Deere & Company — FY2010 Form 10-K
Business context and reporting period. Annual report for the fiscal year ended October 31, 2010; it is not a standalone quarterly filing. Deere operates agriculture and turf, construction and forestry, and credit businesses. Equipment is sold mainly through independent dealers; Financial Services finances equipment sales and leases.
Financial results
| Metric | FY2010 | FY2009 |
|---|---|---|
| Net sales and revenues | $26.005 billion | $23.112 billion |
| Equipment Operations net sales | $23.573 billion | $20.756 billion |
| Net income attributable to Deere & Company | $1.865 billion | $873.5 million |
| Diluted earnings per share | $4.35 | $2.06 |
| Equipment Operations operating profit | $2.909 billion | $1.365 billion |
| Financial Services net income attributable to Deere | $373 million | $203 million |
| Operating cash flow | $2.282 billion | $1.985 billion |
| Cash and cash equivalents, year-end | $3.791 billion | $4.652 billion |
| Total assets, year-end | $43.267 billion | $41.133 billion |
| Long-term borrowings, year-end | $16.815 billion | $17.392 billion |
The cost of sales to net sales ratio improved to 73.8% from 78.3%. Deere reported total short-term borrowings of $7.535 billion and long-term borrowings of $16.815 billion at year-end. Cash plus marketable securities was $4.019 billion; $3.222 billion of $5.294 billion in bank credit lines was unused. Deere’s credit ratings were A2/Prime-1 from Moody’s and A/A-1 from S&P, both with stable outlooks.
FY2010 cash from operations was more than offset by $2.109 billion of investing outflows and $1.010 billion of financing outflows; cash declined $861 million. Financing outflows included $484 million of dividends and $359 million of share repurchases. Deere declared dividends of $1.16 per share for the year.
Material changes versus prior periods
- Revenue rose 13% and Deere-attributable net income more than doubled versus FY2009, when results included $381 million of pretax goodwill impairment and employee-separation charges.
- Equipment sales increased primarily on higher shipment volumes, with additional benefit from pricing and currency translation. Equipment operating profit benefited from volume, price, favorable currency effects and lower raw-material costs.
- Agriculture and turf operating profit rose to $2.790 billion from $1.448 billion. Construction and forestry returned to a $119 million operating profit from an $83 million loss.
- Financial Services operating profit increased to $465 million from $223 million, reflecting improved financing spreads and lower credit-loss provisions. Its average receivables and lease portfolio grew 5%.
- FY2010 included a $27 million pretax goodwill impairment charge and a $35 million pretax write-down of wind-energy assets held for sale. Postretirement benefit costs rose to $658 million from $312 million, primarily due to lower discount rates.
- In the fourth quarter, net sales and revenues were $7.202 billion and Deere-attributable net income was $457 million, versus $5.334 billion and a $223 million loss in Q4 FY2009.
Outlook, commentary and risks
- For FY2011, Deere forecast equipment sales growth of 10%–12%, including an approximately 1% unfavorable currency effect, and Deere-attributable net income of approximately $2.1 billion. First-quarter equipment sales were projected to rise about 34%, including an approximately 2% unfavorable currency effect.
- Agriculture and turf sales were forecast to increase 7%–9%; construction and forestry sales 25%–30%; and Financial Services net income to approximately $360 million. Management cited favorable farm conditions and improving construction and forestry markets, while expecting U.S./Canada farm machinery and turf industry sales to be roughly flat.
- Management expected a record number of new-model launches in 2011 to meet Interim Tier 4 emissions rules. The forecast reflected transition complexity, higher compliance and raw-material costs, and a less favorable agriculture and turf sales mix.
- Key risks include economic recovery and sovereign-debt uncertainty, customer and company access to credit, farm commodity prices and weather, construction activity, currency and interest-rate movements, raw-material and component availability, competition, and timely compliance with emissions requirements.
- Deere completed the sale of its wind-energy business after year-end for approximately $900 million. A dividend increase to $0.35 per share quarterly was declared in December 2010.
- Contingencies include guarantees of approximately $190 million on certain third-party equipment financing and a maximum potential crop-insurance exposure of approximately $1.029 billion in a catastrophic crop-failure scenario combined with reinsurer defaults; management considered that scenario substantially remote. Legal proceedings and environmental matters were not expected by management to have a material effect.
Most important facts for investors to verify
- Whether FY2011 sales and earnings guidance was achieved, especially given emissions-model transition costs, raw-material inflation and sales mix.
- How much of the FY2010 profit recovery reflected sustainable equipment demand and margins versus comparison with FY2009 charges.
- Financial Services credit quality, funding access, portfolio growth, and leverage; the credit segment’s year-end external debt was $20.935 billion.
- Cash conversion and working-capital needs, including year-end inventory growth and the seasonal funding demands of equipment operations.
- Postretirement obligations: reported net OPEB liabilities were $4.830 billion; changes in discount rates and healthcare-cost assumptions can materially affect obligations and expense.
- Final wind-business sale proceeds and use of the proceeds, and the potential financial impact of the disclosed guarantees and other contingencies.