Deere & Company — Q1 FY2019 Form 10-Q
Reporting period: Three months ended January 27, 2019; comparative quarter ended January 28, 2018. Both periods contained 13 weeks. All financial amounts are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 | Change / context |
|---|---|---|---|
| Net sales and revenues | $7,983.6 | $6,913.5 | Up 15% |
| Equipment net sales | $6,940.9 | $5,973.9 | Up 16% |
| Income before income taxes | $677.2 | $517.9 | Up 31% |
| Net income attributable to Deere | $498.5 | $(535.1) | Prior-year result included $977 million of discrete tax-reform charges |
| Diluted earnings per share | $1.54 | $(1.66) | Prior-year comparison is distorted by tax-reform charges |
| Operating cash flow | $(1,650.7) | $(1,296.0) | Seasonal inventory build, lower payables and increased sales receivables were key uses |
| Cash, cash equivalents and restricted cash at period end | $3,723.1 | $4,042.1 | Cash and cash equivalents on the balance sheet were $3,625.7 |
Equipment operating costs and expenses rose with production, R&D and selling costs. Cost of sales was 78.3% of net sales, versus 78.8%. R&D expense increased 14% to $406.8; selling, administrative and general expense rose 8% to $763.7. The filing does not provide a single consolidated operating margin measure.
Segments and material year-over-year changes
- Agriculture and Turf: Sales increased 10% to $4,681; operating profit fell 10% to $348 and margin declined to 7.4% from 9.1%. Higher volumes and pricing were offset by production costs, warranty expense, product mix, R&D and currency effects.
- Construction and Forestry: Sales rose 31% to $2,260; operating profit was $229 versus $32, with margin of 10.1% versus 1.8%. Two additional months of Wirtgen contributed about 24 percentage points of sales growth; Wirtgen reported $14 of operating profit versus a $92 loss a year earlier.
- Financial Services: Revenue increased 10% to $927, while operating profit declined 12% to $192. Higher average financed receivables and leases (up 7%) were offset by less favorable financing spreads and 48% higher interest expense, reflecting higher borrowing rates and borrowings.
- Consolidated sales growth also reflected 5% price realization and 7% from two additional months of Wirtgen; unfavorable currency translation reduced growth by 3%.
- The prior-year quarter included the Wirtgen acquisition, which used $5,129.7 of investing cash. Q1 FY2019 investing cash flow was positive $968.6, so the year-over-year cash-flow comparison is strongly affected by that acquisition.
Balance sheet, debt and liquidity
- Total assets were $69,918.2 and total liabilities $58,571.5 at January 27, 2019. Deere stockholders’ equity was $11,327.8.
- Borrowings comprised $10,737.5 short-term and $27,855.2 long-term, plus $4,464.0 of short-term securitization borrowings. The financing business relies substantially on debt funding; financial-services external interest-bearing debt was $36,783, with debt-to-equity of 7.4 to 1.
- Equipment operations’ interest-bearing debt was $6,273 and debt-to-capital was 36%. These segment debt measures should not be conflated with consolidated borrowings.
- Cash and marketable securities totaled $4,149.2. Worldwide credit lines were $8,352, of which $3,740 was unused. Commercial paper outstanding was $3,760. The company reported compliance with its credit-agreement requirements and stated that it expects sufficient funding and liquidity.
- Dividends paid were $220.3 and common-stock repurchases were $143.9. The Board declared a $0.76-per-share dividend payable May 1, 2019.
Outlook, commentary and risks
- Management forecast FY2019 equipment sales up about 7%, net sales and revenues up about 7%, and Deere-attributable net income of about $3.6 billion. The sales outlook included a roughly 2% adverse currency effect and about 1% contribution from a full year of Wirtgen versus 10 months in FY2018.
- Agriculture and Turf sales were forecast to increase about 4%; Construction and Forestry sales about 13%, including about 4% from the additional Wirtgen months. Financial Services net income was forecast at approximately $630 million.
- Management cited raw-material and logistics costs, tariffs and trade-policy uncertainty, and more cautious farmer purchasing. It expected cost pressures to ease as the year progressed and pointed to product technology, a flexible cost structure and an expanded customer base as supports to results.
- Key uncertainties include agricultural commodity prices and farm income, weather, trade restrictions and tariffs, global economic and political conditions, foreign exchange and interest rates, used-equipment demand and pricing, customer credit performance, funding access and costs, supply-chain constraints, and regulatory or cybersecurity events. Outlook statements are subject to these and other risks.
- Financing receivables past due totaled $489; non-performing receivables were $441, compared with $259 at October 28, 2018. The company began stopping finance-income accrual generally at 90 days delinquent rather than 120 days; management said the prospective estimate change had no significant financial-statement effect.
- Commitments included $336 of third-party retail financing guarantees, with $14 accrued losses, and $377 of property-and-equipment commitments. The company said reasonably possible losses from unresolved legal actions were not expected to materially affect the financial statements. Disclosed environmental matters included an Iowa emissions notice, a Brazil oil-spill fine under administrative defense, and alleged groundwater contamination at an Argentina site.
Most important facts for investors to verify
- Whether the FY2019 sales and approximately $3.6 billion net-income forecasts were achieved, particularly given market, tariff and currency assumptions.
- How much segment earnings improvement persists after separating Wirtgen’s added months from underlying operating performance and costs.
- Financial Services’ funding costs, financing spreads, delinquencies, non-performing receivables and credit-loss provisions.
- Seasonal inventory and operating-cash-flow trends, and the company’s liquidity and borrowing capacity as debt is refinanced.
- Warranty-cost trends, legal and environmental contingencies, and other estimates that could affect reported earnings.