Deere & Company — FY2018 Form 10-K
Reporting period: Fiscal year ended October 28, 2018 (52 weeks). Although the request labels the period “2018 Q4,” this filing reports full-year results; fourth-quarter figures are identified separately below. Deere manufactures agriculture and turf, construction and forestry equipment, and provides equipment financing through its financial services operations.
Financial results and key metrics
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales and revenues | $37.358 billion | $29.738 billion |
| Net sales of equipment operations | $33.351 billion | $25.885 billion |
| Net income attributable to Deere | $2.368 billion | $2.159 billion |
| Diluted earnings per share | $7.24 | $6.68 |
| Operating cash flow | $1.820 billion | $2.200 billion |
| Cash and marketable securities at year-end | $4.394 billion | $9.787 billion |
| Long-term borrowings at year-end | $27.237 billion | $25.891 billion |
- Equipment operating profit was $3.684 billion, up from $2.859 billion. Agriculture and turf operating profit was $2.816 billion (2017: $2.513 billion); construction and forestry was $868 million (2017: $346 million).
- Financial services net income attributable to Deere was $942 million (2017: $477 million). Its operating profit was $792 million, while average receivables and leases financed rose 7%.
- Cost of sales was 76.7% of net sales in both years. Higher volume, price realization, and lower warranty costs supported equipment profitability; higher production and R&D costs were offsets.
- Consolidated cash used for investing was $8.154 billion, including $5.245 billion for acquisitions and $896 million for property and equipment. Financing activities provided $876 million; Deere repurchased $958 million of shares and paid $806 million in dividends.
- Year-end total assets were $70.108 billion and Deere stockholders’ equity was $11.288 billion. Equipment operations’ debt-to-capital ratio was 36%, down from 38%; financial services’ debt-to-equity ratio was 7.5 to 1, versus 7.6 to 1.
- Cash and cash equivalents fell $5.431 billion during the year, primarily in connection with the Wirtgen acquisition. Deere reported $8.389 billion of bank credit lines, of which $3.724 billion was unused. Equipment and financial services have distinct funding needs, so consolidated debt should be interpreted in that context.
Fourth-quarter results and changes versus prior year
In fiscal Q4, net sales and revenues were $9.416 billion (2017: $8.018 billion), and net income attributable to Deere was $785 million (2017: $510 million). Diluted EPS was $2.42 (2017: $1.57).
- Full-year revenue increased 26%; equipment net sales increased 29%. Wirtgen, acquired in December 2017, contributed 12% to equipment sales growth and $3.181 billion of FY2018 revenue.
- Agriculture and turf sales rose 15%. Construction and forestry sales rose 78%, with Wirtgen contributing 53 percentage points to that segment’s increase.
- Net income increased less than revenue, in part because U.S. tax reform produced a net $704 million discrete tax expense: $1.045 billion unfavorable to equipment operations, partly offset by a $341 million benefit in financial services. Excluding the financial services tax benefit, its FY2018 net income was $601 million.
- FY2017 included SiteOne investment-sale gains and an international construction and forestry impairment; these items affect year-over-year comparability. FY2018 also included $56 million of Wirtgen acquisition-related costs.
Outlook, risks, and other notable matters
- Management forecast FY2019 net sales and revenues up about 7% and net income attributable to Deere of about $3.6 billion. Equipment sales were projected up about 7%, including a roughly 2% contribution from a full year of Wirtgen and an approximately 2% unfavorable currency effect.
- Management projected agriculture and turf sales up about 3%, construction and forestry sales up about 15%, and financial services net income of approximately $630 million. Financial services outlook included a higher average portfolio, partly offset by higher selling and administrative expenses, higher credit-loss provision, and less-favorable spreads.
- Management cited improved market conditions and customer response, while noting continuing raw-material cost pressures addressed through pricing and cost management. The outlook is subject to demand, commodity and used-equipment prices, weather, trade and tariff policy, currencies, interest rates, credit losses, funding access, and geopolitical and economic conditions.
- Other significant risks include supply-chain disruptions, increasingly stringent engine-emissions requirements, cybersecurity and data privacy, intellectual-property disputes, pension assumptions, and integration of acquisitions. The company reported supplier material and labor shortages but no significant production stoppages from shortages in FY2018.
- Deere made $1.3 billion of voluntary contributions to U.S. pension and OPEB plans in FY2018; expected total 2019 contributions were approximately $210 million, primarily direct benefit payments. Management expected plan costs to decline about $125 million in 2019.
- Guarantees related primarily to third-party equipment financing totaled about $357 million; Deere recorded a $14 million liability. The company said reasonably possible losses from unresolved legal actions were not expected to materially affect the financial statements. Environmental matters included notices or proceedings in Iowa, Brazil, and Argentina; management did not expect a material financial effect.
- The auditor gave an unqualified opinion on the financial statements and internal controls. Management and the auditor excluded Wirtgen from the FY2018 internal-control assessment; Wirtgen represented 9% of consolidated assets and revenues.
Important facts for investors to verify
- How much FY2019 growth and earnings depend on Wirtgen’s full-year contribution, market demand, and continued favorable volume and pricing.
- The quality and sustainability of earnings after separating tax-reform effects, Wirtgen acquisition effects and costs, and FY2017 SiteOne gains and impairment items.
- Liquidity and refinancing exposure, particularly the decline in cash and securities, upcoming debt maturities, and funding requirements of the financial services portfolio.
- Credit quality, delinquency trends, credit-loss provisions, financing spreads, and used-equipment residual values as the finance portfolio grows.
- Execution and integration of Wirtgen and other acquisitions, including the scope of the internal-control assessment exclusion and any subsequent remediation or changes.
- Exposure to trade restrictions, tariffs, currency movements, supplier constraints, raw-material costs, emissions regulation, and pension obligations.