Deere & Company — Q1 FY2021 Form 10-Q
Reporting period: Three months ended January 31, 2021 (13 weeks); comparable period ended February 2, 2020. Unless noted, amounts are in millions of dollars.
Business context and financial performance
Deere manufactures and distributes agricultural, turf, construction, roadbuilding, and forestry equipment, and provides equipment financing. Beginning in FY2021, it reorganized agriculture and turf into Production and Precision Agriculture and Small Agriculture and Turf; prior-period segment results were recast. Consolidated results include equipment operations and financial services.
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Net sales | $8,051 | $6,530 | +23% |
| Total revenues | $9,112 | $7,631 | +19% |
| Income before taxes | $1,528 | $569 | |
| Net income attributable to Deere | $1,224 | $517 | +137% |
| Diluted EPS | $3.87 | $1.63 | |
| Operating cash flow | $143 | $(508) |
Net income was approximately 13.4% of total revenues, compared with 6.8% a year earlier. The cost-of-sales-to-net-sales ratio improved to 72.1% from 77.7%. Deere attributed the improvement in profitability to higher shipment volumes and mix, price realization, lower expenses, and prior-year voluntary separation costs. Price realization contributed 6 percentage points to worldwide equipment sales growth; currency translation contributed 1 point.
Segments and material year-over-year changes
- Production and Precision Agriculture: Sales of $3,069, up 22%; operating profit of $643, up 195%; operating margin 21.0%, versus 8.7%.
- Small Agriculture and Turf: Sales of $2,515, up 27%; operating profit of $469, up 203%; operating margin 18.6%, versus 7.8%.
- Construction and Forestry: Sales of $2,467, up 21%; operating profit of $268, up 188%; operating margin 10.9%, versus 4.5%. The quarter included an additional month of Wirtgen activity, adding $270 to net sales; prior periods were not restated.
- Financial Services: Revenue, including intercompany revenue, was $934, down 6%; operating profit was $258, up 44%. Lower borrowing costs, favorable financing spreads, lower lease residual losses, and lower credit-loss provisions supported profit.
Financial Services net income was $204, up 49%; equipment operations net income was $1,020, up 168%. Q1 FY2020 included $127 of voluntary employee-separation expense. Q1 FY2021 included $50 of long-lived asset impairments, offset by a $58 favorable Brazilian indirect-tax ruling, for a net $8 pretax benefit from these items.
Cash flow, balance sheet, debt, and liquidity
- Operating cash flow was $143, versus cash used of $508 a year earlier. Seasonal inventory growth used $926 of cash and accounts payable and accrued expenses decreased by $705.
- Investing activities provided $579; financing activities used $933. Cash, cash equivalents, and restricted cash declined $108 to $7,064. Cash and cash equivalents were $6,962 and marketable securities were $667 at quarter-end.
- Total assets were $75,480; total liabilities $61,394; Deere stockholders’ equity $14,083. Inventories were $5,956, up from $4,999 at November 1, 2020.
- Balance-sheet borrowings were $9,224 short term, $32,772 long term, and $3,969 short-term securitization borrowings. Equipment operations’ interest-bearing debt, excluding finance leases, was $10,494; debt-to-total-capital was 43%. Financial Services’ external interest-bearing debt was $35,415 and debt-to-equity was 7.6:1.
- Worldwide credit lines totaled $8,326, of which $6,654 was unused. Management said it expected sufficient funding and liquidity; disclosed credit-agreement requirements were met. The next quarterly dividend was declared at $0.90 per share, payable May 10, 2021.
Outlook, management commentary, and risks
Management cited strong performance across product lines and improving farm and construction conditions, while noting ongoing pandemic-related operational challenges. For 2021, industry sales forecasts included agricultural machinery up 15–20% in the U.S. and Canada, about 5% in Europe, and about 10% for tractors and combines in South America; Asian sales were expected to be slightly lower. U.S. and Canada turf and utility sales were expected up about 5%, construction up about 5%, and compact construction up about 10%; global forestry sales were expected to rise 5–10%. Financial Services was expected to benefit from a higher average portfolio, lower lease residual losses, and favorable spreads. The supplied filing text does not provide a clear company-wide full-year net income forecast.
COVID-19, supply constraints, commodity and used-equipment prices, currency and interest-rate volatility, trade policy, customer demand and credit performance, capital-market access, and geopolitical or regulatory developments were identified as risks. Payment relief granted since the pandemic began remained outstanding on approximately 4% of financing receivables and 3% of operating leases; outstanding trade receivables under relief were not material.
Other notable items: Deere adopted the expected-credit-loss standard, recording a $35 reduction to retained earnings at adoption. It reported $710 of unrecognized tax benefits. Guarantees on third-party equipment financing totaled about $398, with $18 accrued losses. Management said unresolved legal matters were not expected to have a material effect; an appealed environmental fine in Argentina was approximately $296,000.
Most important facts for investors to verify
- How much of the sharp earnings and margin improvement is sustainable versus attributable to prior-year separation costs, the Brazilian tax ruling, price realization, and mix?
- How will production increases, supplier availability, and inventory growth affect operating cash flow and delivery commitments?
- What are the credit-loss and residual-value trends in Financial Services as COVID-related payment relief expires?
- How should investors assess the additional Wirtgen month when comparing Construction and Forestry results with prior periods?
- What full-year company earnings outlook and assumptions were provided elsewhere in Deere’s earnings materials? The supplied filing text does not state a clear consolidated earnings forecast.