Deere & Company — FY2011 Form 10-K
Reporting period: Fiscal year ended October 31, 2011. The filing also reports fourth-quarter results; figures below are in U.S. dollars unless stated otherwise.
Business context
Deere operates agriculture and turf, construction and forestry, and financial services businesses. Equipment is sold primarily through independent dealers; financial services finances equipment purchases and leases and provides related credit and insurance products.
Financial performance
| Metric | FY2011 | FY2010 |
|---|---|---|
| Net sales and revenues | $32.013 billion | $26.005 billion |
| Net sales, equipment operations | $29.466 billion | $23.573 billion |
| Net income attributable to Deere | $2.800 billion | $1.865 billion |
| Diluted earnings per share | $6.63 | $4.35 |
| Operating profit, equipment operations | $3.839 billion | $2.909 billion |
| Operating profit, financial services | $725 million | $499 million |
| Cash from operating activities | $2.326 billion | $2.282 billion |
| Cash and cash equivalents | $3.647 billion | $3.791 billion |
| Marketable securities | $787 million | $228 million |
| Long-term borrowings | $16.960 billion | $16.815 billion |
- Equipment sales rose 25%, mainly on higher shipment volumes; foreign currency translation and price realization each contributed about 3% to the increase.
- Agriculture and turf sales increased 21% to $24.094 billion; segment operating profit was $3.447 billion, up from $2.790 billion.
- Construction and forestry sales increased 45% to $5.372 billion; segment operating profit rose to $392 million from $119 million.
- Financial services net income attributable to Deere increased to $471 million from $373 million, reflecting portfolio growth and lower credit-loss provisions.
- The cost-of-sales-to-equipment-net-sales ratio rose to 74.4% from 73.8%, as higher raw-material and new-product manufacturing costs more than offset improved pricing.
- Fourth-quarter net sales and revenues were $8.612 billion versus $7.202 billion; net income attributable to Deere was $670 million versus $457 million, and diluted EPS was $1.62 versus $1.07.
Cash, debt and liquidity
Investing activities used $2.621 billion, including $1.057 billion of property and equipment purchases and net spending on receivables and leased equipment; proceeds from business sales of $911 million partly offset these outflows. Financing activities provided $140 million, including borrowing proceeds, offset in part by $1.667 billion of share repurchases and $593 million of dividends paid. Cash and cash equivalents declined $143 million during the year.
Cash, cash equivalents and marketable securities totaled $4.435 billion at year-end, compared with $4.019 billion a year earlier. Worldwide bank credit lines were $5.080 billion, of which $3.721 billion was unused. Contractual debt principal was reported at $26.144 billion, including $22.478 billion for financial services; financial services debt primarily funds its receivable and lease portfolio. Equipment operations’ debt-to-capital ratio was 35%, unchanged from 2010. Financial services’ debt-to-equity ratio increased to 7.5:1 from 7.1:1.
Changes, outlook and commentary
- Management forecast fiscal 2012 equipment sales growth of about 15% for the year and 16%–18% for the first quarter, including favorable currency effects of about 1% for the year and 3% for the first quarter. Forecast net income attributable to Deere was approximately $3.2 billion.
- Agriculture and turf sales were forecast to grow about 15%; construction and forestry sales about 16%. Management cited favorable farm incomes, new products and geographic expansion, while noting weaker European economic conditions and broadly flat forestry markets.
- Financial services net income was forecast at approximately $450 million, below FY2011, primarily because credit-loss provisions were expected to return to more typical levels and expenses to rise; portfolio growth was expected to partly offset these effects.
- Management said the company’s cash flow supported global growth as well as dividends and share repurchases. Equipment capital expenditures for FY2012 were estimated at $1.2–$1.3 billion.
- Deere sold its wind-energy business for approximately $900 million in December 2010, focusing resources on core businesses. The prior-year results included a $35 million pretax write-down of the business held for sale.
- The company repurchased $1.667 billion of common stock in FY2011. The 2008 authorization had $4.074 billion remaining at year-end.
Risks, contingencies and unusual items
- Key exposures include uncertain global economic conditions and sovereign debt, credit-market access and funding costs, currency and interest-rate movements, farm commodity prices, weather, raw-material costs and supply-chain disruptions.
- More stringent off-road engine emissions standards require substantial product development and capital investment; delays or higher compliance costs could affect production and results. Management estimated FY2012 capital spending would include emissions compliance.
- Financial services faces risks from funding availability, customer delinquencies and defaults, credit-loss provisions, and evolving financial regulation. At year-end, financing receivables 30 or more days past due were 1.14% of the portfolio, down from 1.78%; the allowance was 0.86% of receivables, down from 1.12%.
- Defined-benefit obligations were sensitive to actuarial assumptions. At year-end, net pension liabilities were $1.373 billion and net postretirement health-care and life-insurance liabilities were $5.193 billion. Management expected approximately $466 million of total plan contributions in FY2012, including direct benefit payments.
- Guarantees related to third-party retail financing were approximately $230 million, with about $7 million accrued for losses. Management stated that reasonably possible additional losses from unresolved legal actions were not expected to materially affect the financial statements. Environmental compliance and cleanup matters were likewise not expected to have a material adverse effect.
- The company reported effective disclosure controls and internal control over financial reporting; the independent auditor issued an unqualified opinion on the financial statements and internal controls.
Important facts for investors to verify
- Whether FY2012 sales and earnings guidance is achieved, particularly given the unsettled global economy and regional market differences.
- Whether rising input, manufacturing, research and development, and emissions-compliance costs pressure equipment margins.
- Whether financial services credit losses return to the anticipated typical level, and how portfolio growth affects funding needs and leverage.
- How capital spending, share repurchases and dividends affect cash, debt and liquidity as the company pursues growth.
- Whether pension and postretirement assumptions, funding requirements, and other significant estimates change materially.