John Deere Financial Report 2010


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This PDF takes you into the financial report of John Deere and Co, in 2010

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John Deere Financial Report 2010

  1. 1. Managerial Accounting andControl-I Financial Analysis of JOHN DEERE AND CO. Rohit Phulsunge1|Financial Report: John Deere
  2. 2. 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 Pune2)John Deere Technology Center, Magarpatta City Pune3)John Deere Water, VadodaraIndustry OverviewBelow is the list of some of the major players in the domain of tractor manufacturing in IndiaS.No Company Location ( Main unit ) Major subsidiaries/ Parent Co.1 Angad Tractors Ghaziabad SAS motors limited2 Balwan Tractors Punjab Vidal & Sohn Tempo Werke, Germany3 Captain Tractors Rajkot, India -4 Eicher Faridabad, Gebr. Eicher a of Germany,TAFE5 HMT Pinjore, Panchkula, Hyderabad Zetor of the Czech Republic6 Indo Farm Baddi, Himachal Pradesh -7 John Deere Sanaswadi, Pune Maharashtra JV with Larsen & Toubro Ltd2|Financial Report: John Deere
  3. 3. 8 MGTL Vadodara, Gujarat Motokov-Praha of Czechoslovakia9 Mahindra and Mumbai , Nagpur Maharashtra International Harvester Inc., Mahindra and Voltas Limited10 Sonalika tractors Morinda, Punjab Renault Agricultural of France11 VST Cuttack, India Mitsubishi Agricultural Machinery of JapanComparison of financials of last 2 years to current year 2010 ( Current) 2009 2008Net Sales and $26,005 $23,112 $28,428Revenue(MM)Operating $3,408 $1,607 $3,420profit(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 world3|Financial Report: John Deere
  4. 4. 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 ( $MM unless indicated) 2008 2009 2010Net sales 28503 20756 23573Operating profit 2927 1365 2909Average assets 10812 10950 10494With inventories at std.costAverage assets 9652 9647 9196With inventories at LIFOOROA @LIFO 30.3 14.1 31.6OROA @std cost 27.1 12.5 27.7$ MM 2008 2009 2010Average Assets @Std. cost 10812 10950 10494Operating profit 2927 1365 2909Cost of assets -1284 -1301 -1259SVA 1643 64 1650Shareholder 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).4|Financial Report: John Deere
  5. 5.  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 2010Financial services($MM unless indicated) 2008 2009 2010Net income Attributable to 337 203 373Deere and Co.Average equity 2355 2732 3064ROE% 14.3 7.4 12.2$MMOperating Profit 493 242 499Change in Allowance for (4) 68 (14)Doubtful RecievablesSVA income 489 310 485Average equity 2355 2732 3064Average allowance for 183 195 232doubtful receivablesSVA Average Equity 2538 2927 3296SVA income 489 310 485Cost of equity -430 -458 -421SVA 59 -148 645|Financial Report: John Deere
  6. 6.  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 ASSETSASSETS 4651.7 3790.6 Cash and cashCash and 2000 equivalents ( incashequivalents 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 $925 ( figures in MM) as the company lent the money in cash to several third party organizations6|Financial Report: John Deere
  7. 7.  The company is expected to be possess more liquidity (i.e more disposable cash) in the near future in the post-recession period2) ASSET Turnover ratio  The formula for the asset turnover ratio evaluates how well a company is utilizing its assets to produce revenue.  The numerator of the asset turnover ratio formula shows revenues which is found on a companys income statement and the denominator shows total assets which is found on a companys balance sheet.  Total assets should be averaged over the period of time that is being evaluated.  The higher the ratio, the more sales that a company is producing based on its assets. Thus, a higher ratio would be preferable to a lower one. ( All figures down are in 100000$) 2008 2009 2010Net sales $28503 $20756 $23573Average assetsWith inventories atLIFO $9652 $9647 $9196Asset turnoverratio 2.953067 2.15155 2.563397 Asset turnover ratio 4 3 2 Asset turnover ratio 1 0 2008 2009 20103) Return on equity (ROE)7|Financial Report: John Deere
  8. 8. The amount of net income returned as a percentage of shareholders equity. Returnon equity measures corporation’s profitability by revealing how much profit acompany generates with the money shareholders have invested. ROE is expressedas a percentage and calculated as:Return on Equity = Net Income/Shareholders EquityNet income is for the full fiscal year (before dividends paid to common stock holdersbut after dividends to preferred stock.) Shareholders equity does notinclude preferred shares. 2008 2009 2010ROE% 14.30% 7.40% 12.20% ROE% 20.00% 15.00% 10.00% ROE% 5.00% 0.00% 2008 2009 2010  ROE helps investors gauge the value the company creates. It measures the profit the company generates on shareholder funds.  This includes equity capital and surpluses retained from profits in previous years. A company with high ROE is likely to be able to generate more cash internally.  The company has witnessed a continuous decline in its ROE since 2007; this is primarily due to swelling equity, but in 2010 it has again started to increase due to increase in net income4) DEBT-EQUITY Ratio Year - 2009 2010Total liabilities ( in million 36,309.8 36,963.40$)shareholders equity ( inmillion $) 6303.4 4822.8Debt-Equity ratio 5.760352 7.6643038|Financial Report: John Deere
  9. 9. Debt-Equity ratio 10 8 6 4 ratio 2 0 2009 2010  A measure of a companys 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 2010Net cash from operating activites ( in 10^6dollars) 2053.7 872.9 1874.39|Financial Report: John Deere
  10. 10. 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 3,790.00Cash and cash equivalentsMarketable securities 192 227.9Receivables from unconsolidated affiliates 38.4 38.8Trade accounts and notes receivable - net 2616.9 3464.2Financing receivables - net 15254.7 17682.2Restricted financing receivables - net 3108.4 2238.3Other receivables 864.5 925.6Inventories 2397.3 3063Total current assets 29,123.90 31,430.00 7,158.90 7,534.50Short-term borrowingsPayables to unconsolidated affiliates 55 203.5Accounts payable and accrued expenses + Income taxes 5371.4 6481.7Total current liabilities 12,585.30 14,219.70Current 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
  11. 11. 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: Timeline2000 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 ManagementDiscussion & Analysis a) Principles of ConsolidationThe consolidated financial statements represent primarily the consolidation of allcompanies in which Deere & Company has a controlling interest. Certain variable11 | F i n a n c i a l R e p o r t : J o h n D e e r e
  12. 12. interest entities (VIEs) are consolidated since the company is the primarybeneficiary. Deere & Company records its investment in each unconsolidatedaffiliated company (generally 20 to 50 per cent ownership) at its related equity in thenet assets of such affiliate. Other investments (less than 20 per cent ownership)arerecorded at cost. b) Revenue RecognitionSales of equipment and service parts are recorded when the sales price isdeterminable and the risks and rewards of ownership are transferred to independentparties based on the sales agreements in effect. In the U.S. and most internationallocations, this transfer occurs primarily when goods are shipped. c) Derivative Financial InstrumentsIt is the company’s policy that derivative transactions are executed only to manageexposures arising in the normal course of business and not for the purpose ofcreating speculative positions or trading. The company’s credit operations managethe relationship of the types and amounts of their funding sources to their receivableand lease portfolio in an effort to diminish risk due to interest rate and foreigncurrency fluctuations, while responding to favourable financing opportunities.D ) New Accounting Standards AdoptedIn the first quarter of 2010, the company adopted Financial Accounting StandardBoard (FASB) Accounting Standards Codification (ASC) 810, Consolidation (FASBStatement No. 160, Noncontrolling Interests in Consolidated Financial Statements).ASC 810 requires that noncontrolling interests are reported as a separate line instockholders’ equity. The net income for both Deere & Company and thenoncontrolling interests is included in “Net Income.” The “Net income (loss)attributable to noncontrolling interests” is deducted from “Net Income” to determinethe “Net Income Attributable to Deere & Company,” which will continue to be used todetermine earnings per share. e) Goodwill ImpairmentIn the fourth quarter of 2010, the company recorded noncash charge in cost of salesfor the impairment of goodwill of $27 million pre-tax, or $25 million after-tax. Thecharge was associated with the company’s John Deere Water reporting unit, which isincluded in the agriculture and turf operating segment. The goodwill impairment wasdue to a decline in the forecasted financial performance as a result of the globaleconomic downturn and more complex integration activities. f) Modified cash flow informationThe company had the following non-cash operating and investing activities that werenot included in the statement of consolidated cash flows. The company transferredinventory to equipment on operating leases of $405 million, $320 million and $307million in 2010, 2009 and 2008, respectively.The company also had accounts payable related to purchases of property andequipment of $135 million, $81 million and $158 million at October 31, 2010, 2009and 2008, respectively. g) Equipment on operating leases12 | F i n a n c i a l R e p o r t : J o h n D e e r e
  13. 13. equipment to retail customers. Initial lease terms generally range from four to 60months. Net equipment on operating leases totaled $1,936 million and $1,733 millionat October 31, 2010and 2009, respectively. The equipment is depreciated on a straight-line basis overthe terms of the lease. The accumulated depreciation on this equipment was $462million and $484 million at October 31, 2010 and 2009, respectively. h) Evaluation of inventoriesMost inventories owned by Deere & Company and its U.S. equipment subsidiariesare valued at cost, on the “last-in,fi rst-out” (LIFO) basis. Remaining inventories aregenerally valued at the lower of cost, on the “fi rst-in, fi rst-out” (FIFO) basis, ormarket. The value of gross inventories on the LIFObasis represented 59 percent of worldwide gross inventories at FIFO value onOctober 31, 2010 and 2009.---------------------------------------------------------------------------------------------------------------------------13 | F i n a n c i a l R e p o r t : J o h n D e e r e