Deere & Company — FY2019 Form 10-K
Reporting period: Fiscal year ended November 3, 2019. Fiscal 2019 included 53 weeks; the fourth quarter included 14 weeks, versus 52 and 13 weeks, respectively, in 2018. Deere manufactures and sells agriculture and turf, construction and forestry equipment, and provides equipment financing and related financial services.
Financial performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales and revenues | $39.258 billion | $37.358 billion |
| Equipment net sales | $34.886 billion | $33.351 billion |
| Net income attributable to Deere | $3.253 billion | $2.368 billion |
| Diluted EPS | $10.15 | $7.24 |
| Operating cash flow | $3.412 billion | $1.822 billion |
| Cash, cash equivalents and marketable securities at year-end | $4.438 billion | $4.394 billion |
| Long-term borrowings at year-end | $30.229 billion | $27.237 billion |
Net income increased 37%; the filing attributes much of the year-over-year change to tax-reform-related discrete adjustments. The 2019 tax adjustment reduced tax expense by $68 million, while the 2018 adjustment increased it by $704 million. Pretax income was comparatively flat at $4.088 billion versus $4.071 billion.
- Agriculture & Turf: Sales of $23.666 billion, up 2%; operating profit of $2.506 billion, down 11%; operating margin of 10.6%, versus 12.1%. Higher production costs, currency effects, R&D and SG&A, and less favorable mix weighed on profit.
- Construction & Forestry: Sales of $11.220 billion, up 10%; operating profit of $1.215 billion, up 40%; operating margin of 10.8%, versus 8.5%. Higher volumes, pricing and Wirtgen’s additional two months of results contributed to growth.
- Financial Services: Revenue of $3.969 billion, up 11%; operating profit of $694 million, down 12%; net income attributable to Deere of $539 million, down from $942 million. Residual-value losses and impairments, and less favorable financing spreads, offset growth in the average portfolio.
The cost-of-sales-to-equipment-net-sales ratio rose slightly to 76.8% from 76.7%. Fiscal 2019 included $77 million of noncash charges for operating-lease equipment and matured lease inventory impairments. Consolidated investing cash flow was an outflow of $3.924 billion and financing cash flow was an inflow of $509 million. Dividends paid were $943 million and common-stock repurchases were $1.253 billion.
Material changes and liquidity
- Worldwide equipment sales rose 5%; price realization contributed 3%, unfavorable currency translation reduced growth by 3%, and Wirtgen’s additional two months contributed about 1% to consolidated equipment sales growth.
- Total assets were $73.011 billion, up from $70.108 billion. Total liabilities were $61.580 billion and Deere & Company stockholders’ equity was $11.413 billion.
- Balance-sheet short-term borrowings, short-term securitization borrowings and long-term borrowings totaled approximately $45.3 billion at year-end, compared with approximately $42.3 billion in 2018. Financial Services accounted for most of the borrowing, supporting its financing portfolio.
- Cash and marketable securities totaled $4.438 billion; commercial paper outstanding was $2.698 billion. Worldwide credit lines were $8.499 billion, of which $5.143 billion was unused. Management stated it expected sufficient funding and liquidity.
- Equipment backlog declined: Agriculture & Turf firm orders were approximately $5.5 billion versus $6.5 billion; Construction & Forestry had no significant backlog versus approximately $3.0 billion a year earlier.
Outlook, risks and unusual items
For fiscal 2020, management forecast Deere-attributable net income of $2.7–$3.1 billion. Agriculture & Turf sales were expected to decline 5–10%, and Construction & Forestry sales 10–15%. Financial Services net income was forecast at approximately $600 million. Management cited cautious farm-equipment demand amid trade tensions and difficult growing and harvesting conditions, and slowing construction activity; it also described the longer-term outlook as positive and emphasized smarter, more efficient and sustainable solutions.
- Financial Services’ expected benefits from lower lease residual-value losses and a larger average portfolio were expected to be partly offset by higher credit-loss provisions, less favorable spreads and higher expenses.
- In the first quarter of fiscal 2020, Deere announced a voluntary employee-separation program estimated at $120 million pretax, with expected annual savings of about $90 million. Separately, 2019 programs incurred $30 million of pretax expense, with estimated 2020 savings of about $30 million.
- Key disclosed risks include agricultural commodity prices, weather and farm income; trade policy and tariffs; construction demand; currency and interest-rate movements; credit losses and used-equipment residual values; supply-chain and raw-material costs; environmental and emissions rules; cybersecurity and privacy; and pension funding and LIBOR transition.
- The filing describes unresolved ordinary-course litigation and an Argentina site groundwater-contamination matter; management did not expect reasonably possible losses to materially affect the financial statements. The filing also reports approximately $343 million of guarantees related to third-party equipment financing.
Most important facts to verify
- How much of the 2019 earnings increase reflects the differing tax-reform adjustments, rather than recurring operating performance.
- Whether projected 2020 equipment-sales declines and the $2.7–$3.1 billion net-income outlook align with subsequent orders, dealer inventories and market conditions.
- Whether lease residual-value assumptions, credit-loss provisions and used-equipment prices support Financial Services’ expected recovery.
- The composition, maturity profile and funding costs of the approximately $45.3 billion of reported borrowings, including Financial Services leverage and securitization funding.
- Whether employee-separation costs and projected savings are realized, and whether the longer fourth quarter affected comparisons with 2018.