01—Abstract
Summary
Summary of the 10-K filed December 19, 2016. Cited figures are marked; the original filing is the authoritative source.
Deere & Company's fiscal 2016 10-K (year ended October 31, 2016) shows a company navigating a sharp agricultural and construction downturn while maintaining profitability and a strong balance sheet.
Worldwide net sales and revenues fell 8% to $26,644 milliona, and net income attributable to Deere fell 21% to $1,524 million ($4.81 diluted EPS), versus $1,940 million ($5.77) in 2015. Equipment net sales declined 9%, with U.S. and Canada sales down 13%. Equipment operating profit dropped to $1,880 million from $2,177 million, driven by lower shipment volumes, currency headwinds, and product mix, partly offset by price realization and cost reductions.
The financial services segment's net income fell to $468 millionb from $633 million on weaker financing spreads, higher lease residual losses, and higher credit loss provisions. Management guides to a further modest decline in 2017: equipment sales down about 1%, U.S. and Canada agricultural industry sales down 5-10%, construction and forestry up about 1%, and net income of roughly $1.4 billion. Management announced voluntary employee separation programs with an estimated $111 million pretax cost (mostly recorded in Q1 2017) and expected savings of about $70 million in 2017.
A December 2016 partial sale of its SiteOne Landscape Supply stake is expected to produce a roughly $105 millionc pretax gain, which is excluded from the 2017 forecast. Financially, Deere generated $3,764 million in operating cash flow, returned $761 million in dividends and $205 million in buybacks, and ended with $4,789 million in cash and marketable securities.
Stockholders' equity declined to $6,520 milliond, largely due to a $908 million after-tax pension and retirement benefit charge in other comprehensive loss. Investors should weigh the cyclical trough against Deere's liquidity, its large financial services book (about $38 billion of receivables and leases administered), and the rising pension and retiree health obligations on the balance sheet.
02—Key points
Key Highlights
- Net sales and revenues fell 8% to $26.6 billion; net income attributable to Deere declined 21% to $1.52 billion ($4.81 diluted EPS) from $1.94 billion ($5.77) in 2015.
- Equipment operations net sales fell 9% to $23.4 billion, with U.S. and Canada equipment sales down 13% on a 14% decline in physical volume.
- Operating profit from worldwide equipment operations fell to $1.88 billion from $2.18 billion; construction and forestry operating profit dropped to $180 million from $528 million.
- Financial services net income declined to $468 million from $633 million due to weaker financing spreads, higher lease residual losses, and higher credit loss provisions.
- 2017 outlook calls for equipment sales down about 1%, U.S. and Canada agricultural industry sales down 5-10%, and net income of about $1.4 billion, excluding a roughly $105 million pretax SiteOne gain.
- Voluntary employee separation programs carry an estimated $111 million pretax cost, with about $70 million in expected 2017 savings.
- Balance sheet remains strong: $4.8 billion of cash and marketable securities, operating cash flow of $3.76 billion, and A-/A2/A ratings, though shareholder equity fell to $6.52 billion after a $908 million pension-related hit to other comprehensive income.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2016, Deere & Co kept $0.06.
- Revenue$26.64B100.0%
- Cost of revenue−$18.25B68.5%
- Gross profit$8.40B31.5%
- Operating costs−$5.79B21.7%
- Operating income$2.61B9.8%
- Interest, other & tax−$1.09B4.1%
- Net income$1.52B5.7%
Where FY2016 revenue went
$26.64B- Cost of revenue: $18.25B, 68% of revenue
- Net income: $1.52B, 5.7% of revenue
- R&D: $1.39B, 5.2% of revenue
- SG&A: $2.79B, 10% of revenue
- Other operating costs: $1.60B, 6.0% of revenue
- Interest, other & tax: $1.09B, 4.1% of revenue
Kept 5.7% as net incomeNet income $1.52B · 5.7%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2016filed December 19, 2016Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $26.64B$28.86B | −7.7% |
| Cost of Revenue | $18.25B$20.14B | −9.4% |
| Gross Profit | $8.40B$8.72B | −3.7% |
| R&D Expenses | $1.39B$1.43B | −2.2% |
| SG&A Expenses | $2.79B$2.87B | −2.9% |
| Operating Expenses | $24.42B$26.08B | −6.4% |
| Operating Income | $2.61B$3.14B | −16.9% |
| Interest Expense | $763.70M$680.00M | +12.3% |
| Net Income | $1.52B$1.94B | −21.4% |
| EPS (Basic) | $4.83$5.81 | −16.9% |
| EPS (Diluted) | $4.81$5.77 | −16.6% |
| Shares Outstanding (Basic) | 315.20M333.60M | −5.5% |
| Shares Outstanding (Diluted) | 316.60M336.00M | −5.8% |
05—Questions
Frequently Asked Questions
Why did Deere's earnings decline in fiscal 2016?
Lower shipment volumes in agriculture and construction, unfavorable currency translation (about 2% on total sales), and a less favorable product mix drove the decline. Price realization of about 2% and lower production and SG&A costs partly offset these pressures. Financial services earnings also fell due to tighter financing spreads, higher residual value losses on leased equipment, and larger credit loss provisions.
What is the outlook for fiscal 2017?
Management expects equipment sales to decline about 1%, with agriculture and turf down about 1% and construction and forestry up about 1%. Net income attributable to Deere is forecast at about $1.4 billion, and financial services net income at about $480 million. The forecast excludes the roughly $105 million pretax gain from the December 2016 SiteOne sale and reflects a weak farm economy, particularly in the U.S., Canada, and the EU28.
How are the voluntary employee separation programs expected to affect results?
The programs carry estimated total pretax expenses of $111 million, of which $11 million was recorded in Q4 2016 and about $100 million is expected mainly in Q1 2017. Management expects about $70 million in annual savings in 2017, allocated across cost of sales, R&D, and SG&A. Payments are expected to be substantially completed in Q1 2017.
Is Deere's balance sheet and liquidity position a concern for investors?
Liquidity remains solid, with $4.8 billion in cash and marketable securities, $7.3 billion in worldwide bank credit lines (of which $5.7 billion was unused), and operating cash flow of $3.76 billion. Credit ratings are A (S&P and Fitch) and A2 (Moody's, negative outlook). Watch items include the $1.9 billion net pension liability and $6.1 billion net OPEB liability, which increased in 2016, and the $5.0 billion of short-term securitization borrowings that depend on retail note collections. Stockholders' equity declined to $6.5 billion.
What are the key risks highlighted in the filing?
Key risks include trade and tariff policy changes, weak commodity prices and farm incomes, currency exchange volatility, eurozone and UK-EU (Brexit) uncertainty, and interest rate and funding cost exposure in the financial services segment. Other notable risks include increasingly stringent engine emissions and greenhouse gas rules, cybersecurity threats, potential loss of GPS radio frequency spectrum that supports precision agriculture, and rising pension and retiree health obligations.
06—Continue