Deere & Company — FY2020 Form 10-K
Reporting period: Fiscal year ended November 1, 2020. The filing also reports fourth-quarter results; FY2020 had 52 weeks and Q4 had 13 weeks, versus 53 and 14 weeks, respectively, in FY2019. Deere manufactures agriculture, turf, construction and forestry equipment and provides equipment financing.
Financial performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales and revenues | $35.540 billion | $39.258 billion |
| Equipment net sales | $31.272 billion | $34.886 billion |
| Net income attributable to Deere & Company | $2.751 billion | $3.253 billion |
| Diluted EPS | $8.69 | $10.15 |
| Operating cash flow | $7.483 billion | $3.412 billion |
| Cost of sales / equipment net sales | 75.7% | 76.8% |
Q4 FY2020: Net sales and revenues were $9.731 billion versus $9.896 billion in Q4 FY2019; net income attributable to Deere was $757 million versus $721 million. Diluted EPS was $2.39 versus $2.27.
- Agriculture and Turf: Sales fell 6% to $22.325 billion, while operating profit rose 18% to $2.969 billion; operating margin increased to 13.3% from 10.6%.
- Construction and Forestry: Sales fell 20% to $8.947 billion and operating profit fell 51% to $590 million; margin declined to 6.6% from 10.8%.
- Financial Services: Net income rose 5% to $566 million; operating profit was $746 million, up 7%. Higher portfolio income and lower impairments and lease-residual losses were partly offset by higher credit-loss provisions and unfavorable financing spreads.
Financial position and liquidity
- At year-end, cash and cash equivalents were $7.066 billion and marketable securities were $641 million. Cash, equivalents and restricted cash increased $3.216 billion during the year.
- Total assets were $75.091 billion; Deere stockholders’ equity was $12.937 billion.
- Balance-sheet borrowings included $8.582 billion short-term borrowings, $4.682 billion short-term securitization borrowings and $32.734 billion long-term borrowings. Financial Services funding needs and debt should be considered separately from equipment operations.
- Worldwide credit lines totaled $8.413 billion, of which $6.801 billion was unused. Commercial paper outstanding was $1.238 billion. The company reported compliance with credit-agreement requirements.
- Operating cash flow benefited from lower receivables and inventories. Investing cash outflow was $3.319 billion and financing cash outflow was $980 million. Property and equipment purchases were $820 million.
- Equipment Operations’ debt-to-capital ratio rose to 45% from 36%; Financial Services’ debt-to-equity ratio improved to 7.8-to-1 from 8.0-to-1.
Material changes and unusual items
- Worldwide revenue declined 9% and equipment sales fell 10%, reflecting lower shipment volumes and unfavorable currency translation, partly offset by price realization.
- Net income included $458 million after tax of impairment and employee-separation charges, compared with $82 million of similar charges in FY2019. FY2020 included $199 million pretax of impairments and closure costs and $335 million pretax of separation-program expenses.
- Separation programs are expected to generate about $250 million in annual savings; $85 million was realized in FY2020. The company expects $135 million of remaining program payments over two years.
- Deere recorded a $24 million loss on the sale of its German lawn mower business. It also acquired Brazilian parts supplier Unimil for $66 million net of cash acquired.
- Share repurchases were suspended in Q2 and Q3 and resumed in Q4, when $487 million of shares were repurchased. FY2020 repurchases totaled $750 million.
Outlook, commentary and risks
Management said the company remained operational through most of the pandemic, although some factories ran at reduced capacity because of component shortages or lower demand. Deere provided short-term payment relief to customers and dealers; balances receiving relief at year-end represented about 2% of trade receivables, 4% of financing receivables and 4% of operating lease balances.
- For 2021, industry sales—not Deere-specific sales guidance—were forecast to rise 5%–10% for U.S. and Canadian agricultural equipment, be flat to 5% higher in Europe, and rise about 5% in South America; Asian agricultural sales were expected to be slightly lower. U.S. and Canadian turf and utility sales were expected to be flat to 5% higher.
- North American construction equipment industry sales were expected to decline about 5%, with compact equipment up about 5%; global forestry industry sales were forecast flat to 5% higher.
- Financial Services expected benefit from favorable financing spreads, lower operating-lease residual losses and a higher average portfolio, partly offset by a higher credit-loss provision. Management did not provide a clear consolidated FY2021 revenue or EPS forecast in the supplied filing text.
- Principal uncertainties include COVID-related demand and supply-chain disruption, customer and dealer credit quality, used-equipment values and lease residuals, farm economics and weather, construction activity, trade policy, currency and interest-rate movements, raw-material costs, cybersecurity and privacy, and labor negotiations. Deere also cited ongoing manufacturing-location and product reviews as part of its strategy transition.
- The company reported an approximately $354,000 environmental fine in Argentina, which it appealed; management said losses from this and other unresolved legal matters were not expected to materially affect the financial statements.
Investor verification priorities
- Review whether the $250 million expected annual separation savings are achieved and how remaining costs affect results.
- Monitor construction and forestry recovery, shipment volumes, and the impact of currency and price realization on margins.
- Assess credit-loss provisioning, payment-relief performance and used-equipment residual values in Financial Services.
- Track liquidity, funding costs, debt maturities and the effect of elevated equipment-operations leverage.
- Compare 2021 actual demand and Deere guidance with the industry forecasts disclosed here, particularly given continuing COVID and supply-chain uncertainty.
Audit and controls: Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting.