John Deere & Company: Analysis of Annual Report

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Background of the company

Deere & Company was established in 1837. The founder John Deere was a discoverer and a blacksmith. The company has experienced a significant amount of growth, development, and expansion since its formation in the 1800s. Deere & Company is currently a public company that is based in America. It trades on the New York Stock Exchange with the ticker symbol DE (Deere & Company, 2015). Further, it operates in the Heavy equipment industry. The company offers a wide range of equipment and machinery that are used in the construction, forestry, and agriculture industry. Some of the other equipment manufactured by the company are lawnmowers, UTV, diesel engines (Deere & Company, 2015). The company also offers financial services to its clients. For reporting purposes, the operations of the company are divided into three segments, these are, financial services, agriculture and turf, and construction and forestry. The operations of the company are also divided into two geographical segments these are, the U.S. and Canada and outside the U.S. and Canada (Deere & Company, 2015). The company sells its products across the world and it currently engages over sixty-five thousand employees. The company faces stiff competition in each category of product it sells. Some of the competitors for the agriculture and turf segment are AGCO Corporation, The Toro Company, and CNH Global N.V among others (Yahoo Finance, 2015). Under, Construction and forestry segment, the competitors are Caterpillar Inc., Volvo Construction Equipment, Ponsse Plc., and Komatsu Ltd. among others (Yahoo Finance, 2015). This paper seeks to carry out an analytic review of the performance of Deere & Company for the past five years. The results will be compared with those of its competitors.

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Analysis of the results

Historical data

The table presented below shows a summary of key financial balances for the company.

2010
($millions)
2011
($millions)
2012
($millions)
2013
($millions)
2014
($millions)
Income statement
Revenue 26,005 32,013 36,157 37,795 36,067
Gross profit 8,262 9,978 11,027 12,128 11,291
Operating income 3,025 4,223 4,734 6,225 5,461
Net income 1,865 2,800 3,065 3,537 3,162
Balance sheet
Current assets 33,367 36,307 42,719 45,103 46,044
Total assets 43,267 48,207 56,266 59,521 61,336
Current liabilities 14,364 17,552 19,091 21,979 21,233
Total liabilities 36,977 41,407 49,424 49,256 52,274
Stockholder’s equity 6,290 6,800 6,842 10,266 9,063
Cash flow statement
Net cash provided by operations 2,282 2,326 1,168 3,254 3,526
Net cash used for investing activities (2,109) (2,621) (4,004) (4,821) (2,881)
Net cash provided by (used for) financing activities (1,010) 140 3,880 407 (288)
Net change in cash (861) (143) 1,005 (1,148) 283
Free cash flow 969 646 (953) 879 867

Income statement

The company reported a significant improvement in the amount of revenue generated during the period. There was an increase in revenue between 2010 and 2013. In 2014, the company reported a 9% dropped in revenue. The revenue is expected to drop further by 20% in 2015. The gross profit and the operating income also followed a similar trend. There are a number of factors that contributed to the decline and future drop in sales. Some of these factors are trade agreements, the negative effect of the state debt, disruptions of capital markets, fiscal and monetary policies, significant volatility in prices of farm commodities, and severe emissions regulations (Deere & Company, 2015). The other factors were negative influence of foreign currency exchange, increased production cost and lower volumes of shipment than in the previous years. These factors also resulted in a higher ratio of cost of sales to net sales. Even though the income generated from net sales dropped, finance and interest income rose in 2014. This can be attributed to the large credit portfolio (Deere & Company, 2015). The component of other income also rose as a result of increased insurance premiums and revenue generated from other services.

On expenses, the company reported a decline in the amount of selling, administrative, and general expenses. This can be attributed to the sales of the water operations and separation of landscapes. Further, there as a decline in the value of research and development because some projects were completed. The interest expense dropped over the period due to declining borrowing rates. Other operating expenses rose over the period. The increase was caused by increased depreciation expense, write-offs, and increased insurance claims. Thus, it can be observed that a number of factors contributed to the trend of balances that were reported in the income statement.

Balance sheet

The company has reported continuous growth in its financial position since 2010. The current assets rose from $33,367 million in 2010 to $46,044 million in 2014. The finance receivables make up a significant proportion of the current assets (Deere & Company, 2015). The total assets also rose from $43,267 million in 2010 to $61,336 million in 2014. A closer review of the assets shows that a significant proportion of the total assets is made up of the current assets. A further analysis of property, plant and equipment shows that the company made a number of acquisitions during the year. The additions amounted to $1,376 million in 2012, $1,158 million in 2013, and $1,016 million in 2014 (Deere & Company, 2015). Therefore, they have been declining over the period. However, depreciation expense rose from $555million in 2012 to $696 million in 2014. The company uses LIFO to value inventories that are based in the United States. Inventories in other regions are valued using FIFO. The inventory balance declined over the period. The current liabilities rose from $14,364 million in 2010 to 21,233 million in 2014 (Deere & Company, 2015). Short-term borrowing, and accounts payables and accrued expenses take a significant proportion of the current liabilities. The long term borrowing accounted for about half of the total liabilities. Since the business is capital intensive, the company heavily relies on borrowing as a way of raising funds for investments. The amount of borrowing has grown to about four times the amount of equity. The long term liability rose from $21,577.7 million in 2013 to $24,380.7 million in 2014. The shareholder’s equity rose from $6,290 million in 2010 to $9,063 million in 2014 (Deere & Company, 2015).

Cash flow statement

There is no clear trend that can be observed in the cash flow statement. However, it can be observed that the company was in a position to generate positive cash flow from operating activities during the period. Further, investments were made during the period. The highest amount of investment was made in 2013. The company generated a significant amount of cash flow from financing activities in 2012. This can be attributed to short and long term borrowings and issuance of shares. The net change in cash was low during the years. Despite the massive investments made during the period, the company had a significant amount of free cash flow throughout the period except in 2012. This allows the company to invest in available opportunities.

Comparative analysis

The tables presented below shows the result of two main competitors. The results will also cover a period of five years.

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Caterpillar, Inc

2010
($millions)
2011
($millions)
2012
($millions)
2013
($millions)
2014
($millions)
Income statement
Revenue 42,588 60,138 65,875 55,656 55,184
Operating income 3,963 7,153 8,573 5,628 5,328
Net income 2,700 4,928 5,681 3,789 3,695
Balance sheet
Total assets 64,020 81,446 89,356 84,896 84,681
Total liabilities 53,196 68,563 71,824 64,085 67,935
Stockholder’s equity 10,824 12,883 17,532 20,811 16,746
Cash flow statement
Net cash provided by operations 5,009 7,010 5,241 10,191 8,057
Net cash used for investing activities (1,595) (11,427) (6,190) (5,046) (3,627)
Net cash provided by (used for) financing activities (4,613) 3,966 3,549 (4,511) (2,996)

Parker Hannifin Corporation

2010
($millions)
2011
($millions)
2012
($millions)
2013
($millions)
2014
($millions)
Income statement
Revenue 9,993 12,346 13,146 13,016 13,216
Operating income 765 1,391 1,668 1,374 1,205
Net income 554 1,049 1,152 948 1,041
Balance sheet
Total assets 9,910 10,887 11,170 12,541 13,274
Total liabilities 5,542 5,503 6,274 6,802 6,615
Stockholder’s equity 4,368 5,384 4,897 5,738 6,659
Cash flow statement
Net cash provided by operations 1,219 1,167 1,530 1,191 1,388
Net cash used for investing activities (146) (245) (376) (810) (646)
Net cash provided by (used for) financing activities (650) (916) (824) 576 (958)

A comparison of the results of the three companies shows that Caterpillar, Inc. had the highest amount of revenue, operating income, and net income followed by Deere & Company while Parker Hannifin Corporation had the least. A further review of the income statements of the three companies shows that the items in the income statements had a similar trend. The companies exhibited growth in performance between 2010 and 2012. After 2012, the performance started to decline. However, Parker Hannifin Corporation had a more erratic trend than the other two companies. Thus, it can be noted that the factors that were mentioned above affect all companies across the industry. A comparison of the balance sheet shows that Caterpillar, Inc. had the largest balance sheet followed by Deere & Company and Parker Hannifin Corporation. In the case of Deere & Company and Parker Hannifin Corporation, the total assets grew throughout the period. However, in the case of Caterpillar, Inc. growth in assets was experienced between 2010 and 2012 thereafter the values dropped. A further analysis of the financial statements shows that the amount of liabilities is more than the amount of equity by a large margin. This gives an indication that the industry is capital intensive. In the case of cash flow statement, all the three companies generated a positive cash flow from the operating activities. In the case of investing activities, the companies had negative cash flow. This shows that they made investments during the period. The companies had positive and negative cash flow from financing activities. Even though the three companies had different level of performance, the trend in the results reported was similar. This implies that factors which affect the industry also affect the performance of companies that operates in the industry.

References

Deere & Company. (2015). Investor relations. Web.

Yahoo Finance. (2015). Deere & Company (DE). Web.

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BusinessEssay. "John Deere & Company: Analysis of Annual Report." March 30, 2022. https://business-essay.com/john-deere-and-amp-company-analysis-of-annual-report/.