Deere & Company — Q1 FY2014 Form 10-Q
Reporting period: Three months ended January 31, 2014; filed February 27, 2014. Unaudited interim results. Amounts are in millions of dollars, except per-share data and percentages.
Business context and results
Deere operates agriculture and turf, construction and forestry, and financial services businesses. Equipment operations manufacture and sell equipment; Financial Services primarily finances equipment sales and leases.
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Net sales and revenues | $7,654 | $7,421 | +3% |
| Equipment net sales | $6,949 | $6,793 | +2% |
| Income before taxes | $965 | $946 | +2% |
| Net income attributable to Deere | $681 | $650 | +5% |
| Diluted EPS | $1.81 | $1.65 | +10% |
Equipment operating profit was $891 versus $837. Net income per share benefited in part from fewer average diluted shares: 375.4 million versus 393.0 million. Equipment cost of sales was 74.8% of net sales, up from 73.8%, reflecting less favorable product mix and currency effects, partly offset by price realization.
Segments and material changes
- Agriculture and turf: Sales rose 2% to $5,596; operating profit increased 4% to $797. Price realization and higher shipments helped, partly offset by product mix and currency.
- Construction and forestry: Sales rose 4% to $1,353; operating profit increased 32% to $94, helped by lower production costs, lower R&D and price realization.
- Financial Services: Segment revenue rose 11% to $634, while operating profit declined 8% to $182. Deere-attributable net income increased to $142.2 from $132.9, helped by portfolio growth and a more favorable tax rate; lower crop insurance margins, higher expenses and less favorable financing spreads weighed on results. Average receivables and leases financed grew 15%.
Other income increased, principally due to higher crop insurance premiums. R&D and selling, administrative and general expenses decreased; the latter was partly due to Landscapes no longer being consolidated. Other operating expenses increased, primarily from higher crop insurance claims and depreciation on leased equipment.
Cash flow, financial position and liquidity
- Cash flow: Operating activities used $746, improved from $1,249 used a year earlier, mainly reflecting seasonal inventory growth and lower accounts payable. Investing activities provided $673, including $304 proceeds from the Landscapes sale. Financing activities used $210, including $477 share repurchases and $193 dividends paid. Cash declined $315 to $3,189.
- Liquidity: Cash and marketable securities totaled $4,627 at January 31, 2014. Worldwide credit lines were $6,509, of which $3,168 was unused. Deere reported access to funding and said it expected adequate liquidity.
- Debt: Consolidated short- and long-term borrowings were $30,923, plus $3,491 of short-term securitization borrowings. Equipment operations’ interest-bearing debt was $6,588, with debt-to-total-capital of 39%. Financial Services’ external interest-bearing debt was $27,826, and debt-to-equity was 7.0:1.
- Balance sheet: Total assets were $57,659, down from $59,521 at October 31, 2013; Deere stockholders’ equity was $10,256. Financing receivables, net, were $25,242, while securitized financing receivables, net, were $3,491.
Quarter-end financing receivables past due totaled $309, compared with $244 at October 31, 2013; non-performing receivables were $136, versus $130. The allowance for credit losses was $167. The filing states that credit quality and funding conditions remain relevant risks.
Outlook, risks and unusual items
- Fiscal 2014 Deere-attributable net income was forecast at approximately $3.3 billion; company equipment sales were projected to decline about 3% for the year and about 6% in Q2 year over year.
- Agriculture and turf sales were forecast to decline about 6% for FY2014, amid lower expected farm incomes and weaker agricultural machinery markets. Construction and forestry sales were forecast to rise about 10%; Financial Services net income was expected to be approximately $600 million.
- Management cited uncertainty around global economic conditions, commodity prices, exchange and interest rates, government policies, customer access to credit, agricultural conditions, and emissions regulation. Financial Services funding access, delinquencies, defaults and credit losses are also risks.
- A $26 pretax, non-cash impairment charge was recorded for John Deere Water assets following a strategic-options review. On February 26, 2014, Deere agreed to sell its Water operations; it did not anticipate a significant after-tax gain or loss.
- Deere completed the sale of 60% of John Deere Landscapes in December 2013 for approximately $305, with no significant gain or loss, and retained a 40% equity interest. Landscapes was deconsolidated in January.
- Other comprehensive income included a $168 currency translation loss, contributing to comprehensive income attributable to Deere of $565, down from $742 a year earlier. The filing identifies unresolved ordinary-course legal matters and says the reasonably possible additional losses, beyond accrued amounts, are not expected to materially affect consolidated financial statements.
Most important facts for investors to verify
- Whether FY2014 earnings and equipment-sales guidance remained achievable as agricultural demand moderated.
- Drivers behind the higher equipment cost-of-sales ratio and the deterioration in Financial Services operating profit.
- Seasonal working-capital needs, cash generation and the sustainability of liquidity and funding access, particularly at Financial Services.
- Credit performance trends, including past-due and non-performing receivables, and the expected provision for credit losses.
- Final terms and financial impact of the planned Water sale, and the ongoing results and valuation of Deere’s retained Landscapes interest.