Deere & Company — FY2014 Form 10-K
Reporting period: Fiscal year ended October 31, 2014. Deere manufactures and distributes agriculture and turf, construction and forestry equipment, and provides equipment financing and related financial services. Unless otherwise noted, amounts are in U.S. dollars.
Financial performance and position
- Revenue: Net sales and revenues were $36.067 billion, down 5% from $37.795 billion. Equipment net sales were $32.961 billion, down 6%; lower shipment volumes and a 1% unfavorable currency effect were partly offset by 2% price realization.
- Profit and earnings: Net income attributable to Deere & Company was $3.162 billion, down 11% from $3.537 billion. Diluted EPS was $8.63 versus $9.09. Equipment operations net income declined to $2.548 billion from $2.974 billion; financial services net income rose to $624 million from $565 million.
- Margins and costs: Cost of sales was 75.2% of equipment net sales, compared with 73.3% in 2013, reflecting mix, currency and higher production costs, including engine-emissions programs. Equipment operating profit fell to $4.297 billion from $5.058 billion. Agriculture and turf operating profit was $3.649 billion, down from $4.680 billion; construction and forestry operating profit rose to $648 million from $378 million. Financial services operating profit increased to $921 million from $870 million.
- Fourth quarter: Net sales and revenues were $8.965 billion versus $9.451 billion in Q4 2013; Deere-attributable net income was $649 million versus $807 million; diluted EPS was $1.83 versus $2.11.
- Cash flow: Operating cash flow was $3.526 billion, compared with $3.254 billion. Investing activities used $2.881 billion and financing activities used $288 million. Cash and cash equivalents increased $283 million to $3.787 billion.
- Debt and liquidity: Long-term borrowings were $24.381 billion, up from $21.578 billion. Financial services external interest-bearing debt was $31.882 billion; equipment operations interest-bearing debt was $5.077 billion. Cash and marketable securities totaled $5.002 billion. Worldwide credit lines were $6.413 billion, of which $3.367 billion was unused. Deere reported stable A2 / A- long-term ratings from Moody’s and S&P, respectively.
- Other measures: Total assets were $61.336 billion, up from $59.521 billion; Deere stockholders’ equity declined to $9.063 billion from $10.266 billion. Dividends declared were $2.22 per share, up from $1.99. Share repurchases totaled $2.731 billion.
Changes versus 2013
- Weaker global farm conditions reduced agriculture and turf sales and profits; equipment operating results also faced lower production volumes, less favorable mix, currency effects, and higher emissions-related costs.
- Construction and forestry improved: sales increased 12% and operating profit increased to $648 million.
- Financial services benefited from portfolio growth and lower average borrowing rates, while credit-loss provisions and expenses increased and crop insurance margins declined.
- Operating cash flow improved, while total borrowings and assets increased. Shareholders’ equity fell, reflecting repurchases, dividends, retirement-benefit adjustments and currency translation, partly offset by earnings.
Outlook, commentary and risks
- FY2015 outlook: Company equipment sales were projected to decline about 15%, with first-quarter sales down about 21% versus the comparable 2014 periods. Deere forecast net income of about $1.9 billion.
- Agriculture and turf sales were forecast to decline about 20%, amid lower commodity prices and farm incomes; U.S. and Canada agricultural industry sales were forecast down 25–30%. Construction and forestry sales were forecast to rise about 5%. Financial services net income was projected at approximately $610 million, lower than 2014, mainly due to higher expected credit-loss provisions and a less favorable tax rate.
- Management described 2014 as a solid year with healthy cash flow and expected the company to remain profitable despite a substantial agricultural-market downturn. It cited longer-term opportunities in food, shelter and infrastructure needs.
- Unusual items and transactions: Deere recorded non-cash impairments, including charges related to China agriculture and turf assets and the Water operations; the 2014 Water-related charges were $62 million pretax. Deere sold 60% of John Deere Landscapes in 2013 and sold its Water operations in May 2014. In December 2014, it agreed to sell its Crop Insurance operations, with closing expected by March 2015 and no significant gain or loss anticipated.
- Principal risks: Farm income, commodity prices, weather and government programs; economic and construction cycles; customer credit quality and financing-market access; interest and currency movements; competition and input-cost or supply disruptions; engine-emissions and other regulatory requirements; geopolitical and trade developments; pension assumptions; cybersecurity; and climate-related impacts. The company said reasonably possible additional losses from unresolved legal proceedings were not expected to materially affect its financial statements.
Investor verification checklist
- Verify the FY2015 equipment-sales and earnings outlook against subsequent results, particularly the assumed farm-market decline.
- Review financial services credit quality, delinquencies, provisions, funding maturities and securitization dependence as the portfolio grows.
- Assess the effect of lower production volumes, product mix, currency and emissions-compliance costs on equipment margins.
- Check the final financial and accounting effects of the Landscapes, Water and Crop Insurance transactions.
- Evaluate total debt and liquidity in light of the financing subsidiary’s leverage and planned repurchases; confirm the status of the remaining $6.230 billion share-repurchase authorization.
- Monitor pension and postretirement obligations, including the sensitivity to discount rates and healthcare-cost assumptions.