John Deere Financial Report 2010

Managerial Accounting and
Control-I

Financial Analysis of JOHN DEERE AND
CO.

Rohit Phulsunge

1|Financial Report: John Deere

John Deere and co.
 John Deere India Private Limited is a subsidiary of Deere & Company, USA in
India.
 Its factory, located near Pune, manufactures 5000 Series agricultural tractors.

 The Indian operations of Deere & Company include a technology center
located at Magarpatta City Pune and John Deere Water Vadodara.

 The technology center provides services in the areas of Information
technology, engineering, supply management, embedded systems and
technical authoring for company’s operations world wide.

 John Deere Water, formed by the acquisitions of Plastro Irrigation Systems, T-
Systems International, and Roberts Irrigation Products, is one of the leading
irrigation companies in the world today.

1) 2) 3)

1)John Deere India, Sanaswadi Pune

2)John Deere Technology Center, Magarpatta City Pune

3)John Deere Water, Vadodara

Industry Overview
Below is the list of some of the major players in the domain of tractor manufacturing in India

S.No Company Location ( Main unit ) Major subsidiaries/ Parent
Co.
1 Angad Tractors Ghaziabad SAS motors limited
2 Balwan Tractors Punjab Vidal & Sohn Tempo Werke,
Germany
3 Captain Tractors Rajkot, India -
4 Eicher Faridabad, Gebr. Eicher a of
Germany,TAFE
5 HMT Pinjore, Panchkula, Hyderabad Zetor of the Czech Republic
6 Indo Farm Baddi, Himachal Pradesh -
7 John Deere Sanaswadi, Pune Maharashtra JV with Larsen & Toubro Ltd


8 MGTL Vadodara, Gujarat Motokov-Praha of
Czechoslovakia
9 Mahindra and Mumbai , Nagpur Maharashtra International Harvester Inc.,
Mahindra and Voltas Limited
10 Sonalika tractors Morinda, Punjab Renault Agricultural of France
11 VST Cuttack, India Mitsubishi Agricultural
Machinery of Japan

Comparison of financials of last 2 years to current year
2010 ( Current) 2009 2008
Net Sales and $26,005 $23,112 $28,428
Revenue(MM)
Operating $3,408 $1,607 $3,420
profit(MM)
Net income (MM) $1,865 $873 $2,053
(All figures are in MM i.e 10^5 * the figures indicated )

Net Sales and Operating profit(MM)
Revenue(MM) 4000

30000 3000

20000 2000 Operating
Net Sales and profit(MM)
10000 Revenue(MM) 1000
0 0
2008 2009 2010 2008 2009 2010

Net income (MM)
2500
2000
1500
1000
(MM)
500
0
2008 2009 2010

 The year 2010 will be remembered as a pivotal one for John Deere. The
company delivered sharply improved financial results despite sluggish global
economic conditions that restrained sales in certain regions and businesses.
 John Deere also proceeded with significant investments aimed at widening
manufacturing footprint and expanding its global market presence. As a result,
the company remains well-positioned to capitalize on growth in the world


economy and, longer term, to benefit from broad economic trends that hold
attractive promise for the future.
 Deere’s equipment operations ended the year essentially debt-free on a net
basis, while its credit company’s balance sheet remained conservatively
capitalized.
 The next evolution of the John Deere Strategy places a sharp focus on
producing the agricultural and construction equipment solutions required by
global markets that are gaining in both size and stature. For fiscal 2010,
Deere reported income of nearly $1.9 billion, on net sales and revenues of
$26.0 billion. Both figures were the second-highest in the company’s history,
trailing only 2008. Income more than doubled on a 13 per cent increase in
sales and revenues. Earnings, in rising by nearly$1 billion, staged their largest
single-year improvement ever.
 All the business units reported higher profit in relation to 2009.The company
again generated strong cash flow as a result profits solid financial
performance and the skilful execution of its business plans.

Deere equipment operations ( $MM unless indicated)
2008 2009 2010
Net sales 28503 20756 23573
Operating profit 2927 1365 2909
Average assets 10812 10950 10494
With inventories at std.cost
Average assets 9652 9647 9196
With inventories at LIFO
OROA @LIFO 30.3 14.1 31.6
OROA @std cost 27.1 12.5 27.7

$ MM

2008 2009 2010
Average Assets @Std. cost 10812 10950 10494
Operating profit 2927 1365 2909
Cost of assets -1284 -1301 -1259
SVA 1643 64 1650

Shareholder value added (SVA)
 Shareholder Value Added (SVA) – is the difference between operating profit
and pre-tax cost of capital.
 It is a metric used by John Deere to evaluate business results and measure
sustainable performance.
 In arriving at SVA, each equipment segment is assessed a pre-tax cost of
assets – generally 12% of average identifiable operating assets with inventory
at standard cost (believed to more closely approximate the current cost of
inventory and the company’s related investment).


 Financial-services businesses are assessed a cost of average equity –
approximately 15% pre-tax in 2010, versus 18% previously, due to lower
leverage.
 The amount of SVA is determined by deducting the asset or equity charge
from operating profit.

SVA
1800
1600
1400
1200
1000
800 SVA
600
400
200
0
2008 2009 2010

 SVA is low in 2009 owing to global meltdown worldwide, however Deere Co.
didn’t take long to realize its SVA figure of 2008 in the year 2010

Financial services
($MM unless indicated)
2008 2009 2010
Net income Attributable to 337 203 373
Deere and Co.
Average equity 2355 2732 3064
ROE% 14.3 7.4 12.2
$MM

Operating Profit 493 242 499
Change in Allowance for (4) 68 (14)
Doubtful Recievables
SVA income 489 310 485
Average equity 2355 2732 3064
Average allowance for 183 195 232
doubtful receivables
SVA Average Equity 2538 2927 3296
SVA income 489 310 485
Cost of equity -430 -458 -421
SVA 59 -148 64


 Worldwide net income attributable to Deere & Company in 2010 was $1,865
million, or $4.35 per share diluted ($4.40 basic), compared with $873 million,
or $2.06 per share diluted ($2.07 basic), in 09. Included in net income for
2009 were charges of $381 million pre-tax ($332 million after-tax), or $.78 per
share diluted and basic, related to impairment of goodwill and voluntary
employee separation expenses.
 Net sales and revenues increased 13 per cent to $26,005 million in 2010,
compared with $23,112 million in 2009.
 Net sales of the Equipment Operations increased 14 per cent in 2010 to
$23,573 million from $20,756 million last year. The sales increase was
primarily due to higher shipment volumes. The increase also included a
favourable effect for foreign currency translation of 3 percent and a price
increase of 2 percent.Net sales in the U.S. and Canada increased 14 per cent
in 2010.
 Worldwide Equipment Operations had an operating profit of $2,909 million in
2010, compared with $1,365 million in 2009. The higher operating profit was
primarily due to higher shipment and production volumes, improved price
realization, the favourable effects of foreign currency exchange and lower raw
material costs, partially offset by increased postretirement costs and higher
incentive compensation expenses.
 The Equipment Operations’ net income, including no controlling interests, was
$1,492 million in 2010, compared with $677 million in 2009 , it was primarily a
result of improved financing spreads and a lower provision for credit losses.

Financial Ratios and other detail
1) CASH
ASSETS
Cash and cash equivalents ( in MM)
5000
4000
2009 2010 3000 ASSETS
ASSETS 4651.7 3790.6 Cash and cash
Cash and 2000 equivalents ( in
cash
equivalents
1000 MM)
( in MM) 0
2009 2010

 Cash and its equivalents decreased as compared to the year 2009 owing to
aggressive purchases made of the manufacturing equipment’s following
recession in terms of cash
 However the other receivables increased from $864 to $925 ( figures in MM)
as the company lent the money in cash to several third party organizations


 The company is expected to be possess more liquidity (i.e more disposable
cash) in the near future in the post-recession period

2) ASSET Turnover ratio

 The formula for the asset turnover ratio evaluates how well a company is
utilizing its assets to produce revenue.
 The numerator of the asset turnover ratio formula shows revenues which is
found on a company's income statement and the denominator shows total
assets which is found on a company's balance sheet.
 Total assets should be averaged over the period of time that is being
evaluated.
 The higher the ratio, the more sales that a company is producing based on its
assets. Thus, a higher ratio would be preferable to a lower one.

( All figures down are in 100000$)

2008 2009 2010
Net sales $28503 $20756 $23573
Average assets
With inventories at
LIFO $9652 $9647 $9196

Asset turnover
ratio 2.953067 2.15155 2.563397

Asset turnover ratio
4

3

2
Asset turnover ratio
1

0
2008 2009 2010

3) Return on equity (ROE)


The amount of net income returned as a percentage of shareholders equity. Return
on equity measures corporation’s profitability by revealing how much profit a
company generates with the money shareholders have invested. ROE is expressed
as a percentage and calculated as:

Return on Equity = Net Income/Shareholder's Equity

Net income is for the full fiscal year (before dividends paid to common stock holders
but after dividends to preferred stock.) Shareholder's equity does not
include preferred shares.

2008 2009 2010
ROE% 14.30% 7.40% 12.20%

ROE%
20.00%

15.00%

10.00%
ROE%
5.00%

0.00%
2008 2009 2010

 ROE helps investors gauge the value the company creates. It measures the
profit the company generates on shareholder funds.
 This includes equity capital and surpluses retained from profits in previous
years. A company with high ROE is likely to be able to generate more cash
internally.
 The company has witnessed a continuous decline in its ROE since 2007; this
is primarily due to swelling equity, but in 2010 it has again started to increase
due to increase in net income

4) DEBT-EQUITY Ratio

Year - 2009 2010
Total liabilities ( in million 36,309.8 36,963.40
$)
shareholders equity ( in
million $) 6303.4 4822.8
Debt-Equity ratio 5.760352 7.664303


Debt-Equity ratio
10
8
6
4 ratio
2
0
2009 2010

 A measure of a company's financial leverage calculated by dividing its total
liabilities by stockholders' equity It indicates what proportion of equity and debt
the company is currently using to finance its assets

 The ratio gives some insight into the outlook of the company towards
financing. A high debt/equity ratio generally means that a company has been
aggressive in financing its growth with debt

 If a lot of debt is used to finance increased operations (high debt to equity),
the company could potentially generate more earnings than it would have
without this outside financing.

 The company’s debt-equity ratio has increased because of increase in the
debt in the financial year 2010 as compared to the debt of year 2009. This is
because of extensive buying of equipment and other amenities for
manufacturing of tractors at a large scale post-recession period. It took loans
from many third party financial institutions during the year 2010.

5) Net cash from operating activities

2008 2009 2010
Net cash from operating activites ( in 10^6
dollars) 2053.7 872.9 1874.3


Net cash from operating
activites ( in 10^6 dollars)
2500
2000
1500 Net cash from
operating
1000
activites ( in
500 10^6 dollars)
0
2008 2009 2010

 The net cash from operating activities is the most crucial than the cash from
financing and investing activities
 The cash generated from the operations of a company, generally defined as
revenues less all operating expenses, but calculated through a series of
adjustments to net income. The OCF can be found on the statement of cash
flows
 The net cash flow from operating activities has increased as compared to
2009, this is a positive sign for the Deere and Co. as company can run its
business profitably in the coming years

6) Current ratio
2009 2010
4,651.70 3,790.00
Cash and cash equivalents
Marketable securities 192 227.9
Receivables from unconsolidated affiliates 38.4 38.8
Trade accounts and notes receivable - net 2616.9 3464.2
Financing receivables - net 15254.7 17682.2
Restricted financing receivables - net 3108.4 2238.3
Other receivables 864.5 925.6
Inventories 2397.3 3063
Total current assets 29,123.90 31,430.00
7,158.90 7,534.50
Short-term borrowings
Payables to unconsolidated affiliates 55 203.5
Accounts payable and accrued expenses + Income taxes 5371.4 6481.7
Total current liabilities 12,585.30 14,219.70

Current ratio 2.31412 2.210314

Current ratio = Current assets / current liabilities

10 | F i n a n c i a l R e p o r t : J o h n D e e r e

Current ratio
2.34
2.32
2.3
2.28
2.26
2.24
Current ratio
2.22
2.2
2.18
2.16
2.14
2009 2010

 It is the ratio between current assets and current liabilities.
 It is a measure of general liquidity and is most widely used to make the
analysis for short term financial position or liquidity of a firm.
 Current assets include cash and those assets which can be easily converted
into cash within a short period of time. It includes account receivables,
inventories, work in progress.
 Current liabilities are those obligations which are payable within a short period
of tie generally one year. It includes account payable, accrued expenses,
income tax payable
 If we see the above data, we can find out that the current assets has
increased in 2010 as compared to 2009, but the current liabilities specially the
short term borrowings increased significantly in 2010 and hence current ratio
has shown a declining trend.

MERGERS AND ACQUISITIONS: Timeline

2000 Deere & Company acquired Timberjack-group from Metso.

2005 Timberjack Oy was renamed John Deere Forestry Oy and the new machinery
was trademarked John Deere.

Highlights of Director’s Report and Management
Discussion & Analysis
a) Principles of Consolidation
The consolidated financial statements represent primarily the consolidation of all
companies in which Deere & Company has a controlling interest. Certain variable


interest entities (VIEs) are consolidated since the company is the primary
beneficiary. Deere & Company records its investment in each unconsolidated
affiliated company (generally 20 to 50 per cent ownership) at its related equity in the
net assets of such affiliate. Other investments (less than 20 per cent ownership)are
recorded at cost.

b) Revenue Recognition
Sales of equipment and service parts are recorded when the sales price is
determinable and the risks and rewards of ownership are transferred to independent
parties based on the sales agreements in effect. In the U.S. and most international
locations, this transfer occurs primarily when goods are shipped.

c) Derivative Financial Instruments
It is the company’s policy that derivative transactions are executed only to manage
exposures arising in the normal course of business and not for the purpose of
creating speculative positions or trading. The company’s credit operations manage
the relationship of the types and amounts of their funding sources to their receivable
and lease portfolio in an effort to diminish risk due to interest rate and foreign
currency fluctuations, while responding to favourable financing opportunities.

D ) New Accounting Standards Adopted
In the first quarter of 2010, the company adopted Financial Accounting Standard
Board (FASB) Accounting Standards Codification (ASC) 810, Consolidation (FASB
Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements).
ASC 810 requires that noncontrolling interests are reported as a separate line in
stockholders’ equity. The net income for both Deere & Company and the
noncontrolling interests is included in “Net Income.” The “Net income (loss)
attributable to noncontrolling interests” is deducted from “Net Income” to determine
the “Net Income Attributable to Deere & Company,” which will continue to be used to
determine earnings per share.

e) Goodwill Impairment
In the fourth quarter of 2010, the company recorded noncash charge in cost of sales
for the impairment of goodwill of $27 million pre-tax, or $25 million after-tax. The
charge was associated with the company’s John Deere Water reporting unit, which is
included in the agriculture and turf operating segment. The goodwill impairment was
due to a decline in the forecasted financial performance as a result of the global
economic downturn and more complex integration activities.

f) Modified cash flow information
The company had the following non-cash operating and investing activities that were
not included in the statement of consolidated cash flows. The company transferred
inventory to equipment on operating leases of $405 million, $320 million and $307
million in 2010, 2009 and 2008, respectively.
The company also had accounts payable related to purchases of property and
equipment of $135 million, $81 million and $158 million at October 31, 2010, 2009
and 2008, respectively.

g) Equipment on operating leases


equipment to retail customers. Initial lease terms generally range from four to 60
months. Net equipment on operating leases totaled $1,936 million and $1,733 million
at October 31, 2010
and 2009, respectively. The equipment is depreciated on a straight-line basis over
the terms of the lease. The accumulated depreciation on this equipment was $462
million and $484 million at October 31, 2010 and 2009, respectively.

h) Evaluation of inventories
Most inventories owned by Deere & Company and its U.S. equipment subsidiaries
are valued at cost, on the “last-in,fi rst-out” (LIFO) basis. Remaining inventories are
generally valued at the lower of cost, on the “fi rst-in, fi rst-out” (FIFO) basis, or
market. The value of gross inventories on the LIFO
basis represented 59 percent of worldwide gross inventories at FIFO value on
October 31, 2010 and 2009.

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John Deere Financial Report 2010

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John Deere Financial Report 2010