Deere & Company — Q3 FY2012 Form 10-Q
Reporting period: Three and nine months ended July 31, 2012; interim financial statements are unaudited. Unless noted, amounts are in millions of dollars.
Business context and results
Deere manufactures and sells agricultural, turf, construction and forestry equipment, and provides equipment financing and related services. For the quarter, worldwide net sales and revenues rose 15% to $9,590; for the first nine months, they rose 13% to $26,365.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Equipment net sales | $8,930 | $7,722 | $24,454 | $21,563 |
| Net income attributable to Deere | $788 | $712 | $2,377 | $2,130 |
| Diluted EPS | $1.98 | $1.69 | $5.88 | $5.01 |
| Segment operating profit: agriculture and turf | $1,014 | $859 | $2,991 | $2,579 |
| Segment operating profit: construction and forestry | $113 | $110 | $356 | $304 |
| Segment operating profit: financial services | $170 | $194 | $520 | $529 |
Quarterly Deere-attributable net income increased 11% and diluted EPS increased 17%; nine-month net income increased 12% and diluted EPS increased 17%. Equipment sales growth reflected higher shipments and price realization, partly offset by unfavorable currency translation. Deere reported equipment cost of sales at 75.7% of net sales for Q3 versus 75.0% a year earlier, and 74.3% for the nine months versus 74.2%.
Cash flow, liquidity and debt
- Consolidated operating cash flow was an outflow of $1,135 for the first nine months, versus an inflow of $636 in 2011. Management attributed the 2012 outflow mainly to seasonal growth in trade receivables and inventories, increased demand, and a decrease in retirement benefit liabilities.
- Investing activities used $2,415, including $808 for property and equipment; financing activities provided $3,354. Cash declined $250 to $3,398. Cash and marketable securities totaled $4,943 at July 31.
- Balance-sheet borrowings were $7,041 short-term, $3,028 short-term securitization borrowings and $21,157 long-term. Long-term borrowings increased from $16,960 at October 31, 2011. Total liabilities were $45,784 and stockholders’ equity was $7,415.
- Worldwide credit lines totaled $5,076, of which $2,848 was unused. The filing says applicable credit-agreement requirements were met. Deere reported ratings of A2/Prime-1 from Moody’s and A/A-1 from S&P, both with stable outlooks.
- Equipment operations’ interest-bearing debt was $6,310, with debt-to-capital of 46%, up from 35% at fiscal year-end. Financial services’ external interest-bearing debt was $24,916; its debt-to-equity ratio was 7.6:1.
Material changes and management commentary
- Agriculture and turf sales increased 14% in Q3 and 11% year to date; construction and forestry sales increased 23% and 24%, respectively. Price realization and higher volumes supported equipment operating profit, partly offset by production and raw-material costs, currency effects, and higher R&D costs. Emissions-related product changes contributed to production costs.
- Financial services net income attributable to Deere was $110.4 in Q3 and $338.6 year to date, down from $125.6 and $348.9. Management cited higher administrative expenses, narrower financing spreads and higher crop-insurance claim reserves, partly offset by portfolio growth and lower credit-loss provisions.
- Trade receivables and inventories increased with seasonality and demand. Financing receivables past due totaled $241 at July 31, versus $350 a year earlier; non-performing financing receivables were $159, versus $204.
Outlook, risks and contingencies
Management forecast fiscal 2012 equipment sales growth of about 13%, including an unfavorable currency effect of about 3%, and Deere-attributable net income of approximately $3.1 billion. Agriculture and turf sales were forecast to rise about 13%; construction and forestry about 17%. Financial services net income was expected to be approximately $450 million, somewhat below the prior year.
Management cited uncertainty in the global recovery, sovereign and state debt, capital-market and customer-credit conditions, U.S. drought and commodity-price volatility, component availability, international market weakness, new-product start-up inefficiencies, and emissions requirements. Outlook is subject to the forward-looking risks described in the filing, including weather, demand, currencies, interest rates, regulation, supply constraints and funding access.
- Commitments included approximately $584 of planned property and equipment construction or acquisition. Equipment- and property-related guarantees were approximately $239, with an $8 accrued liability.
- The company reported unresolved legal matters arising in the ordinary course and said reasonably possible additional losses beyond amounts accrued were not expected to have a material effect. Other miscellaneous contingent liabilities were approximately $50, with payment considered substantially remote.
- In August 2012, financial services completed a retail-note securitization of approximately $1.0 billion. The board declared a $0.46-per-share quarterly dividend payable November 1, 2012.
Important facts for investors to verify
- Whether the fiscal-year sales and approximately $3.1 billion net-income outlook was achieved, especially given drought, commodity-price volatility and weaker international markets.
- Whether working-capital growth, particularly inventories and receivables, converted into operating cash flow after the seasonal period.
- Whether equipment cost pressures, emissions-related production costs and currency headwinds affected margins beyond the reported quarter.
- Whether financial-services spreads, crop-insurance claims, credit quality and funding costs developed as assumed in the outlook.
- Whether rising equipment-operations debt and financial-services leverage remained within covenant limits and funding remained available on reasonable terms.