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Table of Contents • Why John Deere?........................................................................2

• Company History………………………….......................................2

• Behind the Green & Yellow o Basic Facts………………………………..…………….………...3 o Core Values……………………………………………………....5 o Company Structure………………………….…………………..5

• Business Environment o Competition & the Agriculture Market…………….............6 o Legal & Other Challenges………………….…………..………7

• Financial Position o Important Financial Facts………………………………………8 o Assets, Liabilities & SHE……………………….……………….8 o Cash Flow Statement…………………………………….……..9 o Decision making ratios………………………………………..10

• Stock Analysis………………………………………………………….12 o Dividends………………………………………………………..13

• Management Discussion & Analysis o Trends and Economic Decisions…………………….……….14 o 2013 Compared with 2012…………………………….........14 o Market Conditions & Outlook……………………………….15 o Critical Accounting Policies…………………………………..15 o Management’s Report on Internal Control…………...…..16

• Firm Evaluation o Eyes on the Horizon…………………………………….........17 o International Expansion………………………………...........17 o Concluding Statement………………………………..……….18

• Question to the Board…………………………………………….….18

• Bibliography………………………………………………..…………..19

 

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Why John Deere?

John Deere is a cutting edge company that has been consistently on the rise. Their core values are strong, their market is solid, and their execution is powerful. They continue to advance their products, set the pace for the rest of the industry, and are always looking at the horizon to be an even better company than they are. All of us have used or owned John Deere products, and their success is of extreme interest to us.

Company History

In 1837, John Deere had nothing more than a blacksmith shop, a piece of discarded polished steel, and an idea that would help farmers, changing the face of agriculture. Since John Deere manufactured his very first plow in 1837, approximately 596 different tractor models have been designed, produced, and sold. The business was incorporated in 1868 with Deere and his son, Charles, in the executive positions. During the Civil War the company prospered as it diversified its output to include wagons, carriages, and a full line of agricultural equipment. It also adopted modern administrative practices and built an efficient sales, distribution, and service organization which reached into all parts of America. In 1912, John Deere and Company went international when a manufacturing entity opened in Canada. Starting in 1956, the company decided to build plants in Mexico, Germany, and Spain. Over the next few years, France, Argentina, and South Africa were thrown into the mix. There are now 104 John

 

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Deere locations across the globe. In 1998, the company hit a historic financial landmark when it hit $1 billion in sales. Not only was this a first for John Deere, but for the entire agricultural equipment industry. As of 2010, they have employed more than 56,000 employees worldwide and are headquartered in Moline, Illinois. John Deere and Company started out as a manufacturer of farm tractors. It now produces equipment for multiple industries, including agriculture, residential, golf and sport, commercial construction, forestry, government and military, and landscaping. In 2009, Samuel Allen became only the 9th CEO in the company’s 177 years of operation.

Behind the Green & Yellow

Basic Facts: Corporate Headquarters

Moline, Illinois

End of Fiscal Year October 31st Company website http://www.deere.com/wps/dcom/en_US/regional_home.page Number of Board Members

11 Board Members, with the only full time employee of John Deere being Samuel Allen, the CEO and Chairman of the Board

Percent of US sales compared to exported foreign sales

11 board members, with Samuel Allen who is the CEO and Chairman of the board as the only full time employee of John Deere.

Total Revenue 37.8 Billion Net Income 3.537 Billion Outstanding Shares As of 2013, 385 million shares of common stock are outstanding out

of 536 million shares issued Earnings per Share 9.18 EPS. EPS rose 19% from the past year, reflecting the benefits of

fewer outstanding shares due to John Deere’s extensive share repurchase plan

Total Assets In 2013, assets totaled 59.5 billion opposed to 56.3 billion in 2012, yielding an almost 6% increases in total assets

Inventory Valuation Last-In, First-Out (LIFO)

 

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Method Depreciation Method Straight-Line Depreciation Method Percentage of total liabilities to total liabilities & stockholder’s equity

In 2013, Deere & Company’s liabilities accounted for 83% of their total liabilities and stockholder’s equity; this was a decrease from their ration of 88% in 2012.

Goodwill Agriculture & Turf: 242 million Construction: 603 million

Minimum lease payment-operating leases

413 million

Minimum lease payment-capital leases

37 million

Independent public accounting firm used by John Deere

Deloitte & Touche LLP conducted audits under the standards of the Public Accounting Oversight Board. They concluded that John Deere presented fair financial information, maintained effective internal control, and financial statements were in conformity with GAAP.

Stock exchange company securities traded on

New York Stock Exchange

John Deere Trading Symbol

DE

 

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Core Values: The original core values of the company are integrity, quality, commitment and innovation. John Deere prides themselves on the continued implementation and strength of these core values established over 100 years ago. They claim that living by these values steers how they work and what they produce. It allows them to provide the absolute best experience to all people who come in contact with them, customers, investors, and employees. John Deere also values diversity and strives to be an inclusive environment. Their strong convictions and deep root in American values have contributed to their popularity and brand recognition. John Deere’s known success is in large part due to their corporate image as a hard-working, American company. The easily identified slogan that “Nothing Runs like a Deere” is a direct appeal to their core values of high-quality, reliable products. This image that Deere has created goes hand in hand with the values and needs of the American farmer.

Company Structure: Deere & Company has 11 members of the Board of Directors, with only one of them being a full time employee of John Deere. Samuel Allen has been CEO and Chairman of the Board since 2009. We concluded that the fact that only one Board member has relation to John Deere was a positive aspect of the company. The reason we arrived at this conclusion was upon reading the biographies of the other ten board members. The Board is a dynamic, highly-qualified group of very

 

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diverse individuals. The Board includes Charles O. Holliday, Jr., the Chairman of Bank of America and Richard B. Myers, a retired General in the United States Air Force. Myers was the principal military advisor for the President and Secretary of Defense from 2001-2005. Other board members include chairmen, CEO’s, and brilliant men and women in the fields of engineering, agriculture and finance. John Deere’s executive branch is divided into corporate, Ag & Turf, Construction & Forestry, Financial Services, and Supporting Businesses. Each sector is composed of roughly ten to twenty executives who serve a particular branch of each section. We inferred that this division of responsibility is in direct correlation to the firm’s effective internal control and decision-making accountability.

Business Environment

Competition & the Agricultural Market: The construction and agriculture machinery industry is composed of companies that manufacture vehicles as well as tools for construction and agricultural operations. Tractors, which are John Deere’s specialty, are not the only product considered in this specific market. This explains why Deere & Company falls short to Caterpillar Inc. in the overall machinery business. The industry includes products such as earth-moving machinery, bulldozers, tractors, cranes, planting and harvesting equipment like balers, heavy trucks, lawn mowers, and other heavy machinery. John Deere currently owns 34 billion in market cap of the construction and agricultural machinery market. They are the highest among competitors behind Caterpillar Inc., which almost doubles John Deere’s market cap at 64.7 billion.

 

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Legal & Other Challenges: One of the great components about John Deere, unlike many Fortune 500 companies, is that legal issues are not of extreme worry. There are possible unresolved legal actions pertaining to product liability, retail credit, patent, and trademark, but the company feels that these will have no material effect on their financial statements. Like any company, John Deere has concerns for the future that could impede growth and reduce sales. According to Deere & Company, their items of concern include global economic recovery, the impact of national debt, the uncertainty of government action towards monetary and fiscal policies, trade agreements, market disruptions, and the effects of other commodity prices. Experts also project that the entire sales of the agricultural machinery industry are projected to decrease in 2014 by 5 percent. This slight prediction decrease could be due to cutting edge agricultural technology competition, but is of no particular concern to John Deere. All of these factors are issues of worry for John Deere, but the firm is confident that their record growth will continue through these possible adversities.

 

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Financial Position

Important Financial Facts: 1. The cost of sales to net sales in 2013 was 73.3% 2. Recent Net Income percent of sales:

• 2011-9.36% • 2012-9.01% • 2013-9.93%

3. The fourth quarter of 2013 for John Deere was an exciting time for the company. In fact, fourth-quarter income rose 17% and Earnings per share increased 21% from the previous three quarters. These percentages were both record growth increases and are a good foundation for future sales in 2014 and 2015.

Assets, Liabilities & Stockholder’s Equity: Assets (in millions) Total Assets $59,521.3 Cash $3,504 Receivables $35,059.2 Property, Plant & Equipment $5,466.9 Intangibles $77.1 Inventory $4,934.7 Goodwill $844.8

 

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Liabilities (in millions) Total Liabilities $49,253.6 Accounts Payable & Accrued Expenses $8,973.6 Short Term Borrowing $8,778.9 Long Term Borrowing $21,577.7 Retirement Benefits & Other Liabilities $5,416.7

Stockholder’s Equity (in millions) Total Stockholder’s Equity $10,267.7 Common Stock $3,524.2 Treasury Stock <$10,210.9> Retained Earnings $19,645.6 Comprehensive Income Loss <$2,693.1>

Cash Flow Statement: 1. Total Cash Flow from Operating Activit ies

$3,254.3 ( in mill ions)

• Largest Source Net Income • Largest Use Receivables related to sales

2. Total Cash Flow from Investing Activit ies

<$4,820.7> (in millions)

• Largest Source Collection of receivables • Largest Use Cost of receivables acquired (not related

to sales) 3. Total Cash Flow from Financing Activit ies

$406.5 (in millions)

• Largest Source Proceeds from long-term borrowing • Largest Use Payments on long-term borrowing

 

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4. Beginning Cash and Cash Equivalents

$4,652.2 (in millions)

5. Ending Cash and Cash Equivalents

$3,504 (in millions)

• Free Cash Flowà3,536.6 ( in mil l ions of dollars)

o Free cash flow is essentially cash flow from operating expenses less capital expenditures. Deere & Company is in good financial standings because after laying down the cash needed to maintain their asset base, the firm still has $3,536.6 (in millions of dollars) of generated cash to use for the purpose of enhancing shareholder value.

Decision Making Ratios: • Earnings per Share (EPS)à $9.18

o (Net income - Preferred stock dividends)/Average outstanding shares

o Due to 5 billion dollar stock repurchase program, John Deere has raised their basic earnings per share by 19 percent just in the last year. Because of their high value of treasury stock and no preferred stock issued, John Deere has an impressive EPS at $9.18.

• Working Capitalà$26.1 Billion o Working capital is found by subtracting current liabilities from a

company's current assets. Calculating working capital ensures that a company has enough short-term assets to cover its current debt. John Deere’s working capital for 2013 was $26,116.7 in millions of dollars (48,254.9-22,138.2).

• Gross Profit Marginà30.29% o Gross margin reflects how much the company retains on each dollar

that it sells. This percentage is found using the formula: (Revenue - Cost of goods sold)/Revenue. John Deere’s 30.29% demonstrates

 

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that they are not an extremely high profit business. Manufacturing heavy machinery yields a high cost of goods sold and lower profit margin than companies in different industries.

• Current Ratioà2.18 o Current ratio is a liquidity ratio that demonstrates a company’s

ability to pay short-term obligations, and is found by dividing current assets by current liabilities. For the period, John Deere yielded a current ratio of 2.18 (Current Assets of 48,254.9/ Current Liabilities of 22,138.2 in millions of dollars). John Deere’s high current ratio is a good thing, but could be an indication that they are not investing their excess assets enough.

• Quick Ratioà1.96 o Quick ratio is computed by subtracting inventories from current

assets and then dividing that number by current liabilities. For John Deere, 1.96 is an impressive ratio because Deere & Company has $1.96 of liquid assets available to pay off every dollar of current liabilities debt. Quick ratio is a necessary and financially reassuring measurement because a company’s liquidity is crucial to prevent from going under.

• Inventory Turnover Ratioà3.413 o Cost of Goods Sold/Average Inventory

§ $25.667.3 COGS/ {(4,934.7+ 5,170)/2} Of Avg. Inventory (all in millions of dollars) = 3.413 (2013)

o This relatively low inventory turnover ratio of 3.413 is sensible and financially justifiable because of the nature of John Deere’s inventory. John Deere sells durable, high-priced goods that take longer to sell than most products. Therefore, it is not a surprise that Deere & Company have a slow turnover rate of inventory.

• Debt Equity Ratioà4.80 (2013) o Total Liabilities/Stockholder’s Equity o This ratio is significantly lower than the 2012 debt/ equity ratio of

7.17. This yearly change is important to note because in 2012,

 

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Deere & Company financed more growth with debt. Usually this results in volatile earnings as a result of the additional interest expense. The lower ratio in 2013 is a sign that John Deere was more financially stable in terms of financing growth in the most recent year.

Stock Analysis

John Deere’s stock has performed extremely well over the last two years. 536 million shares of common stock have been issued with 1.2 billion authorized. In 2008, John Deere created a 5 billion dollar common stock repurchase plan for the treasury stock account, which has yielded 385 million shares to be outstanding. While Deere & Company has not issued any preferred stock, they have nine million authorized shares of that category. Deere & Company stock price had a brief low at $70.59, and a high of $95.05. As of April 15th, 2014, the price of John Deere stock is $93.15. Despite the high value, Deere & Company stock is a very safe and reliable investment. Their stock has over a 160% rate of return compare to the 103% rate of return of the Dow Jones average. Their low stock price per earnings ratio, lack of inflation, sustainable multiple of its earnings, and high rate of return are reasons that make John Deere a much more reliable and low risk investment than their competitors.

 

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Dividends: • Dividend Yield

o John Deere’s 2013 dividend yield was 2.23%. From a shareholder’s position, this shows how much dividend cash one is receiving per dollar invested in Deere equity. It is calculated by dividing the market price per share from the company’s annual dividends per outstanding common share. Looking at company history, this is a steady, positive increase from past dividend yields of 2.13% in 2012 and 2.04% in 2011. Investors should note Deere & Company’s dividend yield growth as a reason to invest in future equity.

• Dividend Payout Ratio o Deere & Company’s dividend payout of .213 supports the fact that

John Deere used roughly 21.3 percent of their net income to pay cash dividends in 2013. This number is one that is often very different for each year, depending on management’s annual issuance of cash dividends. In comparison, Deere’s main competitor, Caterpillar Inc., had a dividend payout for 2013 of .39. Although Deere’s is lower than Cat for 2013, 21.3% was increase from Deere’s 2012 payout percentage of 20.9%. The fact that Deere & Company allocated 21.3% of their 2013 net income for cash dividends is still impressive and confirms the maturity of the corporation.

 

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Management Discussion & Analysis

Trends & Economic Conditions: John Deere’s growth is on the continued rise, reaching new heights in both net sales and net income. However, sales in three of the company’s four operating segments are expected to decrease in 2014. These include a five percent drop in agricultural equipment, construction and forestry, and financial services. The only expected rise is five percent jump in turf and utility equipment. John Deere’s healthy levels of cash flow have been to fund global growth, pay investors dividends, and share repurchase.

2013 Compared with 2012: Worldwide net income rose from $3.06 billion in 2012 to $3.54 billion in 2013. Net sales and revenue increased five percent to $37.8 billion compared to $36.2 billion in 2012. Net sales of equipment operations increased four percent, which includes improved price realization and unfavorable currency translation. Finance and interest income increased this year due to a larger average credit portfolio, partially offset by lower average financing rates. Due to growth, John Deere’s selling, administrative and general expenses increased for the period. Other operating expenses increased due to the higher depreciation of equipment and impairment charge for the write-down to realizable value of assets. John Deere firmly believes in taking care of their employees, and totaled $575 million in 2013 to provide extensive pension, healthcare and life insurance benefits for their workers.

 

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Market Conditions & Outlook: Company equipment sales are projected to decrease three percent in the year 2014 with an anticipated net income of $3.3 billion. All segments of the company’s business rely on the economic conditions of the global market. Some points of worry for John Deere’s future sales in the market include: customer confidence in economic conditions, foreign currency exchange rate, fluctuations in the value of the U.S. dollar, interest rates, inflation or deflation rates, and uncertainty about government spending and taxes.

Critical Accounting Policies: • Sales Incentive

o At the time a sale to a dealer is recognized, the company records an estimate of the future sales incentive costs for allowances and financing programs that will be due when the dealer sells the equipment to a retail customer. This estimate is based on historical data, field inventory level, announced incentive programs, and retail sales volume. These assumptions yielded a .7 percent estimated cost over the last fiscal year.

• Product Warranties o John Deere records estimated warranty expense at the time a sale to

a deal or consumer is recognized. The company uses historical claim rates experienced applied to their current sales to determine their estimated warranty liability. Product warranty accruals, excluding

 

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extended warranty unamortized premiums, were $822 million as of October 31st, 2013.

• Allowance for Doubtful Accounts o Allowance for doubtful accounts represents the estimated losses

Deere & Company will incur in their receivables portfolio. John Deere bases this assumption off of historical loss experience, portfolio duration, delinquency trends, economic conditions and credit risk quality. Total allowance for credit loss in 2013 was $240 million. This was a decrease from the estimated loss of $243 million in 2012, due to the decrease in loss experience.

Management’s Report on Internal Control: The management of Deere & Company is directly held responsible for the fluidity and effectiveness of their internal control procedures. In the Management’s Report, the executives of Deere & Company first make notice of the inherent limitations to having a perfect internal control system. John Deere’s primary focus of internal control is to arrive at reasonable assurance that their financial statements are presented fairly and in accordance with generally accepted accounting principles. Deere & Company measures yearly internal control based on the criteria set forth in Internal Control - Integrated Framework, which was issued in 1992 by the Committee of Sponsoring Organizations of the Treadway Commission. This framework was an initiative completed by five private sector organizations, including the American Institute of CPA’s. We attempted to read the above framework, upon realizing that it required a purchase fee for access. On December 16, 2013, the corporation’s internal control was audited by Deloitte & Touche LLP. The private audit firm Deloitte performed the audit to make sure that Deere & Company’s financial statements were free of material misstatements. The audits included test-basis examination of evidence that the amounts, disclosures and managerial predictions were a fair representation of actual financial standings. Deloitte concluded that in their opinion John Deere’s consolidated financial information was presented fairly in all material aspects.

 

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Firm Evaluation

Eyes on the Horizon: Experts project the estimated worldwide population to be more than 9 billion with roughly 70% living in cities. The world’s expanding and increasingly urban population will enjoy higher living foods such as meat. Consequently, John Deere will be called on to offer products and services that help meet the increased demand for more shelter, food, fuel and infrastructure in the years ahead. John Deere is a company always looking ahead at how the firm can continue to flourish and satisfy customers for years to come. An aspect of the “eyes on the horizon” philosophy is consistently coming up with new products and ideas. Deere’s extensive investment in new products yielded Research & Development expenditures to reach new heights of $1.5 billion. R&D costs increased primarily as a result of increased spending in support of new products and more stringent engine emission requirements.

International Expansion: In today’s business environment, international firm expansion is crucial for a company’s success. John Deere’s management made it a priority in 2013 to increase business across the globe. Our group noticed that international plant and

 

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production was a primary focus for the Board in the 2013 financial report. It was evident that this was an exciting and focal addition to Deere & Company. In 2013, foreign export sales were roughly thirteen and a half billion dollars and made up 36.89% of total sales. The company also built seven new foreign manufacturing plants. Three of these were built in China, two in Brazil, one in India as well as a new plant in Russia. All of these new plants will focus on a specific side of production: construction equipment, farm tractor services, and tillage equipment. Looking ahead, shareholders and investors should consider the fact that all of the new international plants will be in full operation in 2014. This will increase overall revenues and investors should expect a higher percentage of total sales being international for 2014 and 2015.

Concluding Statement: Since 1837, the strong core values and rich history of John Deere have become synonymous with American farming. 2013 was no different. It was a record setting year for Deere & Company in revenue, net income and R&D spending, demonstrating continued expansion and product diversity. In the eyes of shareholders, stock performance and dividend yield illustrate John Deere’s financial maturity and stability. Although there is a slight predicted decrease in 2014 for the agriculture industry, we expect Deere & Company to continue their advancement as a leading force in the market.

Question to the Board

“Due to urbanization and the shift towards technology as the primary means of agriculture production, would this cause future, long-term setbacks in sales and how does Deere & Company plan on adapting to this change in our culture?”

 

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