Deere & Company — Q1 FY2015 10-Q
Business context and period: Unaudited results for the three months ended January 31, 2015, compared with the three months ended January 31, 2014. Deere manufactures agricultural, turf, construction and forestry equipment and provides equipment financing.
Financial performance
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Net sales and revenues | $6.383 billion | $7.654 billion | -17% |
| Equipment net sales | $5.605 billion | $6.949 billion | -19% |
| Net income attributable to Deere | $386.8 million | $681.1 million | -43% |
| Diluted earnings per share | $1.12 | $1.81 | Down $0.69 |
| Operating profit, all segments | $647 million | $1.073 billion | -40% |
| Cost of sales / equipment net sales | 78.9% | 74.8% | Up 4.1 percentage points |
Equipment sales declined amid weaker agricultural machinery demand, lower shipment volumes and unfavorable mix; price realization partly offset these pressures. Agriculture and turf segment sales fell 27% and operating profit fell to $268 million from $797 million. Construction and forestry sales rose 13% and operating profit increased to $146 million from $94 million. Financial Services operating profit rose to $233 million from $182 million, supported by credit portfolio growth and higher insurance margins, partly offset by less favorable financing spreads.
Cash flow: Operating activities used $510 million, versus $746 million used in the prior-year quarter. Investing activities provided $1.385 billion; financing activities used $583 million. Cash and cash equivalents increased $188 million to $3.975 billion. Capital expenditures for equipment operations were $184 million, compared with $251 million.
Debt and liquidity: At January 31, 2015, reported short-term borrowings were $8.623 billion, short-term securitization borrowings $3.888 billion, and long-term borrowings $24.107 billion. Cash and marketable securities totaled $4.469 billion. Worldwide credit lines were $6.344 billion, of which $2.598 billion was unused. Deere reported $8.246 billion of stockholders’ equity, down from $9.063 billion at October 31, 2014.
Material changes and notable items
- Revenue and profit declined sharply, primarily reflecting weaker agriculture and turf results. Equipment operations operating profit fell to $414 million from $891 million.
- Financial Services receivables and leases administered totaled $37.421 billion, up from $35.653 billion a year earlier. Total past-due financing receivables were $368 million versus $309 million a year earlier; nonperforming receivables were $136 million.
- Other comprehensive loss was $462.3 million, principally a $510.4 million after-tax currency translation loss. This contributed to lower equity.
- Deere repurchased $604.7 million of common stock and paid $209.9 million in dividends during the quarter. The quarterly dividend was $0.60 per share.
- Crop Insurance operations were classified as held for sale: assets of $384.9 million and liabilities of $266.8 million. Deere expected the sale to close by April 2015 and did not anticipate a significant gain or loss.
Outlook, risks and contingencies
Management projected FY2015 net income of approximately $1.8 billion and company equipment sales down about 17%; second-quarter equipment sales were expected to be about 19% lower year over year. Agriculture and turf sales were forecast down about 23%, while construction and forestry sales were forecast up about 5%. Financial Services FY2015 net income was expected to be approximately $630 million.
Management cited lower commodity prices and farm incomes, currency movements, weaker energy-sector conditions, global economic and geopolitical uncertainty, and interest-rate and capital-market risks. The Financial Services outlook anticipated lower financing spreads, a higher provision for credit losses than the low 2014 level, and a less favorable tax rate. Forecasts are forward-looking and actual results may differ materially.
Contingencies included approximately $220 million of guarantees on third-party equipment receivables, with about $7 million accrued, and $236 million of property and equipment commitments. The company said reasonably possible additional losses from unresolved legal matters were not expected to have a material effect. It also reported $1.217 billion in warranty liabilities and unearned premiums.
Key facts for investors to verify
- Whether agricultural demand, shipment volumes and product mix track management’s FY2015 forecasts.
- Whether the $1.8 billion earnings outlook and segment sales forecasts remain achievable as market and currency conditions evolve.
- Credit quality trends, including past-due and nonperforming financing receivables, and the expected increase in credit-loss provisions.
- Funding access and borrowing costs for Financial Services, including securitization exposure and compliance with credit-agreement covenants.
- Completion and final financial impact of the Crop Insurance sale, and the effects of currency translation on reported equity.