UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 2015
Commission file number 1-4121
DEERE & COMPANY
(Exact name of registrant as specified in its charter)
Delaware |
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36-2382580 |
(State of incorporation) |
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(IRS Employer Identification No.) |
One John Deere Place, Moline, Illinois |
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61265 |
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(309) 765-8000 |
(Address of principal executive offices) |
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(Zip Code) |
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(Telephone Number) |
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
Title of each class |
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Name of each exchange on which registered |
Common stock, $1 par value |
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New York Stock Exchange |
8-1/2% Debentures Due 2022 |
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New York Stock Exchange |
6.55% Debentures Due 2028 |
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New York Stock Exchange |
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x |
Accelerated filer o |
Non-accelerated filer o |
Smaller reporting company o |
(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o No x
The aggregate quoted market price of voting stock of registrant held by non-affiliates at April 30, 2015 was $30,160,160,199. At November 30, 2015, 316,700,104 shares of common stock, $1 par value, of the registrant were outstanding. Documents Incorporated by Reference. None.
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Explanatory Note
This Amendment No. 1 on Form 10-K/A (the Amendment No. 1) amends the Deere & Company (the Company) Annual Report on Form 10-K for the fiscal year ended October 31, 2015 (the Original 10-K), as filed with the Securities and Exchange Commission (Commission) on December 18, 2015. The purpose of this Amendment No. 1 is solely to amend and restate the Report of Independent Registered Public Accounting Firm (the Auditors Report) included in the Original 10-K in response to comments received from the Staff of the Commission to correct typographical errors in certain of the references to the three year period covered by the Auditors Report.
Except as described above, this Amendment No. 1 does not amend, update or change any other disclosures in the Original 10-K, including any of the financial information disclosed in Parts II and IV of the Original 10-K, and does not purport to reflect any information or events subsequent to the filing thereof.
This Amendment No. 1 speaks as of the original filing date of the Original 10-K, and the Company has not undertaken herein to amend, supplement or update any information contained in the Original 10-K to give effect to any subsequent events. Accordingly, this Amendment No. 1 should be read in conjunction with the Original 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deere & Company:
We have audited the accompanying consolidated balance sheets of Deere & Company and subsidiaries (the Company) as of October 31, 2015 and 2014, and the related statements of consolidated income, consolidated comprehensive income, changes in consolidated stockholders equity, and consolidated cash flows for each of the three years in the period ended October 31, 2015. Our audits also included the financial statement schedule listed in the Index under Part IV, Item 15(2). We also have audited the Companys internal control over financial reporting as of October 31, 2015, based on criteria established in Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Companys management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and financial statement schedule and an opinion on the Companys internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed by, or under the supervision of, the companys principal executive and principal financial officers, or persons performing similar functions, and effected by the companys board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of October 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 2015, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of October 31, 2015, based on the criteria established in Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
December 18, 2015
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
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(1) |
Financial Statements |
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Statement of Consolidated Income for the years ended October 31, 2015, 2014 and 2013 |
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Statement of Consolidated Comprehensive Income for the years ended October 31, 2015, 2014 and 2013 |
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Statement of Consolidated Cash Flows for the years ended October 31, 2015, 2014 and 2013 |
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(2) |
Schedule to Consolidated Financial Statements |
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Schedule II - Valuation and Qualifying Accounts for the years ended October 31, 2015, 2014 and 2013 |
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(3) |
Exhibits |
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See the Index to Exhibits on page 44 of this report |
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Financial Statement Schedules Omitted | |||
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The following schedules for the Company and consolidated subsidiaries are omitted because of the absence of the conditions under which they are required: I, III, IV and V. |
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DEERE & COMPANY
STATEMENT OF CONSOLIDATED INCOME
For the Years Ended October 31, 2015, 2014 and 2013
(In millions of dollars)
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2015 | 2014 | 2013 | |||||||
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Net Sales and Revenues |
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Net sales |
$ | 25,775.2 | $ | 32,960.6 | $ | 34,997.9 | ||||
Finance and interest income |
2,381.1 | 2,282.1 | 2,115.1 | |||||||
Other income |
706.5 | 824.2 | 682.4 | |||||||
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Total |
28,862.8 | 36,066.9 | 37,795.4 | |||||||
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Costs and Expenses |
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Cost of sales |
20,143.2 | 24,775.8 | 25,667.3 | |||||||
Research and development expenses |
1,425.1 | 1,452.0 | 1,477.3 | |||||||
Selling, administrative and general expenses |
2,873.3 | 3,284.4 | 3,605.5 | |||||||
Interest expense |
680.0 | 664.0 | 741.3 | |||||||
Other operating expenses |
961.1 | 1,093.3 | 820.6 | |||||||
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Total |
26,082.7 | 31,269.5 | 32,312.0 | |||||||
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Income of Consolidated Group before Income Taxes |
2,780.1 |
4,797.4 |
5,483.4 |
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Provision for income taxes |
840.1 | 1,626.5 | 1,945.9 | |||||||
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Income of Consolidated Group |
1,940.0 |
3,170.9 |
3,537.5 |
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Equity in income (loss) of unconsolidated affiliates |
.9 | (7.6 | ) | .1 | ||||||
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Net Income |
1,940.9 |
3,163.3 |
3,537.6 |
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Less: Net income attributable to noncontrolling interests |
.9 | 1.6 | .3 | |||||||
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Net Income Attributable to Deere & Company |
$ | 1,940.0 | $ | 3,161.7 | $ | 3,537.3 | ||||
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Per Share Data |
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Basic |
$ | 5.81 | $ | 8.71 | $ | 9.18 | ||||
Diluted |
$ | 5.77 | $ | 8.63 | $ | 9.09 | ||||
Dividends declared |
$ | 2.40 | $ | 2.22 | $ | 1.99 | ||||
Average Shares Outstanding |
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Basic |
333.6 | 363.0 | 385.3 | |||||||
Diluted |
336.0 | 366.1 | 389.2 | |||||||
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The notes to consolidated financial statements are an integral part of this statement.
5
DEERE & COMPANY
STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME
For the Years Ended October 31, 2015, 2014 and 2013
(In millions
of dollars)
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2015 | 2014 | 2013 | |||||||
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Net Income |
$ | 1,940.9 | $ | 3,163.3 | $ | 3,537.6 | ||||
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Other Comprehensive Income (Loss), Net of Income Taxes |
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Retirement benefits adjustment |
(7.7 | ) | (684.4 | ) | 1,950.0 | |||||
Cumulative translation adjustment |
(935.1 | ) | (415.5 | ) | (70.9 | ) | ||||
Unrealized gain (loss) on derivatives |
(2.5 | ) | 2.8 | 10.7 | ||||||
Unrealized gain (loss) on investments |
(1.5 | ) | 6.9 | (11.3 | ) | |||||
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Other Comprehensive Income (Loss), Net of Income Taxes |
(946.8 | ) | (1,090.2 | ) | 1,878.5 | |||||
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Comprehensive Income of Consolidated Group |
994.1 | 2,073.1 | 5,416.1 | |||||||
Less: Comprehensive income attributable to noncontrolling interests |
.5 | 1.3 | .4 | |||||||
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Comprehensive Income Attributable to Deere & Company |
$ | 993.6 | $ | 2,071.8 | $ | 5,415.7 | ||||
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The notes to consolidated financial statements are an integral part of this statement.
6
DEERE & COMPANY
CONSOLIDATED BALANCE SHEET
As of October 31, 2015 and 2014
(In millions of dollars except per share amounts)
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2015 | 2014 | |||||
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ASSETS |
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Cash and cash equivalents |
$ | 4,162.2 | $ | 3,787.0 | |||
Marketable securities |
437.4 | 1,215.1 | |||||
Receivables from unconsolidated affiliates |
33.3 | 30.2 | |||||
Trade accounts and notes receivable net |
3,051.1 | 3,277.6 | |||||
Financing receivables net |
24,809.0 | 27,422.2 | |||||
Financing receivables securitized net |
4,834.6 | 4,602.3 | |||||
Other receivables |
991.2 | 1,500.3 | |||||
Equipment on operating leases net |
4,970.4 | 4,015.5 | |||||
Inventories |
3,817.0 | 4,209.7 | |||||
Property and equipment net |
5,181.5 | 5,577.8 | |||||
Investments in unconsolidated affiliates |
303.5 | 303.2 | |||||
Goodwill |
726.0 | 791.2 | |||||
Other intangible assets net |
63.6 | 68.8 | |||||
Retirement benefits |
215.6 | 262.0 | |||||
Deferred income taxes |
2,767.3 | 2,776.6 | |||||
Other assets |
1,583.9 | 1,496.9 | |||||
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Total Assets |
$ | 57,947.6 | $ | 61,336.4 | |||
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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LIABILITIES |
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Short-term borrowings |
$ | 8,426.6 | $ | 8,019.2 | |||
Short-term securitization borrowings |
4,590.0 | 4,558.5 | |||||
Payables to unconsolidated affiliates |
80.6 | 101.0 | |||||
Accounts payable and accrued expenses |
7,311.5 | 8,554.1 | |||||
Deferred income taxes |
160.8 | 160.9 | |||||
Long-term borrowings |
23,832.8 | 24,380.7 | |||||
Retirement benefits and other liabilities |
6,787.7 | 6,496.5 | |||||
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Total liabilities |
51,190.0 | 52,270.9 | |||||
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Commitments and contingencies (Note 22) |
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STOCKHOLDERS' EQUITY |
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Common stock, $1 par value (authorized 1,200,000,000 shares; issued 536,431,204 shares in 2015 and 2014), at paid-in amount |
3,825.6 | 3,675.4 | |||||
Common stock in treasury, 219,743,893 shares in 2015 and 190,926,805 shares in 2014, at cost |
(15,497.6 | ) | (12,834.2 | ) | |||
Retained earnings |
23,144.8 | 22,004.4 | |||||
Accumulated other comprehensive income (loss) |
(4,729.4 | ) | (3,783.0 | ) | |||
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Total Deere & Company stockholders' equity |
6,743.4 | 9,062.6 | |||||
Noncontrolling interests |
14.2 | 2.9 | |||||
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Total stockholders' equity |
6,757.6 | 9,065.5 | |||||
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Total Liabilities and Stockholders' Equity |
$ | 57,947.6 | $ | 61,336.4 | |||
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The notes to consolidated financial statements are an integral part of this statement.
7
DEERE & COMPANY
STATEMENT OF CONSOLIDATED CASH FLOWS
For the Years Ended October 31, 2015, 2014 and 2013
(In millions of
dollars)
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2015 | 2014 | 2013 | |||||||
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Cash Flows from Operating Activities |
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Net income |
$ | 1,940.9 | $ | 3,163.3 | $ | 3,537.6 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Provision for credit losses |
55.4 | 38.1 | 20.5 | |||||||
Provision for depreciation and amortization |
1,382.4 | 1,306.5 | 1,140.3 | |||||||
Impairment charges |
34.8 | 95.9 | 102.0 | |||||||
Share-based compensation expense |
66.1 | 78.5 | 80.7 | |||||||
Undistributed earnings of unconsolidated affiliates |
(1.0 | ) | 9.3 | 9.1 | ||||||
Credit for deferred income taxes |
(18.4 | ) | (280.1 | ) | (172.6 | ) | ||||
Changes in assets and liabilities: |
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Trade, notes and financing receivables related to sales |
811.6 | (749.0 | ) | (1,510.2 | ) | |||||
Insurance receivables |
333.4 | (149.9 | ) | 263.4 | ||||||
Inventories |
(691.4 | ) | (297.9 | ) | (728.4 | ) | ||||
Accounts payable and accrued expenses |
(503.6 | ) | (137.1 | ) | 217.1 | |||||
Accrued income taxes payable/receivable |
(137.6 | ) | 342.6 | 80.4 | ||||||
Retirement benefits |
427.5 | 336.9 | 262.0 | |||||||
Other |
40.2 | (231.2 | ) | (47.6 | ) | |||||
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Net cash provided by operating activities |
3,740.3 | 3,525.9 | 3,254.3 | |||||||
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Cash Flows from Investing Activities |
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Collections of receivables (excluding receivables related to sales) |
14,919.7 | 15,319.1 | 14,088.0 | |||||||
Proceeds from maturities and sales of marketable securities |
860.7 | 1,022.5 | 843.9 | |||||||
Proceeds from sales of equipment on operating leases |
1,049.4 | 1,091.5 | 936.7 | |||||||
Proceeds from sales of businesses, net of cash sold |
149.2 | 345.8 | 22.0 | |||||||
Cost of receivables acquired (excluding receivables related to sales) |
(14,996.5 | ) | (17,240.4 | ) | (17,011.7 | ) | ||||
Purchases of marketable securities |
(154.9 | ) | (614.6 | ) | (1,026.3 | ) | ||||
Purchases of property and equipment |
(694.0 | ) | (1,048.3 | ) | (1,158.4 | ) | ||||
Cost of equipment on operating leases acquired |
(2,132.1 | ) | (1,611.0 | ) | (1,216.9 | ) | ||||
Acquisitions of businesses, net of cash acquired |
(83.5 | ) | ||||||||
Other |
(60.2 | ) | (145.6 | ) | (214.5 | ) | ||||
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Net cash used for investing activities |
(1,058.7 | ) | (2,881.0 | ) | (4,820.7 | ) | ||||
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Cash Flows from Financing Activities |
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Increase in total short-term borrowings |
501.6 | 89.2 | 2,749.4 | |||||||
Proceeds from long-term borrowings |
5,711.0 | 8,232.0 | 4,734.0 | |||||||
Payments of long-term borrowings |
(4,863.2 | ) | (5,209.1 | ) | (4,958.5 | ) | ||||
Proceeds from issuance of common stock |
172.1 | 149.5 | 174.5 | |||||||
Repurchases of common stock |
(2,770.7 | ) | (2,731.1 | ) | (1,531.4 | ) | ||||
Dividends paid |
(816.3 | ) | (786.0 | ) | (752.9 | ) | ||||
Excess tax benefits from share-based compensation |
18.5 | 30.8 | 50.7 | |||||||
Other |
(72.1 | ) | (63.6 | ) | (59.3 | ) | ||||
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Net cash (used for) provided by financing activities |
(2,119.1 | ) | (288.3 | ) | 406.5 | |||||
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Effect of Exchange Rate Changes on Cash and Cash Equivalents |
(187.3 | ) | (73.6 | ) | 11.7 | |||||
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Net Increase (Decrease) in Cash and Cash Equivalents |
375.2 | 283.0 | (1,148.2 | ) | ||||||
Cash and Cash Equivalents at Beginning of Year |
3,787.0 | 3,504.0 | 4,652.2 | |||||||
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Cash and Cash Equivalents at End of Year |
$ | 4,162.2 | $ | 3,787.0 | $ | 3,504.0 | ||||
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The notes to consolidated financial statements are an integral part of this statement.
8
DEERE & COMPANY
STATEMENT OF CHANGES IN CONSOLIDATED STOCKHOLDERS' EQUITY
For the Years Ended October 31, 2013, 2014 and 2015
(In millions of dollars)
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Deere & Company Stockholders | |
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Total Stockholders' Equity |
Common Stock |
Treasury Stock |
Retained Earnings |
Accumulated Other Comprehensive Income (Loss) |
Non- controlling Interests |
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Balance October 31, 2012 |
$ | 6,862.0 | $ | 3,352.2 | $ | (8,813.8 | ) | $ | 16,875.2 | $ | (4,571.5 | ) | $ | 19.9 | |||||
Net income |
3,537.6 |
3,537.3 |
..3 |
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Other comprehensive income |
1,878.5 | 1,878.4 | .1 | ||||||||||||||||
Repurchases of common stock |
(1,531.4 | ) | (1,531.4 | ) | |||||||||||||||
Treasury shares reissued |
134.3 | 134.3 | |||||||||||||||||
Dividends declared |
(774.5 | ) | (766.6 | ) | (7.9 | ) | |||||||||||||
Deconsolidation of variable interest entity |
(10.6 | ) | (10.6 | ) | |||||||||||||||
Stock options and other shareholder transactions |
171.8 | 172.0 | (.3 | ) | .1 | ||||||||||||||
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Balance October 31, 2013 |
10,267.7 | 3,524.2 | (10,210.9 | ) | 19,645.6 | (2,693.1 | ) | 1.9 | |||||||||||
Net income |
3,163.3 |
3,161.7 |
1.6 |
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Other comprehensive loss |
(1,090.2 | ) | (1,089.9 | ) | (.3 | ) | |||||||||||||
Repurchases of common stock |
(2,731.1 | ) | (2,731.1 | ) | |||||||||||||||
Treasury shares reissued |
107.8 | 107.8 | |||||||||||||||||
Dividends declared |
(803.7 | ) | (803.4 | ) | (.3 | ) | |||||||||||||
Stock options and other shareholder transactions |
151.7 | 151.2 | .5 | ||||||||||||||||
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Balance October 31, 2014 |
9,065.5 | 3,675.4 | (12,834.2 | ) | 22,004.4 | (3,783.0 | ) | 2.9 | |||||||||||
Net income |
1,940.9 |
1,940.0 |
..9 |
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Other comprehensive loss |
(946.8 | ) | (946.4 | ) | (.4 | ) | |||||||||||||
Repurchases of common stock |
(2,770.7 | ) | (2,770.7 | ) | |||||||||||||||
Treasury shares reissued |
107.3 | 107.3 | |||||||||||||||||
Dividends declared |
(800.8 | ) | (799.5 | ) | (1.3 | ) | |||||||||||||
Stock options and other shareholder transactions |
162.2 | 150.2 | (.1 | ) | 12.1 | ||||||||||||||
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Balance October 31, 2015 |
$ | 6,757.6 | $ | 3,825.6 | $ | (15,497.6 | ) | $ | 23,144.8 | $ | (4,729.4 | ) | $ | 14.2 | |||||
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The notes to consolidated financial statements are an integral part of this statement.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
1. ORGANIZATION AND CONSOLIDATION |
Structure of Operations
The information in the notes and related commentary are presented in a format which includes data grouped as follows:
Equipment Operations Includes the company's agriculture and turf operations and construction and forestry operations with financial services reflected on the equity basis.
Financial Services Includes primarily the company's financing operations.
Consolidated Represents the consolidation of the equipment operations and financial services. References to "Deere & Company" or "the company" refer to the entire enterprise.
Principles of Consolidation
The consolidated financial statements represent primarily the consolidation of all companies in which Deere & Company has a controlling interest. Certain variable interest entities (VIEs) are consolidated since the company has both the power to direct the activities that most significantly impact the VIEs' economic performance and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIEs. Deere & Company records its investment in each unconsolidated affiliated company (generally 20 to 50 percent ownership) at its related equity in the net assets of such affiliate (see Note 10). Other investments (less than 20 percent ownership) are recorded at cost.
Fiscal Year
The company has historically and continues to use a 52/53 week fiscal year ending on the last Sunday in the reporting period. The fiscal year ends for 2015, 2014 and 2013 were November 1, 2015, November 2, 2014 and October 27, 2013, respectively. Fiscal year 2014 contained 53 weeks. For ease of presentation, the consolidated financial statements and notes continue to be dated October 31.
Variable Interest Entities
See Note 13 for VIEs related to securitization of financing receivables.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
The following are significant accounting policies in addition to those included in other notes to the consolidated financial statements.
Use of Estimates in Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts and related disclosures. Actual results could differ from those estimates.
Revenue Recognition
Sales of equipment and service parts are recorded when the sales price is determinable and the risks and rewards of ownership are transferred to independent parties based on the sales agreements in effect. In the U.S. and most international locations, this transfer occurs primarily when goods are shipped. In Canada and some other international locations, certain goods are shipped to dealers on a consignment basis under which the risks and rewards of ownership are not transferred to the dealer.
Accordingly, in these locations, sales are not recorded until a retail customer has purchased the goods. In all cases, when a sale is recorded by the company, no significant uncertainty exists surrounding the purchaser's obligation to pay. No right of return exists on sales of equipment. Service parts and certain attachments returns are estimable and accrued at the time a sale is recognized. The company makes appropriate provisions based on experience for costs such as doubtful receivables, sales incentives and product warranty.
Financing revenue is recorded over the lives of related receivables using the interest method. Insurance premiums recorded in other income are generally recognized in proportion to the costs expected to be incurred over the contract period. Deferred costs on the origination of financing receivables are recognized as a reduction in finance revenue over the expected lives of the receivables using the interest method. Income and deferred costs on the origination of operating leases are recognized on a straight-line basis over the scheduled lease terms in finance revenue.
Sales Incentives
At the time a sale is recognized, the company records an estimate of the future sales incentive costs for allowances and financing programs that will be due when a dealer sells the equipment to a retail customer. The estimate is based on historical data, announced incentive programs, field inventory levels and retail sales volumes.
Product Warranties
At the time a sale is recognized, the company records the estimated future warranty costs. These costs are usually estimated based on historical warranty claims (see Note 22).
Sales Taxes
The company collects and remits taxes assessed by different governmental authorities that are both imposed on and concurrent with revenue producing transactions between the company and its customers. These taxes may include sales, use, value-added and some excise taxes. The company reports the collection of these taxes on a net basis (excluded from revenues).
Shipping and Handling Costs
Shipping and handling costs related to the sales of the company's equipment are included in cost of sales.
Advertising Costs
Advertising costs are charged to expense as incurred. This expense was $157 million in 2015, $174 million in 2014 and $183 million in 2013.
Depreciation and Amortization
Property and equipment, capitalized software and other intangible assets are stated at cost less accumulated depreciation or amortization. These assets are depreciated over their estimated useful lives generally using the straight-line method. Equipment on operating leases is depreciated over the terms of the leases using the straight-line method. Property and equipment expenditures for new and revised products, increased capacity and the replacement or major renewal of significant items are capitalized. Expenditures for maintenance, repairs and minor renewals are generally charged to expense as incurred.
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Securitization of Receivables
Certain financing receivables are periodically transferred to special purpose entities (SPEs) in securitization transactions (see Note 13). These securitizations qualify as collateral for secured borrowings and no gains or losses are recognized at the time of securitization. The receivables remain on the balance sheet and are classified as "Financing receivables securitized net." The company recognizes finance income over the lives of these receivables using the interest method.
Receivables and Allowances
All financing and trade receivables are reported on the balance sheet at outstanding principal adjusted for any charge-offs, the allowance for credit losses, and any deferred fees or costs on originated financing receivables. Allowances for credit losses are maintained in amounts considered to be appropriate in relation to the receivables outstanding based on collection experience, economic conditions and credit risk quality. Receivables are written-off to the allowance when the account is considered uncollectible.
Impairment of Long-Lived Assets, Goodwill and Other Intangible Assets
The company evaluates the carrying value of long-lived assets (including property and equipment, goodwill and other intangible assets) when events or circumstances warrant such a review. Goodwill and intangible assets with indefinite lives are tested for impairment annually at the end of the third fiscal quarter each year, and more often if events or circumstances indicate a reduction in the fair value below the carrying value. Goodwill is allocated and reviewed for impairment by reporting units, which consist primarily of the operating segments and certain other reporting units. The goodwill is allocated to the reporting unit in which the business that created the goodwill resides. To test for goodwill impairment, the carrying value of each reporting unit is compared with its fair value. If the carrying value of the goodwill or long-lived asset is considered impaired, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the asset (see Note 5).
Derivative Financial 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 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.
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 either a cash flow hedge, a fair value hedge, or remains undesignated. Changes in the fair value of derivatives that are designated and effective as cash flow hedges are recorded in other comprehensive income and reclassified to the income statement when the effects of the item being hedged are recognized in the income statement. Changes in the fair
value of derivatives that are designated and effective as fair value hedges are recognized currently in net income. These changes are offset in net income to the extent the hedge was effective by fair value changes related to the risk being hedged on the hedged item. Changes in the fair value of undesignated hedges are recognized currently in the income statement. All ineffective changes in derivative fair values are recognized currently in net income.
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, the hedge accounting discussed above is discontinued (see Note 27).
Foreign Currency Translation
The functional currencies for most of the company's foreign operations are their respective local currencies. The assets and liabilities of these operations are translated into U.S. dollars at the end of the period exchange rates. The revenues and expenses are translated at weighted-average rates for the period. The gains or losses from these translations are recorded in other comprehensive income. Gains or losses from transactions denominated in a currency other than the functional currency of the subsidiary involved and foreign exchange forward contracts are included in net income. The pretax net gain (loss) for foreign exchange in 2015, 2014 and 2013 was $22 million, $(47) million and $(26) million, respectively.
3. NEW ACCOUNTING STANDARDS |
New Accounting Standards Adopted
In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-04, Practical Expedient for the Measurement Date of an Employer's Defined Benefit Obligation and Plan Assets, which amends Accounting Standards Codification (ASC) 715, Compensation Retirement Benefits. This ASU provides a practical expedient for entities whose fiscal year end does not coincide with a month end. The practical expedient permits defined benefit plan assets and obligations to be measured using the month end that is closest to the entity's fiscal year end. Early adoption is permitted. The company early adopted this ASU in the fourth quarter of 2015. As a result, pension and other postretirement benefit plan assets and liabilities were measured as of October 31, 2015. The adoption did not have a material effect on the company's consolidated financial statements.
In May 2015, the FASB issued ASU No. 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent), which amends ASC 820, Fair Value Measurement. This ASU removes the requirement to categorize within the fair value hierarchy investments without readily determinable fair values in entities that elect to measure fair value using net asset value per share or its equivalent. The ASU requires that these investments continue to be shown in the investment disclosure amount to allow the disclosure to reconcile to the investment amount presented in the balance
11
sheet. The ASU was early adopted in the fourth quarter of fiscal year 2015 and was applied retrospectively (see pension and health care assets in Note 7). The adoption did not have a material effect on the consolidated financial statements.
New Accounting Standards to be Adopted
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU No. 2015-14, Deferral of the Effective Date, which amends ASU No. 2014-09. As a result, the effective date will be the first quarter of fiscal year 2019 with early adoption permitted in the first quarter of fiscal year 2018. The adoption will use one of two retrospective application methods. The company has not determined the potential effects on the consolidated financial statements.
In June 2014, the FASB issued ASU No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period, which amends ASC 718, Compensation Stock Compensation. This ASU requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. Therefore, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The total compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The effective date will be the first quarter of fiscal year 2017. The adoption will not have a material effect on the company's consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which amends ASC 835-30, Interest Imputation of Interest. This ASU requires that debt issuance costs related to borrowings be presented in the balance sheet as a direct deduction from the carrying amount of the borrowing. This treatment is consistent with debt discounts. The ASU does not affect the amount or timing of expenses for debt issuance costs. The effective date will be the first quarter of fiscal year 2017 and will be applied retrospectively. The adoption will not have a material effect on the company's consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-05, Customer's Accounting for Fees Paid in a Cloud Computing Arrangement, which amends ASC 350-40, Intangibles-Goodwill and Other-Internal-Use Software. This ASU provides guidance to
customers about whether a cloud computing arrangement includes a software license. If an arrangement includes a software license, the accounting for the license will be consistent with licenses of other intangible assets. If the arrangement does not include a license, the arrangement will be accounted for as a service contract. The effective date will be the first quarter of fiscal year 2017 and will be adopted prospectively. The adoption will not have a material effect on the company's consolidated financial statements.
In May 2015, the FASB issued ASU No. 2015-09, Disclosures about Short-Duration Contracts, which amends ASC 944, Financial Services Insurance. This ASU requires disclosure of additional information about unpaid claims and claims adjustment expenses, including a rollforward of the liability of the claims adjustment liability. The effective date will be the fourth quarter of fiscal year 2017. The adoption will not have a material effect on the company's consolidated financial statements.
In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, which amends ASC 330, Inventory. This ASU simplifies the subsequent measurement of inventory by using only the lower of cost or net realizable value. The ASU does not apply to inventory measured using the last-in, first-out method. The effective date will be the first quarter of fiscal year 2018 with early adoption permitted. The adoption will not have a material effect on the company's consolidated financial statements.
In August 2015, the FASB issued ASU No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, which amends ASC 835-30, Interest Imputation of Interest. This ASU clarifies the presentation and subsequent measurement of debt issuance costs associated with lines of credit. These costs may be presented as an asset and amortized ratably over the term of the line of credit arrangement, regardless of whether there are outstanding borrowings on the arrangement. The effective date will be the first quarter of fiscal year 2017 and will be applied retrospectively. The adoption will not have a material effect on the company's consolidated financial statements.
4. DISPOSITIONS |
In March 2015, the company closed the sale of all of the stock of its wholly-owned subsidiaries, John Deere Insurance Company and John Deere Risk Protection, Inc. (collectively the Crop Insurance operations) to Farmers Mutual Hail Insurance Company of Iowa. These operations were included in the company's financial services operating segment. At January 31, 2015, the total assets of $381 million and liabilities of $267 million were classified as held for sale in the consolidated financial statements, which consisted of $13 million of cash and cash equivalents, $79 million of marketable securities, $265 million of other receivables, $4 million of other intangible assets-net and $20 million of other assets. The related liabilities held for sale consisted of accounts payable and accrued expenses. The total amount of proceeds from the sale was approximately $154 million, including $5 million of cash and cash equivalents sold, with a gain recorded in other income of $42 million pretax and $40 million after-tax. The tax expense was partially offset by a change in a valuation allowance on a capital loss carryforward.
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The company provided certain business services for a fee during a transition period.
In May 2014, the company closed the sale of the stock and certain assets of the entities that compose the company's Water operations to FIMI Opportunity Funds. The sale was the result of the company's intention to invest its resources in growing core businesses. At April 30, 2014, the total assets of $85 million and liabilities of $50 million were classified as held for sale in the consolidated financial statements, which consisted of $57 million of trade receivables, $10 million of other receivables, $49 million of inventories and $5 million of other assets less a $36 million asset impairment. The related liabilities held for sale consisted of accounts payable and accrued expenses of $47 million and retirement benefits and other liabilities of $3 million. The total amount of proceeds from the sale was approximately $35 million with a loss recorded in other operating expenses of $10 million pretax and after-tax in addition to the impairments recorded (see Note 5). The company provided certain business services for a fee during a transition period.
In December 2013, the company closed the sale of 60 percent of its subsidiary John Deere Landscapes, LLC (Landscapes) to a private equity investment firm affiliated with Clayton, Dubilier & Rice, LLC (CD&R). At October 31, 2013, the total assets of $505 million and liabilities of $120 million for these operations were classified as held for sale in the consolidated financial statements and written down to realizable value, which consisted of $153 million of trade receivables, $219 million of inventories, $37 million of property and equipment, $106 million of goodwill, $25 million of other intangible assets and $10 million of other assets less a $45 million asset impairment. The related liabilities held for sale consisted of accounts payable and accrued expenses. The total amount of proceeds from the sale at closing was approximately $305 million with no significant gain or loss, which consisted of $174 million equity contribution and third party debt raised by Landscapes.
The equity contribution was in the form of newly issued cumulative convertible participating preferred units representing 60 percent of the voting rights (on an as converted basis), which rank senior to the company's investment in Landscapes common stock as to dividends. The preferred units had an initial liquidation preference of $174 million and accrue dividends at a rate of 12 percent per annum. The liquidation preference is subject to the company's rights under the stockholders agreement. Due to preferred dividend payment in additional preferred shares over the first two years, CD&R's ownership increased over the two-year period.
The company initially retained 40 percent of the Landscapes business in the form of common stock. As of January 2014, the company deconsolidated Landscapes and began reporting the results as an equity investment in unconsolidated affiliates. Due to the company's continuing involvement through its initial 40 percent interest, Landscapes' historical operating results are presented in continuing operations. Landscapes was rebranded to SiteOne Landscapes Supply, Inc. during 2015.
5. SPECIAL ITEMS |
Impairments
In the fourth quarter of 2014, the company recorded non-cash charges in cost of sales for the impairment of long-lived assets of $18 million and other assets of $16 million pretax and after-tax. The assets are part of the company's agriculture and turf operations in China. The impairment is the result of a decline in forecasted financial performance that indicated it was probable the future cash flows would not cover the carrying amount of assets used to manufacture agricultural equipment in that country (see Note 26).
In 2014, the company recorded non-cash charges of $62 million pretax, or $30 million after-tax, related to the Water operations. In the first quarter, a $26 million pretax and after-tax loss was recorded in cost of sales for the impairment of long-lived assets. In the second quarter, an additional non-cash charge of $36 million pretax, or $4 million after-tax, was recorded in other operating expenses for an impairment to write the Water operations down to fair value less costs to sell. The tax benefits recognized resulted primarily from a change in valuation allowances of the Water operations. These operations were included in the company's agriculture and turf operating segment (see Note 26).
In 2013, the company recorded a non-cash charge for the impairment of long-lived assets of $57 million pretax, or $51 million after-tax. This consists of $50 million pretax, or $44 million after-tax, in the third quarter and $7 million pretax and after-tax in the fourth quarter, related to the company's Water operations, which were included in the agriculture and turf operating segment. The total pretax impairment loss consisted of $50 million recorded in cost of sales and $7 million in selling, administrative and general expenses. The impairments were due to a decline in the forecasted financial performance and a review of strategic options for the business (see Note 26).
In the fourth quarter of 2013, the company recorded a non-cash charge of $45 million pretax and after-tax in other operating expenses for an impairment to write the Landscapes operations down to realizable value. These operations were included in the agriculture and turf operating segment (see Note 4).
6. CASH FLOW INFORMATION |
For purposes of the statement of consolidated cash flows, the company considers investments with purchased maturities of three months or less to be cash equivalents. Substantially all of the company's short-term borrowings, excluding the current maturities of long-term borrowings, mature or may require payment within three months or less.
The equipment operations sell a significant portion of their trade receivables to financial services. These intercompany cash flows are eliminated in the consolidated cash flows.
All cash flows from the changes in trade accounts and notes receivable (see Note 12) 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 (see Note 12) are also included in operating activities. The remaining financing receivables are
13
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 $674 million, $794 million and $659 million in 2015, 2014 and 2013, respectively. The company also had accounts payable related to purchases of property and equipment of $89 million, $128 million and $198 million at October 31, 2015, 2014 and 2013, respectively.
Cash payments for interest and income taxes consisted of the following in millions of dollars:
| | | | | | | | | | |
|
2015 |
2014 |
2013 |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | |
Interest: |
||||||||||
Equipment operations |
$ | 471 | $ | 506 | $ | 511 | ||||
Financial services |
443 | 454 | 502 | |||||||
Intercompany eliminations |
(253 | ) | (268 | ) | (247 | ) | ||||
| | | | | | | | | | |
Consolidated |
$ | 661 | $ | 692 | $ | 766 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Income taxes: |
||||||||||
Equipment operations |
$ | 828 | $ | 1,640 | $ | 1,863 | ||||
Financial services |
190 | 333 | 270 | |||||||
Intercompany eliminations |
(117 | ) | (253 | ) | (179 | ) | ||||
| | | | | | | | | | |
Consolidated |
$ | 901 | $ | 1,720 | $ | 1,954 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
7. PENSION AND OTHER POSTRETIREMENT BENEFITS |
The company has several defined benefit pension plans and postretirement health care and life insurance plans covering its U.S. employees and employees in certain foreign countries. The company uses an October 31 measurement date for these plans.
The components of net periodic pension cost and the assumptions related to the cost consisted of the following in millions of dollars and in percents:
| | | | | | | | | | |
|
2015 |
2014 |
2013 |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | |
Pensions |
||||||||||
Service cost |
$ | 282 | $ | 244 | $ | 273 | ||||
Interest cost |
474 | 480 | 439 | |||||||
Expected return on plan assets |
(769 | ) | (776 | ) | (778 | ) | ||||
Amortization of actuarial loss |
223 | 177 | 265 | |||||||
Amortization of prior service cost |
25 | 25 | 12 | |||||||
Other postemployment benefits |
1 | 5 | ||||||||
Settlements/curtailments |
11 | 9 | 2 | |||||||
| | | | | | | | | | |
Net cost |
$ | 247 | $ | 164 | $ | 213 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Weighted-average assumptions |
||||||||||
Discount rates |
4.0% | 4.5% | 3.8% | |||||||
Rate of compensation increase |
3.8% | 3.8% | 3.9% | |||||||
Expected long-term rates of return |
7.3% | 7.5% | 7.8% | |||||||
| | | | | | | | | | |
The components of net periodic postretirement benefits cost and the assumptions related to the cost consisted of the following in millions of dollars and in percents:
| | | | | | | | | | |
|
2015 |
2014 |
2013 |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | |
Health care and life insurance |
||||||||||
Service cost |
$ | 46 | $ | 44 | $ | 58 | ||||
Interest cost |
259 | 267 | 255 | |||||||
Expected return on plan assets |
(55 | ) | (72 | ) | (84 | ) | ||||
Amortization of actuarial loss |
91 | 33 | 141 | |||||||
Amortization of prior service credit |
(77 | ) | (3 | ) | (8 | ) | ||||
Settlements/curtailments |
1 | (1 | ) | |||||||
| | | | | | | | | | |
Net cost |
$ | 265 | $ | 268 | $ | 362 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Weighted-average assumptions |
||||||||||
Discount rates |
4.2% | 4.7% | 3.8% | |||||||
Expected long-term rates of return |
7.0% | 7.2% | 7.5% | |||||||
| | | | | | | | | | |
The previous pension cost in net income and other changes in plan assets and benefit obligations in other comprehensive income in millions of dollars were as follows:
| | | | | | | | | | |
|
2015 |
2014 |
2013 |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | |
Pensions |
||||||||||
Net cost |
$ | 247 | $ | 164 | $ | 213 | ||||
Retirement benefit adjustments included in other comprehensive (income) loss: |
||||||||||
Net actuarial (gain) loss |
361 | 940 | (1,481 | ) | ||||||
Prior service (credit) cost |
66 | (26 | ) | |||||||
Amortization of actuarial loss |
(223 | ) | (177 | ) | (265 | ) | ||||
Amortization of prior service cost |
(25 | ) | (25 | ) | (12 | ) | ||||
Settlements/curtailments |
(11 | ) | (9 | ) | (2 | ) | ||||
| | | | | | | | | | |
Total (gain) loss recognized in other comprehensive (income) loss |
168 | 729 | (1,786 | ) | ||||||
| | | | | | | | | | |
Total recognized in comprehensive (income) loss |
$ | 415 | $ | 893 | $ | (1,573 | ) | |||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
The previous postretirement benefits cost in net income and other changes in plan assets and benefit obligations in other comprehensive income in millions of dollars were as follows:
| | | | | | | | | | |
|
2015 |
2014 |
2013 |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | |
Health care and life insurance |
||||||||||
Net cost |
$ | 265 | $ | 268 | $ | 362 | ||||
Retirement benefit adjustments included in other comprehensive (income) loss: |
||||||||||
Net actuarial (gain) loss |
(141 | ) | 748 | (1,165 | ) | |||||
Prior service credit |
(3 | ) | (370 | ) | (2 | ) | ||||
Amortization of actuarial loss |
(91 | ) | (33 | ) | (141 | ) | ||||
Amortization of prior service credit |
77 | 3 | 8 | |||||||
Settlements/curtailments |
(2 | ) | 1 | |||||||
| | | | | | | | | | |
Total (gain) loss recognized in other comprehensive (income) loss |
(160 | ) | 349 | (1,300 | ) | |||||
| | | | | | | | | | |
Total recognized in comprehensive (income) loss |
$ | 105 | $ | 617 | $ | (938 | ) | |||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
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The benefit plan obligations, funded status and the assumptions related to the obligations at October 31 in millions of dollars follow:
| | | | | | | | | | | | | |
|
Pensions | Health Care and Life Insurance |
|||||||||||
|
2015 | 2014 | 2015 | 2014 | |||||||||
| | | | | | | | | | | | | |
Change in benefit obligations |
|||||||||||||
Beginning of year balance |
$ | (12,190 | ) | $ | (10,968 | ) | $ | (6,304 | ) | $ | (5,926 | ) | |
Service cost |
(282 | ) | (244 | ) | (46 | ) | (44 | ) | |||||
Interest cost |
(474 | ) | (480 | ) | (259 | ) | (267 | ) | |||||
Actuarial gain (loss) |
(174 | ) | (1,306 | ) | 172 | (757 | ) | ||||||
Amendments |
(66 | ) | 3 | 370 | |||||||||
Benefits paid |
781 | 675 | 344 | 336 | |||||||||
Health care subsidies |
(20 | ) | (22 | ) | |||||||||
Other postemployment benefits |
(1 | ) | (5 | ) | |||||||||
Settlements/curtailments |
2 | 2 | 1 | ||||||||||
Foreign exchange and other |
218 | 136 | 25 | 6 | |||||||||
| | | | | | | | | | | | | |
End of year balance |
(12,186 | ) | (12,190 | ) | (6,084 | ) | (6,304 | ) | |||||
| | | | | | | | | | | | | |
Change in plan assets (fair value) |
|||||||||||||
Beginning of year balance |
11,447 | 11,008 | 957 | 1,157 | |||||||||
Actual return on plan assets |
582 | 1,132 | 24 | 81 | |||||||||
Employer contribution |
83 | 87 | 48 | 51 | |||||||||
Benefits paid |
(781 | ) | (675 | ) | (344 | ) | (336 | ) | |||||
Settlements/curtailments |
(2 | ) | (2 | ) | |||||||||
Foreign exchange and other |
(165 | ) | (103 | ) | 4 | 4 | |||||||
| | | | | | | | | | | | | |
End of year balance |
11,164 | 11,447 | 689 | 957 | |||||||||
| | | | | | | | | | | | | |
Funded status |
$ | (1,022 | ) | $ | (743 | ) | $ | (5,395 | ) | $ | (5,347 | ) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Weighted-average assumptions |
|||||||||||||
Discount rates |
4.1% | 4.0% | 4.3% | 4.2% | |||||||||
Rate of compensation increase |
3.8% | 3.8% | |||||||||||
| | | | | | | | | | | | | |
In the fourth quarter of 2015, the company decided to transition Medicare eligible wage and certain Medicare eligible salaried retirees to a Medicare Advantage plan offered by a private insurance company. This transition, which will take effect in January 2016, will not affect the participants' level of benefits and is expected to result in future cost savings for the company.
In the fourth quarter of 2015 and 2014, the company updated mortality assumptions based on tables issued by the Society of Actuaries.
For Medicare eligible salaried retirees that primarily retire after July 1, 1993 and are eligible for postretirement medical benefits, the company's postretirement benefit plan consists of annual Retiree Medical Credits (RMCs). The RMC is a monetary amount provided to the retirees annually to assist with their medical costs. In October 2014, the RMC plan was modified to change the annual cost sharing provisions. Beginning in 2015, the annual RMC amount did not increase and the rate of future changes will continue to be set each year by the company.
The amounts recognized at October 31 in millions of dollars consist of the following:
| | | | | | | | | | | | | |
|
Pensions | Health Care and Life Insurance |
|||||||||||
|
2015 | 2014 | 2015 | 2014 | |||||||||
| | | | | | | | | | | | | |
Amounts recognized in balance sheet |
|||||||||||||
Noncurrent asset |
$ | 216 | $ | 262 | |||||||||
Current liability |
(44 | ) | (51 | ) | $ | (20 | ) | $ | (21 | ) | |||
Noncurrent liability |
(1,194 | ) | (954 | ) | (5,375 | ) | (5,326 | ) | |||||
| | | | | | | | | | | | | |
Total |
$ | (1,022 | ) | $ | (743 | ) | $ | (5,395 | ) | $ | (5,347 | ) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Amounts recognized in accumulated other comprehensive income pretax |
|||||||||||||
Net actuarial loss |
$ | 4,393 | $ | 4,266 | $ | 1,442 | $ | 1,675 | |||||
Prior service cost (credit) |
83 | 42 | (334 | ) | (407 | ) | |||||||
| | | | | | | | | | | | | |
Total |
$ | 4,476 | $ | 4,308 | $ | 1,108 | $ | 1,268 | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
The total accumulated benefit obligations for all pension plans at October 31, 2015 and 2014 was $11,508 million and $11,425 million, respectively.
The accumulated benefit obligations and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $7,254 million and $6,669 million, respectively, at October 31, 2015 and $1,381 million and $916 million, respectively, at October 31, 2014. The projected benefit obligations and fair value of plan assets for pension plans with projected benefit obligations in excess of plan assets were $8,196 million and $6,958 million, respectively, at October 31, 2015 and $8,213 million and $7,208 million, respectively, at October 31, 2014.
The amounts in accumulated other comprehensive income that are expected to be amortized as net expense (income) during fiscal 2016 in millions of dollars follow:
| | | | | | ||||||
|
| Pensions | | Health Care and Life Insurance |
| ||||||
| | | | | | ||||||
Net actuarial loss |
| | $ | 208 | | | | $ | 75 | | |
Prior service cost (credit) |
| | 16 | | | | (78 | ) | | ||
| | | | | | | | | | ||
Total |
| | $ | 224 | | | | $ | (3 | ) | |
| | | | | | | | | | ||
| | | | | | | | | | ||
| | | | | | | | | | ||
| | | | | |
Actuarial gains and losses are recorded in accumulated other comprehensive income (loss). To the extent unamortized gains and losses exceed 10% of the higher of the market-related value of assets or the benefit obligation, the excess is amortized as a component of net periodic cost over the remaining service period of the active participants. For plans in which all or almost all of the plan's participants are inactive, the amortization period is the remaining life expectancy of the inactive participants.
The company expects to contribute approximately $73 million to its pension plans and approximately $25 million to its health care and life insurance plans in 2016, which are primarily direct benefit payments for unfunded plans.
15
|
The benefits expected to be paid from the benefit plans, which reflect expected future years of service, are as follows in millions of dollars:
| | | | | | | |
|
Pensions | Health Care and Life Insurance* |
|||||
| | | | | | | |
2016 |
$ | 697 | $ | 317 | |||
2017 |
688 | 333 | |||||
2018 |
685 | 339 | |||||
2019 |
690 | 342 | |||||
2020 |
694 | 344 | |||||
2021 to 2025 |
3,484 | 1,766 |
The annual rates of increase in the per capita cost of covered health care benefits (the health care cost trend rates) used to determine accumulated postretirement benefit obligations were based on the trends for medical and prescription drug claims for pre- and post-65 age groups due to the effects of Medicare. At October 31, 2015, the weighted-average composite trend rates for these obligations were assumed to be a .8 percent increase from 2015 to 2016, followed by an increase of 7.9 percent from 2016 to 2017, gradually decreasing to 4.8 percent from 2024 to 2025 and all future years. The small estimated increase from 2015 to 2016 resulted from the transition to the Medicare Advantage plan in January 2016. The obligations at October 31, 2014 and the cost in 2015 assumed a 6.2 percent increase from 2014 to 2015, gradually decreasing to 5.0 percent from 2022 to 2023 and all future years. An increase of one percentage point in the assumed health care cost trend rate would increase the accumulated postretirement benefit obligations by $807 million and the aggregate of service and interest cost component of net periodic postretirement benefits cost for the year by $45 million. A decrease of one percentage point would decrease the obligations by $619 million and the cost by $34 million.
The discount rate assumptions used to determine the postretirement obligations at October 31, 2015 and 2014 were based on hypothetical AA yield curves represented by a series of annualized individual discount rates. These discount rates represent the rates at which the company's benefit obligations could effectively be settled at the October 31 measurement dates.
Beginning in 2016, the company will change the method used to estimate the service and interest cost components of the net periodic pension and other postretirement benefit costs. The new method uses the spot yield curve approach to estimate the service and interest costs by applying the specific spot rates along the yield curve used to determine the benefit obligations to relevant projected cash outflows. Previously, those costs were
determined using a single weighted-average discount rate. The change does not affect the measurement of the total benefit obligations as the change in service and interest costs offsets in the actuarial gains and losses recorded in other comprehensive income. The new method provides a more precise measure of interest and service costs by improving the correlation between the projected benefit cash flows and the discrete spot yield curve rates. The company will account for this change as a change in estimate prospectively beginning in the first quarter of 2016. See "Postretirement Benefit Obligations" in Critical Accounting Policies for additional details.
Fair value measurement levels in the following tables are defined in Note 26.
The fair values of the pension plan assets at October 31, 2015 follow in millions of dollars:
| | | | | | | | ||||||
|
| Total | | Level 1 | | Level 2 |
| ||||||
| | | | | | | | ||||||
Cash and short-term investments |
| $ | 867 | | | $ | 378 | | | $ | 489 | | |
Equity: |
| | | | | | | ||||||
U.S. equity securities and funds |
| 3,075 | | | 3,053 | | | 22 | | | |||
International equity securities |
| 1,802 | | | 1,781 | | | 21 | | | |||
Fixed Income: |
| | | | | | | ||||||
Government and agency securities |
| 386 | | | 197 | | | 189 | | | |||
Corporate debt securities |
| 751 | | | 1 | | | 750 | | | |||
Mortgage-backed securities |
| 83 | | | | | 83 | | | ||||
Fixed income funds |
| 26 | | | 26 | | | | | ||||
Real estate |
| 133 | | | 130 | | | 3 | | | |||
Derivative contracts assets* |
| 190 | | | 25 | | | 165 | | | |||
Derivative contracts liabilities** |
| (26 | ) | | (4 | ) | | (22 | ) | | |||
Receivables, payables and other |
| 4 | | | 3 | | | 1 | | | |||
Securities lending collateral |
| 745 | | | 92 | | | 653 | | | |||
Securities lending liability |
| (745 | ) | | (92 | ) | | (653 | ) | | |||
Securities sold short |
| (470 | ) | | (466 | ) | | (4 | ) | | |||
| | | | | | | | | | | |||
Total of Level 1 and Level 2 assets |
| 6,821 | | | $ | 5,124 | | | $ | 1,697 | | | |
| | | | | | | | | | | |||
| | | | | | | | | | | |||
| | | | | | | | | | | |||
Investments at net asset value***: |
| | | | | | | ||||||
Short-term investments |
| 195 | | | | | | | |||||
U.S. equity funds |
| 33 | | | | | | | |||||
International equity funds |
| 540 | | | | | | | |||||
Corporate debt funds |
| 26 | | | | | | | |||||
Fixed income funds |
| 495 | | | | | | | |||||
Real estate |
| 501 | | | | | | | |||||
Hedge funds |
| 625 | | | | | | | |||||
Private equity/venture capital |
| 1,604 | | | | | | | |||||
Other investments |
| 324 | | | | | | | |||||
| | | | | | | | | | | |||
Total net assets |
| $ | 11,164 | | | | | | | ||||
| | | | | | | | | | | |||
| | | | | | | | | | | |||
| | | | | | | | | | |
16
The fair values of the health care assets at October 31, 2015 follow in millions of dollars:
| | | | | | | | |||||||||
|
| Total | | Level 1 | | Level 2 |
| |||||||||
| | | | | | | | |||||||||
Cash and short-term investments |
| | $ | 35 | | | | $ | 25 | | | | $ | 10 | | |
Equity: |
| | | | | | | | | | ||||||
U.S. equity securities and funds |
| | 229 | | | | 229 | | | | | | ||||
International equity securities |
| | 39 | | | | 39 | | | | | | ||||
Fixed Income: |
| | | | | | | | | | ||||||
Government and agency securities |
| | 84 | | | | 78 | | | | 6 | | | |||
Corporate debt securities |
| | 35 | | | | | | | 35 | | | ||||
Mortgage-backed securities |
| | 13 | | | | | | | 13 | | | ||||
Fixed income funds |
| | 1 | | | | 1 | | | | | | ||||
Real estate |
| | 4 | | | | 4 | | | | | | ||||
Derivative contracts assets* |
| | 4 | | | | 1 | | | | 3 | | | |||
Receivables, payables and other |
| | 1 | | | | 1 | | | | | | ||||
Securities lending collateral |
| | 65 | | | | 9 | | | | 56 | | | |||
Securities lending liability |
| | (65 | ) | | | (9 | ) | | | (56 | ) | | |||
Securities sold short |
| | (10 | ) | | | (10 | ) | | | | | ||||
| | | | | | | | | | | | | | |||
Total of Level 1 and Level 2 assets |
| | 435 | | | | $ | 368 | | | | $ | 67 | | | |
| | | | | | | | | | | | | | |||
| | | | | | | | | | | | | | |||
| | | | | | | | | | | | | | |||
Investments at net asset value**: |
| | | | | | | | | | ||||||
Short-term investments |
| | 4 | | | | | | | | | |||||
International equity funds |
| | 103 | | | | | | | | | |||||
Fixed income funds |
| | 47 | | | | | | | | | |||||
Real estate funds |
| | 10 | | | | | | | | | |||||
Hedge funds |
| | 50 | | | | | | | | | |||||
Private equity/venture capital |
| | 34 | | | | | | | | | |||||
Other investments |
| | 6 | | | | | | | | | |||||
| | | | | | | | | | | | | | |||
Total net assets |
| | $ | 689 | | | | | | | | | ||||
| | | | | | | | | | | | | | |||
| | | | | | | | | | | | | | |||
| | | | | | | | | | | | | |
The fair values of the pension plan assets at October 31, 2014 follow in millions of dollars:
| | | | | | | | ||||||
|
| Total | | Level 1 | | Level 2 |
| ||||||
| | | | | | | | ||||||
Cash and short-term investments |
| $ | 977 | | | $ | 426 | | | $ | 551 | | |
Equity: |
| | | | | | | ||||||
U.S. equity securities and funds |
| 3,088 | | | 3,088 | | | | | ||||
International equity securities and funds |
| 2,046 | | | 2,046 | | | | | ||||
Fixed Income: |
| | | | | | | ||||||
Government and agency securities |
| 434 | | | 412 | | | 22 | | | |||
Corporate debt securities |
| 322 | | | 1 | | | 321 | | | |||
Mortgage-backed securities |
| 96 | | | 11 | | | 85 | | | |||
Fixed income funds |
| 127 | | | 127 | | | | | ||||
Real estate |
| 132 | | | 132 | | | | | ||||
Derivative contracts assets* |
| 322 | | | 14 | | | 308 | | | |||
Derivative contracts liabilities** |
| (39 | ) | | (9 | ) | | (30 | ) | | |||
Receivables, payables and other |
| 1 | | | | | 1 | | | ||||
Securities lending collateral |
| 847 | | | | | 847 | | | ||||
Securities lending liability |
| (847 | ) | | | | (847 | ) | | ||||
Securities sold short |
| (477 | ) | | (477 | ) | | | | ||||
| | | | | | | | | | | |||
Total of Level 1 and Level 2 assets |
| 7,029 | | | $ | 5,771 | | | $ | 1,258 | | | |
| | | | | | | | | | | |||
| | | | | | | | | | | |||
| | | | | | | | | | | |||
Investments at net asset value***: |
| | | | | | | ||||||
Short-term investments |
| 108 | | | | | | | |||||
U.S. equity funds |
| 38 | | | | | | | |||||
International equity funds |
| 382 | | | | | | | |||||
Fixed income funds |
| 957 | | | | | | | |||||
Real estate funds |
| 442 | | | | | | | |||||
Hedge funds |
| 593 | | | | | | | |||||
Private equity/venture capital |
| 1,578 | | | | | | | |||||
Other investments |
| 320 | | | | | | | |||||
| | | | | | | | | | | |||
Total net assets |
| $ | 11,447 | | | | | | | ||||
| | | | | | | | | | | |||
| | | | | | | | | | | |||
| | | | | | | | | | |
17
The fair values of the health care assets at October 31, 2014 follow in millions of dollars:
| | | | | | | | |||||||||
|
| Total | | Level 1 | | Level 2 |
| |||||||||
| | | | | | | | |||||||||
Cash and short-term investments |
| | $ | 52 | | | | $ | 37 | | | | $ | 15 | | |
Equity: |
| | | | | | | | | | ||||||
U.S. equity securities and funds |
| | 310 | | | | 310 | | | | | | ||||
International equity securities |
| | 57 | | | | 57 | | | | | | ||||
Fixed Income: |
| | | | | | | | | | ||||||
Government and agency securities |
| | 164 | | | | 159 | | | | 5 | | | |||
Corporate debt securities |
| | 33 | | | | | | | 33 | | | ||||
Mortgage-backed securities |
| | 13 | | | | | | | 13 | | | ||||
Fixed income funds |
| | 1 | | | | 1 | | | | | | ||||
Real estate |
| | 5 | | | | 5 | | | | | | ||||
Derivative contracts assets* |
| | 5 | | | | | | | 5 | | | ||||
Derivative contracts liabilities** |
| | (1 | ) | | | | | | (1 | ) | | ||||
Receivables, payables and other |
| | 1 | | | | 1 | | | | | | ||||
Securities lending collateral |
| | 126 | | | | | | | 126 | | | ||||
Securities lending liability |
| | (126 | ) | | | | | | (126 | ) | | ||||
Securities sold short |
| | (13 | ) | | | (13 | ) | | | | | ||||
| | | | | | | | | | | | | | |||
Total of Level 1 and Level 2 assets |
| | 627 | | | | $ | 557 | | | | $ | 70 | | | |
| | | | | | | | | | | | | | |||
| | | | | | | | | | | | | | |||
| | | | | | | | | | | | | | |||
Investments at net asset value***: |
| | | | | | | | | | ||||||
Short-term investments |
| | 3 | | | | | | | | | |||||
International equity funds |
| | 121 | | | | | | | | | |||||
Fixed income funds |
| | 69 | | | | | | | | | |||||
Real estate funds |
| | 12 | | | | | | | | | |||||
Hedge funds |
| | 72 | | | | | | | | | |||||
Private equity/venture capital |
| | 44 | | | | | | | | | |||||
Other investments |
| | 9 | | | | | | | | | |||||
| | | | | | | | | | | | | | |||
Total net assets |
| | $ | 957 | | | | | | | | | ||||
| | | | | | | | | | | | | | |||
| | | | | | | | | | | | | | |||
| | | | | | | | | | | | | |
Fair values are determined as follows:
Cash and Short-Term Investments Includes accounts that are valued based on the account value, which approximates fair value, and investment funds that are valued on the fund's net asset value (NAV) based on the fair value of the underlying securities. Also included are securities that are valued using a market approach (matrix pricing model) in which all significant inputs are observable or can be derived from or corroborated by observable market data.
Equity Securities and Funds The values are determined primarily by closing prices in the active market in which the equity investment trades, or the fund's NAV, based on the fair value of the underlying securities.
Fixed Income Securities and Funds The securities are valued using either 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, or they are valued using the closing prices in the active market in which the fixed income investment trades. Fixed income funds are valued using the NAV, based on the fair value of the underlying securities or closing prices in the active market in which the investment trades.
Real Estate, Venture Capital, Private Equity, Hedge Funds and Other The investments, which are structured as limited partnerships, are valued at estimated fair value based on
their proportionate share of the limited partnership's fair value that is determined by the general partner. The general partner values these investments using a combination of NAV, an income approach (primarily estimated cash flows discounted over the expected holding period), or market approach (primarily the valuation of similar securities and properties). Real estate investment trusts are primarily valued at the closing prices in the active markets in which the investment trades. Real estate investment funds and other investments are primarily valued at NAV, based on the fair value of the underlying securities.
Interest Rate, Foreign Currency and Other Derivative Instruments The derivatives are valued using either an income approach (discounted cash flow) using market observable inputs, including swap curves and both forward and spot exchange rates, or a market approach (closing prices in the active market in which the derivative instrument trades).
The primary investment objective for the pension and health care plans assets is to maximize the growth of these assets to support the projected obligations to the beneficiaries over a long period of time, and to do so in a manner that is consistent with the company's risk tolerance. The asset allocation policy is the most important decision in managing the assets and it is reviewed regularly. The asset allocation policy considers the long-term asset class risk/return expectations since the obligations are long-term in nature. The current target allocations for pension assets are approximately 49 percent for equity securities, 24 percent for debt securities, 5 percent for real estate and 22 percent for other investments. The target allocations for health care assets are approximately 53 percent for equity securities, 28 percent for debt securities, 4 percent for real estate and 15 percent for other investments. The allocation percentages above include the effects of combining derivatives with other investments to manage asset allocations and exposures to interest rates and foreign currency exchange. The assets are well diversified and are managed by professional investment firms as well as by investment professionals who are company employees. As a result of the company's diversified investment policy, there were no significant concentrations of risk.
The expected long-term rate of return on plan assets reflects management's expectations of long-term average rates of return on funds invested to provide for benefits included in the projected benefit obligations. A market related value of plan assets is used to calculate the expected return on assets. The market related value recognizes changes in the fair value of pension plan assets systematically over a five-year period. The market related value of the health care and life insurance plan assets equal fair value. The expected return is based on the outlook for inflation and for returns in multiple asset classes, while also considering historical returns, asset allocation and investment strategy. The company's approach has emphasized the long-term nature of the return estimate such that the return assumption is not changed significantly unless there are fundamental changes in capital markets that affect the company's expectations for returns over an extended period of time (i.e., 10 to 20 years). The average annual return of the company's U.S. pension fund was approximately 8.0 percent during the past ten years and approximately 9.0 percent during the past 20 years. Since return premiums over inflation and total returns for major asset classes vary widely even over ten-year periods, recent history is not necessarily indicative of
18
long-term future expected returns. The company's systematic methodology for determining the long-term rate of return for the company's investment strategies supports the long-term expected return assumptions.
The company has created certain Voluntary Employees' Beneficiary Association trusts (VEBAs) for the funding of postretirement health care benefits. The future expected asset returns for these VEBAs are lower than the expected return on the other pension and health care plan assets due to investment in a higher proportion of liquid securities. These assets are in addition to the other postretirement health care plan assets that have been funded under Section 401(h) of the U.S. Internal Revenue Code and maintained in a separate account in the company's pension plan trust.
The company has defined contribution plans related to employee investment and savings plans primarily in the U.S. The company's contributions and costs under these plans were $185 million in 2015, $184 million in 2014 and $178 million in 2013. The contribution rate varies primarily based on the company's performance in the prior year and employee participation in the plans.
8. INCOME TAXES |
The provision for income taxes by taxing jurisdiction and by significant component consisted of the following in millions of dollars:
| | | | | | | | | | |
|
2015 |
2014 |
2013 |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | |
Current: |
||||||||||
U.S.: |
||||||||||
Federal |
$ | 377 | $ | 1,217 | $ | 1,405 | ||||
State |
32 | 126 | 145 | |||||||
Foreign |
449 | 564 | 569 | |||||||
| | | | | | | | | | |
Total current |
858 | 1,907 | 2,119 | |||||||
| | | | | | | | | | |
Deferred: |
||||||||||
U.S.: |
||||||||||
Federal |
21 | (189 | ) | (117 | ) | |||||
State |
4 | (11 | ) | (11 | ) | |||||
Foreign |
(43 | ) | (80 | ) | (45 | ) | ||||
| | | | | | | | | | |
Total deferred |
(18 | ) | (280 | ) | (173 | ) | ||||
| | | | | | | | | | |
Provision for income taxes |
$ | 840 | $ | 1,627 | $ | 1,946 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Based upon the location of the company's operations, the consolidated income before income taxes in the U.S. in 2015, 2014 and 2013 was $1,838 million, $3,219 million and $4,124 million, respectively, and in foreign countries was $942 million, $1,578 million and $1,359 million, respectively. Certain foreign operations are branches of Deere & Company and are subject to U.S. as well as foreign income tax regulations. The pretax income by location and the preceding analysis of the income tax provision by taxing jurisdiction are not directly related.
A comparison of the statutory and effective income tax provision and reasons for related differences in millions of dollars follow:
| | | | | | | | | | |
|
2015 |
2014 |
2013 |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | |
U.S. federal income tax provision at a statutory rate of 35 percent |
$ | 973 | $ | 1,679 | $ | 1,919 | ||||
Increase (decrease) resulting from: |
||||||||||
State and local income taxes, net of federal income tax benefit |
23 | 75 | 87 | |||||||
German branch deferred tax write-off |
56 | |||||||||
Differences in taxability of foreign (earnings) losses |
(449 | ) | (305 | ) | 43 | |||||
Nondeductible impairment charges |
32 | 29 | ||||||||
Research and business tax credits |
(76 | ) | (99 | ) | (56 | ) | ||||
Tax rates on foreign earnings |
(36 | ) | (71 | ) | (34 | ) | ||||
Valuation allowance on deferred taxes |
384 | 454 | (14 | ) | ||||||
Other net |
21 | (138 | ) | (84 | ) | |||||
| | | | | | | | | | |
Provision for income taxes |
$ | 840 | $ | 1,627 | $ | 1,946 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
At October 31, 2015, accumulated earnings in certain subsidiaries outside the U.S. totaled $5,282 million for which no provision for U.S. income taxes or foreign withholding taxes has been made, because it is expected that such earnings will be reinvested outside the U.S. indefinitely. Determination of the amount of unrecognized deferred tax liability on these unremitted earnings is not practicable. At October 31, 2015, the amount of cash and cash equivalents and marketable securities held by these foreign subsidiaries was $1,588 million.
Deferred income taxes arise because there are certain items that are treated differently for financial accounting than for income tax reporting purposes. An analysis of the deferred income tax assets and liabilities at October 31 in millions of dollars follows:
| | | | | | | | | | ||||||||||||
|
| 2015 |
| 2014 |
| ||||||||||||||||
|
| Deferred Tax Assets |
| Deferred Tax Liabilities |
| Deferred Tax Assets |
| Deferred Tax Liabilities |
| ||||||||||||
| | | | | | | | | | ||||||||||||
Other postretirement benefit liabilities |
| | $ | 1,972 | | | | | | | $ | 1,968 | | | | | | ||||
Tax over book depreciation |
| | | | | $ | 574 | | | | | | | $ | 542 | | | ||||
Accrual for sales allowances |
| | 618 | | | | | | | 654 | | | | | | ||||||
Lease transactions |
| | | | | 528 | | | | | | | 404 | | | ||||||
Tax loss and tax credit carryforwards |
| | 604 | | | | | | | 514 | | | | | | ||||||
Foreign unrealized losses |
| | 458 | | | | | | | 146 | | | | | | ||||||
Pension liability net |
| | 315 | | | | | | | 160 | | | | | | ||||||
Accrual for employee benefits |
| | 172 | | | | | | | 229 | | | | | | ||||||
Share-based compensation |
| | 141 | | | | | | | 145 | | | | | | ||||||
Inventory |
| | | | | | | | 22 | | | | | | |||||||
Goodwill and other intangible assets |
| | | | | 80 | | | | | | | 89 | | | ||||||
Allowance for credit losses |
| | 72 | | | | | | | 73 | | | | | | ||||||
Deferred gains on distributed foreign earnings |
| | 33 | | | | | | | 32 | | | | | | ||||||
Deferred compensation |
| | 51 | | | | | | | 47 | | | | | | ||||||
Undistributed foreign earnings |
| | | | | 25 | | | | | | | 26 | | | ||||||
Other items |
| | 436 | | | | 119 | | | | 440 | | | | 116 | | | ||||
Less valuation allowances |
| | (940 | ) | | | | | | (637 | ) | | | | | ||||||
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Deferred income tax assets and liabilities |
| | $ | 3,932 | | | | $ | 1,326 | | | | $ | 3,793 | | | | $ | 1,177 | | |
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19
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Deere & Company files a consolidated federal income tax return in the U.S., which includes the wholly-owned financial services subsidiaries. These subsidiaries account for income taxes generally as if they filed separate income tax returns.
At October 31, 2015, certain tax loss and tax credit carryforwards of $604 million, of which $88 million are capital losses, were available with $226 million expiring from 2016 through 2035 and $378 million with an indefinite carryforward period.
In March 2013, the company changed the corporate structure of most of its German operations from a branch to a subsidiary of Deere & Company. The change provides the company increased flexibility and efficiency in funding growth in international operations. As a result, the tax status of these operations changed. Formerly, as a branch these earnings were taxable in the U.S. as earned. As a subsidiary, these earnings are now taxable in the U.S. if they are distributed to Deere & Company as dividends, which is the same as the company's other foreign subsidiaries. The earnings of the new German subsidiary remain taxable in Germany. Due to the change in tax status and the expectation that the German subsidiary's earnings are indefinitely reinvested, the deferred tax assets and liabilities related to U.S. taxable temporary differences for the previous German branch were written off. The effect of this write-off was a decrease in net deferred tax assets and a charge to the income tax provision of $56 million during the second fiscal quarter of 2013.
A reconciliation of the total amounts of unrecognized tax benefits at October 31 in millions of dollars follows:
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|
2015 |
2014 |
2013 |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | |
Beginning of year balance |
$ | 213 | $ | 272 | $ | 265 | ||||
Increases to tax positions taken during the current year |
32 | 28 | 30 | |||||||
Increases to tax positions taken during prior years |
29 | 20 | 24 | |||||||
Decreases to tax positions taken during prior years |
(15 | ) | (84 | ) | (51 | ) | ||||
Decreases due to lapse of statute of limitations |
(11 | ) | (4 | ) | (5 | ) | ||||
Settlements |
(6 | ) | ||||||||
Foreign exchange |
(13 | ) | (19 | ) | 9 | |||||
| | | | | | | | | | |
End of year balance |
$ | 229 | $ | 213 | $ | 272 | ||||
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The amount of unrecognized tax benefits at October 31, 2015 that would affect the effective tax rate if the tax benefits were recognized was $79 million. 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 twelve months would not be significant.
The company files its tax returns according to the tax laws of the jurisdictions in which it operates, which includes the U.S. federal jurisdiction, and various state and foreign jurisdictions. The U.S. Internal Revenue Service has completed the examination of the company's federal income tax returns for periods prior to 2009. The years 2009 through 2012 federal income tax returns are currently under examination. Various state and foreign income tax returns, including major tax
jurisdictions in Canada and Germany, also remain subject to examination by taxing authorities.
The company's policy is to recognize interest related to income taxes in interest expense and interest income, and recognize penalties in selling, administrative and general expenses. During 2015, 2014 and 2013, the total amount of expense from interest and penalties was $23 million, $11 million and $9 million and the interest income was $3 million, $4 million and $4 million, respectively. At October 31, 2015 and 2014, the liability for accrued interest and penalties totaled $69 million and $54 million and the receivable for interest was $2 million and $2 million, respectively.
9. OTHER INCOME AND OTHER OPERATING EXPENSES |
The major components of other income and other operating expenses consisted of the following in millions of dollars:
| | | | | | | | | | |
|
2015 |
2014 |
2013 |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | |
Other income |
||||||||||
Insurance premiums and fees earned |
$ | 173 | $ | 297 | $ | 252 | ||||
Revenues from services |
280 | 276 | 256 | |||||||
Investment income |
26 | 17 | 15 | |||||||
Other |
228 | 234 | 159 | |||||||
| | | | | | | | | | |
Total |
$ | 707 | $ | 824 | $ | 682 | ||||
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Other operating expenses |
||||||||||
Depreciation of equipment on operating leases |
$ | 577 | $ | 494 | $ | 389 | ||||
Insurance claims and expenses |
183 | 324 | 204 | |||||||
Cost of services |
160 | 151 | 143 | |||||||
Other |
41 | 124 | 85 | |||||||
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Total |
$ | 961 | $ | 1,093 | $ | 821 | ||||
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