industry construction equipment sales in North America are expected to decline by 20 percent for 2020. In forestry, global industry sales are expected to be down 20 to 25 percent due to weaker demand in North America and Russia.
Financial Services. Full year 2020 results are expected to decline due to a higher provision for credit losses and less favorable financing spreads, partially offset by lower losses and impairments on operating lease residual values.

Safe Harbor Statement

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

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

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

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

All of the Company’s businesses and its results are affected by general economic conditions in the global markets and industries in which the Company operates; customer confidence in general economic conditions; government

51

spending and taxing; foreign currency exchange rates and their volatility, especially fluctuations in the value of the U.S. dollar; interest rates (including the availability of IBOR reference rates); inflation and deflation rates; changes in weather patterns; the political and social stability of the global markets in which the Company operates; the effects of, or response to, terrorism and security threats; wars and other conflicts; natural disasters; and the spread of major epidemics (including the COVID pandemic) and government and industry responses to epidemics such as travel restrictions and extended shut down of businesses.

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

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

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

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

52

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

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

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

Critical Accounting Policies

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

CAPITAL RESOURCES AND LIQUIDITY

The discussion of capital resources and liquidity has been organized to review separately, where appropriate, the Company’s consolidated totals, equipment operations, and financial services operations.

Consolidated

Positive cash flows from consolidated operating activities in the first nine months of 2020 were $4,057 million. This cash inflow resulted primarily from net income adjusted for non-cash provisions, a decrease in receivables related to sales, and a change in net retirement benefits, partially offset by a decrease in accounts payable and accrued expenses. Cash outflows from investing activities were $1,517 million in the first nine months of 2020, primarily due to the cost of receivables and equipment on operating leases acquired exceeding collections of receivables (excluding receivables related to sales) and proceeds from sales of equipment on operating leases by $1,214 million, purchases of property and equipment of $594 million, and purchases of marketable securities exceeding proceeds from maturities and sales by $21 million, partially offset by a change in collateral on derivatives – net of $324 million. Positive cash flows from financing activities were $1,724 million in the first nine months of 2020 primarily due to an increase in borrowings of $2,704 million and proceeds from issuance of common stock of $111 million

53

(resulting from the exercise of stock options), partially offset by dividends paid of $718 million and repurchases of common stock of $263 million. Cash, cash equivalents, and restricted cash increased $4,344 million during the first nine months of this year. The increase in cash was primarily to provide added liquidity due to the financial uncertainty created by COVID.

Positive cash flows from consolidated operating activities in the first nine months of 2019 were $404 million. This cash inflow resulted primarily from net income adjusted for non-cash provisions, a change in accrued income taxes payable/receivable, and a change in net retirement benefits, partially offset by a seasonal increase in receivables and inventories, along with an increase in overall demand, and a decrease in accounts payable and accrued expenses. Cash outflows from investing activities were $2,129 million in the first nine months of 2019, primarily due to the cost of receivables and equipment on operating leases acquired exceeding collections of receivables (excluding receivables related to sales) and proceeds from sales of equipment on operating leases by $1,268 million, purchases of property and equipment of $756 million, and purchases of marketable securities exceeding proceeds from maturities and sales by $38 million. Positive cash flows from financing activities were $1,216 million in the first nine months of 2019 primarily due to an increase in borrowings of $2,748 million and proceeds from issuance of common stock of $133 million (resulting from the exercise of stock options), partially offset by repurchases of common stock of $880 million and dividends paid of $703 million. Cash, cash equivalents, and restricted cash decreased $533 million during the first nine months of 2019.

The Company has access to most global markets at a reasonable cost and expects to have sufficient sources of global funding and liquidity to meet its funding needs. Sources of liquidity for the Company include cash and cash equivalents, marketable securities, funds from operations, the issuance of commercial paper and term debt, the securitization of retail notes (both public and private markets), and committed and uncommitted bank lines of credit. The Company’s commercial paper outstanding at August 2, 2020, November 3, 2019, and July 28, 2019 was $1,987 million, $2,698 million, and $2,468 million, respectively, while the total cash and cash equivalents and marketable securities position was $8,830 million, $4,438 million, and $3,948 million, respectively. The total cash and cash equivalents and marketable securities held by foreign subsidiaries was $4,816 million, $2,731 million, and $2,038 million at August 2, 2020, November 3, 2019, and July 28, 2019, respectively.

Lines of Credit. The Company also has access to bank lines of credit with various banks throughout the world. Worldwide lines of credit totaled $8,487 million at August 2, 2020, $6,052 million of which were unused. For the purpose of computing unused credit lines, commercial paper and short-term bank borrowings, excluding secured borrowings and the current portion of long-term borrowings, were primarily considered to constitute utilization. Included in the total credit lines at August 2, 2020 was a 364-day credit facility agreement of $3,000 million expiring in fiscal April 2021. In addition, total credit lines included long-term credit facility agreements of $2,500 million expiring in fiscal April 2024 and $2,500 million expiring in fiscal April 2025. These credit agreements require John Deere Capital Corporation (Capital Corporation) to maintain 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, excluding securitization indebtedness, to capital base (total subordinated debt and stockholder’s equity excluding accumulated other comprehensive income (loss)) at not more than 11 to 1 at the end of any fiscal quarter. The credit agreements also require the equipment operations to maintain a ratio of total debt to total capital (total debt and stockholders’ equity excluding accumulated other comprehensive income (loss)) of 65 percent or less at the end of each fiscal quarter. Under this provision, the Company’s excess equity capacity and retained earnings balance free of restriction at August 2, 2020 was $12,257 million. Alternatively under this provision, the equipment operations had the capacity to incur additional debt of $22,764 million at August 2, 2020. All of these requirements of the credit agreement have been met during the periods included in the financial statements.

Debt Ratings. To access public debt capital markets, the Company relies on credit rating agencies to assign short-term and long-term credit ratings to the Company’s securities as an indicator of credit quality for fixed income investors. A security rating is not a recommendation by the rating agency to buy, sell, or hold Company securities. A credit rating agency may change or withdraw Company ratings based on its assessment of the Company’s current and future ability to meet interest and principal repayment obligations. Each agency’s rating should be evaluated independently of any other rating. Lower credit ratings generally result in higher borrowing costs, including costs of derivative transactions, and reduced access to debt capital markets. The senior long-term and short-term debt ratings and outlook currently assigned to unsecured Company debt securities by the rating agencies engaged by the Company are as follows:

    

Senior

    

    

 

Long-Term

Short-Term

Outlook

 

Fitch Ratings

A

F1

Stable

Moody’s Investors Service, Inc.

 

A2

 

Prime-1

 

Stable

Standard & Poor’s

 

A

 

A-1

 

Stable

54

Trade accounts and notes receivable primarily arise from sales of goods to independent dealers. Trade receivables increased $243 million during the first nine months of 2020, primarily due to a seasonal increase. These receivables decreased $1,285 million, compared to a year ago, primarily due to lower shipment volumes due to the effects of COVID and other macroeconomic issues. The ratios of worldwide trade accounts and notes receivable to the last 12 months’ net sales were 17 percent at August 2, 2020, compared to 15 percent at November 3, 2019 and 20 percent at July 28, 2019. Agriculture and turf trade receivables decreased $606 million and construction and forestry trade receivables decreased $679 million, compared to a year ago. The percentage of total worldwide trade receivables outstanding for periods exceeding 12 months was 3 percent at August 2, 2020, 3 percent at November 3, 2019, and 1 percent at July 28, 2019.

Deere & Company stockholders’ equity was $12,888 million at August 2, 2020, compared with $11,413 million at November 3, 2019 and $12,266 million at July 28, 2019. The increase of $1,475 million during the first nine months of 2020 resulted primarily from net income attributable to Deere & Company of $1,993 million, a change in the retirement benefits adjustment of $338 million, and an increase in common stock of $108 million, partially offset by dividends declared of $716 million and an increase in treasury stock of $197 million.

In August 2020, a committee of the Company’s Board of Directors approved a voluntary contribution to its U.S. OPEB plan for up to $700 million, with an anticipated voluntary contribution of $600 million in the fourth quarter of 2020.

Equipment Operations

The Company’s equipment businesses are capital intensive and are subject to seasonal variations in financing requirements for inventories and certain receivables from dealers. The equipment operations sell a significant portion of their trade receivables to financial services. To the extent necessary, funds provided from operations are supplemented by external financing sources.

Cash provided by operating activities of the equipment operations, including intercompany cash flows, in the first nine months of 2020 was $2,855 million. This resulted primarily from cash inflows from net income adjusted for non-cash provisions, a decrease in inventories and trade and financing receivables held by the equipment operations, and a change in net retirement benefits. Partially offsetting these operating cash inflows were cash outflows from a decrease in accounts payable and accrued expenses and a change in accrued income taxes payable/receivable. Cash, cash equivalents, and restricted cash increased $4,255 million in the first nine months of 2020. The increase in cash was primarily to provide added liquidity due to the financial uncertainty created by COVID.

Cash provided by operating activities of the equipment operations, including intercompany cash flows, in the first nine months of 2019 was $1,959 million. This resulted primarily from cash inflows from net income adjusted for non-cash provisions, an increase in accounts payable and accrued expenses, and a change in net retirement benefits. Partially offsetting these operating cash inflows were cash outflows from a seasonal increase in inventories and trade receivables, along with an increase in overall demand, and a change in accrued income taxes payable/receivable. Cash, cash equivalents, and restricted cash decreased $499 million in the first nine months of 2019.

Trade receivables held by the equipment operations decreased $231 million during the first nine months and decreased $355 million from a year ago. The equipment operations sell a significant portion of their trade receivables to financial services. See the previous consolidated discussion of trade receivables.

Inventories decreased by $325 million during the first nine months and decreased by $1,097 million, compared to a year ago, due to forecasted lower demand related to COVID, other macroeconomic issues, and foreign currency translation. A majority of these inventories are valued on the last-in, first-out (LIFO) method. The ratios of inventories on a first-in, first-out (FIFO) basis (see Note 13), which approximates current cost, to the last 12 months’ cost of sales were 30 percent at August 2, 2020, compared to 29 percent at November 3, 2019 and 32 percent at July 28, 2019.

Total interest-bearing debt, excluding finance lease liabilities, of the equipment operations was $11,056 million at August 2, 2020, compared with $6,446 million at November 3, 2019 and $6,789 million at July 28, 2019. The ratios of debt to total capital (total interest-bearing debt and stockholders’ equity) were 46 percent, 36 percent, and 36 percent at August 2, 2020, November 3, 2019, and July 28, 2019, respectively.

In the second quarter of 2020, the equipment operations issued three tranches of notes in the U.S. with aggregate principal totaling $2,250 million that are due from 2025 to 2050. The equipment operations also issued Euro-Medium-Term notes with aggregate principal totaling €2,000 million (approximately $2,170 million based on the exchange rate at the issue date) that are due from 2024 to 2032. In the first nine months of 2020, the equipment

55

operations issued commercial paper in the U.S. with aggregate principal totaling $466 million, of which $448 million had an original term greater than 90 days. Commercial paper repaid in the third quarter was $406 million. The net increase is presented in “Increase (decrease) in total short-term borrowings” in the consolidated statement of cash flows.

The Company may from time to time seek to retire portions of its outstanding debt securities through cash repurchases or exchanges for other securities, in open-market purchases, privately negotiated transactions, or otherwise. Such repurchases or exchanges, if any, will be subject to and depend on prevailing market conditions, the Company’s liquidity requirements, contractual restrictions, and other factors. The amounts involved in any such transactions, individually or in the aggregate, may be material.

Property and equipment cash expenditures for the equipment operations in the first nine months of 2020 were $591 million, compared with $754 million in the same period last year. Capital expenditures for the equipment operations in 2020 are estimated to be approximately $850 million.

In October 2019, the Company entered into a definitive agreement to acquire Unimil, a privately held Brazilian company in the aftermarket service parts business for sugarcane harvesters. The expected cash purchase price is R$375 million (or approximately $75 million based on the exchange rate at the end of the fiscal quarter). The Company expects to fund the acquisition and the transaction expenses with current cash. The transaction requires customary regulatory approval and is expected to close in the fourth quarter of 2020.

Financial Services

The financial services operations 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 commercial paper, term debt, securitization of retail notes, equity capital, and borrowings from Deere & Company.

During the first nine months of 2020, the cash provided by operating activities was used primarily to increase receivables and leases. Cash flows provided by operating activities, including intercompany cash flows, were $1,442 million in the first nine months. Cash used for investing activities totaled $858 million in the first nine months of 2020 primarily due to the cost of receivables (excluding trade and wholesale) and cost of equipment on operating leases acquired exceeding the collection of these receivables and proceeds from sales of equipment on operating leases by $1,541 million and purchases of marketable securities exceeding proceeds from maturities and sales by $21 million, partially offset by a decrease in trade and wholesale receivables of $423 million and a change in collateral on derivatives - net of $330 million. Cash used for financing activities totaled $480 million, resulting primarily from a decrease in external borrowings of $1,677 million and dividends paid to Deere & Company of $260 million, partially offset by an increase in borrowings from Deere & Company of $1,468 million. Cash, cash equivalents, and restricted cash increased $89 million in the first nine months of 2020.

During the first nine months of 2019, the cash provided by operating activities and financing activities was used primarily to increase receivables and leases. Cash flows provided by operating activities, including intercompany cash flows, were $1,836 million in the first nine months of 2019. Cash used for investing activities totaled $4,339 million in the first nine months of 2019 primarily due to an increase in trade and wholesale receivables of $2,551 million, the cost of receivables (excluding trade and wholesale) and the cost of equipment on operating leases acquired exceeding the collection of these receivables and proceeds from sales of equipment on operating leases by $1,754 million, and purchases of marketable securities exceeding proceeds from maturities and sales by $44 million. Cash provided by financing activities totaled $2,477 million, resulting primarily from an increase in external borrowings of $2,193 million and an increase in borrowings from Deere & Company of $683 million, partially offset by dividends paid to Deere & Company of $377 million. Cash, cash equivalents, and restricted cash decreased $34 million in the first nine months of 2019.

Receivables and leases held by the financial services operations consist of retail notes originated in connection with retail sales of new and used equipment by dealers of John Deere products, retail notes from non-Deere equipment customers, trade receivables, wholesale notes, revolving charge accounts, credit enhanced international export financing generally involving John Deere products, and financing and operating leases. Total receivables and leases decreased $301 million during the first nine months of 2020 and decreased $283 million in the past 12 months. Acquisition volumes of receivables (excluding trade and wholesale) and leases were 3 percent higher in the first nine months of 2020, compared with the same period last year, as volumes of retail notes and revolving charge accounts were higher, while volumes of operating and financing leases were lower. The amount of total trade receivables and wholesale notes decreased compared to November 3, 2019 and July 28, 2019.

56

Total external interest-bearing debt of the financial services operations was $37,366 million at August 2, 2020, compared with $38,888 million at November 3, 2019 and $38,643 million at July 28, 2019. Total external borrowings have changed generally corresponding with the level of receivable and lease portfolio, the level of cash and cash equivalents, the change in payables owed to Deere & Company, and the change in investment from Deere & Company. The financial services operations’ ratio of interest-bearing debt to stockholder’s equity was 7.9 to 1 at August 2, 2020, compared with 8.0 to 1 at November 3, 2019 and 8.0 to 1 at July 28, 2019.

Capital Corporation has a revolving credit agreement to utilize bank conduit facilities to securitize retail notes (see Note 12). At August 2, 2020, this facility had a total capacity, or “financing limit,” of $3,500 million of secured financings at any time. After a two-year revolving period, unless the banks and Capital Corporation agree to renew, Capital Corporation would liquidate the secured borrowings over time as payments on the retail notes are collected. At August 2, 2020, $2,068 million of secured short-term borrowings was outstanding under the agreement.

In the first nine months of 2020, the financial services operations issued $3,274 million and retired $2,226 million of retail note securitization borrowings. In addition, during the first nine months of 2020, the financial services operations issued $3,739 million and retired $5,618 million of long-term borrowings, which were primarily medium-term notes.

Dividends

The Company’s Board of Directors at its meeting on August 26, 2020 declared a quarterly dividend of $.76 per share payable November 9, 2020, to stockholders of record on September 30, 2020.

Item 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See the Company’s most recent annual report filed on Form 10-K (Part II, Item 7A). There has been no material change in this information.

Item 4.CONTROLS AND PROCEDURES

The Company’s principal executive officer and its principal financial officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act)) were effective as of August 2, 2020, based on the evaluation of these controls and procedures required by Rule 13a-15(b) or 15d-15(b) of the Exchange Act. During the third quarter, there were no changes that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II.  OTHER INFORMATION

Item 1.  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 (including asbestos-related liability), retail credit, employment, patent, and trademark matters. Item 103 of the SEC’s Regulation S-K requires disclosure of certain environmental matters when a governmental authority is a party to the proceedings and the proceedings involve potential monetary sanctions that John Deere reasonably believes could exceed $100,000. The following matter is disclosed solely pursuant to that requirement: on October 3, 2018, the Provincia Santa Fe Ministerio de Medio Ambiente of Argentina issued a Notice of Violation to Industrias John Deere Argentina in connection with alleged groundwater contamination at the site; the Company worked with the appropriate authorities to implement corrective actions to remediate the site. On December 16, 2019, the Provincia Santa Fe Ministerio de Medio Ambiente issued a Notice of Fine of approximately $285,000. The Provincia Santa Fe Ministerio de Medio Ambiente is currently operating with limited resources due to COVID, which continues to prevent the Company from accessing its administrative files. The Company will determine its response after it obtains the files. The Company believes the reasonably possible range of losses for this and other unresolved legal actions would not have a material effect on its financial statements.

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Item 1A.  Risk Factors

See the Company’s most recent annual report filed on Form 10-K (Part I, Item 1A).

The COVID pandemic resulted in additional risks that could materially adversely affect the Company’s business, financial condition, results of operations and/or cash flows.

As mentioned previously, COVID was identified in late 2019 and has spread globally. The rapid spread has resulted in governments and other authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place orders and shutdowns. These measures have impacted and may further impact all or portions of the Company’s workforce and operations and the operations of customers and suppliers. Countries around the world have been affected by the pandemic and have taken containment actions. Considerable uncertainty exists regarding such measures and potential future measures. Restrictions on access to the Company’s manufacturing facilities or on the support operations or workforce, or similar limitations for suppliers, and restrictions or disruptions of transportation, port closures and increased border controls or closures, have limited and could continue to limit the Company’s ability to meet customer demand, which could have a material adverse effect on the Company’s financial condition, cash flows and results of operations. There is no certainty that measures taken by governmental authorities will be sufficient to mitigate the risks posed by the virus, and the Company’s ability to perform critical functions could be harmed.

The COVID pandemic caused a global recession and there is no certainty about when a sustained economic recovery may occur. The COVID pandemic has also significantly increased economic and demand uncertainty and has led to disruption and volatility in demand for the Company’s products and services, suppliers’ ability to fill orders, and global capital markets. Economic uncertainties could affect demand for the Company’s products and services, the value of the equipment financed or leased, the demand for financings and the financial condition and credit risk of our dealers and customers. Risks related to negative economic conditions are described in our risk factor titled “Negative economic conditions and outlook can materially weaken demand for John Deere’s equipment and services, limit access to funding and result in higher funding costs” under “Risk Factors” in the Company’s annual report on Form 10-K for the year ended November 3, 2019.

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

The ultimate magnitude of COVID effects, including the extent of its impact on the Company’s financial and operational results, which could be material, will be determined by the length of time that the pandemic continues, its effect on the demand for the Company’s products and services and the supply chain, as well as the effect of governmental regulations imposed in response to the pandemic. We cannot at this time predict the impact of the COVID pandemic, but it could have a material adverse effect on our business, financial condition, results of operations and/or cash flows.

There has been no additional material change to the other risks included in the most recent annual report filed on Form 10-K. The risks described in the annual report on Form 10-K, and the “Safe Harbor Statement” in this report, are not the only risks faced by the Company. Additional risks and uncertainties may also materially affect the Company’s business, financial condition or operating results. One should not consider the risk factors to be a complete discussion of risks, uncertainties, and assumptions.

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Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

The Company’s purchases of its common stock during the third quarter of 2020 were as follows:

    

    

    

Total Number of

    

 

Shares Purchased as

Maximum Number of

 

Total Number of

Part of Publicly

Shares that May Yet Be

 

Shares

Announced Plans or

Purchased under the

 

Purchased

Average Price

Programs (1)

Plans or Programs (1)

 

Period

(thousands)

Paid Per Share

(thousands)

(millions)

 

May 4 to May 31

 

50.1

Jun 1 to Jun 28

50.1

Jun 29 to Aug 2

50.1

Total

(1)During the third quarter of 2020, the Company had a share repurchase plan that was announced in December 2013 to purchase up to $8,000 million of shares of the Company’s common stock. In December 2019, the Company announced an additional share repurchase plan authorizing the purchase of up to an additional $8,000 million of shares of the Company’s common stock. The maximum number of shares that may yet be purchased under these two plans was based on the end of the third quarter closing share price of $176.31 per share. At the end of the third quarter of 2020, $8,826 million of common stock remained to be purchased under the plans.

Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Mine Safety Disclosures

Not applicable.

Item 5.  Other Information

Not applicable.

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Item 6.  Exhibits

Certain instruments relating to long-term borrowings constituting less than 10 percent 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.

3.1

Certificate of Incorporation (Exhibit 3.1 to Form 10-Q of registrant for the quarter ended July 28, 2019, Securities and Exchange Commission File Number 1-4121*)

3.2

Bylaws, as amended (Exhibit 3.1 to Form 8-K of registrant filed on February 28, 2020, Securities and Exchange Commission File Number 1-4121*)

31.1

Rule 13a-14(a)/15d-14(a) Certification

31.2

Rule 13a-14(a)/15d-14(a) Certification

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Section 1350 Certifications

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

*Incorporated by reference. Copies of these exhibits are available from the Company upon request.

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SIGNATURES

 

Pursuant to the requirements 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.

DEERE & COMPANY

Date:

August 27, 2020

By:

/s/ Ryan D. Campbell

Ryan D. Campbell
Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

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