Deere & Company — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended April 30, 2011. Amounts are in U.S. dollars; financial statements are unaudited. Deere makes agricultural, turf, construction and forestry equipment and provides equipment financing.
Financial performance
- Quarter: Net sales and revenues were $8.91 billion, up 25% year over year; equipment net sales rose 27% to $8.33 billion. Net income attributable to Deere was $904.3 million, up 65%, and diluted EPS was $2.12 versus $1.28.
- Six months: Net sales and revenues were $15.03 billion, up 26%; net income attributable to Deere was $1.42 billion, up 79%, and diluted EPS was $3.32 versus $1.85. The 2010 comparison included a $129.5 million health-care-legislation tax charge.
- Segments, Q2: Agriculture and turf sales increased 24% to $6.999 billion and operating profit rose 22% to $1.163 billion. Construction and forestry sales increased 46% to $1.329 billion and operating profit was $105 million versus $36 million. Financial services operating profit rose to $163 million from $110 million, mainly on portfolio growth and lower credit-loss provisions.
- Costs and margins: Q2 cost of sales was 73.3% of equipment net sales, versus 72.8% a year earlier; higher raw-material, compensation and emissions-compliance costs partly offset stronger volume and pricing. Six-month cost of sales was 73.7%, versus 73.9%.
- Cash flow: Consolidated operating cash flow was negative $665 million for the six months, versus positive $417 million in 2010, chiefly reflecting seasonal inventory and receivables increases. Investing cash flow was positive $11 million, including $894 million of business-sale proceeds; financing cash flow was positive $786 million. Cash rose $159 million to $3.95 billion.
- Balance sheet and funding: At April 30, cash and marketable securities totaled $4.19 billion. Total assets were $46.59 billion and stockholders’ equity was $7.43 billion. Short-term borrowings, short-term securitization borrowings and long-term borrowings totaled approximately $26.09 billion. Equipment-operations debt-to-capital was 34%; financial-services debt-to-equity, including intercompany debt, was 7.6 times.
Changes, outlook and risks
- Management forecast fiscal 2011 equipment sales growth of 21%–23%, with approximately 3% favorable currency impact, and Deere-attributable net income of about $2.65 billion. Q3 equipment sales were projected to rise about 20%, including approximately 6% favorable currency impact.
- Full-year agriculture and turf sales were forecast to grow about 20%, construction and forestry about 35%, and financial-services net income to reach approximately $435 million. The annual outlook included estimated Japanese earthquake and tsunami impacts of $300 million in sales and $70 million in operating profit.
- Management cited strong farm demand and improving construction and forestry markets, while monitoring global economic and sovereign-debt uncertainty, credit availability, commodity volatility, supply constraints (including Japan-related disruption), weather and emissions-compliance costs.
- Deere sold its wind-energy business in December 2010 for approximately $900 million and acquired the remaining 64% of A&I Products for approximately $48 million. The board declared a quarterly dividend of $0.41 per share, up $0.06.
- The company reported access to $5.125 billion of worldwide credit lines, of which $2.740 billion was unused; it said funding sources were expected to be sufficient. Credit agreements were in compliance. Unresolved legal matters were described as not expected to have a material effect; approximately $225 million of equipment-financing guarantees were outstanding.
Investor verification priorities
- Check whether inventory and receivables growth converts into operating cash flow as seasonal demand and production evolve.
- Track delivery of the $2.65 billion fiscal-year earnings outlook, including the stated Japan-related impacts, input costs and emissions-transition constraints.
- Assess financial-services credit quality, loss provisions, funding access and leverage alongside growth in receivables and leases.
- Review the wind-business sale proceeds and related earnings/cash-flow effects, and confirm subsequent updates to the outlook or material contingencies.