Deere & Company — FY2016 Form 10-K Summary
Business context and reporting period. Deere manufactures and sells agriculture and turf equipment, construction and forestry equipment, and provides equipment financing and related services. This annual report covers the fiscal year ended October 31, 2016; the fourth quarter ended in October. Financial amounts below are in U.S. dollars.
Financial results and key metrics
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales and revenues | $26.644 billion | $28.863 billion |
| Equipment net sales | $23.387 billion | $25.775 billion |
| Net income attributable to Deere & Company | $1.524 billion | $1.940 billion |
| Diluted earnings per share | $4.81 | $5.77 |
| Operating cash flow | $3.764 billion | $3.740 billion |
| Cash and cash equivalents | $4.336 billion | $4.162 billion |
| Total assets | $57.981 billion | $57.948 billion |
| Long-term borrowings | $23.760 billion | $23.833 billion |
- Revenue declined 8%; equipment sales decreased 9%. Equipment sales included 2% positive price realization and a 2% unfavorable currency translation effect.
- Net income fell 21%. Equipment operations’ operating profit was $1.880 billion, down from $2.177 billion. The cost-of-sales-to-net-sales ratio improved slightly to 78.0% from 78.1%.
- Agriculture and turf sales declined 7%, while segment operating profit rose to $1.700 billion from $1.649 billion, aided by pricing, lower costs and a SiteOne gain. Construction and forestry sales fell 18%; operating profit fell to $180 million from $528 million.
- Financial services attributable net income was $468 million versus $633 million; segment operating profit was $709 million versus $963 million. Lower financing spreads, higher lease residual-value losses and higher credit-loss provisions weighed on results. The prior year included a crop-insurance-business sale gain.
- Fourth-quarter 2016 net sales and revenues were $6.520 billion; net income attributable to Deere was $285 million, or $0.90 diluted EPS.
- Cash from operations was $3.764 billion; investing activities used $1.177 billion and financing activities used $2.401 billion. Property and equipment purchases were $644 million. Cash increased $174 million over the year.
- At year-end, cash and marketable securities totaled $4.789 billion; commercial paper outstanding was $1.253 billion. Worldwide credit lines were $7.315 billion, of which $5.747 billion was unused. Balance-sheet short-term borrowings were $6.912 billion, and short-term securitization borrowings were $5.003 billion.
- Equipment operations’ interest-bearing debt was $4.835 billion, with debt-to-capital of 43%. Financial services’ external interest-bearing debt was $30.839 billion, with debt-to-equity of 7.6:1.
- Dividends declared were $2.40 per share, unchanged from 2015. The company repurchased $205 million of shares in 2016; $3.260 billion remained under its $8 billion authorization.
Material changes versus the prior comparable period
- Lower equipment shipment volumes, unfavorable currency and a less favorable product mix reduced equipment profitability; price realization, lower production costs and reduced selling, administrative and general expenses partially offset the impact.
- Financial services’ provision for credit losses increased, and the total allowance for credit losses rose to $226 million from $198 million. Past-due financing receivables over 30 days were 1.50% of financed receivables, versus 1.28%.
- Operating-lease equipment depreciation increased to $742 million from $577 million; the company also recorded $31 million of lease-asset impairments and $29 million of charges on matured lease inventory.
- Postretirement benefit liabilities increased: net pension liabilities rose to $1.949 billion from $1.022 billion, and net health-care and life-insurance liabilities rose to $6.065 billion from $5.395 billion. The retirement-benefits adjustment reduced equity by $908 million after tax.
- Net cash from operating activities was broadly stable. Inventory fell $477 million in equipment operations, while net equipment on operating leases increased to $5.902 billion from $4.970 billion.
Outlook, commentary, risks and unusual items
- For fiscal 2017, Deere forecast equipment sales down 1% for the year and about 4% lower in the first quarter year over year; the estimates include positive currency translation effects of about 1% and 2%, respectively. Forecast net income attributable to Deere was about $1.4 billion.
- Agriculture and turf sales were forecast down about 1%; North American agricultural industry sales were expected to fall 5%–10%, and EU28 sales about 5%. South American tractor and combine industry sales were forecast up about 15%. Construction and forestry sales were forecast up about 1%. Financial services net income was forecast at approximately $480 million.
- Management cited continuing weakness in agricultural and construction equipment markets, low commodity prices and weak farm incomes, slow global growth, currency volatility and commodity-price volatility. It described disciplined cost management and a broad product portfolio as supporting performance, and said the business was positioned to pursue growth and efficiency gains.
- Voluntary employee separation programs are expected to cost $111 million pretax: $11 million was recorded in Q4 2016 and approximately $100 million primarily in Q1 2017. Expected 2017 savings are approximately $70 million.
- In May 2016, Deere sold part of its SiteOne interest, recognizing a $75 million pretax gain. A further December 2016 sale produced approximately $105 million pretax ($66 million after tax), excluded from the 2017 net-income forecast.
- Deere acquired Monosem and an 80% interest in Hagie Manufacturing in 2016. The planned $190 million Precision Planting acquisition faced a U.S. Department of Justice lawsuit seeking to block it; closing timing was uncertain.
- Identified risks include equipment demand and farm income, used-equipment prices and lease residual values, customer defaults and funding access, interest and foreign-exchange rates, trade and regulatory changes, weather, supply-chain disruption, emissions requirements, cybersecurity and data privacy, and pension funding. Deere said unresolved legal matters were not expected to have a material effect; environmental matters were also not expected to materially affect its consolidated results.
Important facts for investors to verify
- Whether FY2017 equipment-sales and net-income forecasts were achieved, and how commodity prices, farm income and regional demand evolved.
- Whether financial-services credit-loss provisions, delinquencies and lease residual-value losses increased or moderated.
- Whether the announced separation-program costs and projected savings were realized as expected.
- How the SiteOne divestiture proceeds and gains, and the Precision Planting litigation outcome, affected subsequent results and strategy.
- Whether liquidity, funding access and leverage remained consistent with reported credit facilities and covenant requirements.
- How pension and postretirement obligations changed with discount rates, investment returns and health-care cost assumptions.