Business context and reporting period
Deere & Company’s unaudited Form 10-Q covers the third quarter and first nine months of fiscal 2018, ended July 29, 2018; both third-quarter comparison periods comprised 13 weeks. The company operates equipment businesses in agriculture and turf and construction and forestry, alongside equipment financing and related financial services. Figures below are in millions of dollars unless stated otherwise.
Financial performance and position
- Third quarter: Net sales and revenues were $10,308, up 32% year over year; equipment net sales were $9,286, up 36%. Net income attributable to Deere was $910, or $2.78 diluted EPS, compared with $642, or $1.97, a year earlier.
- First nine months: Net sales and revenues were $27,942, up 29%; equipment net sales were $25,007, up 33%. Net income attributable to Deere was $1,584, down 4%, and diluted EPS was $4.82 versus $5.11.
- Segment operating profit: Third-quarter agriculture and turf was $806 (+16%), construction and forestry $281 (+153%), and financial services $196 (-1%). For nine months, the respective figures were $2,249 (+17%), $573 (+121%), and $591 (+13%).
- Costs and margins: Cost of sales was 77.0% of net sales in the quarter (76.8% in the prior-year quarter) and 76.7% for nine months (76.9% prior year). Higher production costs and Wirtgen purchase-accounting effects pressured the quarter; lower warranty costs and price realization helped results.
- Cash flow: Consolidated operating cash flow for nine months was negative $675, versus positive $729 a year earlier. Investing cash outflow was $6,465, including $5,171 for acquisitions; financing cash inflow was $1,656. Cash and cash equivalents declined $5,412 to $3,923.
- Balance sheet and funding: At July 29, cash and marketable securities totaled $4,412, down from $9,787 at October 29, 2017. Borrowings included $11,005 short-term, $4,528 short-term securitization, and $26,838 long-term. Equipment operations reported $6,405 of interest-bearing debt; financial services reported $35,965 of external interest-bearing debt. Total assets were $69,390 and Deere stockholders’ equity was $10,356. Worldwide credit lines were $8,289, with $3,477 unused; the company reported compliance with its credit-agreement requirements.
- Tax and other measures: Nine-month income-tax expense was $1,523 versus $749, including $741 of provisional tax-reform expense. The quarter included a $62 favorable tax adjustment. Financial services’ earnings-to-fixed-charges ratio was 1.82:1 for the quarter and 1.90:1 for nine months.
Material changes versus the prior comparable period
- Wirtgen, acquired in December 2017, materially increased construction and forestry sales. It contributed $1,155 of sales and $88 of operating profit in the quarter, and $2,282 of sales and $37 of operating profit for the nine months. The acquisition’s net cash purchase price was $5,130; it also added substantial goodwill and intangible assets.
- Excluding Wirtgen, equipment operating-profit improvement was attributed mainly to higher shipment volumes, lower warranty costs, and pricing, partly offset by higher production and research and development costs. Prior-year results included gains from the SiteOne investment sale.
- Financial-services results benefited from a larger average portfolio and lower credit-loss provisions; nine-month results also benefited from lower lease residual-value losses. Higher borrowing rates and borrowings increased interest expense, while financing spreads were less favorable.
- Cash and cash equivalents fell sharply, reflecting the Wirtgen acquisition as well as substantial voluntary pension and postretirement plan contributions. The company contributed $950 of the approved $1,000 voluntary contribution during the third quarter.
Guidance, commentary, risks, and contingencies
- Management projected fiscal 2018 equipment sales growth of about 30% and total net sales and revenues growth of about 26%, with Deere-attributable net income of approximately $2,360. The net-income forecast includes $741 of provisional tax-reform expense; prior guidance was $2,300 and included $803 of such expense.
- Fiscal 2018 segment sales outlook was approximately +15% for agriculture and turf and +81% for construction and forestry, with Wirtgen expected to contribute about 55 percentage points to construction and forestry growth. Fourth-quarter equipment sales were projected to rise about 21%, with an anticipated approximately 3% unfavorable currency-translation effect.
- Financial services’ fiscal 2018 net-income outlook was approximately $815, including a $232.4 tax-reform benefit. Management cited a higher portfolio and lower credit-loss and lease residual losses as supports, partly offset by less favorable financing spreads.
- Management described stronger agricultural demand in North America and Europe and improved construction demand, supported by housing, oil and gas activity, and global growth. Raw-material and freight cost pressures were being addressed through cost management and pricing. Trade tensions and geopolitical issues remained concerns.
- Risks highlighted include agricultural and construction demand, weather and commodity conditions, tariffs and trade policy, currency and interest-rate volatility, used-equipment prices and lease residual values, customer credit quality, funding access and cost, supply-chain and freight costs, regulation, and acquisition integration. These forward-looking estimates depend on assumptions and may differ materially from actual results.
- Contingencies include approximately $445 of equipment-financing guarantees, with $20 accrued for losses; $397 of property and equipment commitments; and $125 of miscellaneous contingent liabilities, for which accrued amounts were not material. Management said reasonably possible losses from unresolved legal matters were not expected to materially affect the financial statements.
- On July 31, 2018, Deere announced an agreement to acquire PLA for an expected $75, subject to regulatory approval and customary closing conditions. The filing also reports a $12 pretax gain on the May 2018 sale of seven construction and forestry retail locations.
Investor facts to verify
- How the provisional tax-reform amounts and remaining measurement-period adjustments affect reported and forecast earnings.
- Wirtgen’s ongoing contribution to segment profit, integration, purchase accounting, and cash requirements.
- Whether operating cash flow improves as seasonal receivables and inventory normalize, after the acquisition and pension contributions.
- Credit quality, delinquencies, lease residual values, and funding costs in the expanding financial-services portfolio.
- Debt, liquidity, available credit lines, and sensitivity to rates, currencies, trade actions, and raw-material and freight costs.
- Progress and final cost of the proposed PLA acquisition and the stated 2018 sales and earnings outlook.