Deere & Company — Q1 FY2017 Form 10-Q
Reporting period: 13 weeks ended January 29, 2017; unaudited. Comparisons are with the 13 weeks ended January 31, 2016. Dollar amounts are in millions unless otherwise noted.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Net sales and revenues | $5,625 | $5,525 | +2% |
| Equipment net sales | $4,698 | $4,769 | -1% |
| Net income attributable to Deere & Company | $194 | $254 | -24% |
| Diluted earnings per share | $0.61 | $0.80 | -24% |
| Cash from operating activities | $(742) | $(778) | Less cash used |
| Cash and cash equivalents at quarter-end | $3,890 | $3,460 | +$430 year over year |
- Revenue growth included higher finance and interest income and other income; equipment sales declined. Other income benefited from a $105 million pretax gain on the partial sale of SiteOne.
- Cost of sales was 80.8% of net sales, compared with 80.5% a year earlier. Management attributed the increase primarily to higher warranty costs, unfavorable currency effects and separation-program costs, partly offset by price realization.
- Operating profit by segment was $213 million for Agriculture and Turf (up 48%), $34 million for Construction and Forestry (down 51%), and $169 million for Financial Services (down 13%).
- Interest expense was $208 million, versus $173 million. The filing attributes higher Financial Services interest expense primarily to increased average borrowing rates.
Cash, debt and liquidity
- Operating cash outflow was primarily driven by seasonal inventory growth and lower accounts payable and accrued expenses. Investing activities provided $1,104 million; financing activities used $769 million. Cash decreased $446 million during the quarter.
- At January 29, 2017, reported borrowings included $7,442 million of short-term borrowings, $4,220 million of short-term securitization borrowings and $22,917 million of long-term borrowings. These include funding for Financial Services.
- Cash and marketable securities totaled $4,336 million. Worldwide credit lines were $7,230 million, of which $5,949 million was unused. The company said it expected adequate funding and liquidity; credit-agreement requirements were met.
- Equipment Operations debt-to-total-capital was 41%. Financial Services external interest-bearing debt was $29,775 million, with debt-to-equity of 7.3 to 1.
- The quarterly dividend was $0.60 per share, unchanged year over year. A further $3,260 million remained under the share repurchase authorization at quarter-end.
Changes, outlook and management commentary
- Equipment sales in the U.S. and Canada fell 8%; sales outside those markets rose 11%, including a 1% favorable currency effect. Agriculture and Turf sales were roughly flat; Construction and Forestry sales fell 6%.
- Management forecast FY2017 equipment sales growth of about 4%, second-quarter growth of about 1%, and Deere-attributable net income of approximately $1.5 billion. Agriculture and Turf sales were forecast to rise about 3%; Construction and Forestry about 7%. Financial Services net income was forecast at approximately $480 million.
- Industry outlook remained mixed: U.S. and Canadian agricultural machinery sales were forecast down 5%–10%; EU28 sales down about 5%; South American tractor and combine sales up 15%–20%; and Asian sales flat to slightly higher. U.S. and Canadian turf and utility sales were expected to be roughly flat.
- Management cited signs of stabilization in key agricultural markets, while continuing to target operating efficiency and structural cost reductions. Risks include crop and commodity economics, customer credit and used-equipment values, foreign exchange, interest rates and funding access, geopolitical and trade developments, regulation, supply-chain constraints and competition.
Unusual items, contingencies and other disclosures
- The voluntary employee separation programs generated $94 million of expense in Q1 FY2017; total pretax program expense is approximately $111 million. Management estimated FY2017 savings of about $70 million.
- The SiteOne partial-interest sale generated approximately $114 million of proceeds and a $105 million pretax gain; Deere retained approximately 15% and continued equity-method accounting.
- The Department of Justice is seeking to block Deere’s proposed $190 million acquisition of Precision Planting; the company is contesting the lawsuit and the closing date is uncertain.
- Unresolved legal actions include product liability, retail credit, employment, patent and trademark matters. The company believes reasonably possible additional losses would not materially affect its financial statements. It also disclosed $143 million of equipment-financing guarantees, $158 million of property and equipment commitments, and approximately $1.285 billion of warranty liability and unearned premiums.
- Management identified no material change in risk factors or market-risk disclosures. Disclosure controls were reported effective, with no material change to internal control over financial reporting during the quarter.
Key investor verification points
- Assess how much of reported revenue growth and Agriculture and Turf operating-profit improvement depended on the SiteOne gain, and compare ongoing performance excluding that item.
- Track whether the FY2017 $1.5 billion net-income outlook and segment sales forecasts were achieved, given the mixed regional agricultural market outlook.
- Monitor warranty costs, separation-program charges and delivery of the estimated $70 million in savings.
- Review Financial Services funding costs, credit-loss provisions, delinquencies, used-equipment residual values and securitization funding; the filing reports higher past-due financing receivables than at October 30, 2016.
- Follow the Precision Planting litigation, liquidity and borrowing conditions, and the potential effects of the listed market, regulatory and geopolitical risks.