Deere & Company — FY2013 Form 10-K
Reporting period: Fiscal year ended October 31, 2013. The filing also provides unaudited fourth-quarter results for the quarter ended October 31, 2013. Deere operates agriculture and turf, construction and forestry, and financial services businesses.
Financial results
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales and revenues | $37.795 billion | $36.157 billion |
| Equipment net sales | $34.998 billion | $33.501 billion |
| Net income attributable to Deere | $3.537 billion | $3.065 billion |
| Diluted EPS | $9.09 | $7.63 |
| Equipment operations operating profit | $5.058 billion | $4.397 billion |
| Cost of sales / equipment net sales | 73.3% | 74.6% |
| Operating cash flow | $3.254 billion | $1.168 billion |
Revenue rose 5%, while net income attributable to Deere increased about 15%. Equipment operating profit improved on higher shipments and price realization; those gains were partly offset by currency effects, higher production and selling costs, warranty costs, and impairment charges. The improved cost-of-sales ratio primarily reflected stronger price realization. Financial services net income attributable to Deere was $565 million, up from $460 million.
Fiscal Q4: Net sales and revenues were $9.451 billion versus $9.792 billion in Q4 2012; net income attributable to Deere was $807 million versus $688 million, and diluted EPS was $2.11 versus $1.75.
Cash, debt and liquidity
- Cash from operating activities was $3.254 billion. Investing activities used $4.821 billion and financing activities provided $407 million; cash and cash equivalents fell $1.148 billion to $3.504 billion.
- Capital expenditures were $1.158 billion. Deere repurchased $1.531 billion of common stock and paid $753 million in dividends. Dividends declared were $1.99 per share, compared with $1.79 in FY2012.
- At year-end, cash and marketable securities totaled $5.129 billion. Balance-sheet borrowings were $8.789 billion short-term, $4.109 billion short-term securitization borrowings, and $21.578 billion long-term. Financial services external interest-bearing debt was $28.524 billion; equipment operations debt was $5.951 billion.
- Worldwide credit lines totaled $6.498 billion, of which $2.939 billion was unused. Deere reported that credit-agreement requirements were met. Deere & Company stockholders’ equity increased to $10.266 billion from $6.842 billion.
Material changes and unusual items
- Agriculture and turf sales increased 7% and operating profit rose to $4.680 billion from $3.921 billion. Construction and forestry sales fell 8% and operating profit declined to $378 million from $476 million.
- Financial services operating profit increased to $870 million from $712 million. Growth in the credit portfolio and higher crop insurance margins contributed; the prior year had benefited from wind-energy-credit revenue.
- Deere recorded $102 million of noncash impairment charges in FY2013: $57 million related to John Deere Water and $45 million to John Deere Landscapes. Landscapes assets were classified as held for sale at year-end.
- Deere agreed to sell a 60% interest in John Deere Landscapes for approximately $300 million in proceeds, retaining an initial 40% interest. It also acquired planter manufacturer Bauer Built Manufacturing for approximately $84 million. Deere was reviewing strategic options for John Deere Water.
- Comprehensive income attributable to Deere was $5.416 billion, including a $1.950 billion after-tax retirement-benefits adjustment; this noncash equity item materially lifted comprehensive income compared with FY2012.
Outlook, commentary and risks
For FY2014, Deere forecast equipment sales down about 3% overall and down about 2% in the first quarter, with net income attributable to Deere of approximately $3.3 billion. Agriculture and turf sales were projected to decline about 6%, reflecting expected lower commodity prices and farm incomes, though still healthy by historical standards. Construction and forestry sales were forecast to rise about 10%, supported by U.S. recovery and higher housing starts. Financial services net income was expected to be about $600 million, with portfolio growth partly offset by a higher provision for credit losses.
Management identified demand and funding uncertainty tied to global economic conditions, farm income and commodity prices, weather, currency and interest-rate movements, trade and government policies, customer credit quality, and construction activity. Other cited exposures include increasingly stringent engine-emissions rules, input and supply-chain costs, pension obligations, environmental requirements, and cybersecurity. Deere said unresolved legal matters were not expected to have a material effect beyond accrued amounts. It had approximately $270 million of equipment-financing guarantees outstanding and about $6 million accrued for related losses.
Management concluded disclosure controls and internal control over financial reporting were effective at October 31, 2013; the auditor issued an unqualified opinion on the financial statements and internal controls.
Key facts for investors to verify
- Whether 2014 agricultural demand and lower farm income would produce the forecast decline, and how realized pricing and production levels affected margins.
- Progress and final economics of the Landscapes transaction, including the retained interest and preferred-unit dividend terms; also the outcome of the Water strategic review.
- Whether construction and forestry growth and the projected $3.3 billion FY2014 net income were achieved.
- Credit-portfolio performance, delinquencies, loss provisions, and funding costs at financial services as the receivables portfolio expands.
- Cash generation and capital allocation relative to debt, dividends, and the December 2013 authorization for an additional $8 billion share-repurchase program.
- Effects of pension assumptions, warranty costs, emissions-compliance spending, currency changes, and other estimates or risks identified in the filing.