Business Context and Reporting Period
Company: Deere & Company (John Deere)
Filing Type: Form 10-K (Annual Report)
Period Ended: October 31, 2007
Business Overview: The Company operates through four major segments: Agricultural Equipment, Commercial and Consumer Equipment, Construction and Forestry, and Credit (Financial Services). Operations are categorized geographically as U.S. and Canada, and Outside U.S. and Canada. The Company manufactures and distributes a full line of farm, commercial, and construction equipment, primarily through independent dealer networks, and provides financing for these sales.
Key Financial Metrics
| Metric | 2007 (Millions) | 2006 (Millions) |
|---|---|---|
| Total Net Sales and Revenues | $24,082 | $22,148 |
| Net Income | $1,822 | $1,694 |
| Income from Continuing Operations | $1,822 | $1,453 |
| Diluted EPS (Continuing Ops) | $4.00 | $3.08 |
| Operating Profit (Equipment Ops) | $2,318 | $1,905 |
| Net Income (Financial Services) | $364 | $584 |
| Total Assets | $38,576 | $34,720 |
| Long-term Borrowings | $11,798 | $11,584 |
| Short-term Borrowings | $9,969 | $8,121 |
| Cash and Cash Equivalents | $2,279 | $1,688 |
| Operating Cash Flow | $2,759 | $973 |
Note: Per share data reflects a two-for-one stock split effective November 26, 2007.
Material Changes vs. Prior Period
- Revenue Growth: Total net sales and revenues increased 9% to $24.1 billion. Equipment Operations net sales rose 8% to $21.5 billion, driven by a 27% increase in sales outside the U.S. and Canada. U.S. and Canada equipment sales were flat.
- Profitability: Worldwide net income increased 8% to $1.8 billion. Income from continuing operations rose 25% to $1.8 billion, excluding the impact of discontinued health care operations sold in 2006.
- Segment Performance:
- Agricultural Equipment: Operating profit surged 64% to $1.44 billion due to higher volumes and improved price realization.
- Commercial & Consumer: Operating profit increased 38% to $304 million, aided by the acquisition of LESCO, Inc.
- Construction & Forestry: Operating profit declined 29% to $571 million due to a 13% drop in sales caused by the U.S. housing downturn.
- Credit: Operating profit increased 5% to $548 million, driven by portfolio growth, though net income decreased year-over-year due to the prior year's gain on the sale of health care operations.
- Cost Structure: The cost of sales to net sales ratio improved to 75.6% from 77.3%, offsetting higher raw material costs with improved price realization and volume.
- Accounting Changes: Adoption of FASB Statement No. 158 resulted in a $1.1 billion charge to stockholders' equity related to unrecognized pension and postretirement benefit obligations.
Guidance, Outlook, and Risks
2008 Outlook
- Sales: Company equipment sales are projected to increase approximately 12% for fiscal 2008, with a 25% increase expected in the first quarter.
- Net Income: Forecast at approximately $2.1 billion for 2008 and $325 million for the first quarter.
- Segment Forecasts:
- Agricultural: Sales expected to rise 17% globally, supported by strong farm economics and commodity prices.
- Commercial & Consumer: Sales projected up 10%, including 8 percentage points from LESCO.
- Construction & Forestry: Sales expected to be flat compared to 2007 due to continued pressure in the U.S. housing market.
- Credit: Net income forecast at $375 million.
Risks and Contingencies
- Economic Conditions: Sensitivity to the U.S. housing market (Construction segment), farm commodity prices, and global economic prosperity.
- Raw Materials: Exposure to price fluctuations in steel, rubber, and fuel.
- Interest Rates: Rising rates could dampen demand and increase funding costs for the Credit segment.
- Legal: Ongoing product liability (including asbestos), retail credit, and intellectual property litigation, though management does not expect a material effect.
- Off-Balance Sheet: Guarantees related to crop insurance (max exposure ~$489 million in a catastrophic scenario) and third-party receivables (~$190 million).
Investor Verification Checklist
- Stock Split Adjustment: Verify all per-share data is adjusted for the two-for-one stock split effective November 26, 2007.
- Discontinued Operations: Confirm that 2006 results include a $241 million gain from the sale of health care operations, which is excluded from 2007 continuing operations.
- Pension Accounting: Review the impact of FASB 158 adoption, which reduced stockholders' equity by $1.1 billion but did not affect net income.
- Construction Segment: Monitor the U.S. housing market's impact on the Construction and Forestry segment, which saw a 13% sales decline in 2007.
- Acquisitions: Assess the integration and contribution of LESCO, Inc. (Commercial/Consumer) and Ningbo Benye (Agricultural) to 2008 growth targets.
- Debt Levels: Note the increase in short-term borrowings to nearly $10 billion, primarily driven by the Credit segment's portfolio growth.