DEERE & CO - 10-K Summary (Fiscal Year Ended Oct 31, 2006)
Business Context and Reporting Period
This Form 10-K covers the fiscal year ended October 31, 2006. Deere & Company operates through four major segments: Agricultural Equipment, Commercial and Consumer Equipment, Construction and Forestry, and Financial Services (Credit). The company manufactures and distributes a full line of farm, construction, and outdoor power equipment, primarily through independent dealer networks. Financial Services provides financing for equipment sales and leases, wholesale financing to dealers, and crop risk mitigation products.
Key Financial Metrics
| Metric | 2006 | 2005 |
|---|---|---|
| Total Net Sales and Revenues | $22,148 million | $21,191 million |
| Net Income | $1,694 million | $1,447 million |
| Income from Continuing Operations | $1,453 million | $1,414 million |
| Diluted EPS (Continuing Ops) | $6.16 | $5.74 |
| Diluted EPS (Net Income) | $7.18 | $5.87 |
| Operating Profit (Equipment Ops) | $1,905 million | $1,842 million |
| Operating Profit (Credit Ops) | $520 million | $491 million |
| Cost of Sales to Net Sales Ratio | 77.3% | 78.2% |
| Total Assets | $34,720 million | $33,637 million |
| Long-term Borrowings | $11,584 million | $11,739 million |
| Stockholders' Equity | $7,491 million | $6,852 million |
Material Changes vs. Prior Period
- Revenue Growth: Total net sales and revenues increased 5% to $22.1 billion, driven by a 2% increase in Equipment Operations net sales ($19.9 billion) and a 24% increase in Credit Operations revenues.
- Profitability: Net income rose 17% to $1.69 billion. Income from continuing operations increased 3% to $1.45 billion. The increase in total net income was significantly boosted by a $241 million gain from discontinued operations (sale of health care business), compared to $33 million in 2005.
- Segment Performance:
- Agricultural Equipment: Operating profit decreased 9% to $882 million due to lower shipments, despite improved price realization.
- Commercial & Consumer: Operating profit increased 21% to $221 million, driven by landscape operations.
- Construction & Forestry: Operating profit increased 16% to $802 million, reflecting strong retail demand and improved margins.
- Credit: Operating profit increased 6% to $520 million due to portfolio growth, partially offset by higher credit loss provisions.
- Special Items: The company incurred a $70 million pretax expense related to the repurchase of outstanding debt securities and $44 million in restructuring costs for closing a forestry facility in Canada.
Guidance, Outlook, and Risks
- 2007 Outlook:
- Equipment Sales: Projected to be roughly flat for the full year, with a 5% increase expected in Q1 2007.
- Production: Expected to be down 4% for the year and Q1.
- Net Income: Forecast at approximately $1.325 billion for the full year and $150-$175 million for Q1.
- Credit Income: Forecast at approximately $345 million for the full year.
- Market Conditions:
- Agricultural: Strong global demand for crops and renewable fuels supports the outlook, though U.S./Canada sales may face a slow start due to used equipment inventories and legislative uncertainty. Sales in Australia are expected to drop 25% due to drought.
- Construction: Expected to slow in 2007 due to lower residential housing construction, with worldwide sales forecast to decrease 5%.
- Risks and Contingencies:
- Raw Materials: Rising costs for steel, rubber, and fuel could impact margins, though the company aims to offset these through pricing and efficiency.
- Government Policy: Changes in U.S. farm legislation (2007 Farm Bill) and Brazilian government programs pose risks to agricultural demand.
- Interest Rates: Higher rates could dampen economic activity and increase funding costs for the Credit segment.
- Legal: Ongoing litigation regarding product liability (including asbestos) and credit matters, though management does not expect a material effect.
Investor Verification Checklist
- Discontinued Operations Impact: Verify the sustainability of earnings by analyzing results excluding the $241 million gain from the sale of the health care business.
- Raw Material Hedging: Assess the company's ability to pass on increased steel and fuel costs to customers without losing market share.
- Credit Portfolio Quality: Review the allowance for credit losses ($217 million) and delinquency rates, particularly given the expansion of the credit portfolio.
- Geographic Exposure: Monitor the impact of the Australian drought and Brazilian financing uncertainties on the Agricultural Equipment segment.
- Debt Repurchase: Confirm the long-term benefit of the $500 million debt repurchase versus the immediate $70 million expense incurred.
- Pension Obligations: Review the $3.7 billion in unrecognized losses related to postretirement benefit plans and the expected 2007 contribution of $443 million.