01—Abstract
Summary
Summary of the 10-K filed December 17, 2012. Cited figures are marked; the original filing is the authoritative source.
Deere & Company's fiscal 2012 10-K (fiscal year ended October 31, 2012) shows a strong year driven by pricing and volume.
Net sales and revenues rose 13% to $36,157 milliona, and net income attributable to Deere & Company reached $3,065 million, or $7.63 per diluted share, up from $6.63 in 2011. The equipment operations posted an operating profit of $4,397 million, with agriculture and turf (net sales up 13%) and construction and forestry (up 19%) both contributing. Price realization of 4% partly offset a 3% unfavorable currency effect.
The cost of sales ratio edged up to 74.6% from 74.4% on higher production and raw material costs, a goodwill impairment of $33 millionb at John Deere Water, and higher R&D spending of $1,434 million. The financial services segment earned $460 million, slightly below $471 million in 2011, as crop insurance claims, higher selling expenses and narrower financing spreads offset portfolio growth. Balance sheet leverage increased meaningfully: long-term borrowings rose to $22,453 million from $16,960 million, and equipment operations' total debt-to-capital ratio climbed to 46% from 35%.
Share repurchases totaled $1,588 millionc during the year, and shareholder dividends declared rose to $1.79 per share from $1.52. Management guided fiscal 2013 to equipment sales up about 5%, with agriculture and turf up about 4% and construction and forestry up about 8%, and net income near $3.2 billion. Key risks include European sovereign debt stress, trade and government farm policy, commodity price volatility, tightening engine emission standards (Tier 4), and dependence on financing conditions for dealer and customer demand.
02—Key points
Key Highlights
- Net sales and revenues increased 13% to $36,157 million; equipment operations net sales rose 14% to $33,501 million, with U.S. and Canada sales up 20%.
- Diluted EPS of $7.63 versus $6.63 in 2011; net income attributable to Deere & Company was $3,065 million.
- Equipment operations operating profit reached $4,397 million, up from $3,839 million, helped by 4% price realization and higher shipment volumes.
- Financial services net income declined slightly to $460 million from $471 million due to higher crop insurance claims and narrower financing spreads.
- Long-term borrowings rose to $22,453 million from $16,960 million; equipment operations debt-to-capital rose to 46% from 35%.
- Returned capital through $1,588 million in share repurchases and $698 million in dividends paid; dividends declared rose to $1.79 per share.
- FY2013 guidance calls for equipment sales up about 5% and net income near $3.2 billion, with financial services net income around $500 million.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2012, Deere & Co kept $0.08.
- Revenue$36.16B100.0%
- Cost of revenue−$25.01B69.2%
- Gross profit$11.15B30.8%
- Operating costs−$6.04B16.7%
- Operating income$5.11B14.1%
- Interest, other & tax−$2.04B5.7%
- Net income$3.06B8.5%
Where FY2012 revenue went
$36.16B- Cost of revenue: $25.01B, 69% of revenue
- Net income: $3.06B, 8.5% of revenue
- R&D: $1.43B, 4.0% of revenue
- SG&A: $3.42B, 9.5% of revenue
- Other operating costs: $1.19B, 3.3% of revenue
- Interest, other & tax: $2.04B, 5.7% of revenue
Kept 8.5% as net incomeNet income $3.06B · 8.5%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2012filed December 17, 2012Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $36.16B$32.01B | +12.9% |
| Cost of Revenue | $25.01B$21.92B | +14.1% |
| Gross Profit | $11.15B$10.09B | +10.5% |
| R&D Expenses | $1.43B$1.23B | +16.9% |
| SG&A Expenses | $3.42B$3.17B | +7.8% |
| Operating Expenses | $31.42B$27.79B | +13.1% |
| Operating Income | $5.11B$4.56B | +11.9% |
| Interest Expense | $782.80M$759.40M | +3.1% |
| Net Income | $3.06B$2.80B | +9.5% |
| EPS (Basic) | $7.72$6.71 | +15.1% |
| EPS (Diluted) | $7.63$6.63 | +15.1% |
| Shares Outstanding (Basic) | 397.10M417.40M | −4.9% |
| Shares Outstanding (Diluted) | 401.50M422.40M | −4.9% |
05—Questions
Frequently Asked Questions
How strong was Deere's underlying profitability in fiscal 2012?
Profitability was strong. Net income attributable to Deere rose about 9% to $3,065 million, and the net income margin on net sales was 9.1%. Most of the gain came from price realization and higher volumes in the U.S. and Canada, partly offset by higher production, raw material and R&D costs and currency headwinds.
Is Deere's rising debt a concern for investors?
Debt increased significantly, mainly within financial services, where long-term borrowings reached $17,008 million to fund a larger receivables and lease portfolio. Equipment operations debt also rose to $5,870 million, lifting its debt-to-capital ratio to 46% from 35%. Management states it has access to most global markets at reasonable cost and cites covenant compliance, but higher leverage raises sensitivity to funding costs and credit rating changes.
What drove the goodwill impairment and does it signal broader problems?
The $33 million pretax non-cash charge related to the John Deere Water reporting unit within agriculture and turf, due to lower forecasted performance tied to integration complexity. Goodwill for that unit is now fully written off. The company stated that a 10% decline in the fair value of its other reporting units would not have affected goodwill carrying values, so the charge appears isolated, though it is worth monitoring.
What are the main risks to the fiscal 2013 outlook?
Key risks include European sovereign debt instability and weak EU industry sales, trade and government farm policy changes, softer economic conditions in India and China, U.S. livestock and dairy caution, drought and commodity price volatility, and funding-cost pressure on financial services. Increasingly stringent Tier 4 and Stage IV engine emission rules also add development costs and execution risk.
What do pension and retiree obligations mean for future cash flow?
Pension and OPEB net liabilities rose to $1,817 million and $5,736 million respectively. Total company contributions were $478 million in 2012, and about $554 million is expected in 2013, including roughly $450 million in voluntary contributions. Postretirement costs are expected to rise by about $75 million in 2013, so these obligations will remain a meaningful use of cash.
06—Continue