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    DEERE & COMPANY FEET ON THE GROUND EYES ON THE HORIZON ANNUAL REPORT 2013 Deere & Company Annual Report 2013


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    FEET ON THE GROUND Net Sales and Revenues (MM) Net Income (MM) $32,013 $36,157 Net sales and revenues $2,800 $3,065 $3,537 Net income* jumped 15%, $37,795 grew 5% in 2013, helped by to a new high. It was Deere’s higher sales of agricultural third consecutive year equipment and increased of record earnings. On a financial-services revenues. per-share basis, earnings were up 19%, benefiting from fewer shares outstanding. 2011 2012 2013 2011 2012 2013 * Net income attributable to Deere & Company. SVA (MM) Dividends Declared (U.S. dollars per share) $2,527 $2,776 $3,390 Strong profits, plus the $1.52 $1.79 $1.99 In 2013, Deere boosted its disciplined use of assets and quarterly dividend rate by 11%. the skillful execution of It was the 11th dividend business plans, propelled SVA*, increase since 2004. Over this or Shareholder Value Added, time, the company returned to a new high in 2013. about 60% of the equipment SVA represents operating operations’ cash flow to 2011 2012 2013 profit less an implied charge investors through dividends for capital. and share repurchases net * Non-GAAP financial measure. of issuances. See page 14 for details. 2011 2012 2013 About the Cover “Feet on the Ground, Eyes on the Horizon” describes our approach to doing business. Feet on the ground means maintaining focus on operational excellence and delivering quality products and services for customers like Helmut Seitz (pictured) of Guarapuava, Paraná, Brazil. Eyes on the horizon refers to expanding our market presence and pursuing attractive growth opportunities around the world. 2


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    EYES ON THE HORIZON More than 9 Billion: Estimated worldwide population by 2050 70% 70% living in cities Experts project that the world’s expanding and increasingly urban population will enjoy higher living VWDQGDUGVDQGGLHWVZLWKPRUHJUDLQLQWHQVLYH foods such as meat. In response, Deere will be called on to offer products and services that help meet the demand for vastly more food, fuel, shelter and infrastructure in the years ahead. 2010 2050 Capital Expenditures + Research & Development Target: $50 Billion in Mid-Cycle Sales $50 B (in billions) $2.3 $2.8 $2.6 In 2010, Deere set an ambitious goal: to reach ELOOLRQLQVDOHV DWPLGF\FOHYROXPHV  E\ZKLOHLPSURYLQJSURƟWDELOLW\ R&D Spending $1.2 $1.4 $1.5 Net sales have increased nearly 50% since the baseline year. Capital Expenditures $1.1 $1.4 $1.1 Net Sales (actual) 2011 2012 2013 Keeping our “eyes on the horizon,” carrying out our ambitious growth plans, requires an extensive investment in new products and capacity. Seven new factories in markets key to our growth were completed in 2013. 2010 2011 2012 2013 2018 3


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    CHAIRMAN’S MESSAGE Deere Achieves Record Results as Drive to Expand Global Customer Base Moves Ahead In 2013, John Deere had its best year yet. We delivered record income for the third successive year and the eighth time in the last 10 years. The company also generated its highest-ever operating return on operating assets* (OROA), a reflection of the solid execution of our business plans. At the same time, we expanded our worldwide footprint and continued an aggressive launch of advanced new products. Our commitment to being a good corporate citizen and employer led to higher levels of volunteerism and engagement. For the fiscal year, Deere reported income of $3.54 billion on net sales and revenues of $37.8 billion. Income was up 15 percent on a 5 percent increase in sales and revenues. Earnings per share rose fully 19 percent, reflecting the benefit of fewer shares outstanding due to continued share repurchases. The year’s results produced healthy levels of economic profit, or Shareholder Valued Added* (SVA), which reached $3.39 billion. SVA – operating profit less an implied capital charge – is the primary measure used in managing the company and making investment decisions. Operating cash flow totaled $3.25 billion for the year. These dollars funded important geographic expansions and delivered value directly to investors as dividends and share repurchases. Dividend payments and buybacks totaled $2.28 billion for the year. Since 2004, the company has increased the quarterly dividend rate on 11 occasions and repurchased about 180 million shares of stock. In a vote of confidence in the company’s future, Deere’s board of directors earlier this month authorized additional share repurchases of up to $8 billion. Customers appreciate the fast hydraulic flow of the productive 532-horsepower 870G LC excavator. It saves them fuel, time and money, making it a perfect choice for excavating and truck-loading operations. 4 * OROA and SVA are non-GAAP financial measures. See page 14 for details.


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    Our recent success has allowed Deere to make global investments A 295-horsepower Final-Tier-4 engine powers the 8295R tractor, one of nine 8R Series models introduced in 2013. Late in the year, at unprecedented rates while keeping its balance sheet strong. Deere announced that manufacturing capacity for the flagship tractors At year-end, Deere carried some $5 billion of cash and securities, will be added in Brazil, addressing the needs of customers there. with relatively low debt. Our financial-services operation remained conservatively capitalized as well. Deere’s financial-services organization delivered record income A&T SETTING PACE while providing convenient and competitive financing to our Our performance was led by the Agriculture & Turf division (A&T), equipment customers. Income climbed to $565 million as the which had another banner year. Deere’s largest division brought loan and lease portfolio grew by almost $5 billion. Credit quality – advanced new products to market, broadened its customer base, a hallmark of our financial-services operation – remained and reinforced its preeminent position in key markets. A&T results exceptionally strong. The provision for loss equaled just over were aided by positive farm conditions and higher sales of large a dollar for each $3,300 of portfolio value. equipment, particularly in North and South America. POWERFUL TRENDS DRIVING PLANS In other businesses, Construction & Forestry (C&F) remained Providing strong support to Deere’s growth plans are the profitable in spite of a slowdown in demand for construction powerful tailwinds of a growing, increasingly urban population machinery. As it showed in 2013, the division has been adept at and rising living standards. As a result of these trends, which are managing costs and establishing a more flexible cost structure. most pronounced in developing parts of the world, agricultural This has allowed C&F to contribute to the company’s overall output will need to double by mid-century. At the same time, results while expanding its product line and making investments massive urbanization will trigger an urgent need for more roads, to serve a more global group of customers. Of significance, bridges and buildings. new factories were opened in China and Brazil, both markets expected to play a central role in the division’s growth ambitions. 5


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    2013 brought advancements in precision agriculture to Deere’s record of solid execution shows how effectively we’re help customers manage and make better use of data. New wireless data transmission, for example, links equipment keeping our feet on the ground. In 2013, we successfully to the farm’s management system and trusted advisors introduced dozens of advanced products while completing through the MyJohnDeere platform. crucial parts of an extensive engine-development program. Also, our factories did a good job of keeping pace with demand, To capitalize on this promising situation, Deere has been a fact that helped the company control inventories and post pursuing a far-reaching operating strategy that made further high levels of asset profitability. OROA for the year hit a new strides in 2013. Its aim is to expand our global market presence record of 31.8 percent. in a major way and achieve further improvements in profitability We’re also keeping our eyes trained on the horizon. Over the and asset management. last three years, Deere has announced plans for seven new The strategy’s essence is captured in the phrase, “Feet on the factories in markets key to our future growth. I’m pleased to say Ground, Eyes on the Horizon.” This means maintaining a laser-like all reached completion in 2013 and will be ready for higher focus on operating excellence and customer service while production in 2014. Three facilities are in China, for construction simultaneously looking to the future and making the necessary equipment, engines and large farm machinery; while two are investments to expand our customer base throughout the world. in Brazil, one with joint-venture partner Hitachi, for construction equipment. Of the remaining new factories, one is located in India, for the manufacture of farm tractors and the other is in Russia, for seeding and tillage equipment. Also during the year, 6


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    Dozens of available attachments (HH40 hydraulic breaker shown here) help tailor the new midsized 318E skid steer loader to a variety of jobs, including ag material handling, construction, demolition and landscaping work. It’s also a good fit for rental operations. expansions were announced for cab production in Germany and large tractors in Brazil. We are making continued investments in our U.S. manufacturing base as well. Of the dozen or so major factory projects underway in the company today, more than half are located in the U.S., including expansions that got started in 2013 at our seeding operations in Moline and Valley City, N.D. Essentially all of our major U.S. factories have undergone extensive modernization and expansion in recent years. In other developments, we announced the sale of a controlling interest in our landscapes operation and purchased a maker of ultrawide planters. By narrowing our focus and expanding our capabilities, these moves are aimed squarely at our goals for increased growth and profitability. DEALERS CONTRIBUTING TO SUCCESS John Deere’s success is closely tied to the strength of our dealership network. Further progress was made in 2013 ensuring we have a best-in-class distribution and aftermarket support system around the globe. C&F, for example, opened new dealership locations in Brazil and China and continued efforts to increase the financial stability of dealers in the U.S. In Europe, A&T is continuing aggressive moves to help dealers increase their profitability and service capabilities through improved operational efficiency. In the CIS (Commonwealth of Independent States), the number of dealer locations has climbed by more than 50 percent in the past three years. To help customers get the most value from their John Deere equipment, we opened new parts-distribution centers in South Africa and Argentina. In addition, plans were announced to expand our parts operations in Brazil and India, in line with growth in our businesses. The company augmented its financing capabilities by adding cooperative bank relationships in seven African nations where sales growth is expected. Deere now has a retail- financing presence in over 40 countries representing more than 90 percent of our sales. 7


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    Because of these investments – which give our growth plans a Many new products feature John Deere engine technology that powerful boost – Deere now enjoys highly efficient manufacturing reduces emissions while meeting customer requirements for capacity in all our significant markets, plus the means to finance, power, reliability, and fuel and fluid efficiency. In one of the distribute and service the products being built there. year’s major accomplishments, Deere completed certification of its larger engines to meet the more-stringent U.S. and European MAJOR YEAR FOR NEW PRODUCTS emissions standards that begin taking effect in 2014. This In 2013, John Deere continued with a record introduction of milestone is part of a sweeping multi-year program that has products featuring improvements in power, comfort and resulted in the redesign of virtually all John Deere engines and performance. Highlighting new agricultural equipment were seen emissions levels reduced by over 99 percent since 1996. nine advanced, more powerful members of our flagship row-crop tractor family and a pair of highly productive self- INNOVATING TO DIFFERENTIATE propelled sprayers. John Deere’s success rests in no small part on our ability to differentiate our products and services through market-leading The company marked its 50th year in the lawn-care equipment business with the introduction of a series of premium lawn tractors and an innovative flex-fuel commercial mower. ZTrak 900 Series zero-turn mowers offer mowing businesses a choice: a price-fighter series, a mid-spec series and an Also making its debut was Deere’s first hybrid-electric model ultra-productive series. The Z925, shown, features an of construction equipment. innovative engine that saves customers up to 25% in fuel costs. 8


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    Sprayer customers wanted more speed, comfort and control. maintenance or operating issues from miles away, keeping The R4030 self-propelled sprayer brings a new design and suspension that help take field speeds up to 20 mph farmers up and running. and road speeds to 30 mph. In our eyes, innovation is a “multiplier.” To that end, Deere’s ability to translate innovations into profitable solutions will help innovation. The company’s advanced products and technology us win customers and achieve our growth aims. But of no less earned further honors in 2013 and brought additional value to importance, it also will help us attract high-caliber, committed our customers. employees and achieve our goals for developing extraordinary global talent. Deere was named one of the world’s top 100 innovators by a leading business-media group based on our patents and BUILDING ON A PROUD RECORD OF CITIZENSHIP proprietary technology. In addition, lines of advanced products In 2013, the company and its foundation took meaningful and features – from tractors, balers and hitches to high- steps in support of sustainable solutions for world hunger, performance transmissions – were awarded medals and other improved educational opportunities, and the development recognitions at major shows in Germany, Italy and Russia. of economically vibrant communities. These make up the Our new Chinese-made combine took honors at Asia’s largest three main focus areas of our corporate citizenship efforts. farm machinery exposition. At an international construction An aggressive commitment to employee volunteerism lies at and mining equipment show, a Deere backhoe and articulated the heart of Deere’s citizenship work. The number of volunteer dump truck were named best products in their categories. hours reported by employees more than doubled for the year. Our FarmSight strategy moved ahead, resulting in new capabilities In one example, some 3,000 U.S. employees prepared nearly that help customers optimize equipment maintenance and make 960,000 packaged meals for those in need in the company’s more-informed agronomic decisions. New, high-capacity wireless home communities. In another case, a global team of data linkage keeps operators, farmers and dealers connected, enabling them to share vital data. Dealers can even diagnose 9


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    20 employees spent a week in northwest India, where they The company further strengthened its commitment to responsible helped train small farmers in new agricultural methods, environmental practices in 2013. Among our achievements, a set conducted classes and assessed the progress of a community- of broader, more stringent goals was established for managing development program supported by the Deere foundation. the environmental impact of our operations and products. They call for cutting water and energy usage and greenhouse gas In a move aimed at providing increased opportunities to youth, emissions by 15 percent per ton of production and recycling a new program sponsored by Deere was kicked off to help 75 percent of the waste from our manufacturing facilities by 2018. young people learn about careers in golf-course management We’re also adopting life-cycle engineering to minimize the and the science of agronomy. The program is part of First Tee, environmental footprint of our products and services. a non-profit youth organization to which Deere made a major donation in early 2013. In other milestones, Deere was named to prominent listings of most-reputable and most-ethical companies. For the fifth time, Responsible citizenship is also reflected in efforts to protect Fortune magazine cited Deere as one of the world’s 50 most- the well-being of our employees. Deere had another solid admired companies. In addition, the company again was featured overall safety performance in 2013, with over half of our in a listing of the top-100 global brands. locations reporting no lost-time injuries. This record, however, was overshadowed by on-the-job deaths of two employees. These losses stand as a tragic reminder that we cannot, and In 2010, Deere set an ambitious course, targeting significant global growth. As a result, seven new factories outside the U.S. we must not, relax our efforts to provide more healthful were put into operation in 2013, including this engine factory and safe workplaces. near Tianjin, China, where Zhang Shuitao (pictured) works. 10


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    SEARCHING FOR CERTAINTY The John Deere senior management team at company headquarters in Moline, lllinois. From left: Jim Israel, Raj Kalathur, Max Guinn, Today’s world is filled with uncertainty – fiscal, economic, Jean Gilles, Mary Jones, Mike Mack, Sam Allen, Jim Field, John May, and political uncertainty – that breeds extreme caution, and Mark von Pentz. disrupts thoughtful planning, and is generally bad for business. And while this is true in the U.S., it’s also the case in many other markets. In spite of this unsettled backdrop, we’re as certain as ever On behalf of the John Deere team, about John Deere’s own businesses and future prospects. We’re sure about the quality and reliability of our products and services, the talent and commitment of our employees, the capacity and efficiency of our production facilities, and the depth and focus of our strategy. Samuel R. Allen We’re equally confident that as the world’s population swells December 16, 2013 in size and affluence, abundant opportunities will emerge for Deere to deliver substantial value to customers, investors and other stakeholders in the years ahead. We have no doubt the company is well-equipped to seize these opportunities – and we are proud to reaffirm our belief that John Deere’s best days are on the horizon! 11


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    2013 HIGHLIGHTS DEERE ENTERPRISE SVA (MM) AGRICULTURE & TURF SVA (MM) – Demand for farm machinery – %ROVWHUHGE\KLJKGHPDQGIRU $2,527 $2,776 $3,390 $2,245 $2,534 $3,215 DQGLQFUHDVHGƟQDQFLQJOHDG ODUJHDJULFXOWXUDOHTXLSPHQW WRJDLQLQQHWVDOHVDQG VDOHVFOLPEWRELOOLRQ UHYHQXHVWRELOOLRQ – 6WURQJGHPDQGDQGFRVW – (DUQLQJVULVHWRELOOLRQ GLVFLSOLQHSXVKPDUJLQVWR DWKLUGFRQVHFXWLYH\HDUO\ DQGRSHUDWLQJSURƟWWR UHFRUGWRWDO ELOOLRQ2SHUDWLQJUHWXUQ – +HDOWK\SURƟWDQGGLVFLSOLQHG RQRSHUDWLQJDVVHWVLV 2011 2012 2013 2011 2012 2013 PDQDJHPHQWFRQWULEXWHWR – )RFXVLQJRQJURZWK$ 7 UHFRUG69$ WRWDORIELOOLRQ GLYLVLRQODXQFKHVQHZODUJH – 0DLQWDLQLQJFRPPLWPHQWWRUHWXUQFDVKWRLQYHVWRUVFRPSDQ\ URZFURSWUDFWRUVZLWK)LQDO7LHUFHUWLƟHGHQJLQHVDQQRXQFHV UDLVHVTXDUWHUO\GLYLGHQGUDWHVKDUHEX\EDFNVFRQWLQXH LWZLOOEXLOGƠDJVKLS5WUDFWRUVLQIDVWJURZLQJ%UD]LOPDUNHW ZLWKIXUWKHUSXUFKDVHRIPLOOLRQVKDUHV /DXQFKHVRWKHUQHZDQGXSGDWHGSURGXFWVLQFOXGLQJSURGXFWLYH VHOISURSHOOHGVSUD\HUVDQGDƠH[IXHOFRPPHUFLDOPRZHU – &RQWLQXLQJIRFXVRQJURZWKEXVLQHVVHVFRPSDQ\DFTXLUHV XOWUDZLGHSODQWHUPDQXIDFWXUHUDQGDJUHHVWRVHOOPDMRULW\ – %URDGHQLQJOLQHIRUVWURQJGHDOHUQHWZRUNLQ(XURSH$ 7 LQWHUHVWLQODQGVFDSHVRSHUDWLRQV LQWURGXFHVQHZDQGXSGDWHGFRPELQHVWUDFWRUVEDOHUVDQGRWKHU SURGXFWVVXLWDEOHIRUUHJLRQŤVIDUPHUVDQGFRQWUDFWRUV – ([SDQGLQJUDQJHRISURGXFWLYLW\WRROVFRPSDQ\LQWURGXFHVIDUP EQUIPMENT OPERATIONS SVA (MM) PDQDJHPHQWDSSOLFDWLRQIRUPRELOHGHYLFHVJLYLQJIDUPHUV UHPRWHDFFHVVWRDJURQRPLFLQIRUPDWLRQDSSMRLQVQHZLQƟHOG – (TXLSPHQWVDOHVLQFUHDVHWR VHQVRUVDQGKLJKHUFDSDFLW\ZLUHOHVVGDWDWUDQVIHUWRVXSSRUW $2,294 $2,602 $3,147 ELOOLRQRSHUDWLQJSURƟW SURGXFWLRQGHFLVLRQV FOLPEVWRELOOLRQ – ([SDQGLQJLQ$VLD$ 7FRPSOHWHVFRQVWUXFWLRQRIWUDFWRUIDFWRU\ – 6WURQJFRVWDQGDVVHW LQ'HZDV,QGLD,Q&KLQD1LQJERIDFWRU\EHJLQVSURGXFWLRQ PDQDJHPHQWKHOSVJHQHUDWH RIVPDOOWUDFNFRPELQHIRUSDGG\ULFHKDUYHVWLQJ0DFKLQHMRLQV RSHUDWLQJUHWXUQRQRSHUDWLQJ DZDUGZLQQLQJFRUQSLFNHUDQGJUDLQFRPELQHRQOLVWRI DVVHWV RI HTXLSPHQW-RKQ'HHUHGHVLJQVEXLOGVDQGVHOOVLQ$VLDPDUNHWV – &DSLWDOVSHQGLQJRQJURZWK 2011 2012 2013 QHZSURGXFWGHYHORSPHQW WRWDOVELOOLRQ – -RKQ'HHUHHQJLQHVRIKSDQGDERYHUHFHLYH86(3$ )LQDO7LHU(86WDJH,9DQG&DOLIRUQLD$LU5HVRXUFHV%RDUG HPLVVLRQVFHUWLƟFDWLRQVPHHWLQJPRUHVWULQJHQWUHJXODWLRQV WKDWJRLQWRHIIHFWLQ – &RPSDQ\ŤVGLUHFWGULYHWUDQVPLVVLRQIRUWUDFWRUVZLQVLQQRYDWLRQ DZDUGDWPDMRU(XURSHDQSURGXFWVKRZDVƟUVWXVHRIGXDOFOXWFK PHFKDQLFDOWUDQVPLVVLRQRXWVLGHSUHPLXPDXWRPRELOHPDUNHW – 5HVSRQGLQJWRLQFUHDVLQJGHPDQGLQGHYHORSLQJPDUNHWV 'HHUHRSHQVUHJLRQDOSDUWVGLVWULEXWLRQFHQWHULQ-RKDQQHVEXUJ WRVHUYHVXE6DKDUDQ$IULFDDOVRDQQRXQFHVH[SDQVLRQRI 6RXWK$PHULFDUHJLRQDOFHQWHULQ%UD]LO 12 1RQ*$$3ƟQDQFLDOPHDVXUH6HHSDJHIRUGHWDLOV


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    CONSTRUCTION & FORESTRY SVA (MM) 5-YEAR CUMULATIVE TOTAL RETURN – ,QGLIƟFXOWHQYLURQPHQW 'HHUHFRPSDUHGWR6 3,QGH[ $49 $68 $(68) & )RSHUDWLQJSURƟWGHFOLQHV DQG6 3&RQVWUXFWLRQ )DUP0DFKLQHU\,QGH[ WRPLOOLRQ5HVXOWVZHUH $250 hurt by continuing market $200 weakness and global growth H[SHQVHVVDOHVVOLSWR $150 ELOOLRQ $100 – Building presence in China, 2011 2012 2013 $50 division begins production $0 of wheel loaders, excavators for China and other markets 2008 2009 2010 2011 2012 2013 DWQHZIDFWRU\LQ7LDQMLQDSSRLQWVQHZGHDOHUV Deere & Company S&P 500 S&P 500 Construction & Farm Machinery – Continuing expansion in South America, division establishes dealer network in Brazil, prepares new factory complex At October 31 2008 2009 2010 2011 2012 2013 near São Paulo for production of loaders, backhoes and, 'HHUH &RPSDQ\       ZLWKMRLQWYHQWXUHSDUWQHU+LWDFKLH[FDYDWRUV 6 3 00.00     – C&F launches new products, including models of excavators 6 3&RQ )DUP0DFK 00.00     DQGORDGHUVDOVRLQWURGXFHVLQQRYDWLYHERRPFRQWURORQ forestry forwarders that reduces fuel consumption and The graph compares the cumulative total returns of Deere & Company, the S&P 500 LPSURYHVSURGXFWLYLW\E\DVPXFKDVFRPSDUHGZLWK &RQVWUXFWLRQ )DUP0DFKLQHU\,QGH[DQGWKH6 36WRFN,QGH[RYHUDƟYH\HDUSHULRG It assumes $100 was invested on October 31, 2008, and that dividends were reinvested. previous machines. Deere & Company stock price at October 31, 2013, was $81.84. The Standard & Poor’s 500 Construction & Farm Machinery Index is made up of Deere (DE), Caterpillar (CAT), Cummins (CMI), Joy Global (JOY), and Paccar (PCAR). The stock performance FINANCIAL SERVICES SVA (MM) shown in the graph is not intended to forecast and does not necessarily indicate future price performance. – Growth in credit portfolio $233 $174 $243 and higher crop insurance Copyright © 2013 Standard & Poor’s, a division of McGraw Hill Financial. All rights reserved. (www.researchdatagroup.com/S&P.htm). margins lead to record QHWLQFRPHRIPLOOLRQ – 69$KLWVUHFRUGPLOOLRQ – Portfolio of receivables and OHDVHVƟQDQFHGLQFUHDVHV UHDFKLQJELOOLRQ 2011 2012 2013 – Continuing record of RXWVWDQGLQJFUHGLWTXDOLW\GLYLVLRQŤVSURYLVLRQIRUORVVHTXDOV RIDYHUDJHSRUWIROLR)LQDQFLDO6HUYLFHVDOVRVHHVH[WUHPHO\ favorable levels of past dues and writeoffs. – 'LYLVLRQHQWHUVLQWRƟQDQFLQJDUUDQJHPHQWVLQVHYHQ$IULFDQ QDWLRQVH[SDQGLQJƟQDQFLDOVHUYLFHVRSHUDWLRQVWKDWDOUHDG\ VXSSRUWWKHVDOHRI-RKQ'HHUHSURGXFWVLQPDMRUPDUNHWV 13


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    FINANCIAL REVIEW SVA: FOCUSING ON GROWTH AND SUSTAINABLE PERFORMANCE TABLE OF CONTENTS Shareholder Value Added (SVA) – essentially, the difference between operating profit Management’s Discussion and pretax cost of capital – is a metric used by John Deere to evaluate business results and Analysis ........................... 15 and measure sustainable performance. Reports of Management To arrive at SVA, each equipment segment is assessed a pretax cost of assets – and Independent Registered generally 12% of average identifiable operating assets with inventory at standard Public Accounting Firm ........... 26 cost (believed to more closely approximate the current cost of inventory and the Consolidated Financial company’s related investment). The financial services segment is assessed a cost of Statements ........................... 27 average equity – approximately 15% pretax. Notes to Consolidated The amount of SVA is determined by deducting the asset or equity charge from Financial Statements ............. 32 operating profit. Selected Financial Data .......... 61 Additional information on these metrics and their relationship to amounts presented in accordance with U.S. GAAP can be found at our website, www.JohnDeere.com. Note: Some totals may vary due to rounding. DEERE EQUIPMENT OPERATIONS CONSTRUCTION & FORESTRY $MM unless indicated 2011 2012 2013 $MM unless indicated 2011 2012 2013 Net Sales 29,466 33,501 34,998 Net Sales 5,372 6,378 5,866 Operating Profit 3,839 4,397 5,058 Operating Profit 392 476 378 Average Assets Average Assets With Inventories @ Std Cost 12,875 14,965 15,924 With Inventories @ Std Cost 2,858 3,401 3,713 With Inventories @ LIFO 11,516 13,594 14,569 With Inventories @ LIFO 2,649 3,172 3,466 OROA % @ LIFO 33.3 32.3 34.7 OROA % @ LIFO 14.8 15.0 10.9 Asset Turns (Std Cost) 2.29 2.24 2.20 Asset Turns (Std Cost) 1.88 1.88 1.58 Operating Margin % x 13.03 x 13.12 x 14.45 Operating Margin % x 7.30 x 7.46 x 6.44 OROA % @ Standard Cost 29.8 29.4 31.8 OROA % @ Standard Cost 13.7 14.0 10.2 $MM 2011 2012 2013 $MM 2011 2012 2013 Average Assets @ Std Cost 12,875 14,965 15,924 Average Assets @ Std Cost 2,858 3,401 3,713 Operating Profit 3,839 4,397 5,058 Operating Profit 392 476 378 Cost of Assets -1,545 -1,795 -1,911 Cost of Assets -343 -408 -446 SVA 2,294 2,602 3,147 SVA 49 68 -68 Deere Equipment Operations, to create and grow SVA, are targeting an operating return on average operating FINANCIAL SERVICES assets (OROA) of 20% at mid-cycle sales volumes and $MM unless indicated 2011 2012 2013 equally ambitious returns at other points in the cycle. (For purposes of this calculation, operating assets Net Income Attributable are average identifiable assets during the year with to Deere & Company 471 460 565 inventories valued at standard cost.) Average Equity 3,194 3,470 4,073 ROE % 14.7 13.3 13.9 AGRICULTURE & TURF $MM 2011 2012 2013 $MM unless indicated 2011 2012 2013 Operating Profit 725 712 870 Net Sales 24,094 27,123 29,132 Average Equity 3,194 3,470 4,073 Operating Profit 3,447 3,921 4,680 Operating Profit 725 712 870 Average Assets Cost of Equity -492 -538 -627 With Inventories @ Std Cost 10,017 11,564 12,211 SVA 233 174 243 With Inventories @ LIFO 8,867 10,422 11,103 The Financial Services SVA metric is calculated on a OROA % @ LIFO 38.9 37.6 42.2 pretax basis. Asset Turns (Std Cost) 2.41 2.35 2.39 Operating Margin % x 14.31 x 14.46 x 16.06 OROA % @ Standard Cost 34.4 33.9 38.3 $MM 2011 2012 2013 Average Assets @ Std Cost 10,017 11,564 12,211 Operating Profit 3,447 3,921 4,680 Cost of Assets -1,202 -1,387 -1,465 SVA 2,245 2,534 3,215 14


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    MANAGEMENT’S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS FOR THE YEARS ENDED The company believes its plans for helping meet the OCTOBER 31, 2013, 2012 AND 2011 world’s need for food, shelter and infrastructure are firmly on OVERVIEW track. The company’s financial results have generated healthy levels of cash flow, which have been used to fund global Organization growth and provide direct benefit to investors through divi- The company’s equipment operations generate revenues and dends and share repurchases. cash primarily from the sale of equipment to John Deere dealers and distributors. The equipment operations manufacture and 2013 COMPARED WITH 2012 distribute a full line of agricultural equipment; a variety of CONSOLIDATED RESULTS commercial, consumer and landscapes equipment and products; Worldwide net income attributable to Deere & Company in and a broad range of equipment for construction and forestry. 2013 was $3,537 million, or $9.09 per share diluted ($9.18 basic), The company’s financial services primarily provide credit compared with $3,065 million, or $7.63 per share diluted services, which mainly finance sales and leases of equipment by ($7.72 basic), in 2012. Net sales and revenues increased John Deere dealers and trade receivables purchased from the 5 percent to $37,795 million in 2013, compared with $36,157 equipment operations. In addition, financial services offer crop million in 2012. Net sales of the equipment operations risk mitigation products and extended equipment warranties. increased 4 percent in 2013 to $34,998 million from $33,501 The information in the following discussion is presented in a million last year. The sales increase included improved price format that includes information grouped as consolidated, realization of 3 percent and an unfavorable foreign currency equipment operations and financial services. The company translation effect of 1 percent. Net sales in the U.S. and Canada also views its operations as consisting of two geographic areas, increased 5 percent in 2013. Net sales outside the U.S. and the U.S. and Canada, and outside the U.S. and Canada. Canada increased by 4 percent in 2013, which included an The company’s operating segments consist of agriculture and unfavorable effect of 3 percent for foreign currency translation. turf, construction and forestry, and financial services. Worldwide equipment operations had an operating profit Trends and Economic Conditions of $5,058 million in 2013, compared with $4,397 million in The company’s agriculture and turf equipment sales increased 2012. The higher operating profit was primarily due to the 7 percent in 2013 and are forecast to decrease by about 6 impact of improved price realization and higher shipment percent for 2014. Industry agricultural machinery sales in the volumes, partially offset by the unfavorable effects of foreign U.S. and Canada for 2014 are forecast to decrease 5 to 10 currency exchange, increased production costs, higher selling, percent, compared to 2013. Industry sales in the European administrative and general expenses and increased warranty Union (EU)28 nations are forecast to decrease about 5 percent costs. The increased production costs were due primarily to in 2014, while South American industry sales are projected to higher manufacturing overhead expenses in support of growth, decrease 5 to 10 percent from strong 2013 levels. Industry sales new products and engine emission requirements, partially in the Commonwealth of Independent States are expected to offset by lower raw material costs. The results were also decrease slightly, while sales in Asia are forecast to increase affected by impairment charges for long-lived assets related to slightly in 2014. Industry sales of turf and utility equipment in the Water operations and a write down to realizable value of the U.S. and Canada are expected to increase approximately the assets being held for sale for the Landscapes operations 5 percent. The company’s construction and forestry sales (see Notes 4 and 5). decreased 8 percent in 2013 and are forecast to increase by The equipment operations’ net income was $2,974 million about 10 percent in 2014. Sales in world forestry markets are in 2013, compared with $2,616 million in 2012. The same expected to increase in 2014. Net income of the company’s operating factors mentioned above, as well as an increase in financial services operations attributable to Deere & Company interest expense due to higher average borrowings and a higher in 2014 is expected to be approximately $600 million. effective tax rate affected these results. Items of concern include the uncertainty of the effective- Net income of the financial services operations attribut- ness of governmental actions in respect to monetary and fiscal able to Deere & Company in 2013 increased to $565 million, policies, the global economic recovery, the impact of sovereign compared with $460 million in 2012. The results were higher and state debt, eurozone issues, capital market disruptions and primarily due to growth in the credit portfolio and higher crop trade agreements. Significant volatility in the price of many insurance margins, partially offset by higher selling, administrative commodities could also impact the company’s results. and general expenses. In addition, last year’s results benefited Designing and producing products with engines that continue from revenue related to wind energy credits. Additional infor- to meet high performance standards and increasingly stringent mation is presented in the following discussion of the emissions regulations is one of the company’s major priorities. “Worldwide Financial Services Operations.” The cost of sales to net sales ratio for 2013 was 73.3 percent, compared with 74.6 percent last year. The improvement was primarily due to the increase in price realization, partially offset by the unfavorable effects of foreign currency exchange, higher production costs and increased warranty costs. 15


  • Page 16

    Finance and interest income increased this year due to a The increase in operating profit was primarily due to improved larger average credit portfolio, partially offset by lower average price realization and higher shipment volumes, partially offset financing rates. Research and development costs increased by the unfavorable effects of foreign currency exchange, primarily as a result of increased spending in support of new increased production costs, higher selling, administrative and products and more stringent engine emission requirements. general expenses and increased warranty costs. The increased Selling, administrative and general expenses increased primarily production costs were due primarily to higher manufacturing due to growth. Interest expense decreased due to lower average overhead expenses in support of growth, new products and borrowing rates, partially offset by higher average borrowings. engine emission requirements, partially offset by lower raw Other operating expenses increased primarily due to higher material costs. The results were also affected by the previously depreciation of equipment on operating leases and the impair- mentioned impairment charges for the Water and Landscapes ment charge for the write-down to realizable value of assets operations. being held for sale (see Note 5). Worldwide Construction and Forestry Operations The company has several defined benefit pension plans The construction and forestry segment had an operating profit and defined benefit health care and life insurance plans. of $378 million in 2013, compared with $476 million in 2012. The company’s postretirement benefit costs for these plans in Net sales decreased 8 percent for the year primarily due to 2013 were $575 million, compared with $511 million in 2012. lower shipment volumes, partially offset by price realization. The long-term expected return on plan assets, which is reflected The decline in operating profit in 2013 was primarily due to in these costs, was an expected gain of 7.8 percent in 2013 and lower shipment volumes, an unfavorable product mix, increases 8.0 percent in 2012, or $862 million in 2013 and $887 million in production costs and higher selling, administrative and in 2012. The actual return was a gain of $1,470 million in 2013 general expenses, partially offset by improved price realization. and $849 million in 2012. In 2014, the expected return will be approximately 7.5 percent. The company’s postretirement costs Worldwide Financial Services Operations in 2014 are expected to decrease approximately $150 million. The operating profit of the financial services segment was The company makes any required contributions to the plan $870 million in 2013, compared with $712 million in 2012. assets under applicable regulations and voluntary contributions The results were higher primarily due to growth in the credit from time to time based on the company’s liquidity and ability portfolio and higher crop insurance margins, partially offset to make tax-deductible contributions. Total company contribu- by increased selling, administrative and general expenses. tions to the plans were $338 million in 2013 and $478 million In addition, last year’s results benefited from revenue related in 2012, which include direct benefit payments for unfunded to wind energy credits. Total revenues of the financial services plans. These contributions also included voluntary contributions operations, including intercompany revenues, increased to plan assets of $227 million in 2013 and $350 million in 2012. 5 percent in 2013, primarily reflecting the larger portfolio. Total company contributions in 2014 are expected to be The average balance of receivables and leases financed was 16 approximately $115 million, which are primarily direct benefit percent higher in 2013, compared with 2012. Interest expense payments for unfunded plans. The company has no significant decreased 18 percent in 2013 as a result of lower average required contributions to pension plan assets in 2014 under borrowing rates, partially offset by higher average borrowings. applicable funding regulations. See the following discussion of The financial services operations’ ratio of earnings to fixed “Critical Accounting Policies” for more information about charges was 2.90 to 1 in 2013, compared with 2.25 to 1 in 2012. postretirement benefit obligations. Equipment Operations in U.S. and Canada BUSINESS SEGMENT AND GEOGRAPHIC AREA RESULTS The equipment operations in the U.S. and Canada had The following discussion relates to operating results by an operating profit of $4,062 million in 2013, compared with reportable segment and geographic area. Operating profit is $3,836 million in 2012. The increase was due primarily to income before certain external interest expense, certain foreign improved price realization and higher shipment volumes, exchange gains or losses, income taxes and corporate expenses. partially offset by higher production costs, increased warranty However, operating profit of the financial services segment costs and higher selling, administrative and general expenses. includes the effect of interest expense and foreign currency The results were also affected by impairment charges for the exchange gains or losses. Landscapes and Water operations. Net sales increased 5 percent Worldwide Agriculture and Turf Operations due primarily to price realization and higher shipment volumes. The agriculture and turf segment had an operating profit of The physical volume of sales increased 1 percent, compared $4,680 million in 2013, compared with $3,921 million in 2012. with 2012. Net sales increased 7 percent this year primarily due to higher shipment volumes and improved price realization, partially offset by the unfavorable effects of foreign currency translation. 16


  • Page 17

    Equipment Operations outside U.S. and Canada Financial Services. Fiscal year 2014 net income attributable The equipment operations outside the U.S. and Canada had to Deere & Company for the financial services operations is an operating profit of $996 million in 2013, compared with expected to be approximately $600 million. The outlook $561 million in 2012. The increase was primarily due to the reflects improvement primarily due to continued growth in the effects of improved price realization and higher shipment credit portfolio, partially offset by a projected increase in the volumes, partially offset by the unfavorable effects of foreign provision for credit losses from the low level in 2013. currency exchange, higher selling, administrative and general SAFE HARBOR STATEMENT expenses, increased production costs and higher warranty costs. Safe Harbor Statement under the Private Securities Litigation The results were also affected by impairment charges for the Reform Act of 1995: Statements under “Overview,” “Market Water operations. Net sales were 4 percent higher primarily Conditions and Outlook,” and other forward-looking state- reflecting price realization and increased shipment volumes, ments herein that relate to future events, expectations, trends partially offset by the effect of foreign currency translation. and operating periods involve certain factors that are subject to The physical volume of sales increased 3 percent, compared change, and important risks and uncertainties that could cause with 2012. actual results to differ materially. Some of these risks and uncertainties could affect particular lines of business, while MARKET CONDITIONS AND OUTLOOK others could affect all of the company’s businesses. Company equipment sales are projected to decrease about The company’s agricultural equipment business is subject 3 percent for fiscal year 2014 and decrease about 2 percent for to a number of uncertainties including the many interrelated the first quarter, compared with the same periods in 2013. factors that affect farmers’ confidence. These factors include For fiscal year 2014, net income attributable to Deere & Company worldwide economic conditions, demand for agricultural is anticipated to be about $3.3 billion. products, world grain stocks, weather conditions (including its Agriculture and Turf. The company’s worldwide sales of effects on timely planting and harvesting), soil conditions agriculture and turf equipment are forecast to decrease by (including low subsoil moisture from recent drought conditions), about 6 percent for fiscal year 2014. The outlook contemplates harvest yields, prices for commodities and livestock, crop and the sale of a majority interest in the Landscapes operations. livestock production expenses, availability of transport for crops, Although commodity prices and farm incomes are expected to the growth and sustainability of nonfood uses for some crops remain at healthy levels in 2014 by historical standards, they are (including ethanol and biodiesel production), real estate values, forecast to be lower than in 2013. The company believes the available acreage for farming, the land ownership policies of decline will have a dampening effect on demand, primarily for various governments, changes in government farm programs large farm equipment. and policies (including those in Argentina, Brazil, China, the Industry sales for agricultural machinery in the U.S. and European Union, India, Russia and the U.S.), international Canada are forecast to decrease 5 to 10 percent for the year, reaction to such programs, changes in and effects of crop with the decline mainly reflecting lower sales of large equip- insurance programs, global trade agreements, animal diseases ment such as high horsepower tractors and combines. and their effects on poultry, beef and pork consumption and Fiscal year industry sales in the EU28 are forecast to prices, crop pests and diseases, and the level of farm product decrease about 5 percent due to lower commodity prices and exports (including concerns about genetically modified farm incomes. In South America, industry sales of tractors organisms). and combines are projected to decrease 5 to 10 percent from Factors affecting the outlook for the company’s turf strong 2013 levels. Industry sales in the Commonwealth of and utility equipment include general economic conditions, Independent States are expected to decrease slightly for the consumer confidence, weather conditions, customer profitabil- year, while Asian sales are projected to increase slightly. ity, consumer borrowing patterns, consumer purchasing In the U.S. and Canada, industry sales of turf and utility preferences, housing starts, infrastructure investment, spending equipment are expected to increase about 5 percent for 2014, by municipalities and golf courses, and consumable input costs. reflecting improved market conditions. General economic conditions, consumer spending Construction and Forestry. The company’s worldwide sales of patterns, real estate and housing prices, the number of housing construction and forestry equipment are forecast to increase by starts and interest rates are especially important to sales of the about 10 percent for 2014. The gain reflects further economic company’s construction and forestry equipment. The levels of recovery and higher housing starts in the U.S. as well as sales public and non-residential construction also impact the results increases outside the U.S. and Canada. Global forestry sales are of the company’s construction and forestry segment. Prices for expected to increase for the year due to general economic pulp, paper, lumber and structural panels are important to sales growth and higher sales in European markets. of forestry equipment. 17


  • Page 18

    All of the company’s businesses and its reported results are Commodity Futures Trading Commission and other financial affected by general economic conditions in the global markets regulators; actions by environmental, health and safety regula- in which the company operates, especially material changes in tory agencies, including those related to engine emissions (in economic activity in these markets; customer confidence in particular Interim Tier 4/Stage IIIb and Final Tier 4/Stage IV general economic conditions; foreign currency exchange rates non-road diesel emission requirements in the U.S. and European and their volatility, especially fluctuations in the value of the Union), carbon and other greenhouse gas emissions, noise and U.S. dollar; interest rates; and inflation and deflation rates. the risk of climate change; changes in labor regulations; changes General economic conditions can affect demand for the to accounting standards; changes in tax rates, estimates, and company’s equipment as well. Uncertainty about and actual regulations and company actions related thereto; compliance government spending and taxing could adversely affect the with U.S. and foreign laws when expanding to new markets; economy, employment, consumer and corporate spending, and actions by other regulatory bodies including changes in and company results. laws and regulations affecting the sectors in which the company Customer and company operations and results could be operates. Customer and company operations and results also affected by changes in weather patterns (including the effects of could be affected by changes to GPS radio frequency bands or drought conditions in parts of the U.S. and dryer than normal their permitted uses. conditions in certain other markets); the political and social Other factors that could materially affect results include stability of the global markets in which the company operates; production, design and technological innovations and difficul- the effects of, or response to, terrorism and security threats; ties, including capacity and supply constraints and prices; wars and other conflicts and the threat thereof; and the spread the availability and prices of strategically sourced materials, of major epidemics. components and whole goods; delays or disruptions in the Significant changes in market liquidity conditions and any company’s supply chain or the loss of liquidity by suppliers; failure to comply with financial covenants in credit agreements the failure of suppliers to comply with laws, regulations and could impact access to funding and funding costs, which could company policy pertaining to employment, human rights, reduce the company’s earnings and cash flows. Financial market health, safety, the environment and other ethical business conditions could also negatively impact customer access to practices; start-up of new plants and new products; the success capital for purchases of the company’s products and customer of new product initiatives and customer acceptance of new confidence and purchase decisions; borrowing and repayment products; changes in customer product preferences and sales practices; and the number and size of customer loan delinquen- mix whether as a result of changes in equipment design to meet cies and defaults. A debt crisis, in Europe or elsewhere, could government regulations or for other reasons; gaps or limitations negatively impact currencies, global financial markets, social and in rural broadband coverage, capacity and speed needed to political stability, funding sources and costs, asset and obligation support technology solutions; oil and energy prices and supplies; values, customers, suppliers, and company operations and the availability and cost of freight; actions of competitors in the results. State debt crises also could negatively impact customers, various industries in which the company competes, particularly suppliers, demand for equipment, and company operations and price discounting; dealer practices especially as to levels of new results. The company’s investment management activities could and used field inventories; labor relations; acquisitions and be impaired by changes in the equity and bond markets, which divestitures of businesses, the integration of new businesses; would negatively affect earnings. the implementation of organizational changes; difficulties Additional factors that could materially affect the com- related to the conversion and implementation of enterprise pany’s operations, access to capital, expenses and results include resource planning systems that disrupt business, negatively changes in and the impact of governmental trade, banking, impact supply or distribution relationships or create higher monetary and fiscal policies, including financial regulatory than expected costs; security breaches and other disruptions to reform and its effects on the consumer finance industry, the company’s information technology infrastructure; changes derivatives, funding costs and other areas, and governmental in company declared dividends and common stock issuances programs, policies and tariffs in particular jurisdictions or for the and repurchases. benefit of certain industries or sectors (including protectionist Company results are also affected by changes in the level and expropriation policies and trade and licensing restrictions and funding of employee retirement benefits, changes in market that could disrupt international commerce); actions by the values of investment assets, the level of interest and discount U.S. Federal Reserve Board and other central banks; actions by rates, and compensation, retirement and mortality rates which the U.S. Securities and Exchange Commission (SEC), the U.S. impact retirement benefit costs, and significant changes in health care costs including those which may result from governmental action. 18


  • Page 19

    The liquidity and ongoing profitability of John Deere Net income of the financial services operations attribut- Capital Corporation (Capital Corporation) and other credit able to Deere & Company in 2012 decreased to $460 million, subsidiaries depend largely on timely access to capital to meet compared with $471 million in 2011. The decrease was primarily future cash flow requirements and fund operations and the costs a result of increased selling, administrative and general expenses, associated with engaging in diversified funding activities and to higher reserves for crop insurance claims and narrower financing fund purchases of the company’s products. If market uncertainty spreads, partially offset by growth in the credit portfolio and a increases and general economic conditions worsen, funding lower provision for credit losses. Additional information is could be unavailable or insufficient. Additionally, customer presented in the following discussion of the “Worldwide confidence levels may result in declines in credit applications Financial Services Operations.” and increases in delinquencies and default rates, which could The cost of sales to net sales ratio for 2012 was 74.6 percent, materially impact write-offs and provisions for credit losses. compared with 74.4 percent in 2011. The increase was primarily The failure of reinsurers of the company’s insurance business due to higher production costs, increased raw material costs and also could materially affect results. unfavorable effects of foreign currency exchange, partially offset The company’s outlook is based upon assumptions by improved price realization. relating to the factors described above, which are sometimes Finance and interest income increased in 2012 due to a based upon estimates and data prepared by government agencies. larger average credit portfolio, partially offset by lower average Such estimates and data are often revised. The company, except financing rates. Other income increased primarily as a result of as required by law, undertakes no obligation to update or revise an increase in service revenues and insurance premiums and its outlook, whether as a result of new developments or fees. Research and development costs increased primarily as a otherwise. Further information concerning the company and result of increased spending in support of new products and its businesses, including factors that potentially could materially more stringent emission requirements. Selling, administrative affect the company’s financial results, is included in other filings and general expenses increased primarily due to growth and with the SEC. incentive compensation expenses. Interest expense increased 2012 COMPARED WITH 2011 due to higher average borrowings, partially offset by lower average borrowing rates. Other operating expenses increased CONSOLIDATED RESULTS primarily due to higher crop insurance claims and costs and Worldwide net income attributable to Deere & Company in depreciation of equipment on operating leases. 2012 was $3,065 million, or $7.63 per share diluted ($7.72 The company has several defined benefit pension plans basic), compared with $2,800 million, or $6.63 per share and defined benefit health care and life insurance plans. diluted ($6.71 basic), in 2011. Net sales and revenues increased The company’s postretirement benefit costs for these plans in 13 percent to $36,157 million in 2012, compared with $32,013 2012 were $511 million, compared with $603 million in 2011. million in 2011. Net sales of the equipment operations The long-term expected return on plan assets, which is increased 14 percent in 2012 to $33,501 million from $29,466 reflected in these costs, was an expected gain of 8.0 percent in million in 2011. The sales increase included improved price 2012 and 2011, or $887 million in 2012 and $906 million in realization of 4 percent and an unfavorable foreign currency 2011. The actual return was a gain of $849 million in 2012 translation effect of 3 percent. Net sales in the U.S. and Canada and $695 million in 2011. Total company contributions to the increased 20 percent in 2012. Net sales outside the U.S. and plans were $478 million in 2012 and $122 million in 2011, Canada increased by 5 percent in 2012, which included an which include direct benefit payments for unfunded plans. unfavorable effect of 6 percent for foreign currency translation. These contributions also included voluntary contributions to Worldwide equipment operations had an operating profit plan assets of $350 million in 2012. of $4,397 million in 2012, compared with $3,839 million in 2011. The higher operating profit was primarily due to the impact of improved price realization and higher shipment volumes, partially offset by higher production and raw material costs, unfavorable effects of foreign currency exchange, increased research and development expenses, higher selling, administrative and general expenses and a goodwill impairment charge (see Note 5). The increase in production costs related to new products, engine emission requirements and incentive compensation expenses. The equipment operations’ net income was $2,616 million in 2012, compared with $2,329 million in 2011. The same operating factors mentioned above, as well as an increase in the effective tax rate and interest expense affected these results. 19


  • Page 20

    BUSINESS SEGMENT AND GEOGRAPHIC AREA RESULTS Equipment Operations outside U.S. and Canada Worldwide Agriculture and Turf Operations The equipment operations outside the U.S. and Canada had The agriculture and turf segment had an operating profit of an operating profit of $561 million in 2012, compared with $3,921 million in 2012, compared with $3,447 million in 2011. $941 million in 2011. The decrease was primarily due to higher Net sales increased 13 percent in 2012 primarily due to higher production and raw material costs, the unfavorable effects of shipment volumes and improved price realization, partially foreign currency exchange, increased selling, administrative and offset by the unfavorable effects of foreign currency translation. general expenses and higher research and development expenses, The increase in operating profit was primarily due to higher partially offset by the effects of higher shipment volumes and shipment volumes and price realization, partially offset by improved price realization. Net sales were 5 percent higher in increased production and raw material costs, unfavorable effects 2012 primarily reflecting increased shipment volumes and price of foreign currency exchange, increased research and develop- realization, partially offset by the effect of foreign currency ment expenses and higher selling, administrative and general translation. The physical volume of sales increased 7 percent, expenses. The increase in production costs was primarily related compared with 2011. to new products, engine emission requirements and incentive CAPITAL RESOURCES AND LIQUIDITY compensation expenses. The discussion of capital resources and liquidity has been Worldwide Construction and Forestry Operations organized to review separately, where appropriate, the company’s The construction and forestry segment had an operating profit consolidated totals, equipment operations and financial services of $476 million in 2012, compared with $392 million in 2011. operations. Net sales increased 19 percent in 2012 primarily due to higher CONSOLIDATED shipment volumes and improved price realization. The operat- Positive cash flows from consolidated operating activities in ing profit improvement in 2012 was primarily due to price 2013 were $3,254 million. This resulted primarily from net realization and higher shipment volumes, partially offset by income adjusted for non-cash provisions, which were partially increased production and raw material costs, increased research offset by increases in receivables related to sales and inventories, and development expenses and higher selling, administrative excluding non-cash activities. Cash outflows from investing and general expenses. The increase in production costs was activities were $4,821 million in 2013, primarily due to the primarily related to new products, engine emission require- cost of receivables (excluding receivables related to sales) and ments and incentive compensation expenses. cost of equipment on operating leases exceeding the collections Worldwide Financial Services Operations of receivables and the proceeds from sales of equipment on The operating profit of the financial services segment was operating leases by $3,204 million, purchases of property $712 million in 2012, compared with $725 million in 2011. and equipment of $1,158 million and purchases exceeding The decrease in operating profit was primarily due to increased maturities and sales of marketable securities by $182 million. selling, administrative and general expenses, higher reserves Cash inflows from financing activities were $407 million in for crop insurance claims and narrower financing spreads, 2013 primarily due to an increase in borrowings of $2,525 partially offset by growth in the credit portfolio and a lower million, partially offset by repurchases of common stock of provision for credit losses. Total revenues of the financial $1,531 million and dividends paid of $753 million. Cash and services operations, including intercompany revenues, increased cash equivalents decreased $1,148 million during 2013. 3 percent in 2012, primarily reflecting the larger portfolio. Over the last three years, operating activities have The average balance of receivables and leases financed was provided an aggregate of $6,748 million in cash. In addition, 10 percent higher in 2012, compared with 2011. Interest expense increases in borrowings were $10,874 million, proceeds from decreased 4 percent in 2012 as a result of lower average sales of businesses were $963 million, proceeds from issuance borrowing rates, partially offset by higher average borrowings. of common stock (resulting from the exercise of stock options) The financial services operations’ ratio of earnings to fixed were $406 million. The aggregate amount of these cash flows charges was 2.25 to 1 in 2012, compared with 2.22 to 1 in 2011. was used mainly to acquire receivables (excluding receivables related to sales) and equipment on operating leases that Equipment Operations in U.S. and Canada exceeded collections of receivables and the proceeds from sales The equipment operations in the U.S. and Canada had an of equipment on operating leases by $7,027 million, repurchase operating profit of $3,836 million in 2012, compared with common stock of $4,786 million, purchase property and $2,898 million in 2011. The increase was due to higher equipment of $3,534 million, pay dividends of $2,044 million shipment volumes and improved price realization, partially and purchase marketable securities that exceeded proceeds from offset by increased production and raw material costs, increased maturities and sales by $1,419 million. Cash and cash equiva- research and development expenses and higher selling, adminis- lents decreased $287 million over the three-year period. trative and general expenses. Net sales increased 20 percent in 2012 primarily due to higher shipment volumes and price realization. The physical volume of sales increased 14 percent, compared with 2011. 20


  • Page 21

    The company has access to most global markets at ratings generally result in higher borrowing costs, including reasonable costs and expects to have sufficient sources of global costs of derivative transactions, and reduced access to debt funding and liquidity to meet its funding needs. The company’s capital markets. The senior long-term and short-term debt exposures to receivables from customers in European countries ratings and outlook currently assigned to unsecured company experiencing economic strains are not significant. Sources of securities by the rating agencies engaged by the company are liquidity for the company include cash and cash equivalents, as follows: marketable securities, funds from operations, the issuance of Senior commercial paper and term debt, the securitization of retail Long-Term Short-Term Outlook notes (both public and private markets) and committed and Moody’s Investors uncommitted bank lines of credit. The company’s commercial Service, Inc. ......................... A2 Prime-1 Stable paper outstanding at October 31, 2013 and 2012 was $3,162 Standard & Poor’s .................. A A-1 Stable million and $1,207 million, respectively, while the total cash and cash equivalents and marketable securities position was Trade accounts and notes receivable primarily arise from $5,129 million and $6,123 million, respectively. The amount sales of goods to independent dealers. Trade receivables of the total cash and cash equivalents and marketable securities decreased by $41 million in 2013 primarily due to the reclas- held by foreign subsidiaries, in which earnings are considered sification of receivables related to the Landscapes operations to indefinitely reinvested, was $559 million and $628 million at held for sale and the decrease in construction and forestry October 31, 2013 and 2012, respectively. receivables. The ratio of trade accounts and notes receivable at Lines of Credit. The company also has access to bank October 31 to fiscal year net sales was 11 percent in 2013 and lines of credit with various banks throughout the world. 2012. Total worldwide agriculture and turf receivables increased Worldwide lines of credit totaled $6,498 million at October 31, $53 million and construction and forestry receivables decreased 2013, $2,939 million of which were unused. For the purpose $94 million. The collection period for trade receivables averages of computing unused credit lines, commercial paper and less than 12 months. The percentage of trade receivables short-term bank borrowings, excluding secured borrowings and outstanding for a period exceeding 12 months was 1 percent the current portion of long-term borrowings, were primarily and 2 percent at October 31, 2013 and 2012, respectively. considered to constitute utilization. Included in the total credit Deere & Company’s stockholders’ equity was $10,266 lines at October 31, 2013 were long-term credit facility million at October 31, 2013, compared with $6,842 million agreements of $2,500 million, expiring in April 2017, and at October 31, 2012. The increase of $3,424 million resulted $2,500 million, expiring in April 2018. These credit agreements from net income attributable to Deere & Company of $3,537 require Capital Corporation to maintain its consolidated ratio of million, a change in the retirement benefits adjustment of earnings to fixed charges at not less than 1.05 to 1 for each fiscal $1,950 million and an increase in common stock of $172 quarter and the ratio of senior debt, excluding securitization million, which were partially offset by an increase in treasury indebtedness, to capital base (total subordinated debt and stock of $1,397 million, dividends declared of $767 million, stockholder’s equity excluding accumulated other comprehen- and a change in the cumulative translation adjustment of sive income (loss)) at not more than 11 to 1 at the end of any $71 million. fiscal quarter. The credit agreements also require the equipment EQUIPMENT OPERATIONS operations to maintain a ratio of total debt to total capital (total The company’s equipment businesses are capital intensive and debt and stockholders’ equity excluding accumulated other are subject to seasonal variations in financing requirements for comprehensive income (loss)) of 65 percent or less at the end of inventories and certain receivables from dealers. The equipment each fiscal quarter. Under this provision, the company’s excess operations sell a significant portion of their trade receivables equity capacity and retained earnings balance free of restriction to financial services. To the extent necessary, funds provided at October 31, 2013 was $9,756 million. Alternatively under from operations are supplemented by external financing sources. this provision, the equipment operations had the capacity to Cash provided by operating activities of the equipment incur additional debt of $18,119 million at October 31, 2013. operations during 2013, including intercompany cash flows, All of these requirements of the credit agreements have been was $4,669 million primarily due to net income adjusted for met during the periods included in the consolidated financial non-cash provisions and an increase in accounts payable and statements. accrued expenses. Debt Ratings. To access public debt capital markets, the Over the last three years, these operating activities, company relies on credit rating agencies to assign short-term including intercompany cash flows, have provided an aggregate and long-term credit ratings to the company’s securities as an of $10,615 million in cash. indicator of credit quality for fixed income investors. A security Trade receivables held by the equipment operations rating is not a recommendation by the rating agency to buy, decreased by $218 million during 2013. The equipment sell or hold company securities. A credit rating agency may operations sell a significant portion of their trade receivables change or withdraw company ratings based on its assessment to financial services (see previous consolidated discussion). of the company’s current and future ability to meet interest and principal repayment obligations. Each agency’s rating should be evaluated independently of any other rating. Lower credit 21


  • Page 22

    Inventories decreased by $235 million in 2013 primarily Receivables and equipment on operating leases increased due to the reclassification of inventories related to the by $4,851 million in 2013, compared with 2012. Total acquisi- Landscapes operations to held for sale (see Note 4). Most of tion volumes of receivables (excluding trade and wholesale notes) these inventories are valued on the last-in, first-out (LIFO) and cost of equipment on operating leases increased 14 percent method. The ratios of inventories on a first-in, first-out (FIFO) in 2013, compared with 2012. The volumes of operating leases, basis (see Note 15), which approximates current cost, to fiscal retail notes and financing leases increased approximately 34 year cost of sales were 25 percent and 26 percent at October 31, percent, 19 percent and 6 percent, respectively, while revolving 2013 and 2012, respectively. charge accounts remained about the same and operating loans Total interest-bearing debt of the equipment operations decreased 52 percent due to lower market coverage. The amount was $5,951 million at the end of 2013, compared with $5,870 of wholesale notes increased 23 percent and trade receivables million at the end of 2012 and $3,696 million at the end of 2011. increased 6 percent during 2013. At October 31, 2013 and The ratio of total debt to total capital (total interest-bearing 2012, net receivables and leases administered, which include debt and stockholders’ equity) at the end of 2013, 2012 and receivables administered but not owned, were $36,559 million 2011 was 37 percent, 46 percent and 35 percent, respectively. and $31,746 million, respectively. Property and equipment cash expenditures for the Total external interest-bearing debt of the financial equipment operations in 2013 were $1,155 million, compared services operations was $28,524 million at the end of 2013, with $1,316 million in 2012. Capital expenditures in 2014 are compared with $26,551 million at the end of 2012 and $22,894 estimated to be $1,200 million. million at the end of 2011. Total external borrowings have FINANCIAL SERVICES changed generally corresponding with the level of the receivable The financial services operations rely on their ability to and lease portfolio, the level of cash and cash equivalents, the raise substantial amounts of funds to finance their receivable change in payables owed to Deere & Company and the change and lease portfolios. Their primary sources of funds for this in investment from Deere & Company. The financial services purpose are a combination of commercial paper, term debt, operations’ ratio of total interest-bearing debt to total stock- securitization of retail notes, equity capital and borrowings holder’s equity was 7.3 to 1 at the end of 2013, 7.2 to 1 at the from Deere & Company. end of 2012 and 7.5 to 1 at the end of 2011. The cash provided by operating activities and financing The Capital Corporation has a revolving credit activities was used primarily for investing activities. Cash flows agreement to utilize bank conduit facilities to securitize retail from the financial services’ operating activities, including notes (see Note 13). At October 31, 2013, the facility had a intercompany cash flows, were $1,244 million in 2013. total capacity, or “financing limit,” of up to $3,000 million of Cash used by investing activities totaled $5,845 million in 2013, secured financings at any time. The facility was renewed in primarily due to the cost of receivables (excluding trade and November 2013 for the same capacity. After a three-year wholesale) and cost of equipment on operating leases exceeding revolving period, unless the banks and Capital Corporation collections of these receivables and the proceeds from sales of agree to renew, Capital Corporation would liquidate the equipment on operating leases by $4,523 million and an increase secured borrowings over time as payments on the retail notes in trade receivables and wholesale notes of $1,153 million. are collected. At October 31, 2013, $1,563 million of short- Cash provided by financing activities totaled $4,321 million in term securitization borrowings was outstanding under the 2013, representing primarily an increase in external borrowings agreement. of $2,397 million, borrowings from Deere & Company of $2,007 During 2013, the financial services operations issued million and capital investment from Deere & Company of $2,789 million and retired $2,255 million of retail note securiti- $122 million, partially offset by dividends paid of $186 million zation borrowings. During 2013, the financial services operations to Deere & Company. Cash and cash equivalents decreased also issued $4,451 million and retired $4,767 million of $264 million. long-term borrowings. The long-term borrowing retirements Over the last three years, the operating activities, including included $650 million of 5.10% Debentures due in January intercompany cash flows, have provided $3,186 million in cash. 2013. The remaining issuances and retirements were primarily In addition, an increase in total borrowings of $10,707 million medium-term notes. and capital investment from Deere & Company of $455 million OFF-BALANCE-SHEET ARRANGEMENTS provided cash inflows. These amounts have been used mainly At October 31, 2013, the company had approximately to fund receivables (excluding trade and wholesale) and $270 million of guarantees issued primarily to banks outside the equipment on operating lease acquisitions, which exceeded U.S. related to third-party receivables for the retail financing collections and the proceeds from sales of equipment on of John Deere equipment. The company may recover a portion operating leases by $10,275 million, fund an increase in trade of any required payments incurred under these agreements from receivables and wholesale notes of $3,233 million and pay repossession of the equipment collateralizing the receivables. dividends to Deere & Company of $570 million. Cash and cash The maximum remaining term of the receivables guaranteed at equivalents increased $39 million over the three-year period. October 31, 2013 was approximately seven years. 22


  • Page 23

    AGGREGATE CONTRACTUAL OBLIGATIONS the company records the sale. Changes in the mix and types of The payment schedule for the company’s contractual obligations programs affect these estimates, which are reviewed quarterly. at October 31, 2013 in millions of dollars is as follows: The sales incentive accruals at October 31, 2013, 2012 and 2011 were $1,531 million, $1,453 million and $1,122 Less More million, respectively. The increase in 2013 and 2012 were than 2&3 4&5 than primarily due to higher sales volumes. Total 1 year years years 5 years The estimation of the sales incentive accrual is impacted On-balance-sheet by many assumptions. One of the key assumptions is the Debt* historical percent of sales incentive costs to retail sales from Equipment operations ..... $ 5,967 $ 1,081 $ 477 $ 51 $ 4,358 dealers. Over the last five fiscal years, this percent has varied Financial services** ....... 28,287 9,870 9,777 5,521 3,119 by an average of approximately plus or minus .7 percent, Total ......................... 34,254 10,951 10,254 5,572 7,477 compared to the average sales incentive costs to retail sales Interest relating to debt***.. 4,940 650 946 745 2,599 percent during that period. Holding other assumptions constant, Accounts payable .............. 3,128 2,998 89 38 3 if this estimated cost experience percent were to increase or Capital leases .................... 37 23 9 3 2 decrease .7 percent, the sales incentive accrual at October 31, Off-balance-sheet 2013 would increase or decrease by approximately $60 million. Purchase obligations .......... 3,487 3,444 43 Operating leases................ 413 130 156 79 48 Product Warranties Total .................................. $46,259 $ 18,196 $ 11,497 $ 6,437 $10,129 At the time a sale to a dealer is recognized, the company records the estimated future warranty costs. The company * Principal payments. generally determines its total warranty liability by applying ** Securitization borrowings of $4,109 million classified as short-term on the balance sheet related to the securitization of retail notes are included in this table based on historical claims rate experience to the estimated amount of the expected payment schedule (see Note 18). equipment that has been sold and is still under warranty based *** Includes projected payments related to interest rate swaps. on dealer inventories and retail sales. The historical claims rate The previous table does not include unrecognized tax is primarily determined by a review of five-year claims costs benefit liabilities of approximately $272 million at October 31, and consideration of current quality developments. Variances in 2013 since the timing of future payments is not reasonably claims experience and the type of warranty programs affect estimable at this time (see Note 8). For additional information these estimates, which are reviewed quarterly. regarding pension and other postretirement employee benefit The product warranty accruals, excluding extended obligations, short-term borrowings, long-term borrowings and warranty unamortized premiums, at October 31, 2013, 2012 lease obligations, see Notes 7, 18, 20 and 21, respectively. and 2011 were $822 million, $733 million and $662 million, respectively. The changes were primarily due to higher sales CRITICAL ACCOUNTING POLICIES volumes in 2013 and 2012. The preparation of the company’s consolidated financial Estimates used to determine the product warranty accruals statements in conformity with accounting principles generally are significantly affected by the historical percent of warranty accepted in the U.S. requires management to make estimates claims costs to sales. Over the last five fiscal years, this percent and assumptions that affect reported amounts of assets, liabilities, has varied by an average of approximately plus or minus .08 revenues and expenses. Changes in these estimates and assump- percent, compared to the average warranty costs to sales percent tions could have a significant effect on the financial statements. during that period. Holding other assumptions constant, if this The accounting policies below are those management believes estimated cost experience percent were to increase or decrease are the most critical to the preparation of the company’s financial .08 percent, the warranty accrual at October 31, 2013 would statements and require the most difficult, subjective or complex increase or decrease by approximately $35 million. judgments. The company’s other accounting policies are Postretirement Benefit Obligations described in the Notes to the Consolidated Financial Statements. Pension obligations and other postretirement employee Sales Incentives benefit (OPEB) obligations are based on various assumptions At the time a sale to a dealer is recognized, the company records used by the company’s actuaries in calculating these amounts. an estimate of the future sales incentive costs for allowances and These assumptions include discount rates, health care cost trend financing programs that will be due when the dealer sells the rates, expected return on plan assets, compensation increases, equipment to a retail customer. The estimate is based on retirement rates, mortality rates and other factors. Actual results historical data, announced incentive programs, field inventory that differ from the assumptions and changes in assumptions levels and retail sales volumes. The final cost of these programs affect future expenses and obligations. and the amount of accrual required for a specific sale are fully determined when the dealer sells the equipment to the retail customer. This is due to numerous programs available at any particular time and new programs that may be announced after 23


  • Page 24

    The pension assets, net of pension liabilities, recognized Based on this testing, the company identified a reporting on the balance sheet at October 31, 2013 were $40 million. unit in 2012 for which the goodwill was impaired. In the The pension liabilities, net of pension assets, at October 31, fourth quarter of 2012, the company recorded a non-cash 2012 and 2011 were $1,817 million and $1,373 million, charge in cost of sales of $33 million pretax, or $31 million respectively. The increase in pension net assets in 2013 was after-tax. The charge was associated with a reporting unit primarily due to the return on plan assets and increases in included in the agriculture and turf operating segment. The key discount rates, partially offset by interest on the liabilities. factor contributing to the impairment was a decline in the The increase in pension net liabilities in 2012 was primarily reporting unit’s forecasted financial performance (see Note 5). due to decreases in discount rates and interest on the liabilities, A 10 percent decrease in the estimated fair value of the partially offset by the return on plan assets. The OPEB liabilities, company’s reporting units not being held for sale would have net of OPEB assets, on these same dates were $4,769 million, had no impact on the carrying value of goodwill at the annual $5,736 million and $5,193 million, respectively. The decrease measurement date in 2013. in the OPEB net liabilities in 2013 was primarily due to Allowance for Credit Losses increases in discount rates and favorable claims experience, The allowance for credit losses represents an estimate of partially offset by interest on the liabilities. The increase in the losses inherent in the company’s receivable portfolio. 2012 was primarily due to the decreases in discount rates and The level of the allowance is based on many quantitative interest on the liabilities. and qualitative factors, including historical loss experience The effect of hypothetical changes to selected assumptions by product category, portfolio duration, delinquency trends, on the company’s major U.S. retirement benefit plans would be economic conditions and credit risk quality. The adequacy as follows in millions of dollars: of the allowance is assessed quarterly. Different assumptions or October 31, 2013 _________ ______________ 2014 changes in economic conditions would result in changes to the Increase Increase allowance for credit losses and the provision for credit losses. Percentage (Decrease) (Decrease) The total allowance for credit losses at October 31, 2013, Assumptions Change PBO/APBO* Expense 2012 and 2011 was $240 million, $243 million and $269 million, Pension respectively. The allowance was approximately the same in Discount rate** ................... +/-.5 $ (520)/551 $ (29)/27 2013, compared to 2012. The decrease in 2012, compared to Expected return 2011, was primarily due to decreases in loss experience. on assets ....................... +/-.5 (46)/46 The assumptions used in evaluating the company’s OPEB exposure to credit losses involve estimates and significant Discount rate** ................... +/-.5 (326)/360 (12)/19 judgment. The historical loss experience on the receivable Expected return portfolio represents one of the key assumptions involved in on assets ....................... +/-.5 (5)/5 determining the allowance for credit losses. Over the last five Health care cost fiscal years, this percent has varied by an average of approxi- trend rate** .................... +/-1.0 703/(558) 98/(62) mately plus or minus .28 percent, compared to the average * Projected benefit obligation (PBO) for pension plans and accumulated postretirement loss experience percent during that period. Holding other benefit obligation (APBO) for OPEB plans. assumptions constant, if this estimated loss experience on the ** Pretax impact on service cost, interest cost and amortization of gains or losses. receivable portfolio were to increase or decrease .28 percent, Goodwill the allowance for credit losses at October 31, 2013 would Goodwill is not amortized and is tested for impairment annually increase or decrease by approximately $95 million. and when events or circumstances change such that it is more Operating Lease Residual Values likely than not that the fair value of a reporting unit is reduced The carrying value of equipment on operating leases is affected below its carrying amount. The end of the third quarter is the by the estimated fair values of the equipment at the end of the annual measurement date. To test for goodwill impairment, lease (residual values). Upon termination of the lease, the the carrying value of each reporting unit is compared with its equipment is either purchased by the lessee or sold to a third fair value. If the carrying value of the goodwill is considered party, in which case the company may record a gain or a loss impaired, a loss is recognized based on the amount by which the for the difference between the estimated residual value and the carrying value exceeds the implied fair value of the goodwill. sales price. The residual values are dependent on current An estimate of the fair value of the reporting unit is economic conditions and are reviewed quarterly. Changes in determined through a combination of comparable market values residual value assumptions would affect the amount of deprecia- for similar businesses and discounted cash flows. These estimates tion expense and the amount of investment in equipment on can change significantly based on such factors as the reporting operating leases. unit’s financial performance, economic conditions, interest The total operating lease residual values at October 31, rates, growth rates, pricing, changes in business strategies and 2013, 2012 and 2011 were $2,115 million, $1,676 million and competition. $1,425 million, respectively. The changes in 2013 and 2012 were primarily due to the increasing levels of operating leases. 24


  • Page 25

    Estimates used in determining end of lease market values Foreign Currency Risk for equipment on operating leases significantly impact the In the equipment operations, the company’s practice is to hedge amount and timing of depreciation expense. If future market significant currency exposures. Worldwide foreign currency values for this equipment were to decrease 10 percent from exposures are reviewed quarterly. Based on the equipment the company’s present estimates, the total impact would be operations’ anticipated and committed foreign currency cash to increase the company’s annual depreciation for equipment inflows, outflows and hedging policy for the next twelve on operating leases by approximately $95 million. months, the company estimates that a hypothetical 10 percent FINANCIAL INSTRUMENT MARKET RISK INFORMATION weakening of the U.S. dollar relative to other currencies through 2014 would decrease the 2014 expected net cash The company is naturally exposed to various interest rate and inflows by $10 million. At October 31, 2012, a hypothetical foreign currency risks. As a result, the company enters into 10 percent weakening of the U.S. dollar under similar assump- derivative transactions to manage certain of these exposures that tions and calculations indicated a potential $68 million adverse arise in the normal course of business and not for the purpose effect on the 2013 net cash inflows. of creating speculative positions or trading. The company’s In the financial services operations, the company’s financial services manage the relationship of the types and policy is to hedge the foreign currency risk if the currency of amounts of their funding sources to their receivable and lease the borrowings does not match the currency of the receivable portfolio in an effort to diminish risk due to interest rate and portfolio. As a result, a hypothetical 10 percent adverse change foreign currency fluctuations, while responding to favorable in the value of the U.S. dollar relative to all other foreign financing opportunities. Accordingly, from time to time, these currencies would not have a material effect on the financial operations enter into interest rate swap agreements to manage services cash flows. their interest rate exposure. The company also has foreign currency exposures at some of its foreign and domestic opera- tions related to buying, selling and financing in currencies other than the functional currencies. The company has entered into agreements related to the management of these foreign currency transaction risks. Interest Rate Risk Quarterly, the company uses a combination of cash flow models to assess the sensitivity of its financial instruments with interest rate exposure to changes in market interest rates. The models calculate the effect of adjusting interest rates as follows. Cash flows for financing receivables are discounted at the current prevailing rate for each receivable portfolio. Cash flows for marketable securities are primarily discounted at the applicable benchmark yield curve plus market credit spreads. Cash flows for unsecured borrowings are discounted at the applicable benchmark yield curve plus market credit spreads for similarly rated borrowers. Cash flows for securitized borrowings are discounted at the swap yield curve plus a market credit spread for similarly rated borrowers. Cash flows for interest rate swaps are projected and discounted using forward rates from the swap yield curve at the repricing dates. The net loss in these financial instruments’ fair values which would be caused by decreasing the interest rates by 10 percent from the market rates at October 31, 2013 would have been approximately $14 million. The net loss from decreasing the interest rates by 10 percent at October 31, 2012 would have been approximately $33 million. 25


  • Page 26

    MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER over financial reporting included obtaining an understanding FINANCIAL REPORTING of internal control over financial reporting, assessing the risk The management of Deere & Company is responsible for that a material weakness exists, and testing and evaluating the establishing and maintaining adequate internal control over design and operating effectiveness of internal control based on financial reporting. Deere & Company’s internal control system the assessed risk. Our audits also included performing such other was designed to provide reasonable assurance regarding the procedures as we considered necessary in the circumstances. preparation and fair presentation of published financial statements We believe that our audits provide a reasonable basis for our in accordance with generally accepted accounting principles. opinions. All internal control systems, no matter how well designed, A company’s internal control over financial reporting is a have inherent limitations. Therefore, even those systems process designed by, or under the supervision of, the company’s determined to be effective can provide only reasonable assurance principal executive and principal financial officers, or persons with respect to financial statement preparation and presentation performing similar functions, and effected by the company’s in accordance with generally accepted accounting principles. board of directors, management, and other personnel to provide Management assessed the effectiveness of the company’s reasonable assurance regarding the reliability of financial internal control over financial reporting as of October 31, 2013, reporting and the preparation of financial statements for using the criteria set forth in Internal Control – Integrated external purposes in accordance with generally accepted Framework (1992) issued by the Committee of Sponsoring accounting principles. A company’s internal control over Organizations of the Treadway Commission. Based on that financial reporting includes those policies and procedures that assessment, management believes that, as of October 31, 2013, (1) pertain to the maintenance of records that, in reasonable the company’s internal control over financial reporting was detail, accurately and fairly reflect the transactions and effective. dispositions of the assets of the company; (2) provide reasonable The company’s independent registered public accounting assurance that transactions are recorded as necessary to permit firm has issued an audit report on the effectiveness of the preparation of financial statements in accordance with generally company’s internal control over financial reporting. This report accepted accounting principles, and that receipts and expendi- appears below. tures of the company are being made only in accordance with authorizations of management and directors of the company; December 16, 2013 and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition REPORT OF INDEPENDENT of the company’s assets that could have a material effect on the REGISTERED PUBLIC ACCOUNTING FIRM financial statements. Deere & Company: Because of the inherent limitations of internal control We have audited the accompanying consolidated balance sheets over financial reporting, including the possibility of collusion of Deere & Company and subsidiaries (the “Company”) as of or improper management override of controls, material October 31, 2013 and 2012, and the related statements of misstatements due to error or fraud may not be prevented or consolidated income, comprehensive income, changes in detected on a timely basis. Also, projections of any evaluation consolidated stockholders’ equity, and consolidated cash flows of the effectiveness of the internal control over financial for each of the three years in the period ended October 31, reporting to future periods are subject to the risk that the controls 2013. We also have audited the Company’s internal control may become inadequate because of changes in conditions, or over financial reporting as of October 31, 2013, based on that the degree of compliance with the policies or procedures criteria established in Internal Control - Integrated Framework may deteriorate. (1992) issued by the Committee of Sponsoring Organizations In our opinion, the consolidated financial statements of the Treadway Commission. The Company’s management referred to above present fairly, in all material respects, the is responsible for these financial statements, for maintaining financial position of the Company as of October 31, 2013 and effective internal control over financial reporting, and for its 2012, and the results of their operations and their cash flows for assessment of the effectiveness of internal control over financial each of the three years in the period ended October 31, 2013, reporting, included in the accompanying Management’s Report in conformity with accounting principles generally accepted in on Internal Control Over Financial Reporting. Our responsi- the United States of America. Also in our opinion, the Company bility is to express an opinion on these financial statements and maintained, in all material respects, effective internal control an opinion on the Company’s internal control over financial over financial reporting as of October 31, 2013, based on the reporting based on our audits. criteria established in Internal Control – Integrated Framework We conducted our audits in accordance with the (1992) issued by the Committee of Sponsoring Organizations of standards of the Public Company Accounting Oversight Board the Treadway Commission. (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 Deloitte & Touche LLP maintained in all material respects. Our audits of the financial Chicago, Illinois statements included examining, on a test basis, evidence December 16, 2013 supporting the amounts and disclosures in the financial state- ments, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control 26


  • Page 27

    Deere & Company STATEMENT OF CONSOLIDATED INCOME For the Years Ended October 31, 2013, 2012 and 2011 (In millions of dollars) _______ 2013 _______ 2012 _______ 2011 Net Sales and Revenues Net sales .................................................................................................................................................... $ 34,997.9 $ 33,500.9 $ 29,466.1 Finance and interest income ....................................................................................................................... 2,115.1 1,981.3 1,922.6 Other income ............................................................................................................................................. 682.4 674.9 623.8 Total ..................................................................................................................................................... 37,795.4 36,157.1 32,012.5 Costs and Expenses Cost of sales .............................................................................................................................................. 25,667.3 25,007.8 21,919.4 Research and development expenses .......................................................................................................... 1,477.3 1,433.6 1,226.2 Selling, administrative and general expenses ............................................................................................... 3,605.5 3,417.0 3,168.7 Interest expense ......................................................................................................................................... 741.3 782.8 759.4 Other operating expenses ........................................................................................................................... 820.6 781.5 716.0 Total ..................................................................................................................................................... 32,312.0 31,422.7 27,789.7 Income of Consolidated Group before Income Taxes .......................................................................... 5,483.4 4,734.4 4,222.8 Provision for income taxes .......................................................................................................................... 1,945.9 1,659.4 1,423.6 Income of Consolidated Group............................................................................................................... 3,537.5 3,075.0 2,799.2 Equity in income (loss) of unconsolidated affiliates ....................................................................................... .1 (3.4) 8.6 Net Income .............................................................................................................................................. 3,537.6 3,071.6 2,807.8 Less: Net income attributable to noncontrolling interests.......................................................................... .3 6.9 7.9 Net Income Attributable to Deere & Company ...................................................................................... $ 3,537.3 $ 3,064.7 $ 2,799.9 Per Share Data Basic ......................................................................................................................................................... $ 9.18 $ 7.72 $ 6.71 Diluted ....................................................................................................................................................... $ 9.09 $ 7.63 $ 6.63 Dividends declared ..................................................................................................................................... $ 1.99 $ 1.79 $ 1.52 Average Shares Outstanding Basic ......................................................................................................................................................... 385.3 397.1 417.4 Diluted ....................................................................................................................................................... 389.2 401.5 422.4 The notes to consolidated financial statements are an integral part of this statement. 27


  • Page 28

    Deere & Company STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME For the Years Ended October 31, 2013, 2012 and 2011 (In millions of dollars) _______ 2013 _______ 2012 ________ 2011 Net Income .............................................................................................................................................. $ 3,537.6 $ 3,071.6 $ 2,807.8 Other Comprehensive Income (Loss), Net of Income Taxes Retirement benefits adjustment............................................................................................................... 1,950.0 (623.6) (338.4) Cumulative translation adjustment........................................................................................................... (70.9) (270.0) 17.8 Unrealized gain (loss) on derivatives ........................................................................................................ 10.7 (5.1) 20.9 Unrealized gain (loss) on investments ...................................................................................................... (11.3) 4.9 1.3 Other Comprehensive Income (Loss), Net of Income Taxes.................................................................. 1,878.5 (893.8) (298.4) Comprehensive Income of Consolidated Group ................................................................................... 5,416.1 2,177.8 2,509.4 Less: Comprehensive income attributable to noncontrolling interests ..................................................................................................................... .4 6.6 7.9 Comprehensive Income Attributable to Deere & Company ................................................................. $ 5,415.7 $ 2,171.2 $ 2,501.5 The notes to consolidated financial statements are an integral part of this statement. 28


  • Page 29

    Deere & Company CONSOLIDATED BALANCE SHEET As of October 31, 2013 and 2012 (In millions of dollars except per share amounts) 2013 _________ 2012 _________ ASSETS Cash and cash equivalents..................................................................................................................................... $ 3,504.0 $ 4,652.2 Marketable securities ............................................................................................................................................ 1,624.8 1,470.4 Receivables from unconsolidated affiliates .............................................................................................................. 31.2 59.7 Trade accounts and notes receivable - net .............................................................................................................. 3,758.2 3,799.1 Financing receivables - net .................................................................................................................................... 25,632.7 22,159.1 Financing receivables securitized - net ................................................................................................................... 4,153.1 3,617.6 Other receivables .................................................................................................................................................. 1,464.0 1,790.9 Equipment on operating leases - net ...................................................................................................................... 3,152.2 2,527.8 Inventories ............................................................................................................................................................ 4,934.7 5,170.0 Property and equipment - net ................................................................................................................................ 5,466.9 5,011.9 Investments in unconsolidated affiliates .................................................................................................................. 221.4 215.0 Goodwill ................................................................................................................................................................ 844.8 921.2 Other intangible assets - net .................................................................................................................................. 77.1 105.0 Retirement benefits ............................................................................................................................................... 551.1 20.2 Deferred income taxes ........................................................................................................................................... 2,325.4 3,280.4 Other assets.......................................................................................................................................................... 1,274.7 1,465.3 Assets held for sale ............................................................................................................................................... 505.0 Total Assets ........................................................................................................................................................ $ 59,521.3 $ 56,265.8 LIABILITIES AND STOCKHOLDERS’ EQUITY LIABILITIES Short-term borrowings ........................................................................................................................................... $ 8,788.9 $ 6,392.5 Short-term securitization borrowings ...................................................................................................................... 4,109.1 3,574.8 Payables to unconsolidated affiliates ...................................................................................................................... 106.9 135.2 Accounts payable and accrued expenses................................................................................................................ 8,973.6 8,988.9 Deferred income taxes ........................................................................................................................................... 160.3 164.4 Long-term borrowings ........................................................................................................................................... 21,577.7 22,453.1 Retirement benefits and other liabilities .................................................................................................................. 5,416.7 7,694.9 Liabilities held for sale ........................................................................................................................................... 120.4 Total liabilities ........................................................................................................................................... 49,253.6 49,403.8 Commitments and contingencies (Note 22) STOCKHOLDERS’ EQUITY Common stock, $1 par value (authorized – 1,200,000,000 shares; issued – 536,431,204 shares in 2013 and 2012), at paid-in amount.................................................................. 3,524.2 3,352.2 Common stock in treasury, 162,628,440 shares in 2013 and 148,625,875 shares in 2012, at cost......................... (10,210.9) (8,813.8) Retained earnings.................................................................................................................................................. 19,645.6 16,875.2 Accumulated other comprehensive income (loss) .................................................................................................... (2,693.1) (4,571.5) Total Deere & Company stockholders’ equity .......................................................................................................... 10,265.8 6,842.1 Noncontrolling interests ......................................................................................................................................... 1.9 19.9 Total stockholders’ equity .............................................................................................................................. 10,267.7 6,862.0 Total Liabilities and Stockholders’ Equity ....................................................................................................... $ 59,521.3 $ 56,265.8 The notes to consolidated financial statements are an integral part of this statement. 29


  • Page 30

    Deere & Company STATEMENT OF CONSOLIDATED CASH FLOWS For the Years Ended October 31, 2013, 2012 and 2011 (In millions of dollars) 2013 _________ 2012 ________ 2011 ________ Cash Flows from Operating Activities Net income................................................................................................................................................. $ 3,537.6 $ 3,071.6 $ 2,807.8 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses ....................................................................................................................... 20.5 5.1 13.5 Provision for depreciation and amortization.............................................................................................. 1,140.3 1,004.2 914.9 Impairment charges................................................................................................................................ 102.0 33.4 Share-based compensation expense ....................................................................................................... 80.7 74.5 69.0 Undistributed earnings of unconsolidated affiliates ................................................................................... 9.1 1.8 11.1 Credit for deferred income taxes ............................................................................................................. (172.6) (91.8) (168.0) Changes in assets and liabilities: Trade, notes and financing receivables related to sales......................................................................... (1,510.2) (1,901.6) (808.9) Insurance receivables ......................................................................................................................... 263.4 (338.5) (300.1) Inventories ......................................................................................................................................... (728.4) (1,510.2) (1,730.5) Accounts payable and accrued expenses............................................................................................. 217.1 1,061.8 1,287.0 Accrued income taxes payable/receivable ........................................................................................... 80.4 (72.3) 1.2 Retirement benefits ............................................................................................................................ 262.0 63.3 495.3 Other ..................................................................................................................................................... (47.6) (233.6) (266.0) Net cash provided by operating activities......................................................................................... 3,254.3 1,167.7 2,326.3 Cash Flows from Investing Activities Collections of receivables (excluding receivables related to sales) ................................................................. 14,088.0 13,064.9 12,151.4 Proceeds from maturities and sales of marketable securities ........................................................................ 843.9 240.3 32.4 Proceeds from sales of equipment on operating leases ................................................................................ 936.7 799.5 683.4 Proceeds from sales of businesses, net of cash sold .................................................................................... 22.0 30.2 911.1 Cost of receivables acquired (excluding receivables related to sales) ............................................................. (17,011.7) (15,139.0) (13,956.8) Purchases of marketable securities ............................................................................................................. (1,026.3) (922.2) (586.9) Purchases of property and equipment ......................................................................................................... (1,158.4) (1,319.2) (1,056.6) Cost of equipment on operating leases acquired .......................................................................................... (1,216.9) (801.8) (624.2) Acquisitions of businesses, net of cash acquired .......................................................................................... (83.5) (60.8) Other ......................................................................................................................................................... (214.5) 43.2 (113.7) Net cash used for investing activities .............................................................................................. (4,820.7) (4,004.1) (2,620.7) Cash Flows from Financing Activities Increase (decrease) in total short-term borrowings....................................................................................... 2,749.4 894.9 (226.1) Proceeds from long-term borrowings........................................................................................................... 4,734.0 10,642.0 5,655.0 Payments of long-term borrowings .............................................................................................................. (4,958.5) (5,396.0) (3,220.8) Proceeds from issuance of common stock ................................................................................................... 174.5 61.0 170.0 Repurchases of common stock ................................................................................................................... (1,531.4) (1,587.7) (1,667.0) Dividends paid ............................................................................................................................................ (752.9) (697.9) (593.1) Excess tax benefits from share-based compensation ................................................................................... 50.7 30.1 70.1 Other ......................................................................................................................................................... (59.3) (66.2) (48.5) Net cash provided by financing activities ......................................................................................... 406.5 3,880.2 139.6 Effect of Exchange Rate Changes on Cash and Cash Equivalents ...................................................... 11.7 (38.8) 11.4 Net Increase (Decrease) in Cash and Cash Equivalents ...................................................................... (1,148.2) 1,005.0 (143.4) Cash and Cash Equivalents at Beginning of Year ................................................................................. 4,652.2 3,647.2 3,790.6 Cash and Cash Equivalents at End of Year............................................................................................ $ 3,504.0 $ 4,652.2 $ 3,647.2 The notes to consolidated financial statements are an integral part of this statement. 30


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    Deere & Company STATEMENT OF CHANGES IN CONSOLIDATED STOCKHOLDERS’ EQUITY For the Years Ended October 31, 2011, 2012 and 2013 (In millions of dollars) Deere & Company Stockholders Accumulated Total Other Non- Stockholders’ Common Treasury Retained Comprehensive controlling Equity Stock Stock Earnings Income (Loss) Interests Balance October 31, 2010 ........................................... $ 6,303.4 $ 3,106.3 $ (5,789.5) $ 12,353.1 $ (3,379.6) $ 13.1 Net income..................................................................... 2,807.8 2,799.9 7.9 Other comprehensive loss ............................................... (298.4) (298.4) Repurchases of common stock ....................................... (1,667.0) (1,667.0) Treasury shares reissued ................................................ 163.7 163.7 Dividends declared ......................................................... (638.0) (633.5) (4.5) Stock options and other .................................................. 143.4 145.4 (.1) (1.9) Balance October 31, 2011 ........................................... 6,814.9 3,251.7 (7,292.8) 14,519.4 (3,678.0) 14.6 Net income..................................................................... 3,071.6 3,064.7 6.9 Other comprehensive loss ............................................... (893.8) (893.5) (.3) Repurchases of common stock ....................................... (1,587.7) (1,587.7) Treasury shares reissued ................................................ 66.7 66.7 Dividends declared ......................................................... (709.2) (708.9) (.3) Stock options and other .................................................. 99.5 100.5 (1.0) 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 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 .................................................. 171.8 172.0 (.3) .1 Balance October 31, 2013 ........................................... $ 10,267.7 $ 3,524.2 $ (10,210.9) $ 19,645.6 $ (2,693.1) $ 1.9 The notes to consolidated financial statements are an integral part of this statement. 31


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    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIzATION AND CONSOLIDATION The VIE was financed primarily through its own Structure of Operations liabilities. The assets of the VIE could only be used to settle The information in the notes and related commentary are the obligations of the VIE. The creditors of the VIE did not presented in a format which includes data grouped as follows: have recourse to the general credit of the company. Equipment Operations – Includes the company’s See Note 13 for VIEs related to securitization of financing agriculture and turf operations and construction and forestry receivables. operations with financial services reflected on the equity basis. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Financial Services – Includes primarily the company’s The following are significant accounting policies in addition financing operations. to those included in other notes to the consolidated financial Consolidated – Represents the consolidation of the statements. equipment operations and financial services. References to Use of Estimates in Financial Statements “Deere & Company” or “the company” refer to the entire The preparation of financial statements in conformity with enterprise. accounting principles generally accepted in the U.S. requires Principles of Consolidation management to make estimates and assumptions that affect the The consolidated financial statements represent primarily the reported amounts and related disclosures. Actual results could consolidation of all companies in which Deere & Company differ from those estimates. has a controlling interest. Certain variable interest entities Revenue Recognition (VIEs) are consolidated since the company has both the power Sales of equipment and service parts are recorded when the sales to direct the activities that most significantly impact the VIEs’ price is determinable and the risks and rewards of ownership are economic performance and the obligation to absorb losses or transferred to independent parties based on the sales agreements the right to receive benefits that could potentially be significant in effect. In the U.S. and most international locations, this transfer to the VIEs. Deere & Company records its investment in each occurs primarily when goods are shipped. In Canada and some unconsolidated affiliated company (generally 20 to 50 percent other international locations, certain goods are shipped to dealers ownership) at its related equity in the net assets of such affiliate on a consignment basis under which the risks and rewards of (see Note 10). Other investments (less than 20 percent owner- ownership are not transferred to the dealer. Accordingly, in ship) are recorded at cost. these locations, sales are not recorded until a retail customer has Variable Interest Entities purchased the goods. In all cases, when a sale is recorded by the The company was previously the primary beneficiary of and company, no significant uncertainty exists surrounding the consolidated a supplier that was a VIE. The company had both purchaser’s obligation to pay. No right of return exists on sales the power to direct the activities of the VIE that most signifi- of equipment. Service parts and certain attachments returns cantly impacted the VIE’s economic performance and the are estimable and accrued at the time a sale is recognized. obligation to absorb losses or the right to receive benefits that The company makes appropriate provisions based on experi- could potentially be significant to the VIE. In the first quarter ence for costs such as doubtful receivables, sales incentives and of 2013, the entity was deconsolidated since the company no product warranty. longer has a variable interest in the supplier. No related parties Financing revenue is recorded over the lives of related were involved in the deconsolidation. The effect on the receivables using the interest method. Insurance premiums financial statements for the deconsolidation was a decrease in recorded in other income are generally recognized in proportion assets, liabilities and noncontrolling interests of approximately to the costs expected to be incurred over the contract period. $26 million, $15 million and $11 million, respectively, with no Deferred costs on the origination of financing receivables are gain or loss. No additional support beyond what was previously recognized as a reduction in finance revenue over the expected contractually required was provided during any periods lives of the receivables using the interest method. Income and presented. The VIE produced blended fertilizer and other lawn deferred costs on the origination of operating leases are recog- care products for the agriculture and turf segment. nized on a straight-line basis over the scheduled lease terms in The assets and liabilities of this supplier VIE consisted of finance revenue. the following last year at October 31 in millions of dollars: Sales Incentives 2012 At the time a sale is recognized, the company records an Cash and cash equivalents............................................................. $ 26 estimate of the future sales incentive costs for allowances Intercompany receivables............................................................... 7 and financing programs that will be due when a dealer sells Inventories .................................................................................... 25 the equipment to a retail customer. The estimate is based on Property and equipment – net ........................................................ 2 historical data, announced incentive programs, field inventory Other assets.................................................................................. 5 levels and retail sales volumes. Total assets ................................................................................... $ 65 Product Warranties At the time a sale is recognized, the company records the Short-term borrowings ................................................................... $ 5 estimated future warranty costs. These costs are usually Accounts payable and accrued expenses ........................................ 48 estimated based on historical warranty claims (see Note 22). Total liabilities ................................................................................ $ 53 32


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    Sales Taxes reporting unit in which the business that created the goodwill The company collects and remits taxes assessed by different resides. To test for goodwill impairment, the carrying value governmental authorities that are both imposed on and of each reporting unit is compared with its fair value. If the concurrent with revenue producing transactions between the carrying value of the goodwill or long-lived asset is considered company and its customers. These taxes may include sales, use, impaired, a loss is recognized based on the amount by which the value-added and some excise taxes. The company reports the carrying value exceeds the fair value of the asset (see Note 5). collection of these taxes on a net basis (excluded from revenues). Derivative Financial Instruments Shipping and Handling Costs It is the company’s policy that derivative transactions are Shipping and handling costs related to the sales of the company’s executed only to manage exposures arising in the normal course equipment are included in cost of sales. of business and not for the purpose of creating speculative Advertising Costs positions or trading. The company’s financial services manage the Advertising costs are charged to expense as incurred. This expense relationship of the types and amounts of their funding sources was $183 million in 2013, $177 million in 2012 and $163 million to their receivable and lease portfolio in an effort to diminish in 2011. risk due to interest rate and foreign currency fluctuations, while Depreciation and Amortization responding to favorable financing opportunities. The company Property and equipment, capitalized software and other also has foreign currency exposures at some of its foreign and intangible assets are stated at cost less accumulated depreciation domestic operations related to buying, selling and financing in or amortization. These assets are depreciated over their esti- currencies other than the functional currencies. mated useful lives generally using the straight-line method. All derivatives are recorded at fair value on the balance Equipment on operating leases is depreciated over the terms of sheet. Cash collateral received or paid is not offset against the the leases using the straight-line method. Property and equip- derivative fair values on the balance sheet. Each derivative is ment expenditures for new and revised products, increased designated as either a cash flow hedge, a fair value hedge, or capacity and the replacement or major renewal of significant remains undesignated. Changes in the fair value of derivatives items are capitalized. Expenditures for maintenance, repairs and that are designated and effective as cash flow hedges are recorded minor renewals are generally charged to expense as incurred. in other comprehensive income and reclassified to the income Securitization of Receivables statement when the effects of the item being hedged are Certain financing receivables are periodically transferred to recognized in the income statement. Changes in the fair value of special purpose entities (SPEs) in securitization transactions derivatives that are designated and effective as fair value hedges (see Note 13). These securitizations qualify as collateral for are recognized currently in net income. These changes are offset secured borrowings and no gains or losses are recognized at the in net income to the extent the hedge was effective by fair value time of securitization. The receivables remain on the balance changes related to the risk being hedged on the hedged item. sheet and are classified as “Financing receivables securitized Changes in the fair value of undesignated hedges are recognized - net.” The company recognizes finance income over the lives currently in the income statement. All ineffective changes in of these receivables using the interest method. derivative fair values are recognized currently in net income. Receivables and Allowances All designated hedges are formally documented as to the All financing and trade receivables are reported on the balance relationship with the hedged item as well as the risk-management sheet at outstanding principal adjusted for any charge-offs, strategy. Both at inception and on an ongoing basis the hedging the allowance for credit losses, and any deferred fees or costs on instrument is assessed as to its effectiveness. If and when a originated financing receivables. Allowances for credit losses are derivative is determined not to be highly effective as a hedge, maintained in amounts considered to be appropriate in relation or the underlying hedged transaction is no longer likely to to the receivables outstanding based on collection experience, occur, or the hedge designation is removed, or the derivative economic conditions and credit risk quality. Receivables are is terminated, the hedge accounting discussed above is discon- written-off to the allowance when the account is considered tinued (see Note 27). uncollectible. Foreign Currency Translation Impairment of Long-Lived Assets, Goodwill and The functional currencies for most of the company’s foreign Other Intangible Assets operations are their respective local currencies. The assets and The company evaluates the carrying value of long-lived assets liabilities of these operations are translated into U.S. dollars at (including property and equipment, goodwill and other the end of the period exchange rates. The revenues and intangible assets) when events or circumstances warrant such expenses are translated at weighted-average rates for the period. a review. Goodwill and intangible assets with indefinite lives The gains or losses from these translations are recorded in are tested for impairment annually at the end of the third fiscal other comprehensive income. Gains or losses from transactions quarter each year, or more often if events or circumstances denominated in a currency other than the functional currency indicate a reduction in the fair value below the carrying value. of the subsidiary involved and foreign exchange forward Goodwill is allocated and reviewed for impairment by reporting contracts are included in net income. The pretax net losses for units, which consist primarily of the operating segments and foreign exchange in 2013, 2012 and 2011 were $26 million, certain other reporting units. The goodwill is allocated to the $96 million and $121 million, respectively. 33


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    3. NEW ACCOUNTING STANDARDS In February 2013, the FASB issued ASU No. 2013-02, New Accounting Standards Adopted Reporting of Amounts Reclassified Out of Accumulated In the first quarter of 2013, the company adopted Financial Other Comprehensive Income, which amends ASC 220, Accounting Standards Board (FASB) Accounting Standards Comprehensive Income. This ASU requires the disclosure Update (ASU) No. 2011-05, Presentation of Comprehensive of amounts reclassified out of accumulated other comprehensive Income, which amends Accounting Standards Codification income by component and by net income line item. (ASC) 220, Comprehensive Income. This ASU requires the The disclosure may be provided either parenthetically on the presentation of total comprehensive income, total net income face of the financial statements or in the notes. The effective and the components of net income and comprehensive income date will be the first quarter of fiscal year 2014 and must be either in a single continuous statement or in two separate but applied prospectively. The adoption will not have a material consecutive statements. The company has presented two effect on the company’s consolidated financial statements. separate but consecutive statements with the tax effects for 4. ACQUISITIONS AND DISPOSITIONS other comprehensive income items disclosed in the notes. In September 2013, the company acquired Bauer Built The requirements do not change how earnings per share is Manufacturing Inc., a manufacturer of planters located in calculated or presented. The adoption did not have a material Paton, Iowa, for approximately $84 million. The fair values effect on the company’s consolidated financial statements. assigned to the assets and liabilities related to the acquired In the first quarter of 2013, the company adopted FASB entity were approximately $9 million of receivables, $11 million ASU No. 2011-08, Testing Goodwill for Impairment, which of inventories, $25 million of property and equipment, $13 amends ASC 350, Intangibles - Goodwill and Other. This ASU million of goodwill, $26 million of identifiable intangible gives an entity the option to first assess qualitative factors to assets, $1 million of other assets and $1 million of liabilities. determine if goodwill is impaired. The entity may first deter- The identifiable intangibles were primarily related to technol- mine based on qualitative factors if it is more likely than not ogy, a non-compete contract, customer relationships and a that the fair value of a reporting unit is less than its carrying trademark, which have amortization periods with a weighted- amount, including goodwill. If that assessment indicates no average of seven years. The entity was consolidated and the impairment, the first and second steps of the quantitative results of these operations have been included in the company’s goodwill impairment test are not required. The adoption did consolidated financial statements in the agriculture and turf not have a material effect on the company’s consolidated segment since the date of acquisition. The pro forma results of financial statements. operations as if the acquisition had occurred at the beginning of In the first quarter of 2013, the company adopted FASB the current or comparative fiscal year would not differ signifi- ASU No. 2012-02, Testing Indefinite-Lived Intangible Assets cantly from the reported results. for Impairment, which amends ASC 350, Intangibles – In October 2013, the company entered into an invest- Goodwill and Other. This ASU gives an entity the option to ment agreement with a private equity investment firm affiliated first assess qualitative factors to determine if indefinite-lived with Clayton, Dubilier & Rice, LLC (CD&R) for the sale of intangible assets are impaired. The entity may first determine 60 percent of its subsidiary John Deere Landscapes LLC based on qualitative factors if it is more likely than not that the (Landscapes). Landscapes is included in the company’s agricul- fair value of indefinite-lived intangible assets are less than their ture and turf segment and distributes irrigation equipment, carrying amount. If that assessment indicates no impairment, nursery products and landscape supplies, including seed, the quantitative impairment test is not required. The adoption fertilizer and hardscape materials, primarily to landscape service did not have a material effect on the company’s consolidated professionals. The sale is a result of the company’s intention to financial statements. invest its resources in growing its core businesses. The 60 New Accounting Standards to be Adopted percent sale for approximately $300 million proceeds includes a In December 2011, the FASB issued ASU No. 2011-11, $174 million equity contribution from CD&R and third party Disclosures about Offsetting Assets and Liabilities, which debt to be raised by Landscapes. The equity contribution is in amends ASC 210, Balance Sheet. This ASU requires entities to the form of newly issued cumulative convertible participating disclose gross and net information about both instruments and preferred units representing 60 percent of the voting rights (on transactions eligible for offset in the statement of financial an as converted basis), which will rank senior to the company’s position and those subject to an agreement similar to a master common stock as to dividends. The preferred units have an netting arrangement. This would include derivatives and other initial liquidation preference of $174 million and will accrue financial securities arrangements. The effective date will be the dividends at a rate of 12 percent per annum. The liquidation first quarter of fiscal year 2014 and must be applied retrospec- preference will be subject to the company’s rights under the tively. The adoption will not have a material effect on the stockholders agreement. Due to preferred dividend payment in company’s consolidated financial statements. additional preferred shares over the first two years, CD&R’s ownership will increase over the two-year period. The com- pany will retain initially 40 percent of the Landscapes business in the form of common stock and report the results as an equity investment in unconsolidated affiliates. The fair value of the 34


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    company’s 40 percent equity investment to be retained was All cash flows from the changes in trade accounts and approximately $80 million at October 31, 2013. notes receivable (see Note 12) are classified as operating The major classes of the total consolidated assets and activities in the statement of consolidated cash flows as these liabilities of the Landscapes business that were classified as held receivables arise from sales to the company’s customers. for sale at October 31 were as follows in millions of dollars: Cash flows from financing receivables that are related to sales 2013 to the company’s customers (see Note 12) are also included in operating activities. The remaining financing receivables are Trade accounts and notes receivables – net.................................... $ 153 Inventories .................................................................................... 219 related to the financing of equipment sold by independent Property and equipment – net ........................................................ 37 dealers and are included in investing activities. Goodwill ........................................................................................ 106 The company had the following non-cash operating and Other intangible assets – net ......................................................... 25 investing activities that were not included in the statement of Other assets.................................................................................. 10 consolidated cash flows. The company transferred inventory Asset impairment .......................................................................... (45) to equipment on operating leases of $659 million, $563 million Total assets held for sale .......................................................... $ 505 and $449 million in 2013, 2012 and 2011, respectively. Accounts payable and accrued expenses, and The company also had accounts payable related to purchases Total liabilities held for sale ...................................................... $ 120 of property and equipment of $198 million, $185 million and $135 million at October 31, 2013, 2012 and 2011, respectively. 5. SPECIAL ITEMS Cash payments for interest and income taxes consisted of the following in millions of dollars: Impairments In 2013, the company recorded a non-cash charge for the 2013 2012 2011 impairment of long-lived assets of $57 million pretax, or $51 Interest: million after-tax. This consists of $50 million pretax, or $44 Equipment operations ............................ $ 511 $ 420 $ 370 million after-tax, in the third quarter and $7 million pretax and Financial services .................................. 502 638 616 after-tax in the fourth quarter, related to the company’s Water Intercompany eliminations...................... (247) (248) (231) operations, which are included in the agriculture and turf Consolidated........................................... $ 766 $ 810 $ 755 operating segment. The total pretax impairment loss consisted Income taxes: of $50 million recorded in cost of sales and $7 million in selling, Equipment operations ............................ $ 1,863 $ 1,704 $ 1,379 administrative and general expenses. The impairments were Financial services .................................. 270 207 336 due to a decline in the forecasted financial performance and Intercompany eliminations...................... (179) (167) (266) a review of strategic options for the business (see Note 26). Consolidated........................................... $ 1,954 $ 1,744 $ 1,449 In the fourth quarter of 2013, the company recorded a non-cash charge of $45 million pretax and after-tax in other 7. PENSION AND OTHER POSTRETIREMENT BENEFITS operating expenses for an impairment to write the Landscapes The company has several defined benefit pension plans and operations down to realizable value. These operations were postretirement health care and life insurance plans covering its included in the agriculture and turf operating segment and U.S. employees and employees in certain foreign countries. classified as held for sale at October 31, 2013 (see Note 4). The company uses an October 31 measurement date for these In the fourth quarter of 2012, the company recorded a plans. non-cash charge in cost of sales for the impairment of goodwill The components of net periodic pension cost and the of $33 million pretax, or $31 million after-tax, related to the assumptions related to the cost consisted of the following in company’s Water operations. The goodwill impairment in millions of dollars and in percents: 2012 was due to a decline in the forecasted financial perfor- mance as a result of more complex integration activities. 2013 2012 2011 The goodwill in this reporting unit was completely written off Pensions in 2012 (see Note 26). Service cost .............................................. $ 273 $ 220 $ 197 Interest cost .............................................. 439 465 492 6. CASH FLOW INFORMATION Expected return on plan assets .................. (778) (787) (793) For purposes of the statement of consolidated cash flows, Amortization of actuarial losses .................. 265 202 148 the company considers investments with purchased maturities Amortization of prior service cost ............... 12 47 46 of three months or less to be cash equivalents. Substantially all Early-retirement benefits............................ 3 of the company’s short-term borrowings, excluding the current Settlements/curtailments ........................... 2 10 1 maturities of long-term borrowings, mature or may require Net cost................................................... $ 213 $ 160 $ 91 payment within three months or less. Weighted-average assumptions The equipment operations sell a significant portion of Discount rates ........................................... 3.8% 4.4% 5.0% their trade receivables to financial services. These intercompany Rate of compensation increase................... 3.9% 3.9% 3.9% cash flows are eliminated in the consolidated cash flows. Expected long-term rates of return ............. 7.8% 8.0% 8.1% 35


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    The components of net periodic postretirement benefits The previous postretirement benefits cost in net income cost and the assumptions related to the cost consisted of the and other changes in plan assets and benefit obligations in other following in millions of dollars and in percents: comprehensive income in millions of dollars were as follows: 2013 2012 2011 2013 2012 2011 Health care and life insurance Health care and life insurance Service cost .............................................. $ 58 $ 49 $ 44 Net cost .............................................................. $ 362 $ 351 $ 512 Interest cost .............................................. 255 281 326 Retirement benefit adjustments included in Expected return on plan assets .................. (84) (100) (113) other comprehensive (income) loss: Amortization of actuarial loss ..................... 141 136 271 Net actuarial (gain) loss ............................... (1,165) 335 132 Amortization of prior service credit ............. (8) (15) (16) Prior service (credit) cost ............................. (2) 2 Net cost................................................... $ 362 $ 351 $ 512 Amortization of actuarial loss ....................... (141) (136) (271) Amortization of prior service credit ............... 8 15 16 Weighted-average assumptions Total (gain) loss recognized in other Discount rates ........................................... 3.8% 4.4% 5.2% comprehensive (income) loss .............. (1,300) 216 (123) Expected long-term rates of return ............. 7.5% 7.7% 7.7% Total recognized in comprehensive For fiscal year 2012, the participants in one of the (income) loss .................................................. $ (938) $ 567 $ 389 company’s postretirement health care plans became “almost all” inactive as described by the applicable accounting standards The benefit plan obligations, funded status and the due to additional retirements. As a result, beginning in 2012, assumptions related to the obligations at October 31 in millions the net actuarial loss for this plan in the table above is being of dollars follow: amortized over the longer period for the average remaining Health Care life expectancy of the inactive participants rather than the and Pensions ___________ Life Insurance ____________ average remaining service period of the active participants. 2013 2012 2013 2012 The amortization of actuarial loss also decreased in 2012 due Change in benefit obligations to lower expected costs from the prescription drug plan to Beginning of year balance ................ $ (11,834) $(10,925) $ (7,023) $ (6,652) provide group benefits under Medicare Part D as an alternative Service cost .................................... (273) (220) (58) (49) to collecting the retiree drug subsidy. Interest cost .................................... (439) (465) (255) (281) The previous pension cost in net income and other Actuarial gain (loss) ......................... 951 (947) 1,092 (347) changes in plan assets and benefit obligations in other compre- Amendments................................... 26 (5) 2 (2) hensive income in millions of dollars were as follows: Benefits paid ................................... 655 656 329 333 Health care subsidies....................... (16) (15) 2013 2012 2011 Settlements/curtailments................. 3 10 Pensions Foreign exchange and other ............. (57) 62 3 (10) Net cost .............................................................. $ 213 $ 160 $ 91 End of year balance ......................... (10,968) (11,834) (5,926) (7,023) Retirement benefit adjustments included in other comprehensive (income) loss: Change in plan assets (fair value) Net actuarial (gain) loss ............................... (1,481) 999 848 Beginning of year balance ................ 10,017 9,552 1,287 1,459 Prior service (credit) cost ............................. (26) 5 9 Actual return on plan assets............. 1,312 736 158 113 Amortization of actuarial loss ....................... (265) (202) (148) Employer contribution ...................... 301 441 37 37 Amortization of prior service cost ................. (12) (47) (46) Benefits paid ................................... (655) (656) (329) (333) Settlements/curtailments ............................ (2) (10) (1) Settlements..................................... (3) (10) Total (gain) loss recognized in other Foreign exchange and other ............. 36 (46) 4 11 comprehensive (income) loss .............. (1,786) 745 662 End of year balance ......................... 11,008 10,017 1,157 1,287 Total recognized in comprehensive (income) loss .................................................. $ (1,573) $ 905 $ 753 Funded status .............................. $ 40 $ (1,817) $ (4,769) $ (5,736) Weighted-average assumptions Discount rates ................................. 4.5% 3.8% 4.7% 3.8% Rate of compensation increase ........ 3.8% 3.9% 36


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    The amounts recognized at October 31 in millions of The benefits expected to be paid from the benefit plans, dollars consist of the following: which reflect expected future years of service, are as follows in Health Care millions of dollars: and Pensions ___________ Life Insurance ____________ Health Care 2013 2012 2013 2012 and Pensions Life Insurance* Amounts recognized in balance sheet 2014............................................................... $ 690 $ 321 Noncurrent asset ............................. $ 551 $ 20 2015............................................................... 673 331 Current liability ................................ (58) (53) $ (21) $ (23) 2016............................................................... 672 339 Noncurrent liability ............................ (453) (1,784) (4,748) (5,713) 2017............................................................... 679 357 2018............................................................... 682 362 Total ............................................... $ 40 $ (1,817) $ (4,769) $ (5,736) 2019 to 2023.................................................. 3,467 1,831 Amounts recognized in * Net of prescription drug group benefit subsidy under Medicare Part D. accumulated other compre- hensive income – pretax The annual rates of increase in the per capita cost of Net actuarial loss ............................. $ 3,512 $ 5,260 $ 960 $ 2,266 covered health care benefits (the health care cost trend rates) Prior service cost (credit) .................. 67 105 (41) (47) used to determine accumulated postretirement benefit obliga- Total ............................................... $ 3,579 $ 5,365 $ 919 $ 2,219 tions were based on the trends for medical and prescription drug claims for pre- and post-65 age groups due to the effects The total accumulated benefit obligations for all pension of Medicare. At October 31, 2013, the weighted-average plans at October 31, 2013 and 2012 was $10,352 million and composite trend rates for these obligations were assumed to be $11,181 million, respectively. a 6.5 percent increase from 2013 to 2014, gradually decreasing The accumulated benefit obligations and fair value of plan to 5.0 percent from 2021 to 2022 and all future years. assets for pension plans with accumulated benefit obligations The obligations at October 31, 2012 and the cost in 2013 in excess of plan assets were $680 million and $267 million, assumed a 7.1 percent increase from 2012 to 2013, gradually respectively, at October 31, 2013 and $10,987 million and decreasing to 5.0 percent from 2018 to 2019 and all future $9,787 million, respectively, at October 31, 2012. The pro- years. An increase of one percentage point in the assumed jected benefit obligations and fair value of plan assets for health care cost trend rate would increase the accumulated pension plans with projected benefit obligations in excess of postretirement benefit obligations by $717 million and the plan assets were $1,340 million and $829 million, respectively, aggregate of service and interest cost component of net periodic at October 31, 2013 and $11,627 million and $9,790 million, postretirement benefits cost for the year by $43 million. respectively, at October 31, 2012. A decrease of one percentage point would decrease the obliga- The amounts in accumulated other comprehensive income tions by $570 million and the cost by $34 million. that are expected to be amortized as net expense (income) during The discount rate assumptions used to determine the fiscal 2014 in millions of dollars follow: postretirement obligations at October 31, 2013 and 2012 were Health Care based on hypothetical AA yield curves represented by a series and of annualized individual discount rates. These discount rates Pensions Life Insurance represent the rates at which the company’s benefit obligations Net actuarial loss ......................................... $ 174 $ 37 could effectively be settled at the October 31 measurement dates. Prior service cost (credit) ............................. 25 (3) Fair value measurement levels in the following tables are Total ........................................................... $ 199 $ 34 defined in Note 26. The company expects to contribute approximately $88 million to its pension plans and approximately $27 million to its health care and life insurance plans in 2014, which are primarily direct benefit payments for unfunded plans. 37


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    The fair values of the pension plan assets at October 31, The fair values of the pension plan assets at October 31, 2013 follow in millions of dollars: 2012 follow in millions of dollars: Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Cash and short-term investments.......$ 1,190 $ 317 $ 873 Cash and short-term investments.......$ 1,166 $ 287 $ 879 Equity: Equity: U.S. equity securities...................... 3,321 3,321 U.S. equity securities...................... 2,481 2,481 U.S. equity funds............................ 47 5 42 U.S. equity funds............................ 43 8 35 International equity securities ......... 1,953 1,953 International equity securities ......... 1,477 1,477 International equity funds ............... 481 68 413 International equity funds ............... 411 49 362 Fixed Income: Fixed Income: Government and agency securities.. 391 370 21 Government and agency securities.. 404 379 25 Corporate debt securities................ 278 278 Corporate debt securities................ 220 220 Mortgage-backed securities ........... 106 14 92 Mortgage-backed securities ........... 126 126 Fixed income funds ........................ 601 91 510 Fixed income funds ........................ 853 92 761 Real estate ........................................ 550 110 12 $ 428 Real estate ........................................ 537 104 14 $ 419 Private equity/venture capital ............. 1,416 1,416 Private equity/venture capital ............. 1,319 1,319 Hedge funds...................................... 529 379 150 Hedge funds...................................... 578 2 422 154 Other investments ............................. 389 3 386 Other investments ............................. 508 1 507 Derivative contracts - assets*............. 769 10 759 Derivative contracts - assets*............. 721 1 720 Derivative contracts - liabilities** ........ (591) (6) (585) Derivative contracts - liabilities** ........ (454) (20) (434) Receivables, payables and other .......... 14 14 Receivables, payables and other .......... (41) (41) Securities lending collateral................ 716 716 Securities lending collateral................ 223 223 Securities lending liability ................... (716) (716) Securities lending liability ................... (223) (223) Securities sold short .......................... (436) (436) Securities sold short .......................... (332) (332) Total net assets ..............................$ 11,008 $ 5,834 $ 3,180 $ 1,994 Total net assets ..............................$ 10,017 $ 4,488 $ 3,637 $ 1,892 * Includes contracts for interest rates of $749 million, foreign currency of $10 million, * Includes contracts for interest rates of $707 million, foreign currency of $8 million equity of $9 million and other of $1 million. and other of $6 million. ** Includes contracts for interest rates of $563 million, foreign currency of $22 million ** Includes contracts for interest rates of $418 million, foreign currency of $12 million and other of $6 million. and other of $24 million. The fair values of the health care assets at October 31, 2013 The fair values of the health care assets at October 31, 2012 follow in millions of dollars: follow in millions of dollars: Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Cash and short-term investments.......$ 58 $ 29 $ 29 Cash and short-term investments.......$ 78 $ 11 $ 67 Equity: Equity: U.S. equity securities...................... 298 298 U.S. equity securities...................... 319 319 U.S. equity funds............................ 84 84 U.S. equity funds............................ 67 67 International equity securities ......... 71 71 International equity securities ......... 69 69 International equity funds ............... 187 187 International equity funds ............... 200 200 Fixed Income: Fixed Income: Government and agency securities.. 184 180 4 Government and agency securities.. 218 215 3 Corporate debt securities................ 33 33 Corporate debt securities................ 35 35 Mortgage-backed securities ........... 11 11 Mortgage-backed securities ........... 15 15 Fixed income funds ........................ 58 58 Fixed income funds ........................ 72 72 Real estate ........................................ 52 6 31 $ 15 Real estate ........................................ 53 7 29 $ 17 Private equity/venture capital ............. 48 48 Private equity/venture capital ............. 54 54 Hedge funds...................................... 71 66 5 Hedge funds...................................... 85 79 6 Other investments ............................. 13 13 Other investments ............................. 21 21 Derivative contracts - assets*............. 4 4 Derivative contracts - assets*............. 8 8 Derivative contracts - liabilities** ........ (1) (1) Derivative contracts - liabilities** ........ (1) (1) Receivables, payables and other .......... 1 1 Receivables, payables and other .......... 8 8 Securities lending collateral................ 109 109 Securities lending collateral................ 38 38 Securities lending liability ................... (109) (109) Securities lending liability ................... (38) (38) Securities sold short .......................... (15) (15) Securities sold short .......................... (14) (14) Total net assets ..............................$ 1,157 $ 654 $ 435 $ 68 Total net assets ..............................$ 1,287 $ 682 $ 528 $ 77 * Includes contracts for interest rates of $3 million and foreign currency of $1 million. * Includes contracts for interest rates of $7 million and foreign currency of $1 million. ** Includes contracts for foreign currency of $1 million. ** Includes contracts for foreign currency of $1 million. 38


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    A reconciliation of Level 3 pension and health care Interest Rate, Foreign Currency and Other Derivative asset fair value measurements in millions of dollars follows: Instruments – The derivatives are valued using either an income Private Equity/ approach (discounted cash flow) using market observable inputs, Real Venture Hedge including swap curves and both forward and spot exchange Total Estate Capital Funds rates, or a market approach (closing prices in the active market October 31, 2011* .......... $ 1,765 $ 437 $ 1,178 $ 150 in which the derivative instrument trades). Realized gain .................... 18 18 The primary investment objective for the pension plan Change in unrealized assets is to maximize the growth of these assets to meet the gain (loss) .................... 74 (4) 65 13 projected obligations to the beneficiaries over a long period Purchases, sales and of time, and to do so in a manner that is consistent with the settlements - net .......... 112 3 112 (3) company’s earnings strength and risk tolerance. The primary October 31, 2012* .......... 1,969 436 1,373 160 investment objective for the health care plan assets is to provide Realized gain .................... 58 51 7 the company with the financial flexibility to pay the projected Change in unrealized gain ............................. 220 68 142 10 obligations to beneficiaries over a long period of time. The asset Purchases, sales and allocation policy is the most important decision in managing settlements - net .......... (185) (61) (102) (22) the assets and it is reviewed regularly. The asset allocation October 31, 2013* .......... $ 2,062 $ 443 $ 1,464 $ 155 policy considers the company’s financial strength and long-term asset class risk/return expectations since the obligations are * Health care Level 3 assets represent approximately 3 percent to 5 percent of the reconciliation amounts for 2013, 2012 and 2011. long-term in nature. The current target allocations for pension assets are approximately 47 percent for equity securities, Fair values are determined as follows: 24 percent for debt securities, 5 percent for real estate and Cash and Short-Term Investments – Includes accounts that 24 percent for other investments. The target allocations for are valued based on the account value, which approximates fair health care assets are approximately 53 percent for equity value, and investment funds that are valued on the fund’s net securities, 29 percent for debt securities, 3 percent for real estate asset value (NAV) based on the fair value of the underlying and 15 percent for other investments. The allocation percentages securities. Also included are securities that are valued using a above include the effects of combining derivatives with other market approach (matrix pricing model) in which all significant investments to manage asset allocations and exposures to inputs are observable or can be derived from or corroborated by interest rates and foreign currency exchange. The assets are well observable market data. diversified and are managed by professional investment firms as Equity Securities and Funds – The values are determined well as by investment professionals who are company employees. primarily by closing prices in the active market in which the As a result of the company’s diversified investment policy, there equity investment trades, or the fund’s NAV, based on the fair were no significant concentrations of risk. value of the underlying securities. The expected long-term rate of return on plan assets Fixed Income Securities and Funds – The securities are reflects management’s expectations of long-term average rates of valued using either a market approach (matrix pricing model) return on funds invested to provide for benefits included in the in which all significant inputs are observable or can be derived projected benefit obligations. The expected return is based on from or corroborated by observable market data such as interest the outlook for inflation and for returns in multiple asset classes, rates, yield curves, volatilities, credit risk and prepayment speeds, while also considering historical returns, asset allocation and or they are valued using the closing prices in the active market investment strategy. The company’s approach has emphasized in which the fixed income investment trades. Fixed income the long-term nature of the return estimate such that the return funds are valued using the NAV, based on the fair value of the assumption is not changed significantly unless there are funda- underlying securities. mental changes in capital markets that affect the company’s Real Estate, Venture Capital and Private Equity – expectations for returns over an extended period of time (i.e., 10 The investments, which are structured as limited partnerships, to 20 years). The average annual return of the company’s U.S. are valued using an income approach (estimated cash flows pension fund was approximately 8.8 percent during the past ten discounted over the expected holding period), as well as a years and approximately 9.4 percent during the past 20 years. market approach (the valuation of similar securities and Since return premiums over inflation and total returns for major properties). These investments are valued at estimated fair value asset classes vary widely even over ten-year periods, recent based on their proportionate share of the limited partnership’s history is not necessarily indicative of long-term future expected fair value that is determined by the general partner. Real estate returns. The company’s systematic methodology for determining investment trusts are valued at the closing prices in the active the long-term rate of return for the company’s investment markets in which the investment trades. Real estate investment strategies supports the long-term expected return assumptions. funds are valued at the NAV, based on the fair value of the The company has created certain Voluntary Employees’ underlying securities. Beneficiary Association trusts (VEBAs) for the funding of Hedge Funds and Other Investments – The investments are postretirement health care benefits. The future expected asset valued using the NAV provided by the administrator of the fund, returns for these VEBAs are lower than the expected return on which is based on the fair value of the underlying securities. the other pension and health care plan assets due to investment 39


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    in a higher proportion of liquid securities. These assets are in 2013 2012 2011 addition to the other postretirement health care plan assets that Tax rates on foreign earnings ............................. (34) (69) (70) have been funded under Section 401(h) of the U.S. Internal Valuation allowance on foreign deferred taxes ..... (14) 200 18 Revenue Code and maintained in a separate account in the Other-net .......................................................... (84) (26) (39) company’s pension plan trust. Provision for income taxes ........................... $ 1,946 $ 1,659 $ 1,424 The company has defined contribution plans related to employee investment and savings plans primarily in the U.S. At October 31, 2013, accumulated earnings in certain The company’s contributions and costs under these plans were subsidiaries outside the U.S. totaled $4,297 million for which $178 million in 2013, $155 million in 2012 and $108 million no provision for U.S. income taxes or foreign withholding taxes in 2011. The contribution rate varies primarily based on the has been made, because it is expected that such earnings will be company’s performance in the prior year and employee reinvested outside the U.S. indefinitely. Determination of the participation in the plans. amount of unrecognized deferred tax liability on these unremit- 8. INCOME TAXES ted earnings is not practicable. At October 31, 2013, the The provision for income taxes by taxing jurisdiction and amount of cash and cash equivalents and marketable securities by significant component consisted of the following in millions held by these foreign subsidiaries was $559 million. of dollars: Deferred income taxes arise because there are certain items that are treated differently for financial accounting than 2013 2012 2011 for income tax reporting purposes. An analysis of the deferred Current: income tax assets and liabilities at October 31 in millions of U.S.: dollars follows: Federal ..................................................... $ 1,405 $ 1,277 $ 928 2013 2012 ______________ _______________ State ........................................................ 145 119 144 Deferred Deferred Deferred Deferred Foreign ......................................................... 569 355 520 Tax Tax Tax Tax Total current ......................................... 2,119 1,751 1,592 Assets Liabilities Assets Liabilities Deferred: Other postretirement U.S.: benefit liabilities ....................... $ 1,777 $ 2,136 Federal ..................................................... (117) (76) (135) Tax over book depreciation............ $ 582 $ 606 State ........................................................ (11) (7) (28) Accrual for sales allowances ......... 602 546 Foreign ......................................................... (45) (9) (5) Pension liabilities - net .................. 457 Lease transactions ....................... 424 317 Total deferred ....................................... (173) (92) (168) Pension asset - net ....................... 137 Provision for income taxes ........................... $ 1,946 $ 1,659 $ 1,424 Tax loss and tax credit carryforwards .......................... 371 249 Based upon the location of the company’s operations, the Accrual for employee benefits ....... 234 249 consolidated income before income taxes in the U.S. in 2013, Share-based compensation .......... 142 133 2012 and 2011 was $4,124 million, $3,582 million and $2,618 Inventory ...................................... 161 131 Goodwill and other million, respectively, and in foreign countries was $1,359 million, intangible assets ...................... 100 110 $1,152 million and $1,605 million, respectively. Certain foreign Allowance for credit losses............ 69 92 operations are branches of Deere & Company and are, there- Deferred gains on distributed fore, subject to U.S. as well as foreign income tax regulations. foreign earnings ....................... 26 84 The pretax income by location and the preceding analysis of Deferred compensation................. 44 40 the income tax provision by taxing jurisdiction are, therefore, Undistributed foreign earnings....... 26 11 not directly related. Other items .................................. 419 157 443 115 A comparison of the statutory and effective income tax Less valuation allowances ............. (254) (285) provision and reasons for related differences in millions of Deferred income tax dollars follow: assets and liabilities ............ $ 3,591 $ 1,426 $ 4,275 $ 1,159 2013 2012 2011 Deere & Company files a consolidated federal income tax U.S. federal income tax provision return in the U.S., which includes the wholly-owned financial at a statutory rate of 35 percent ................ $ 1,919 $ 1,657 $1,478 services subsidiaries. These subsidiaries account for income taxes Increase (decrease) resulting from: generally as if they filed separate income tax returns. State and local income taxes, net of At October 31, 2013, certain tax loss and tax credit federal income tax benefit ............................... 87 73 75 carryforwards of $371 million were available with $127 million German branch deferred tax write-off................... 56 Nontaxable foreign partnership (earnings) losses .. 43 (172) expiring from 2014 through 2033 and $244 million with an Nondeductible impairment charges ...................... 29 6 indefinite carryforward period. Research and development tax credits ............... (56) (10) (38) In March 2013, the company changed the corporate structure of most of its German operations from a branch to a (continued) subsidiary of Deere & Company. The change provides the 40


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    company increased flexibility and efficiency in funding growth and 2012, the liability for accrued interest and penalties totaled in international operations. As a result, the tax status of these $49 million and $39 million and the receivable for interest was operations has changed. Formerly, as a branch these earnings $2 million and $1 million, respectively. were taxable in the U.S. as earned. As a subsidiary, these 9. OTHER INCOME AND OTHER OPERATING EXPENSES earnings will now be taxable in the U.S. if they are distributed The major components of other income and other operating to Deere & Company as dividends, which is the same as the expenses consisted of the following in millions of dollars: company’s other foreign subsidiaries. The earnings of the new German subsidiary remain taxable in Germany. Due to the 2013 2012 2011 change in tax status and the expectation that the German Other income subsidiary’s earnings are indefinitely reinvested, the deferred tax Revenues from services ............................. $ 256 $ 233 $ 217 assets and liabilities related to U.S. taxable temporary differences Insurance premiums and fees earned ......... 252 248 236 Investment income .................................... 15 14 11 for the previous German branch were written off. The effect of Other ........................................................ 159 180 160 this write-off was a decrease in net deferred tax assets and a charge to the income tax provision of $56 million during the Total ..................................................... $ 682 $ 675 $ 624 second fiscal quarter of 2013. Other operating expenses A reconciliation of the total amounts of unrecognized tax Depreciation of equipment on benefits at October 31 in millions of dollars follows: operating leases .................................... $ 389 $ 339 $ 306 2013 2012 2011 Insurance claims and expenses .................. 204 245 193 Cost of services ......................................... 143 122 115 Beginning of year balance ....................... $ 265 $ 199 $ 218 Other ........................................................ 85 76 102 Increases to tax positions taken during the current year ....................................... 30 46 23 Total ..................................................... $ 821 $ 782 $ 716 Increases to tax positions taken during prior years............................................... 24 54 13 The company issues insurance policies for crop insurance Decreases to tax positions taken during and extended equipment warranties. The crop insurance prior years............................................... (51) (14) (42) subsidiary utilizes reinsurance to limit its losses and reduce its Decreases due to lapse of statute of exposure to claims. Although reinsurance contracts permit limitations ............................................... (5) (9) (13) recovery of certain claims from reinsurers, the insurance Settlements................................................. (1) subsidiary is not relieved of its primary obligation to the Foreign exchange ........................................ 9 (11) 1 policyholders. The premiums ceded by the crop insurance End of year balance ................................. $ 272 $ 265 $ 199 subsidiary in 2013, 2012 and 2011 were $337 million, $251 million and $246 million, and claims recoveries on the ceded The amount of unrecognized tax benefits at October 31, business were $294 million, $493 million and $271 million, 2013 that would affect the effective tax rate if the tax benefits respectively. The amounts from reinsurance are netted against were recognized was $59 million. The remaining liability was the insurance premiums and fees earned and the insurance related to tax positions for which there are offsetting tax claims and expenses in the table above. receivables, or the uncertainty was only related to timing. 10. UNCONSOLIDATED AFFILIATED COMPANIES The company expects that any reasonably possible change in the amounts of unrecognized tax benefits in the next twelve Unconsolidated affiliated companies are companies in which months would not be significant. Deere & Company generally owns 20 percent to 50 percent The company files its tax returns according to the tax of the outstanding voting shares. Deere & Company does not laws of the jurisdictions in which it operates, which includes control these companies and accounts for its investments in them the U.S. federal jurisdiction, and various state and foreign on the equity basis. The investments in these companies primarily jurisdictions. The U.S. Internal Revenue Service has completed consist of Bell Equipment Limited (32 percent ownership), the examination of the company’s federal income tax returns Deere-Hitachi Construction Machinery Corporation (50 percent for periods prior to 2009. The years 2009 and 2010 federal ownership) and Ashok Leyland John Deere Construction income tax returns are currently under examination. Equipment Company Private Limited (50 percent ownership). Various state and foreign income tax returns, including major The unconsolidated affiliated companies primarily manufacture tax jurisdictions in Canada and Germany, also remain subject or market equipment. Deere & Company’s share of the income to examination by taxing authorities. or loss of these companies is reported in the consolidated The company’s policy is to recognize interest related to income statement under “Equity in income (loss) of unconsoli- income taxes in interest expense and interest income, and dated affiliates.” The investment in these companies is reported recognize penalties in selling, administrative and general in the consolidated balance sheet under “Investments in expenses. During 2013, 2012 and 2011, the total amount of unconsolidated affiliates.” expense from interest and penalties was $9 million, $6 million and $3 million and the interest income was $4 million, $1 million and $3 million, respectively. At October 31, 2013 41


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    Combined financial information of the unconsolidated Actual maturities may differ from contractual maturities affiliated companies in millions of dollars follows: because some securities may be called or prepaid. Because of Operations 2013 2012 2011 the potential for prepayment on mortgage-backed securities, they are not categorized by contractual maturity. Proceeds from Sales ........................................................ $ 2,299 $ 2,722 $ 2,233 Net income (loss) ...................................... 10 (1) 34 the sales of available-for-sale securities were $7 million in 2013, Deere & Company’s equity in $7 million in 2012 and $2 million in 2011. Realized gains, net income (loss) ................................... (3) 9 realized losses, the increase (decrease) in net unrealized gains or losses and unrealized losses that have been continuous for over Financial Position 2013 2012 twelve months were not significant in 2013, 2012 and 2011. Total assets ............................................................. $ 1,566 $ 1,621 Unrealized losses at October 31, 2013 and 2012 were primarily Total external borrowings ......................................... 550 345 the result of an increase in interest rates and were not recog- Total net assets ....................................................... 547 558 nized in income due to the ability and intent to hold to Deere & Company’s share of the net assets .............. 221 215 maturity. There were no impairment write-downs in the Consolidated retained earnings at October 31, 2013 periods reported. include undistributed earnings of the unconsolidated affiliates 12. RECEIVABLES of $90 million. Dividends from unconsolidated affiliates were Trade Accounts and Notes Receivable $10 million in 2013, $.2 million in 2012 and $18 million in 2011. Trade accounts and notes receivable at October 31 consisted of 11. MARKETABLE SECURITIES the following in millions of dollars: All marketable securities are classified as available-for-sale, 2013 2012 with unrealized gains and losses shown as a component of Trade accounts and notes: stockholders’ equity. Realized gains or losses from the sales of Agriculture and turf ................................................. $ 3,127 $ 3,074 marketable securities are based on the specific identification Construction and forestry......................................... 631 725 method. Trade accounts and notes receivable–net ............. $ 3,758 $ 3,799 The amortized cost and fair value of marketable securities at October 31 in millions of dollars follow: At October 31, 2013 and 2012, dealer notes included in Gross Gross the previous table were $75 million and $95 million, and the Amortized Unrealized Unrealized Fair allowance for credit losses was $67 million and $66 million, Cost Gains Losses Value respectively. 2013 The equipment operations sell a significant portion of their Equity fund .................................. $ 18 $ 2 $ 20 trade receivables to financial services and provide compensation U.S. government debt securities ... 1,309 5 $ 2 1,312 Municipal debt securities ............. 34 2 36 to these operations at approximate market rates of interest. Corporate debt securities ............. 135 6 3 138 Trade accounts and notes receivable primarily arise from Mortgage-backed securities* ....... 121 2 4 119 sales of goods to independent dealers. Under the terms of the Marketable securities.............. $1,617 $ 17 $ 9 $ 1,625 sales to dealers, interest is primarily charged to dealers on outstanding balances, from the earlier of the date when goods are 2012 sold to retail customers by the dealer or the expiration of certain U.S. government debt securities ... $ 1,193 $ 7 $ 1,200 interest-free periods granted at the time of the sale to the dealer, Municipal debt securities ............. 35 3 38 Corporate debt securities ............. 100 10 110 until payment is received by the company. Dealers cannot cancel Mortgage-backed securities* ....... 117 6 $ 1 122 purchases after the equipment is shipped and are responsible for payment even if the equipment is not sold to retail customers. Marketable securities.............. $1,445 $ 26 $ 1 $ 1,470 The interest-free periods are determined based on the type of * Primarily issued by U.S. government sponsored enterprises. equipment sold and the time of year of the sale. These periods The contractual maturities of debt securities at October 31, range from one to twelve months for most equipment. 2013 in millions of dollars follow: Interest-free periods may not be extended. Interest charged may Amortized Fair not be forgiven and the past due interest rates exceed market Cost Value rates. The company evaluates and assesses dealers on an ongoing Due in one year or less ................................................. $ 1,016 $ 1,016 basis as to their creditworthiness and generally retains a security Due after one through five years.................................... 273 278 interest in the goods associated with the trade receivables. Due after five through 10 years ..................................... 128 130 The company is obligated to repurchase goods sold to a dealer Due after 10 years ........................................................ 61 62 upon cancellation or termination of the dealer’s contract for such Mortgage-backed securities.......................................... 121 119 causes as change in ownership and closeout of the business. Debt securities .......................................................... $ 1,599 $ 1,605 Trade accounts and notes receivable have significant concentrations of credit risk in the agriculture and turf sector and construction and forestry sector as shown in the 42


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    previous table. On a geographic basis, there is not a dispropor- 2013 2012 tionate concentration of credit risk in any area. Unrestricted Unrestricted Financing Receivables Less: Financing receivables at October 31 consisted of the following Unearned finance income: in millions of dollars: Equipment notes .......................... $ 191 $ 191 Sales-type leases ......................... 58 61 2013 ________________ 2012 ________________ Unrestricted/Securitized Unrestricted/Securitized Total ........................................ 249 252 Retail notes: Financing receivables Equipment: related to the company’s Agriculture and turf .......... $ 16,209 $ 3,602 $14,144 $ 3,126 sales of equipment ....................... $ 7,785 $ 6,595 Construction and forestry........................ 1,449 607 1,091 553 Financing receivable installments, including unearned Total ................................ 17,658 4,209 15,235 3,679 finance income, at October 31 are scheduled as follows in Wholesale notes ....................... 4,802 3,888 millions of dollars: Revolving charge accounts ........ 2,593 2,488 2013 2012 ________________ _________________ Financing leases Unrestricted/Securitized Unrestricted/Securitized (direct and sales-type) .......... 1,513 1,411 Operating loans ........................ 32 42 Due in months: 0 – 12 ............................. $ 13,343 $ 1,663 $11,486 $ 1,437 Total financing receivables .... 26,598 4,209 23,064 3,679 13 – 24 ............................. 4,879 1,177 4,257 1,004 Less: 25 – 36 ............................. 3,750 808 3,232 712 Unearned finance income: 37 – 48 ............................. 2,620 422 2,278 399 Equipment notes .............. 665 42 619 44 49 – 60 ............................. 1,610 130 1,356 120 Financing leases .............. 141 126 Thereafter .......................... 396 9 455 7 Total ............................ 806 42 745 44 Total ..................................... $ 26,598 $ 4,209 $23,064 $ 3,679 Allowance for credit losses ... 159 14 160 17 Financing The maximum terms for retail notes are generally seven receivables – net............... $ 25,633 $ 4,153 $22,159 $ 3,618 years for agriculture and turf equipment and five years for construction and forestry equipment. The maximum term for The residual values for investments in financing leases at financing leases is generally five years, while the average term October 31, 2013 and 2012 totaled $94 million and $79 million, for wholesale notes is less than twelve months. respectively. At October 31, 2013 and 2012, the unpaid balances of Financing receivables have significant concentrations of receivables administered but not owned were $82 million credit risk in the agriculture and turf sector and construction and and $120 million, respectively. At October 31, 2013 and 2012, forestry sector as shown in the previous table. On a geographic worldwide financing receivables administered, which include basis, there is not a disproportionate concentration of credit risk financing receivables administered but not owned, totaled in any area. The company retains as collateral a security interest $29,868 million and $25,897 million, respectively. in the equipment associated with retail notes, wholesale notes Past due balances of financing receivables still accruing and financing leases. finance income represent the total balance held (principal plus Financing receivables at October 31 related to the accrued interest) with any payment amounts 30 days or more company’s sales of equipment that were included in the table past the contractual payment due date. Non-performing above consisted of the following in millions of dollars: financing receivables represent loans for which the company has 2013 2012 ceased accruing finance income. These receivables are generally Unrestricted Unrestricted 120 days delinquent and the estimated uncollectible amount, Retail notes*: after charging the dealer’s withholding account, has been Equipment: written off to the allowance for credit losses. Finance income Agriculture and turf ...................... $ 2,042 $ 1,810 for non-performing receivables is recognized on a cash basis. Construction and forestry ............. 364 313 Accrual of finance income is resumed when the receivable Total ........................................ 2,406 2,123 becomes contractually current and collections are reasonably Wholesale notes ................................... 4,802 3,888 assured. Sales-type leases ................................. 826 836 Total ............................................ $ 8,034 $ 6,847 * These retail notes generally arise from sales of equipment by company-owned dealers or through direct sales. (continued) 43


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    An age analysis of past due financing receivables that are Total Total still accruing interest and non-performing financing receivables Total Non- Financing at October 31, 2013 follows in millions of dollars: Past Due Performing Current Receivables Retail Notes: 30-59 60-89 90 Days Days Days or Greater Total Agriculture and turf ...... $ 102 $ 117 $16,432 $16,651 Past Due Past Due Past Due Past Due Construction and forestry .................... 66 13 1,521 1,600 Retail Notes: Other: Agriculture and turf ...... $ 75 $ 26 $ 20 $ 121 Agriculture and turf ...... 30 11 6,464 6,505 Construction and Construction and forestry .................... 39 14 9 62 forestry .................... 12 3 1,183 1,198 Other: Agriculture and turf ...... 28 9 5 42 Total ........................ $ 210 $ 144 $25,600 25,954 Construction and Less allowance for forestry .................... 12 4 3 19 credit losses................. 177 Total ............................... $ 154 $ 53 $ 37 $ 244 Total financing receivables - net ....... $25,777 Total Total Total Non- Financing An analysis of the allowance for credit losses and invest- Past Due Performing Current Receivables ment in financing receivables follows in millions of dollars: Retail Notes: Agriculture and turf ...... $ 121 $ 102 $ 18,942 $ 19,165 Revolving Construction and Retail Charge Notes Accounts Other Total forestry .................... 62 12 1,921 1,995 Other: 2013 Agriculture and turf ...... 42 13 7,613 7,668 Allowance: Construction and Beginning of year forestry .................... 19 3 1,109 1,131 balance........................ $ 110 $ 40 $ 27 $ 177 Provision (credit) .......... (2) 5 7 10 Total ........................ $ 244 $ 130 $ 29,585 29,959 Write-offs .................... (11) (21) (3) (35) Less allowance for Recoveries ................... 9 17 1 27 credit losses................. 173 Translation Total financing adjustments ............. (5) (1) (6) receivables - net ....... $ 29,786 End of year balance* ......... $ 101 $ 41 $ 31 $ 173 An age analysis of past due financing receivables that are Financing receivables: still accruing interest and non-performing financing receivables End of year balance .......... $ 21,160 $ 2,593 $ 6,206 $29,959 at October 31, 2012 follows in millions of dollars: Balance individually evaluated ................. $ 21 $ 33 $ 54 30-59 60-89 90 Days Days Days or Greater Total * Individual allowances were not significant. Past Due Past Due Past Due Past Due 2012 Retail Notes: Allowance: Agriculture and turf ...... $ 60 $ 25 $ 17 $ 102 Beginning of year Construction and balance........................ $ 130 $ 40 $ 27 $ 197 forestry .................... 39 18 9 66 Provision (credit) .......... (12) 8 3 (1) Other: Write-offs .................... (8) (30) (4) (42) Agriculture and turf ...... 21 6 3 30 Recoveries ................... 10 22 1 33 Construction and Translation forestry .................... 8 2 2 12 adjustments ............. (10) (10) Total ............................... $ 128 $ 51 $ 31 $ 210 End of year balance* ......... $ 110 $ 40 $ 27 $ 177 (continued) Financing receivables: End of year balance .......... $18,251 $ 2,488 $ 5,215 $25,954 Balance individually evaluated ................. $ 11 $ 1 $ 1 $ 13 * Individual allowances were not significant. (continued) 44


  • Page 45

    Revolving Unpaid Average Retail Charge Recorded Principal Specific Recorded Notes Accounts Other Total Investment Balance Allowance Investment 2011 2012* Allowance: Receivables with Beginning of year specific allowance** ..... $ 1 $ 1 $ 1 $ 1 balance........................ $ 144 $ 44 $ 37 $ 225 Receivables without a Provision (credit) .......... 3 8 (2) 9 specific allowance***.... 9 9 10 Write-offs .................... (29) (40) (10) (79) Total ............................... $ 10 $ 10 $ 1 $ 11 Recoveries ................... 12 28 2 42 Agriculture and turf ...... $ 6 $ 6 $ 1 $ 6 End of year balance* ......... $ 130 $ 40 $ 27 $ 197 Construction and Financing receivables: forestry .................... $ 4 $ 4 $ 5 End of year balance .......... $16,296 $ 2,518 $ 4,212 $23,026 * Finance income recognized was not material. Balance individually ** Primarily operating loans and retail notes. evaluated ................. $ 12 $ 11 $ 23 *** Retail notes. * Individual allowances were not significant. A troubled debt restructuring is generally the modification Past-due amounts over 30 days represented .82 percent of debt in which a creditor grants a concession it would not and .81 percent of the receivables financed at October 31, 2013 otherwise consider to a debtor that is experiencing financial and 2012, respectively. The allowance for credit losses repre- difficulties. These modifications may include a reduction of the sented .58 percent and .68 percent of financing receivables stated interest rate, an extension of the maturity dates, a outstanding at October 31, 2013 and 2012, respectively. reduction of the face amount or maturity amount of the debt, In addition, at October 31, 2013 and 2012, the company’s or a reduction of accrued interest. During 2013, 2012 and financial services operations had $197 million and $194 million, 2011, the company identified 92, 138 and 213 financing respectively, of deposits withheld from dealers and merchants receivable contracts, primarily operating loans and retail notes, available for potential credit losses. as troubled debt restructurings with aggregate balances of Financing receivables are considered impaired when it is $16 million, $5 million and $11 million pre-modification and probable the company will be unable to collect all amounts due $15 million, $4 million and $10 million post-modification, according to the contractual terms. Receivables reviewed for respectively. During these same periods, there were no signifi- impairment generally include those that are either past due, cant troubled debt restructurings that subsequently defaulted or have provided bankruptcy notification, or require significant and were written off. At October 31, 2013, the company had collection efforts. Receivables, which are impaired, are gener- no commitments to lend additional funds to borrowers whose ally classified as non-performing. accounts were modified in troubled debt restructurings. An analysis of the impaired financing receivables at Other Receivables October 31 follows in millions of dollars: Other receivables at October 31 consisted of the following in millions of dollars: Unpaid Average Recorded Principal Specific Recorded 2013 2012 Investment Balance Allowance Investment Taxes receivable ........................................................... $ 868 $ 971 2013* Reinsurance receivables ............................................... 351 569 Receivables with Insurance premium receivables ..................................... 24 69 specific allowance** ..... $ 18 $ 18 $ 4 $ 19 Other ........................................................................... 221 182 Receivables without a Other receivables ...................................................... $ 1,464 $ 1,791 specific allowance***.... 8 8 8 Total ............................... $ 26 $ 26 $ 4 $ 27 Reinsurance and insurance premium receivables are Agriculture and turf ...... $ 23 $ 23 $ 4 $ 24 associated with the financial services’ crop insurance subsidiary Construction and (see Note 9). forestry .................... $ 3 $ 3 $ 3 13. SECURITIzATION OF FINANCING RECEIVABLES (continued) The company, as a part of its overall funding strategy, periodically transfers certain financing receivables (retail notes) into variable interest entities (VIEs) that are special purpose entities (SPEs), or a non-VIE banking operation, as part of its asset-backed securities programs (securitizations). The structure of these transactions is such that the transfer of the retail notes did not meet the criteria of sales of receivables, and is, therefore, accounted for as a secured borrowing. SPEs utilized in securiti- zations of retail notes differ from other entities included in the company’s consolidated statements because the assets they hold are legally isolated. Use of the assets held by the SPEs or the 45


  • Page 46

    non-VIE is restricted by terms of the documents governing the were restricted assets (retail notes securitized, allowance for securitization transactions. credit losses and other assets) of $1,274 million and $1,049 In securitizations of retail notes related to secured million at October 31, 2013 and 2012, respectively. borrowings, the retail notes are transferred to certain SPEs or The liabilities (short-term securitization borrowings and accrued to a non-VIE banking operation, which in turn issue debt to interest) related to these conduits were $1,225 million and investors. The resulting secured borrowings are recorded as $1,004 million at October 31, 2013 and 2012, respectively. “Short-term securitization borrowings” on the balance sheet. The company’s carrying amount of the liabilities to the The securitized retail notes are recorded as “Financing receiv- unconsolidated conduits, compared to the maximum exposure ables securitized - net” on the balance sheet. The total restricted to loss related to these conduits, which would only be incurred assets on the balance sheet related to these securitizations include in the event of a complete loss on the restricted assets, was as the financing receivables securitized less an allowance for credit follows at October 31 in millions of dollars: losses, and other assets primarily representing restricted cash. 2013 For those securitizations in which retail notes are transferred Carrying value of liabilities.............................................................. $ 1,225 into SPEs, the SPEs supporting the secured borrowings are Maximum exposure to loss............................................................. 1,274 consolidated unless the company does not have both the power to direct the activities that most significantly impact the SPEs’ The total assets of unconsolidated VIEs related to securiti- economic performance and the obligation to absorb losses or zations were approximately $42 billion at October 31, 2013. the right to receive benefits that could potentially be significant The components of consolidated restricted assets related to to the SPEs. No additional support to these SPEs beyond what secured borrowings in securitization transactions at October 31 was previously contractually required has been provided during were as follows in millions of dollars: the reporting periods. In certain securitizations, the company consolidates the 2013 2012 SPEs since it has both the power to direct the activities that Financing receivables securitized (retail notes) ............... $ 4,167 $ 3,635 most significantly impact the SPEs’ economic performance Allowance for credit losses ............................................ (14) (17) through its role as servicer of all the receivables held by the Other assets................................................................. 100 85 SPEs, and the obligation through variable interests in the Total restricted securitized assets .......................... $ 4,253 $ 3,703 SPEs to absorb losses or receive benefits that could potentially be significant to the SPEs. The restricted assets (retail notes The components of consolidated secured borrowings and securitized, allowance for credit losses and other assets) of the other liabilities related to securitizations at October 31 were as consolidated SPEs totaled $2,626 million and $2,330 million follows in millions of dollars: at October 31, 2013 and 2012, respectively. The liabilities 2013 2012 (short-term securitization borrowings and accrued interest) Short-term securitization borrowings ............................. $ 4,109 $ 3,575 of these SPEs totaled $2,547 million and $2,262 million at Accrued interest on borrowings ..................................... 1 1 October 31, 2013 and 2012, respectively. The credit holders Total liabilities related to restricted of these SPEs do not have legal recourse to the company’s securitized assets ................................................ $ 4,110 $ 3,576 general credit. In certain securitizations, the company transfers retail The secured borrowings related to these restricted notes to a non-VIE banking operation, which is not consoli- securitized retail notes are obligations that are payable as the dated since the company does not have a controlling interest in retail notes are liquidated. Repayment of the secured borrowings the entity. The company’s carrying values and interests related depends primarily on cash flows generated by the restricted to the securitizations with the unconsolidated non-VIE were assets. Due to the company’s short-term credit rating, cash restricted assets (retail notes securitized, allowance for credit collections from these restricted assets are not required to be losses and other assets) of $353 million and $324 million placed into a segregated collection account until immediately at October 31, 2013 and 2012, respectively. The liabilities prior to the time payment is required to the secured creditors. (short-term securitization borrowings and accrued interest) At October 31, 2013, the maximum remaining term of all were $338 million and $310 million at October 31, 2013 and securitized retail notes was approximately seven years. 2012, respectively. In certain securitizations, the company transfers retail notes 14. EQUIPMENT ON OPERATING LEASES into bank-sponsored, multi-seller, commercial paper conduits, Operating leases arise primarily from the leasing of John Deere which are SPEs that are not consolidated. The company does equipment to retail customers. Initial lease terms generally range not service a significant portion of the conduits’ receivables, and from four to 60 months. Net equipment on operating leases therefore, does not have the power to direct the activities that totaled $3,152 million and $2,528 million at October 31, 2013 most significantly impact the conduits’ economic performance. and 2012, respectively. The equipment is depreciated on a These conduits provide a funding source to the company (as straight-line basis over the terms of the lease. The accumulated well as other transferors into the conduit) as they fund the retail depreciation on this equipment was $545 million and notes through the issuance of commercial paper. The company’s $499 million at October 31, 2013 and 2012, respectively. carrying values and variable interest related to these conduits 46


  • Page 47

    The corresponding depreciation expense was $389 million in Total property and equipment additions in 2013, 2012 2013, $339 million in 2012 and $306 million in 2011. and 2011 were $1,158 million, $1,376 million and $1,059 Future payments to be received on operating leases million and depreciation was $637 million, $555 million and totaled $1,274 million at October 31, 2013 and are scheduled $516 million, respectively. Capitalized interest was $13 million, in millions of dollars as follows: 2014 – $522, 2015 – $360, $7 million and $8 million in the same periods, respectively. 2016 – $229, 2017 – $136 and 2018 – $27. The cost of leased property and equipment under capital leases 15. INVENTORIES of $58 million and $47 million and accumulated depreciation of $29 million and $25 million at October 31, 2013 and 2012, Most inventories owned by Deere & Company and its respectively, is included in property and equipment. U.S. equipment subsidiaries are valued at cost, on the “last-in, Capitalized software has an estimated useful life of three first-out” (LIFO) basis. Remaining inventories are generally years. The amounts of total capitalized software costs, including valued at the lower of cost, on the “first-in, first-out” (FIFO) purchased and internally developed software, classified as basis, or market. The value of gross inventories on the LIFO “Other Assets” at October 31, 2013 and 2012 were $778 million basis represented 63 percent and 61 percent of worldwide gross and $684 million, less accumulated amortization of $584 million inventories at FIFO value at October 31, 2013 and 2012, and $493 million, respectively. Amortization of these software respectively. If all inventories had been valued on a FIFO basis, costs was $93 million in 2013, $89 million in 2012 and $73 estimated inventories by major classification at October 31 in million in 2011. The cost of leased software assets under capital millions of dollars would have been as follows: leases amounting to $46 million and $42 million at October 31, 2013 2012 2013 and 2012, respectively, is included in other assets. Raw materials and supplies ........................................... $ 1,954 $ 1,874 The cost of compliance with foreseeable environmental Work-in-process ........................................................... 753 652 requirements has been accrued and did not have a material Finished goods and parts .............................................. 3,757 4,065 effect on the company’s consolidated financial statements. Total FIFO value........................................................ 6,464 6,591 17. GOODWILL AND OTHER INTANGIBLE ASSETS-NET Less adjustment to LIFO value....................................... 1,529 1,421 The changes in amounts of goodwill by operating segments Inventories................................................................. $ 4,935 $ 5,170 were as follows in millions of dollars: Agriculture Construction 16. PROPERTY AND DEPRECIATION and and A summary of property and equipment at October 31 in millions Turf Forestry Total of dollars follows: Balance at October 31, 2011 .............. $ 701 $ 615 $ 1,316 Less accumulated Useful Lives* impairment losses ...................... 316 316 (Years) 2013 2012 Net balance ................................... 385 615 1,000 Equipment Operations Impairment loss* ................................ (33) (33) Land .................................................. $ 123 $ 137 Translation adjustments and other ....... (15) (31) (46) Buildings and building equipment ........ 23 2,875 2,584 Machinery and equipment ................... 11 4,931 4,393 Balance at October 31, 2012 .............. 686 584 1,270 Dies, patterns, tools, etc ..................... 8 1,492 1,330 Less accumulated All other ............................................. 6 866 819 impairment losses ...................... 349 349 Construction in progress ..................... 728 938 Net balance ................................... 337 584 921 Total at cost ................................... 11,015 10,201 Reclassification to assets Less accumulated depreciation ........... 5,606 5,250 held for sale** ................................ (395) (395) Acquisition* ........................................ 13 13 Total .............................................. 5,409 4,951 Translation adjustments and other ....... (2) 19 17 Financial Services Balance at October 31, 2013 .............. 302 603 905 Land .................................................. 4 4 Less accumulated Buildings and building equipment ........ 27 71 70 impairment losses** ................... 60 60 All other ............................................. 6 36 36 Goodwill ........................................... $ 242 $ 603 $ 845 Total at cost ................................... 111 110 Less accumulated depreciation ........... 53 49 * See Notes 4 and 5. ** Accumulated impairment losses were also reduced by $289 million related to Total .............................................. 58 61 Landscapes reclassification to held for sale (see Note 4). Property and equipment-net .......... $ 5,467 $ 5,012 * Weighted-averages 47


  • Page 48

    The components of other intangible assets are as follows The weighted-average interest rates on total short-term in millions of dollars: borrowings, excluding current maturities of long-term Useful Lives* borrowings, at October 31, 2013 and 2012 were .8 percent (Years) 2013 2012 and 1.0 percent, respectively. Amortized intangible assets: Lines of credit available from U.S. and foreign banks were Customer lists and relationships ........... 15 $ 20 $ 99 $6,498 million at October 31, 2013. At October 31, 2013, Technology, patents, trademarks $2,939 million of these worldwide lines of credit were unused. and other ........................................ 18 88 109 For the purpose of computing the unused credit lines, com- Total at cost .................................... 108 208 mercial paper and short-term bank borrowings, excluding Less accumulated amortization** ......... 35 107 secured borrowings and the current portion of long-term Total ............................................... 73 101 borrowings, were primarily considered to constitute utilization. Included in the above lines of credit were long-term credit Unamortized intangible assets: facility agreements for $2,500 million, expiring in April 2017, Licenses ............................................. 4 4 and $2,500 million, expiring in April 2018. The agreements are Other intangible assets-net ................ $ 77 $ 105 mutually extendable and the annual facility fees are not signifi- * Weighted-averages cant. These credit agreements require Capital Corporation to ** Accumulated amortization at 2013 and 2012 for customer lists and relationships maintain its consolidated ratio of earnings to fixed charges at was $8 million and $60 million and technology, patents, trademarks and other was $27 million and $47 million, respectively. not less than 1.05 to 1 for each fiscal quarter and the ratio of senior debt, excluding securitization indebtedness, to capital Other intangible assets are stated at cost less accumulated base (total subordinated debt and stockholder’s equity excluding amortization. The amortization of other intangible assets in accumulated other comprehensive income (loss)) at not more 2013, 2012 and 2011 was $22 million, $21 million and than 11 to 1 at the end of any fiscal quarter. The credit agree- $20 million, respectively. The estimated amortization expense ments also require the equipment operations to maintain a ratio for the next five years is as follows in millions of dollars: of total debt to total capital (total debt and stockholders’ equity 2014 - $12, 2015 - $11, 2016 - $10, 2017 – $10 and 2018 - $6. excluding accumulated other comprehensive income (loss)) of 18. TOTAL SHORT-TERM BORROWINGS 65 percent or less at the end of each fiscal quarter. Under this provision, the company’s excess equity capacity and retained Total short-term borrowings at October 31 consisted of the earnings balance free of restriction at October 31, 2013 was following in millions of dollars: $9,756 million. Alternatively under this provision, the equip- 2013 2012 ment operations had the capacity to incur additional debt of Equipment Operations $18,119 million at October 31, 2013. All of these requirements Commercial paper ....................................................... $ 146 of the credit agreements have been met during the periods Notes payable to banks ................................................ $ 259 84 included in the consolidated financial statements. Long-term borrowings due within one year ................... 821 195 Deere & Company has an agreement with Capital Total ....................................................................... 1,080 425 Corporation pursuant to which it has agreed to continue to own, Financial Services directly or through one or more wholly-owned subsidiaries, Commercial paper ....................................................... 3,162 1,061 at least 51 percent of the voting shares of capital stock of Capital Notes payable to banks ................................................ 139 117 Corporation and to maintain Capital Corporation’s consolidated Long-term borrowings due within one year ................... 4,408* 4,790* tangible net worth at not less than $50 million. This agreement Total ....................................................................... 7,709 5,968 also obligates Deere & Company to make payments to Capital Short-term borrowings ............................................ 8,789 6,393 Corporation such that its consolidated ratio of earnings to fixed Financial Services charges is not less than 1.05 to 1 for each fiscal quarter. Short-term securitization borrowings ............................ 4,109 3,575 Deere & Company’s obligations to make payments to Capital Total short-term borrowings ................................... $ 12,898 $ 9,968 Corporation under the agreement are independent of whether Capital Corporation is in default on its indebtedness, obligations * Includes unamortized fair value adjustments related to interest rate swaps. or other liabilities. Further, Deere & Company’s obligations The short-term securitization borrowings for financial under the agreement are not measured by the amount of services are secured by financing receivables (retail notes) on Capital Corporation’s indebtedness, obligations or other the balance sheet (see Note 13). Although these securitization liabilities. Deere & Company’s obligations to make payments borrowings are classified as short-term since payment is required under this agreement are expressly stated not to be a guaranty if the retail notes are liquidated early, the payment schedule for of any specific indebtedness, obligation or liability of Capital these borrowings of $4,109 million at October 31, 2013 based Corporation and are enforceable only by or in the name of on the expected liquidation of the retail notes in millions of Capital Corporation. No payments were required under this dollars is as follows: 2014 - $2,162, 2015 - $1,177, 2016 - $577, agreement during the periods included in the consolidated 2017 - $166, 2018 - $25 and 2019 - $2. financial statements. 48


  • Page 49

    19. ACCOUNTS PAYABLE AND ACCRUED EXPENSES 2013 2012 Accounts payable and accrued expenses at October 31 consisted Financial Services of the following in millions of dollars: Notes and debentures: Medium-term notes due 2014 – 2023: 2013 2012 (principal $15,055 - 2013, $15,242 - 2012) Equipment Operations Average interest rates of 1.2% – 2013, Accounts payable: 1.6% – 2012 ....................................................... $15,316* $ 15,737* Trade payables ......................................................... $ 2,174 $ 2,287 2.75% senior note due 2022: ($500 principal) Dividends payable .................................................... 192 179 Swapped $500 to variable interest rate Other ....................................................................... 197 147 of .9% – 2013, 1.1% – 2012................................ 491* 518* Accrued expenses: Other notes .............................................................. 900 753 Dealer sales discounts .............................................. 1,491 1,413 Total .................................................................... 16,707 17,008 Employee benefits .................................................... 1,408 1,337 Product warranties ................................................... 822 733 Long-term borrowings** .......................................... $ 21,578 $22,453 Unearned revenue .................................................... 368 282 * Includes unamortized fair value adjustments related to interest rate swaps. Other ....................................................................... 1,339 1,301 ** All interest rates are as of year end. Total .................................................................... 7,991 7,679 The approximate principal amounts of the equipment Financial Services operations’ long-term borrowings maturing in each of the Accounts payable: Deposits withheld from dealers and merchants .......... 197 194 next five years in millions of dollars are as follows: 2014 – $821, Other ....................................................................... 368 505 2015 – $266, 2016 – $211, 2017 – $28 and 2018 – $23. Accrued expenses: The approximate principal amounts of the financial services’ Unearned revenue .................................................... 551 452 long-term borrowings maturing in each of the next five years in Accrued interest ....................................................... 130 160 millions of dollars are as follows: 2014 – $4,408, 2015 – $4,649, Employee benefits .................................................... 86 69 2016 – $3,374, 2017 – $2,954 and 2018 – $2,376. Insurance claims reserve* ......................................... 197 449 21. LEASES Other ....................................................................... 321 301 Total .................................................................... 1,850 2,130 At October 31, 2013, future minimum lease payments under capital leases amounted to $37 million as follows: 2014 – $23, Eliminations** ............................................................... 867 820 2015 – $5, 2016 – $4, 2017 – $2, 2018 – $1 and later years $2. Accounts payable and accrued expenses ............... $ 8,974 $ 8,989 Total rental expense for operating leases was $237 million * See Note 9. in 2013, $215 million in 2012 and $175 million in 2011. ** Primarily trade receivable valuation accounts which are reclassified as accrued At October 31, 2013, future minimum lease payments under expenses by the equipment operations as a result of their trade receivables being sold to financial services. operating leases amounted to $413 million as follows: 2014 – $130, 2015 – $95, 2016 – $61, 2017 – $45, 2018 – $34 20. LONG-TERM BORROWINGS and later years $48. Long-term borrowings at October 31 consisted of the following 22. COMMITMENTS AND CONTINGENCIES in millions of dollars: The company generally determines its warranty liability by 2013 2012 applying historical claims rate experience to the estimated amount Equipment Operations of equipment that has been sold and is still under warranty based Notes and debentures: on dealer inventories and retail sales. The historical claims rate 6.95% notes due 2014: ($700 principal) .................. $ 718* is primarily determined by a review of five-year claims costs and 4.375% notes due 2019........................................... $ 750 750 current quality developments. 8-1/2% debentures due 2022 .................................. 105 105 The premiums for the company’s extended warranties 2.60% notes due 2022 ............................................ 1,000 1,000 are primarily recognized in income in proportion to the costs 6.55% debentures due 2028.................................... 200 200 expected to be incurred over the contract period. The unamor- 5.375% notes due 2029 .......................................... 500 500 tized extended warranty premiums (deferred revenue) included 8.10% debentures due 2030 .................................... 250 250 in the following table totaled $342 million and $292 million at 7.125% notes due 2031 ........................................... 300 300 3.90% notes due 2042 ............................................ 1,250 1,250 October 31, 2013 and 2012, respectively. Other notes .............................................................. 516 372 Total .................................................................... $ 4,871 $ 5,445 (continued) 49


  • Page 50

    A reconciliation of the changes in the warranty liability The number of common shares the company is authorized and unearned premiums in millions of dollars follows: to issue is 1,200 million. The number of authorized preferred Warranty Liability/ shares, none of which has been issued, is nine million. Unearned Premiums _______________ The Board of Directors at its meeting in May 2008 2013 2012 authorized the repurchase of up to $5,000 million of additional Beginning of year balance ........................................ $ 1,025 $ 892 common stock (61.1 million shares based on the October 31, Payments ..................................................................... (736) (580) 2013 closing common stock price of $81.84 per share). Amortization of premiums received................................ (120) (100) At October 31, 2013, this repurchase program had $957 million Accruals for warranties ................................................. 821 666 (11.7 million shares at the same price) remaining to be repur- Premiums received ....................................................... 170 164 chased. Repurchases of the company’s common stock under Foreign exchange ......................................................... 4 (17) this plan will be made from time to time, at the company’s End of year balance .................................................. $ 1,164 $ 1,025 discretion, in the open market. A reconciliation of basic and diluted net income per share At October 31, 2013, the company had approximately attributable to Deere & Company follows in millions, except $270 million of guarantees issued primarily to banks outside the per share amounts: U.S. related to third-party receivables for the retail financing 2013 2012 2011 of John Deere equipment. The company may recover a portion Net income attributable to of any required payments incurred under these agreements from Deere & Company ............................... $ 3,537.3 $ 3,064.7 $ 2,799.9 repossession of the equipment collateralizing the receivables. Less income allocable to participating At October 31, 2013, the company had accrued losses of securities ............................................ .9 .8 1.0 approximately $6 million under these agreements. The maximum Income allocable to common stock ........... $ 3,536.4 $ 3,063.9 $ 2,798.9 remaining term of the receivables guaranteed at October 31, 2013 was approximately seven years. Average shares outstanding ..................... 385.3 397.1 417.4 At October 31, 2013, the company had commitments of Basic per share .................................... $ 9.18 $ 7.72 $ 6.71 approximately $279 million for the construction and acquisition Average shares outstanding ..................... 385.3 397.1 417.4 of property and equipment. At October 31, 2013, the company Effect of dilutive stock options .................. 3.9 4.4 5.0 also had pledged or restricted assets of $68 million, primarily as Total potential shares outstanding ........ 389.2 401.5 422.4 collateral for borrowings and restricted other assets. In addition, Diluted per share.................................. $ 9.09 $ 7.63 $ 6.63 see Note 13 for restricted assets associated with borrowings related to securitizations. All stock options outstanding were included in the The company also had other miscellaneous contingencies computation during 2013, 2012 and 2011, except 2.4 million totaling approximately $50 million at October 31, 2013, for options in 2013, 1.8 million in 2012 and none in 2011 that had which it believes the probability for payment is substantially an antidilutive effect under the treasury stock method. remote. The accrued liability for these contingencies was not material at October 31, 2013. 24. STOCK OPTION AND RESTRICTED STOCK AWARDS The company is subject to various unresolved legal The company issues stock options and restricted stock awards actions which arise in the normal course of its business, the to key employees under plans approved by stockholders. most prevalent of which relate to product liability (including Restricted stock is also issued to nonemployee directors for asbestos related liability), retail credit, software licensing, patent, their services as directors under a plan approved by stockholders. trademark and environmental matters. The company believes Options are awarded with the exercise price equal to the market the reasonably possible range of losses for these unresolved legal price and become exercisable in one to three years after grant. actions in addition to the amounts accrued would not have a Options expire ten years after the date of grant. Restricted stock material effect on its financial statements. awards generally vest after three years. The compensation cost 23. CAPITAL STOCK for stock options, service based restricted stock units and market/service based restricted stock units, which is based on Changes in the common stock account in millions were the fair value at the grant date, is recognized on a straight-line as follows: basis over the requisite period the employee is required to Number of render service. The compensation cost for performance/service Shares Issued Amount based units, which is based on the fair value at the grant date, Balance at October 31, 2010 .............................. 536.4 $ 3,106 is recognized over the employees’ requisite service period and Stock options and other ...................................... 146 periodically adjusted for the probable number of shares to be Balance at October 31, 2011 .............................. 536.4 3,252 awarded. According to these plans at October 31, 2013, the Stock options and other ...................................... 100 company is authorized to grant an additional 10.4 million shares Balance at October 31, 2012 .............................. 536.4 3,352 related to stock options or restricted stock. Stock options and other ...................................... 172 The fair value of each option award was estimated on the Balance at October 31, 2013........................... 536.4 $ 3,524 date of grant using a binomial lattice option valuation model. 50

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