Deere & Company — Q1 fiscal 2018 10-Q
Business context and reporting period. The unaudited quarter ended January 28, 2018 and comprised 13 weeks; the comparable quarter ended January 29, 2017. Deere reports equipment operations—agriculture and turf, and construction and forestry—and financial services. The quarter includes Wirtgen, acquired December 1, 2017.
Financial performance
- Revenue: Net sales and revenues were $6.914 billion, up 23% year over year. Equipment net sales rose 27% to $5.974 billion; financial-services revenues rose 11% to $776 million. Wirtgen contributed to growth, as did higher volumes and favorable currency translation.
- Profit and margins: Income before taxes increased to $518 million from $328 million. Deere reported a net loss attributable to Deere & Company of $535 million, or $1.66 per diluted share, versus net income of $199 million, or $0.62 per diluted share. The reported $1.058 billion income-tax provision included a provisional $965 million tax-reform expense. Equipment cost of sales was 78.8% of net sales, compared with 80.5% a year earlier.
- Segments: Agriculture and turf sales rose 18% to $4.243 billion and operating profit rose to $387 million from $218 million. Construction and forestry sales rose 57% to $1.731 billion, while operating profit fell to $32 million from $37 million; Wirtgen recorded a $92 million operating loss, attributed to purchase-accounting effects and acquisition costs. Financial-services operating profit increased to $217 million from $167 million.
- Cash flow: Operating activities used $1.297 billion, compared with $737 million in the prior-year quarter, mainly reflecting seasonal inventory growth and lower accounts payable and accrued expenses. Investing activities used $4.090 billion, including $5.130 billion for acquisitions, principally Wirtgen. Financing activities used $231 million. Cash and equivalents declined $5.420 billion to $3.915 billion.
- Debt and liquidity: At quarter-end, short-term borrowings were $9.744 billion, short-term securitization borrowings $4.428 billion, and long-term borrowings $26.422 billion. Cash and marketable securities totaled $4.377 billion. Worldwide credit lines were $8.201 billion, of which $4.670 billion was unused. Deere reported that credit-agreement requirements were met.
- Other metrics: Total assets were $66.578 billion and total stockholders’ equity $9.265 billion. Financing receivables, net, were $28.329 billion; past-due financing receivables were $505 million and non-performing receivables $238 million. Dividends declared and paid were $0.60 per share.
Material changes and unusual items
- Tax reform drove the quarterly net loss: the provisional $965 million tax charge comprised a $715 million deferred-tax-asset remeasurement expense and $262 million deemed-repatriation tax, partly offset by other tax benefits. The company said the deferred-tax remeasurement was non-cash and planned to pay the repatriation tax over eight years. The estimate remained provisional.
- Wirtgen added $255 million of quarterly sales and revenues and reported a $98 million pretax loss. Deere incurred $50 million of acquisition-related costs. Preliminary purchase accounting included $2.062 billion of goodwill and $1.453 billion of other intangible assets; valuations could be updated during the measurement period.
- First-quarter equipment sales were affected by supply-chain bottlenecks and shipping delays. Excluding Wirtgen’s operating loss, equipment profit improvement was primarily attributed to higher shipment volumes and lower warranty costs, partly offset by higher production costs.
- Other income was lower than a year earlier, partly because the prior-year period included a gain from the sale of a partial interest in SiteOne. In the current quarter, Deere recorded a $13 million pretax gain on the sale of Florida construction and forestry retail locations.
Outlook, commentary, and risks
Management forecast fiscal 2018 equipment sales growth of about 29%, total net sales and revenues growth of about 25%, and Deere-attributable net income of about $2.1 billion. The net-income outlook included an estimated $750 million unfavorable tax-reform impact for the year. For Q2, equipment sales were forecast to rise about 30%–40% year over year. Full-year segment sales forecasts were approximately 15% growth for agriculture and turf and 80% for construction and forestry; Wirtgen was expected to contribute about 12% to full-year company sales. Financial-services net income was forecast at approximately $840 million, including about $320 million of favorable tax-reform effects.
Management cited improving agricultural and construction markets and said the company was positioned to benefit, while noting supply-chain and logistics constraints. Risks highlighted include farm economics and weather, construction demand, used-equipment values and lease residuals, interest and foreign-exchange rates, commodity prices, trade and policy changes, funding access, customer credit performance, and acquisition integration. The company also noted that tax-reform accounting and the effects of certain provisions remained under evaluation. Unresolved ordinary-course legal matters were not expected to have a material effect, according to the company.
Important facts for investors to verify
- How final tax-reform accounting, including the provisional deferred-tax and repatriation amounts, changes the effective tax rate and full-year $2.1 billion earnings outlook.
- Whether Wirtgen’s purchase accounting, acquisition costs, integration, and expected contribution develop in line with management’s sales forecasts.
- Whether supply-chain and shipping constraints ease and projected segment sales growth converts into operating profit and cash generation.
- How seasonal inventory and working-capital needs, the acquisition-related cash outflow, and debt funding affect liquidity through the rest of fiscal 2018.
- Whether financing-receivable delinquencies, credit losses, used-equipment values, and financial-services funding costs remain consistent with management’s assumptions.