DEERE & CO annual report, FY2009

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Deere & Company — FY2009 Form 10-K

Reporting period: Fiscal year ended October 31, 2009. The filing is an annual report, not a standalone fourth-quarter filing; it also reports a fourth-quarter net loss.

Business context and financial performance

Deere operates agriculture and turf, construction and forestry, and credit businesses. Equipment is sold mainly through dealer networks; Financial Services finances equipment sales and leases.

  • Revenue: Net sales and revenues were $23.112 billion, down 19% from $28.438 billion in FY2008. Equipment net sales fell 20% to $20.756 billion, mainly on lower shipment volumes; favorable price realization partly offset lower volumes and adverse currency translation.
  • Profit: Net income was $873.5 million, down from $2.053 billion; diluted EPS was $2.06 versus $4.70. Equipment Operations operating profit fell to $1.365 billion from $2.927 billion. Financial Services net income was $202.5 million versus $337.4 million.
  • Margins: Cost of sales was 78.3% of equipment net sales, versus 75.9% in 2008, reflecting lower production and shipment volumes, foreign exchange, higher raw-material costs and special charges.
  • Segments: Agriculture and turf sales were $18.122 billion and operating profit was $1.448 billion. Construction and forestry sales were $2.634 billion, down 45%, and the segment recorded an $83 million operating loss. Credit operating profit was $223 million, down from $478 million.
  • Cash flow: Consolidated operating cash flow was $1.985 billion, investing cash outflow $57 million and financing cash inflow $470 million. Cash and cash equivalents increased $2.440 billion to $4.652 billion. Capital expenditures were $907 million.
  • Debt and liquidity: Short- and long-term borrowings totaled approximately $24.551 billion at year-end, compared with $22.419 billion in 2008. Cash plus marketable securities totaled $4.844 billion. The company reported $4.558 billion of worldwide bank lines, of which $4.214 billion was unused; it stated liquidity was sufficient for expected funding needs.
  • Balance sheet: Total assets were $41.133 billion; stockholders’ equity fell to $4.819 billion from $6.533 billion, primarily due to a $2.537 billion retirement-benefits adjustment. Dividends declared were $1.12 per share, versus $1.06.

Changes versus the prior comparable period

  • Revenue, net income and equipment operating profit declined materially as the global downturn reduced demand and production. Equipment sales outside the U.S. and Canada fell 28%; U.S. and Canada sales fell 14%.
  • Construction and forestry moved from a $466 million operating profit in 2008 to an $83 million loss in 2009.
  • Credit results weakened as provisions for credit losses rose, financing spreads narrowed, crop-insurance commissions declined and construction-equipment lease residual losses increased. The credit-loss allowance rose to $316 million from $226 million.
  • Trade receivables and inventories declined to $5.014 billion from $6.276 billion. Agriculture and turf firm backlog fell to about $3.6 billion from $6.7 billion.

Outlook, commentary and risks

  • FY2010 outlook: Equipment sales were forecast down about 1% for the year and 10% in the first quarter. Net income was expected to be approximately $900 million. Management forecast agriculture and turf sales down about 4%, construction and forestry sales up about 18%, and Credit net income around $240 million.
  • Management expected postretirement benefit costs to increase by about $400 million pretax in 2010, mainly because of lower discount rates. Equipment Operations capital spending was estimated at $850–$900 million, largely for emissions compliance, facility modernization and new products.
  • The fourth quarter included a $289 million pretax, noncash goodwill impairment at John Deere Landscapes and $91 million pretax of voluntary separation expenses. The Welland, Ontario facility closure generated additional restructuring costs; the company expected about $40 million of annual pretax benefit from the closure in 2010 and $50–$60 million of annual savings from the separation program.
  • Key risks include a slow or worsening recovery, reduced customer access to credit, credit losses, currency and interest-rate movements, raw-material and supplier disruption, used-equipment values, weather and agricultural conditions, and regulatory changes. New Interim Tier 4/Stage IIIb engine-emissions standards apply beginning in 2011.
  • Contingencies include crop-insurance-related exposure of up to about $981 million in the remote event of widespread crop failure and reinsurance defaults, and about $170 million of third-party financing guarantees. Management considered the likelihood of the crop-insurance scenario substantially remote. Environmental matters and unresolved legal actions were not expected to have a material effect.

Important facts for investors to verify

  • Review the full cash-flow and debt disclosures, including Financial Services’ funding needs, securitizations and scheduled maturities; consolidated borrowing totals combine equipment and finance operations.
  • Assess the assumptions behind credit-loss reserves, lease residual values, goodwill valuation and retirement-benefit obligations.
  • Compare actual FY2010 sales, earnings and benefit costs with management’s forecasts and the regional/segment assumptions supporting them.
  • Confirm the scope and timing of restructuring savings, Welland closure costs and emissions-compliance capital spending.
  • Review fourth-quarter results and special charges in the quarterly table: the quarter reported a $223 million net loss, including diluted loss per share of $0.53.