Deere & Company — Q1 FY2016 10-Q
Business context and period. The unaudited quarter ended January 31, 2016, comprised 13 weeks; comparisons are with the 13-week prior-year quarter. Deere’s businesses are equipment operations (agriculture and turf; construction and forestry) and financial services. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Total net sales and revenues | $5,524.5 | $6,383.1 |
| Equipment net sales | $4,769.2 | $5,605.1 |
| Net income attributable to Deere | $254.4 | $386.8 |
| Diluted EPS | $0.80 | $1.12 |
| Operating profit, agriculture and turf | $144 | $268 |
| Operating profit, construction and forestry | $70 | $146 |
| Operating profit, financial services | $194 | $233 |
| Cash from operating activities | $(777.6) | $(510.1) |
- Total revenues declined 13% and Deere-attributable net income declined 34%. Equipment sales fell 15%; financial-services revenue fell 2%.
- Cost of sales was 80.5% of equipment net sales, versus 78.9% a year earlier. Management cited currency effects and less favorable product mix, partly offset by pricing and lower production costs.
- Operating cash outflow reflected lower accounts payable and accrued expenses, seasonal inventory growth and income-tax working-capital movements. Investing activities provided $851.6; financing activities used $742.9. Cash declined $702.3 to $3,459.9.
- At January 31, cash and cash equivalents were $3,459.9 and marketable securities $476.3. Total borrowings were approximately $36.2 billion, comprising short-term borrowings of $7.8 billion, securitization borrowings of $3.9 billion and long-term borrowings of $24.5 billion. Equipment-operations debt-to-capital was 42%; financial-services debt-to-equity was 7.6:1.
- Worldwide credit lines totaled $7.189 billion, of which $4.436 billion was unused. The company reported compliance with credit-agreement requirements. The quarterly dividend was $0.60 per share; cash dividends paid totaled $193.1.
Material changes and management commentary
- Agriculture and turf sales declined 12%, with operating profit down 46%; construction and forestry sales declined 23%, with operating profit down 52%. Financial-services operating profit fell 17%.
- Equipment results reflected lower shipment volumes, unfavorable currency translation and product mix; pricing, reduced selling and administrative expenses, and lower production costs partly offset those effects. Financial-services results were pressured by currency, higher construction-equipment lease residual-value losses, less favorable financing spreads and higher credit-loss provisions.
- Management forecast FY2016 equipment sales down about 10%, with second-quarter sales down about 8% year over year, and FY2016 Deere-attributable net income of approximately $1.3 billion. Financial-services net income was forecast at approximately $525 million.
- FY2016 segment outlook: agriculture and turf sales down about 10%; construction and forestry down about 11%. Management cited weak agricultural conditions, low commodity prices and farm incomes, weakness in the North American energy sector, and lower demand outside the U.S. and Canada. These are forward-looking estimates, not guarantees.
- Management said all segments remained profitable and characterized the business as more durable through the downturn, while noting uncertainty around the global economy, currencies, commodities, government policies, interest rates, capital markets and geopolitical events.
Risks, contingencies and unusual items
- Financing receivables past due totaled $483 and non-performing receivables $154 at quarter-end; the credit-loss allowance was $155. The provision for credit losses was $9.4 versus $1.0 a year earlier. Investors should monitor delinquencies, defaults and lease residual values.
- Legal matters included product liability, retail credit, intellectual property and environmental claims. Deere said reasonably possible additional losses beyond amounts accrued were not expected to materially affect consolidated financial statements. It also reported $153 of equipment-retail financing guarantees, with $4 accrued losses, and $173 of property-and-equipment commitments.
- In Q1 the company prospectively changed its method for estimating pension and postretirement service and interest costs. It estimated FY2016 costs would be about $175 lower than under the prior method; total benefit obligations were not affected by the method change.
- Currency translation reduced quarterly other comprehensive income by $158. Deere cited foreign-exchange volatility as a business risk.
- After quarter-end, Deere acquired precision-planter maker Monosem for approximately $166, including cash acquired. The planned Precision Planting acquisition, with an estimated $190 purchase price net of cash acquired, remained subject to customary conditions and regulatory approvals.
- The company’s forecast is exposed to agricultural and construction market conditions, customer access to credit, funding-market disruptions, input and freight costs, supply-chain constraints, regulation and other risks described in the filing. Management reported no material change to the risk factors in its latest Form 10-K.
Important facts for investors to verify
- Whether FY2016 revenue and earnings forecasts remain achievable as equipment demand and foreign-exchange conditions evolve.
- Trends in equipment shipments, dealer inventories, pricing, product mix and production costs by segment.
- Financial-services credit-loss provisions, delinquency and non-performing balances, residual-value losses, and financing spreads.
- Cash conversion and seasonal working-capital needs, alongside borrowing levels, liquidity access and covenant compliance.
- The effects of the pension-cost estimation change, the Monosem acquisition and the pending Precision Planting transaction.