John Deere 2009 Annual Report Download - page 12

The cost of sales to net sales ratio for 2009 was 78.3
percent, compared with 75.9 percent last year. The increase
was primarily due to lower shipment and production volumes,
unfavorable effects of foreign exchange, a goodwill impairment
charge, higher raw material costs and voluntary employee
separation expenses.
Finance and interest income declined this year due to lower
fi nancing rates and a smaller average portfolio. Other income
decreased primarily as a result of lower commissions from crop
insurance and lower earnings from marketable securities.
Research and development expenses increased primarily as a
result of increased spending in support of new products including
designing and producing products with engines to meet more
stringent emissions regulations. Selling, administrative and
general expenses decreased primarily due to lower compensation
expenses and the effect of currency translation. Interest expense
decreased due to lower average borrowing rates, partially offset
by higher average borrowings. The equity in income of
unconsolidated affi liates decreased as a result of lower income
from construction equipment manufacturing affi liates impacted
by the low levels of construction activity.
The company has several defi ned benefi t pension plans
and defi ned benefi t health care and life insurance plans.
The company’s postretirement benefi t costs for these plans in
2009 were $312 million, compared with $277 million in 2008.
The long-term expected return on plan assets, which is refl ected
in these costs, was an expected gain of 8.2 percent in 2009 and
2008, or $857 million in 2009 and $920 million in 2008.
The actual return was a gain of $1,142 million in 2009 and a
loss of $2,158 million in 2008. In 2010, the expected return
will be approximately 8.2 percent. The company expects
postretirement benefi t costs in 2010 to be approximately
$400 million higher than in 2009, primarily due to lower
discount rates. The company makes any required contributions
to the plan assets under applicable regulations and voluntary
contributions from time to time based on the company’s
liquidity and ability to make tax-deductible contributions.
Total company contributions to the plans were $358 million in
2009 and $431 million in 2008, which include direct benefi t
payments for unfunded plans. These contributions also included
voluntary contributions to total plan assets of approximately
$150 million in 2009 and $297 million in 2008. Total company
contributions in 2010 are expected to be approximately
$390 million, which are primarily direct benefi t payments.
The company has no signifi cant contributions to pension plan
assets required in 2010 under applicable funding regulations.
See the following discussion of “Critical Accounting Policies”
for more information about postretirement benefi t obligations.
BUSINESS SEGMENT AND GEOGRAPHIC AREA RESULTS
The following discussion relates to operating results by
reportable segment and geographic area. Operating profi t is
income before external interest expense, certain foreign
exchange gains or losses, income taxes and corporate expenses.
However, operating profi t of the credit segment includes the
effect of interest expense and foreign exchange gains or losses.
Worldwide Agriculture and Turf Operations
The agriculture and turf segment had an operating profi t of
$1,448 million in 2009, compared with $2,461 million in 2008.
Net sales decreased 14 percent this year due to lower shipment
volumes and the unfavorable effects of currency translation,
partially offset by improved price realization. The decrease
in operating profi t was primarily due to lower shipment and
production volumes, unfavorable effects of foreign currency
exchange, a goodwill impairment charge, higher raw material
costs and voluntary employee separation expenses, partially offset
by improved price realization and lower selling, administrative
and general expenses.
Worldwide Construction and Forestry Operations
The construction and forestry segment had an operating loss
of $83 million in 2009, compared with an operating profi t of
$466 million in 2008. Net sales decreased 45 percent for the year
refl ecting the pressure from market conditions. The operating
profi t was lower primarily due to lower shipment and production
volumes and lower equity in income from unconsolidated
affi liates, partially offset by improved price realization and lower
selling, administrative and general expenses.
Worldwide Credit Operations
The operating profi t of the credit operations was $223 million
in 2009, compared with $478 million in 2008. The decrease
in operating profi t was primarily due to a higher provision for
credit losses, lower commissions from crop insurance, narrower
fi nancing spreads, a higher pretax loss from wind energy projects
and higher losses from construction equipment operating lease
residual values, partially offset by lower selling, administrative
and general expenses. Total revenues of the credit operations,
including intercompany revenues, decreased 11 percent in
2009, primarily refl ecting the lower fi nancing rates and a
smaller portfolio. The average balance of receivables and leases
fi nanced was 1 percent lower in 2009, compared with 2008.
Interest expense decreased 8 percent in 2009 as a result of lower
average borrowing rates, partially offset by higher average
borrowings. The credit operations’ ratio of earnings to fi xed
charges was 1.24 to 1 in 2009, compared with 1.45 to 1 in 2008.
Equipment Operations in U.S. and Canada
The equipment operations in the U.S. and Canada had an
operating profi t of $1,129 million in 2009, compared with
$1,831 million in 2008. The decrease was primarily due to lower
shipment and production volumes, a goodwill impairment
charge, higher raw material costs and voluntary employee
separation expenses, partially offset by improved price realization
and decreased selling, administrative and general expenses.
Net sales decreased 14 percent due to lower volumes and the
unfavorable effects of currency translation, partially offset by
improved price realization. The physical volume decreased
18 percent, compared with 2008.
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