Deere & Company — Q2 2020 Form 10-Q
Business context and reporting period. The filing covers the quarter ended May 3, 2020, and the six months then ended; each second quarter comparison covered 13 weeks. Deere operates agriculture and turf, construction and forestry, and financial services businesses. The filing describes significant disruption from COVID-19.
Financial performance
All amounts are U.S. dollars in millions, except per-share data and percentages.
| Metric | Q2 2020 | Q2 2019 | Change |
|---|---|---|---|
| Net sales | 8,224 | 10,273 | -20% |
| Total revenues | 9,253 | 11,342 | -18% |
| Net income attributable to Deere | 666 | 1,135 | -41% |
| Diluted EPS | $2.11 | $3.52 | -40% |
| Equipment operations operating profit | 890 | 1,366 | -35% |
| Financial services net income | 60 | 121 | -50% |
For the first six months, revenues were $16,884 million (-13%), net sales were $14,754 million (-14%), Deere-attributable net income was $1,182 million (-28%), and diluted EPS was $3.73 versus $5.07. Segment operating profit declined 15% in agriculture and turf, 67% in construction and forestry, and 30% in financial services.
Q2 segment operating margins were 13.3% in agriculture and turf (14.0% prior year) and 4.3% in construction and forestry (11.6%). Consolidated cost of sales was 76.5% of net sales, compared with 75.5%.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $776 million, versus cash used of $1,495 million a year earlier; investing cash flow was $30 million and financing cash flow was $4,343 million. Cash, cash equivalents and restricted cash increased $5,047 million to $9,003 million, primarily reflecting increased borrowing.
- At May 3, 2020, cash and cash equivalents were $8,900 million and marketable securities were $626 million. Total assets were $77,326 million, total liabilities $65,461 million, and Deere stockholders’ equity $11,864 million.
- Balance-sheet borrowings comprised $11,179 million short-term, $4,640 million short-term securitization borrowings, and $34,324 million long-term. Equipment operations’ interest-bearing debt, excluding finance leases, was $11,343 million; financial services’ external interest-bearing debt was $38,761 million.
- Deere issued $2,250 million of U.S. notes and €2,000 million (approximately $2,170 million at issuance) of Euro-Medium-Term notes during Q2. Its $8,000 million revolving credit facilities were renewed and undrawn at quarter-end. Worldwide credit lines totaled $9,178 million, of which $4,614 million was unused. The company reported that it met applicable credit-agreement requirements.
- Cash dividends paid in the first six months were $481 million; common-stock repurchases were $263 million. Deere suspended repurchases in response to COVID-related uncertainty and reduced planned capital expenditures.
Material changes and unusual items
- COVID-related lower shipment volumes were the primary pressure on equipment sales. Q2 agriculture and turf sales fell 18%; construction and forestry sales fell 25%. Financial services revenue was down 1% for the quarter, while its operating profit fell 56%.
- Q2 pretax impairment charges totaled $114 million: $62 million for fixed assets at an asphalt plant factory in Germany, $22 million for operating-lease equipment, $10 million for matured lease inventory, and $20 million for a minority investment. The filing also reports a $38 million increase in the Q2 financing-receivable credit-loss allowance related to estimated losses, primarily in construction equipment lending.
- The voluntary employee-separation program generated $136 million of pretax expense in the first half, including $9 million in Q2. Estimated annual savings are approximately $85 million, with about $65 million expected in 2020.
- First-half tax results included discrete benefits of $43 million related to a foreign-subsidiary tax-status change and $28 million from share-based compensation tax benefits.
- Other comprehensive loss was $386 million in Q2, principally reflecting a $441 million cumulative translation loss, partly offset by retirement-benefit adjustments.
Outlook, commentary and risks
Management said COVID-19 and containment measures affected demand, factory operations, suppliers, costs, cash flows and forecasts. Deere remained designated an essential business in many markets, implemented health and safety measures, and said facilities and parts distribution centers were largely operational. The filing does not provide a clear consolidated full-year sales or earnings forecast.
Management’s 2020 industry outlook anticipated agricultural machinery sales down about 10% in the U.S. and Canada, 5%–10% lower in Europe, and 10%–15% lower for South American tractors and combines; turf and utility equipment down about 10% in the U.S. and Canada; North American construction equipment down 20%–30%; and global forestry sales down 15%–20%. Financial services full-year results were expected to decline, mainly from higher credit-loss provisions and less-favorable financing spreads.
COVID-related customer payment relief at quarter-end covered approximately 10% of the trade-receivable portfolio, 3% of financing receivables, and 2% of the operating-lease portfolio. The company cautioned that the pandemic’s duration and economic effects were unknown, and that prolonged shutdowns, supplier disruption, weaker demand, used-equipment values, credit losses, and capital-market or funding conditions could materially affect results, liquidity and financial position. It warned that further deterioration in forecasts could lead to additional impairments.
Deere said reasonably possible losses from unresolved legal matters were not expected to materially affect its financial statements. It disclosed an approximately $328,000 environmental fine in Argentina; access to administrative files was restricted during the pandemic, and the company had not yet determined its response.
Most important facts for investors to verify
- Whether equipment demand, production constraints and supplier delays improve or worsen, particularly in construction, forestry, turf and smaller agriculture equipment.
- Whether payment relief leads to higher delinquencies, credit-loss provisions or defaults, and whether reported allowance estimates remain adequate.
- Whether used-equipment values, lease returns and forecast assumptions trigger further impairments.
- How increased borrowing and liquidity measures affect leverage, interest costs, credit ratings and access to funding.
- Whether expected separation-program savings materialize and whether the stated industry forecasts and financial-services outlook are revised.