Deere & Company — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended July 31, 2015. Unaudited results; dollar amounts below are in millions unless otherwise noted.
Business context
Deere operates agriculture and turf, construction and forestry, and financial services businesses. Equipment operations manufacture and sell machinery; Financial Services primarily finances equipment sales and leases. Management attributed results to the continuing agricultural downturn, lower construction equipment demand, currency effects, and lower equipment shipments.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Change | Nine months 2015 | Nine months 2014 | Change |
|---|---|---|---|---|---|---|
| Total net sales and revenues | $7,593.7 | $9,500.2 | -20% | $22,147.5 | $27,102.1 | -18% |
| Equipment net sales | $6,839.5 | $8,723.0 | -22% | $19,843.1 | $24,917.8 | -20% |
| Net income attributable to Deere | $511.6 | $850.7 | -40% | $1,588.8 | $2,512.5 | -37% |
| Diluted EPS | $1.53 | $2.33 | -34% | $4.67 | $6.79 | -31% |
| Operating cash flow | Not separately provided | Not separately provided | $1,191.8 | $682.1 | +$509.7 |
For Q3, the cost of sales ratio rose to 78.3% from 75.8%; for the nine months it increased to 78.0% from 75.0%. Deere cited less favorable product mix and currency effects, partly offset by pricing and lower production costs. The filing does not provide a consolidated operating margin as a directly stated metric.
- Agriculture and turf: Q3 sales fell 24% and operating profit fell 50% to $472; nine-month sales fell 25% and operating profit fell 54% to $1,378. Lower volumes, mix, and currency were primary pressures.
- Construction and forestry: Q3 sales declined 13% and operating profit declined 34% to $129. Nine-month sales were essentially flat and operating profit rose 10% to $464.
- Financial Services: Q3 operating profit was $239, down 4%; nine-month operating profit was $737, up 12%. The quarterly decline reflected less favorable financing spreads; year-to-date gains included crop insurance divestiture effects and growth in the average credit portfolio.
Balance sheet, debt and liquidity
At July 31, 2015, total assets were $58,932, total liabilities $51,207, and Deere stockholders’ equity $7,723. Cash and cash equivalents were $4,131 and marketable securities $421, totaling $4,552. Total borrowings were approximately $37,144, including $9,348 short-term borrowings, $4,595 short-term securitization borrowings, and $23,201 long-term borrowings. Financial Services’ external interest-bearing debt was $32,018; equipment operations’ interest-bearing debt was $5,126.
Nine-month operating cash flow was $1,192; investing activities provided $170 and financing activities used $855. Cash increased $344. Financing cash use included $1,834 of share repurchases and $618 of dividends. Worldwide credit lines totaled $7,373, of which $2,875 was unused. Deere reported that credit-agreement requirements were met. Its debt ratings were Moody’s A2/Prime-1 and S&P A/A-1, both with stable outlooks.
Material changes and unusual items
- Equipment operations’ operating profit fell to $601 in Q3 from $1,135, and to $1,842 for nine months from $3,387.
- Crop Insurance operations were sold in March 2015; Deere recorded a $42 pretax ($40 after-tax) gain. The divestiture reduced crop insurance income thereafter.
- Other comprehensive income included a $256 Q3 and $833 nine-month cumulative translation loss, contributing to total other comprehensive losses of $214 and $725, respectively.
- Deere repurchased $1,834 of stock during the first nine months. At quarter-end, $4,398 remained under the announced repurchase plan.
Outlook, risks and contingencies
Management forecast fiscal 2015 net income of approximately $1,800, equipment sales down about 21% for the year and down about 24% in Q4. Agriculture and turf sales were forecast down about 25%; construction and forestry sales down about 5%; Financial Services net income was expected to be approximately $630. Management cited weak commodity prices and farm income, North American energy-sector weakness, adverse currency translation, and less favorable financing spreads. Financial Services’ outlook also included an expected increase in credit-loss provisions.
Risks highlighted include agricultural prices, weather and harvest conditions, global economic and geopolitical developments, currencies and interest rates, capital-market access, customer credit quality, regulation and emissions requirements, supply-chain constraints, competition, and legal proceedings. Deere said unresolved legal actions were not expected to have a material effect beyond accrued amounts. At July 31, guarantees were approximately $183, with $7 accrued; property and equipment commitments were approximately $221. Warranty liabilities and unearned premiums totaled $1,246. Unrecognized tax benefits were $236, of which approximately $80 would affect the effective tax rate if recognized.
Important facts for investors to verify
- Whether agricultural demand, commodity prices, and equipment shipment volumes track management’s full-year and Q4 assumptions.
- How currency movements and product mix affect equipment profitability and the cost-of-sales ratio.
- Whether Financial Services’ credit losses, delinquencies, financing spreads, and funding access remain consistent with the forecast.
- The recurring earnings impact of the Crop Insurance sale versus the one-time $42 pretax gain.
- Whether cash generation can support dividends, share repurchases, and debt funding while maintaining liquidity and covenant compliance.