Deere & Company — FY2017 Form 10-K Summary
Reporting period: Fiscal year ended October 29, 2017. This is an annual filing; fourth-quarter results are also reported below. Amounts are in U.S. dollars unless noted.
Business context and period results
Deere operates agriculture and turf, construction and forestry, and financial services businesses. Equipment is sold primarily through dealer networks; financial services finances equipment sales and leases. Management said farm and construction equipment markets improved during 2017 and described the company as positioned for stronger, more consistent results.
Key financial metrics
| Metric | FY2017 | FY2016 |
|---|---|---|
| Total net sales and revenues | $29.738 billion | $26.644 billion |
| Equipment net sales | $25.885 billion | $23.387 billion |
| Net income attributable to Deere | $2.159 billion | $1.524 billion |
| Diluted earnings per share | $6.68 | $4.81 |
| Dividends declared per share | $2.40 | $2.40 |
| Net cash from operating activities | $2.200 billion | $3.770 billion |
| Cash and cash equivalents at year-end | $9.335 billion | $4.336 billion |
| Total assets | $65.786 billion | $57.919 billion |
| Deere stockholders’ equity | $9.557 billion | $6.520 billion |
- Net income attributable to Deere was about 7.3% of revenues. Cost of sales was 77.0% of equipment net sales, improving from 78.0%, mainly on price realization and product mix.
- Equipment operating profit rose to $2.821 billion from $1.880 billion. Agriculture and turf sales rose 9% and operating profit was $2.484 billion; construction and forestry sales rose 17% and operating profit was $337 million.
- Financial services attributable net income was $477 million, versus $468 million. Its operating profit was $722 million, versus $709 million; higher average borrowing rates increased interest expense.
- Investing activities used $1.644 billion; financing activities provided $4.287 billion. Year-end cash increased $4.999 billion, primarily reflecting cash held for the Wirtgen acquisition. Equipment operations’ capital expenditures were $583 million; 2018 equipment capital spending was estimated at about $925 million.
- Year-end borrowings were approximately $40.0 billion, including $25.891 billion long-term borrowings, $10.035 billion short-term borrowings and $4.119 billion short-term securitization borrowings. Cash and marketable securities totaled $9.787 billion. Worldwide credit lines were $7.878 billion, of which $4.061 billion was unused; reported debt covenants were met.
- Fourth-quarter FY2017 revenues were $8.018 billion and Deere-attributable net income was $510 million, versus $6.520 billion and $285 million, respectively, in fourth-quarter FY2016.
Material changes versus FY2016
- Revenue rose 12% and Deere-attributable net income rose about 42%, led by higher equipment shipment volumes and improved sales mix. Equipment sales outside the U.S. and Canada increased 20%; U.S. and Canada equipment sales increased 5%.
- FY2017 equipment profit benefited from $375 million of pretax gains on sales of the remaining SiteOne investment, as well as volume, price and mix. Increased production costs, selling and administrative expenses, and warranty costs partly offset these gains.
- Operating cash flow declined about $1.570 billion, primarily reflecting increased inventory and receivables and other working-capital movements. Cash nevertheless rose sharply, in large part because of funds set aside for Wirtgen.
- Warranty accruals increased to $1.007 billion from $779 million, attributed primarily to higher sales volumes and claims experience. Sales-incentive accruals rose to $1.581 billion from $1.391 billion.
- Financial services’ average financed portfolio was 1% higher; lower lease residual-value losses supported earnings, while less favorable financing spreads and higher expenses were offsets.
Outlook, unusual items and risks
- FY2018 outlook: Equipment sales projected to increase about 22%; total net sales and revenues about 19%; Deere-attributable net income about $2.6 billion. Forecasts include positive currency translation of about 2% for the year.
- Agriculture and turf sales were projected to rise about 9%. Construction and forestry sales were projected to rise about 69%, including Wirtgen’s expected contribution. Financial services net income attributable to Deere was forecast at about $515 million.
- Deere completed its Wirtgen acquisition on December 1, 2017, after fiscal year-end, for €4.475 billion (about $5.327 billion). Wirtgen was forecast to contribute about $3.1 billion in FY2018 sales, $75 million in operating profit and $25 million in net income after estimated purchase-accounting and transaction costs. Purchase-price allocation was not yet complete.
- Other notable items included the $284 million Blue River Technology acquisition; $102 million of FY2017 expenses from voluntary employee-separation programs; and a $40 million pretax noncash impairment charge in the fourth quarter relating to an investment in an international construction equipment manufacturer.
- Key disclosed risks include farm income and commodity prices, weather, global economic and construction conditions, trade and government policy, currency and interest-rate movements, financial-services credit and funding risks, used-equipment values and lease residuals, supplier disruptions and input costs, emissions rules, cybersecurity and privacy, and acquisition integration. Deere reported increased supply disruptions linked to supplier labor shortages.
- Deere cited unresolved ordinary-course litigation and an Iowa environmental notice alleging permitted-emissions exceedances at one facility; it said reasonably possible losses from unresolved legal actions were not expected to materially affect its financial statements. Management and the auditor reported effective internal control over financial reporting; the auditor issued an unqualified opinion.
Important facts for investors to verify
- Whether FY2018 guidance is achieved, and how much growth is organic versus attributable to Wirtgen and currency.
- Wirtgen’s final purchase-price allocation, financing impact, integration costs and realized contribution relative to the forecast.
- How much FY2017 earnings depended on the $375 million SiteOne gains and the sustainability of equipment profit improvement.
- Whether higher warranty accruals and claims, sales incentives, and production costs continue to pressure margins.
- Financial-services portfolio quality, delinquencies, credit-loss provisions, lease residual values, financing spreads and access to funding.
- Cash and debt levels after the Wirtgen closing, refinancing needs and the extent of available committed liquidity.