01—Abstract
Summary
Summary of the 10-K filed December 18, 2008. Cited figures are marked; the original filing is the authoritative source.
Deere & Company's fiscal 2008 10-K (year ended October 31, 2008) shows a company at a strong earnings peak that is now entering a sharp global downturn.
Worldwide net income rose 13% to $2,053 milliona ($4.70 diluted EPS), and net sales and revenues grew 18% to $28,438 million. Growth was driven mainly by the agricultural equipment segment, where net sales rose 37% on higher volumes, favorable currency and price realization, while commercial and consumer sales grew 2% and construction and forestry sales fell 4%. Operating profit in the agricultural segment reached $2,224 million, offset by higher raw material costs, a Canadian plant closure (Welland, Ontario, roughly $98 million of total expected charges) and a cost of sales ratio that rose to 75.9%.
Management's outlook is cautious. Equipment sales are projected to be roughly flat in 2009, with first-quarter sales up about 7%, and net income is forecast at about $1.9 billionb. Agricultural sales are expected to rise about 5%, while commercial and consumer sales (down about 6%) and construction and forestry sales (down about 12%) are expected to weaken with the U.S. housing market and nonresidential construction.
Financial Services faces narrower funding spreads, with credit segment net income forecast to fall to about $300 millionc from $337 million. Currency translation is a roughly 6% headwind to 2009 sales. Balance-sheet and capital-return items matter for investors.
Stockholders' equity fell to $6.5 billiond from $7.2 billion because of $1.7 billion in buybacks and a pension and retiree-benefit adjustment, and pension assets dropped sharply as the actual plan return was a loss of about $2.2 billion. Management also reports a $5 billion buyback authorization, $2.1 billion of commercial paper guaranteed under the FDIC's Temporary Liquidity Guarantee Program, and a $3.75 billion credit facility. Total long-term borrowings rose to $13.9 billion, largely at Financial Services, which carries most of the company's debt against its receivables portfolio.
02—Key points
Key Highlights
- Record results: net income of $2,053 million ($4.70 diluted EPS), up from $1,822 million ($4.00) in 2007; net sales and revenues up 18% to $28.4 billion.
- Agricultural equipment net sales rose 37% to $16.6 billion, with operating profit of $2,224 million, the main driver of the year's growth.
- 2009 outlook is cautious: equipment sales about flat for the year, net income forecast at about $1.9 billion, and a roughly 6% currency headwind.
- Commercial/consumer sales forecast down about 6% and construction/forestry sales down about 12% in 2009 as housing and nonresidential construction weaken.
- Shareholder returns: $1.68 billion of share repurchases and $448 million of dividends paid in 2008; a new $5 billion buyback authorization was approved in May 2008.
- Pension and retiree-benefit exposure increased: the pension plan return was a loss of about $2.2 billion, retirement benefit assets fell, and stockholders' equity dropped to $6.5 billion from $7.2 billion.
- Financial Services relies on the FDIC's Temporary Liquidity Guarantee Program for $2.1 billion of commercial paper, and credit segment 2009 net income is forecast to fall to about $300 million.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2008, Deere & Co kept $0.07.
- Revenue$28.44B100.0%
- Cost of revenue−$19.57B68.8%
- Gross profit$8.86B31.2%
- Operating costs−$5.44B19.1%
- Operating income$3.42B12.0%
- Interest, other & tax−$1.37B4.8%
- Net income$2.05B7.2%
Where FY2008 revenue went
$28.44B- Cost of revenue: $19.57B, 69% of revenue
- Net income: $2.05B, 7.2% of revenue
- R&D: $943.1M, 3.3% of revenue
- SG&A: $2.96B, 10% of revenue
- Other operating costs: $1.54B, 5.4% of revenue
- Interest, other & tax: $1.37B, 4.8% of revenue
Kept 7.2% as net incomeNet income $2.05B · 7.2%R&D $943.1M · 3.3%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2008filed December 18, 2008Financial Statements
FY2008 against FY2007
| Line item | FY2008FY2007 | Change |
|---|---|---|
| Revenue | $28.44B$24.08B | +18.1% |
| Cost of Revenue | $19.57B$16.25B | +20.4% |
| Gross Profit | $8.86B$7.83B | +13.2% |
| R&D Expenses | $943.10M$816.80M | +15.5% |
| SG&A Expenses | $2.96B$2.62B | +13.0% |
| Operating Income | $3.42B— | — |
| Interest Expense | $1.14B$1.15B | −1.2% |
| Net Income | $2.05B$1.82B | +12.7% |
| EPS (Basic) | $4.76$4.05 | +17.5% |
| EPS (Diluted) | $4.70$4.00 | +17.5% |
| Shares Outstanding (Basic) | 431.10M449.30M | −4.1% |
| Shares Outstanding (Diluted) | 436.30M455.00M | −4.1% |
05—Questions
Frequently Asked Questions
How did Deere perform in fiscal 2008 compared with 2007?
Net income rose about 13% to $2,053 million ($4.70 diluted EPS) from $1,822 million ($4.00). Net sales and revenues rose 18% to $28,438 million, driven mainly by a 37% increase in agricultural equipment net sales on higher volumes, currency benefits and better pricing. Operating profit for the equipment segments increased, while Financial Services net income fell to $337 million from $364 million.
What is management's outlook for 2009?
Management projects equipment sales roughly flat for the full year and up about 7% in the first quarter, with net income of about $1.9 billion. Agricultural sales are expected up about 5%, while commercial/consumer sales are forecast down about 6% and construction/forestry sales down about 12%. The company says the outlook is highly uncertain given the economic downturn.
What risks does the filing highlight for investors?
Key risks include the global financial downturn and credit market liquidity, which could affect Financial Services funding costs and customer access to credit; weakness in housing and construction; currency translation (about a 6% sales headwind expected in 2009); raw material and supplier costs; and pension losses after the sharp fall in plan asset values. Changes in government programs and credit ratings are also flagged.
How is Deere returning capital to shareholders, and how is its balance sheet positioned?
In 2008 Deere repurchased $1.68 billion of stock and paid $448 million in dividends, with the quarterly dividend raised to $0.28 per share. A $5 billion additional repurchase authorization was approved in May 2008, bringing total remaining authority to about 143 million shares. Total assets were $38.7 billion, and total long-term borrowings were $13.9 billion, mostly at Financial Services; the company said it had sufficient liquidity and was in compliance with its credit facility covenants.
What special charges or one-time items affected 2008 results?
The company recorded special charges of $31 million after tax (about $0.07 per share) for closing its Welland, Ontario facility, which makes utility vehicles and attachments. The total expected cost of that closure is about $98 million pretax, with the plant scheduled to close by the end of 2009. The company expects annual savings of about $40 million once the closure is complete.
06—Continue