Deere & Company — FY2015 Form 10-K Summary
Business context and reporting period
Deere manufactures and sells agriculture and turf equipment, construction and forestry equipment, and provides equipment financing and related services. This annual report covers the fiscal year ended October 31, 2015; fiscal 2014 included 53 weeks. The filing also reports fourth-quarter results.
Financial performance and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales and revenues | $28.863 billion | $36.067 billion |
| Net sales, equipment operations | $25.775 billion | $32.961 billion |
| Net income attributable to Deere | $1.940 billion | $3.162 billion |
| Diluted earnings per share | $5.77 | $8.63 |
| Operating profit: agriculture and turf | $1.649 billion | $3.649 billion |
| Operating profit: construction and forestry | $528 million | $648 million |
| Operating profit: financial services | $963 million | $921 million |
| Cash provided by operating activities | $3.740 billion | $3.526 billion |
| Cash and cash equivalents at year-end | $4.162 billion | $3.787 billion |
| Total assets at year-end | $57.948 billion | $61.336 billion |
| Long-term borrowings at year-end | $23.833 billion | $24.381 billion |
The cost-of-sales-to-net-sales ratio rose to 78.1% from 75.2%, implying a lower equipment gross margin on that basis. Cash and marketable securities totaled $4.600 billion; $4.031 billion of worldwide credit lines were unused. Total stockholders’ equity fell to $6.758 billion from $9.066 billion. Equipment operations’ debt-to-capital ratio was 42%, versus 36% in 2014; financial services’ interest-bearing debt-to-equity ratio was 7.6-to-1.
Fourth-quarter 2015 revenue was $6.715 billion and net income attributable to Deere was $351 million, compared with $8.965 billion and $649 million, respectively, in fourth-quarter 2014. Diluted EPS was $1.08 versus $1.83.
Material changes versus the prior comparable period
- Annual revenue declined 20% and net income attributable to Deere declined 39%. Equipment sales fell 22%; lower shipment volumes, less favorable product mix, and foreign exchange were the principal pressures.
- Agriculture and turf sales declined 25%, with operating profit falling to $1.649 billion. Construction and forestry sales declined 9%, with operating profit down to $528 million.
- Financial services attributable net income increased to $633 million from $624 million. Benefits from portfolio growth, the crop insurance divestiture, and lower expenses were partly offset by weaker financing spreads and increased construction-lease residual-value losses.
- Operating cash flow increased, while investing cash outflow narrowed to $1.059 billion. Financing activities used $2.119 billion, including $2.771 billion of share repurchases and $816 million of dividends; cash increased $375 million.
- The company sold its crop insurance operations in March 2015 for approximately $154 million of proceeds and recorded a $42 million pretax gain. A lower effective tax rate, principally from a fourth-quarter reduction in a deferred-tax valuation allowance, benefited 2015 results.
Outlook, commentary, risks, and contingencies
- For FY2016, Deere forecast equipment sales down about 7%, including a first-quarter decline of about 11%, and net income attributable to Deere of approximately $1.4 billion. Agriculture and turf sales were forecast down about 8%; construction and forestry sales down about 5%.
- Financial services FY2016 attributable net income was expected to be about $550 million, reflecting less favorable financing spreads and a higher provision for credit losses; 2015 included the crop insurance sale gain.
- Management cited continued weakness in global agriculture and construction markets, but described the outlook as better than prior downturns and said the company remained positioned to pursue growth. Forecasts depend on farm income and commodity prices, weather, construction activity, currency movements, interest rates, and global economic and political conditions.
- Other significant risks include financing-portfolio credit losses and funding access, used-equipment and lease residual values, supplier and raw-material disruptions, emissions compliance costs, pension obligations, cyber and technology risks, trade restrictions, and changes to GPS radio-frequency allocations.
- At year-end, the company reported approximately $162 million of third-party financing guarantees, with about $4 million accrued. It said unresolved legal actions were not expected to have a material effect beyond amounts accrued. Pension and other postretirement liabilities were substantial; management expected FY2016 contributions of approximately $98 million and a decrease in postretirement benefit costs.
- In November 2015, Deere announced agreements to acquire Monosem and Precision Planting for an estimated $325 million, subject to customary closing conditions and regulatory approvals.
Important facts for investors to verify
- Whether FY2016 sales and earnings forecasts were achieved, particularly given the projected agricultural-market contraction.
- Credit quality trends: past-due financing receivables over 30 days were 1.28% of financed receivables, up from 0.90%; also monitor provisions, delinquencies, and lease residual-value losses.
- The sustainability of financial services earnings amid lower financing spreads, increased expected credit-loss provisions, and reliance on external funding.
- Cash generation, capital spending, repurchases, dividends, and the effect of the weaker operating cycle on equity and leverage.
- Completion and performance of the announced acquisitions, and the costs and financial impact of pension obligations, emissions requirements, and other contingencies.