Deere & Company — Q2 2014 Form 10-Q
Reporting period: Three and six months ended April 30, 2014; comparative periods ended April 30, 2013. Figures are unaudited and in U.S. dollars unless noted.
Business context
Deere manufactures and sells agriculture and turf, and construction and forestry equipment; its Financial Services operations finance equipment sales and leases. The quarter reflected weaker agriculture demand, partly offset by growth in construction and forestry and Financial Services.
Key financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total net sales and revenues | $9.948bn (-9%) | $10.914bn | $17.602bn (-4%) | $18.335bn |
| Equipment net sales | $9.246bn (-10%) | $10.265bn | $16.195bn (-5%) | $17.058bn |
| Net income attributable to Deere | $980.7m (-10%) | $1.084bn | $1.662bn (-4%) | $1.734bn |
| Diluted EPS | $2.65 (-4%) | $2.76 | $4.46 (+1%) | $4.41 |
| Equipment cost of sales / net sales | 74.3% | 72.9% | 74.5% | 73.3% |
| Operating cash flow | Not separately reported for the quarter | -$831.9m | -$1.156bn |
For the quarter, Agriculture and Turf sales fell 12% and operating profit fell 22% to $1.229bn. Construction and Forestry sales rose 2% and operating profit rose 63% to $132m. Financial Services operating profit increased 16% to $229m. For the six months, those segments’ sales changed -7%, +3%, and +9%, respectively; operating profit changed -14%, +48%, and +4%.
Financial position, liquidity and cash flow
- At April 30, cash and cash equivalents were $3.079bn and marketable securities were $1.572bn, together $4.650bn. Cash declined $425.5m from fiscal year-end.
- Six-month operating cash outflow was $831.9m, primarily reflecting seasonal increases in trade receivables and inventories and lower payables. Investing cash outflow was $267.4m; financing provided $699.3m.
- Balance-sheet borrowings were $8.763bn short-term, $4.330bn short-term securitization borrowings and $23.167bn long-term at April 30. Equipment Operations’ interest-bearing debt was $5.837bn; Financial Services’ external interest-bearing debt was $30.422bn.
- Worldwide credit lines totaled $6.490bn, of which $2.247bn was unused. The company reported compliance with its credit-agreement requirements. Ratings were Moody’s A2 / Prime-1 and S&P A / A-1, both with stable outlooks.
- Stockholders’ equity was $10.668bn, up from $10.268bn at October 31, 2013. The Financial Services debt-to-equity ratio was 7.5 to 1.
Material changes and notable items
- Lower equipment shipment volumes, unfavorable currency effects and less favorable product mix reduced equipment operating profit; price realization partly offset these pressures. Equipment sales included 2% price realization and a 1% unfavorable currency effect.
- Financial Services earnings improved with portfolio growth; lower average interest rates also reduced interest expense. Higher selling and administrative expenses and lower crop insurance margins partly offset the gains.
- Water operations were classified as held for sale following an agreement to sell; Deere recorded a $36m pretax impairment in Q2 ($4m after tax). The filing also reports a $26m pretax and after-tax impairment in Q1 associated with the Water business review.
- Deere sold 60% of John Deere Landscapes in December 2013 for approximately $305m, with no significant gain or loss, and ceased consolidating the business in January 2014. Its retained 40% interest is accounted for as an equity investment.
- Share repurchases totaled $1.093bn in the first six months. The Board declared a quarterly dividend of $0.60 per share in May, an increase of $0.09 (about 18%) from the prior rate.
Outlook, management commentary and risks
Management forecast fiscal 2014 Deere-attributable net income of approximately $3.3bn, company equipment sales down about 4%, and third-quarter equipment sales down about 4% year over year. Full-year Agriculture and Turf sales were forecast down about 7%; Construction and Forestry sales up about 10%; and Financial Services net income approximately $600m.
Management cited lower farm income and commodity-price pressure as risks to agricultural equipment demand, while U.S. housing recovery supported construction expectations. Broader stated risks include global economic and political conditions, currency and interest-rate movements, commodity volatility, weather, customer credit and delinquencies, funding access, regulation and emissions requirements, supply constraints, and product acceptance. Management said it expected sufficient funding and liquidity. Interim results are not necessarily indicative of full-year results.
Legal matters arising in the ordinary course include product liability, retail credit, software licensing, intellectual property and environmental issues; the company said reasonably possible losses beyond accruals were not expected to have a material effect. Guarantees of third-party equipment financing totaled approximately $307m, with an $8m accrued liability. The filing reports no material change in previously disclosed risk factors.
Investor verification priorities
- Verify whether the projected $3.3bn fiscal-year net income and segment sales outlook remained achievable as agricultural markets weakened.
- Track Agriculture and Turf shipment volumes, product mix, pricing and currency impacts, alongside Construction and Forestry growth.
- Assess Financial Services credit quality and funding: past-due financing receivables were $313m versus $244m at October 31, 2013; non-performing balances were $137m versus $130m.
- Monitor seasonal working-capital needs, debt levels, available credit lines and the effect of continued share repurchases and dividend increases on liquidity.
- Confirm completion and final economics of the Water operations sale and review any further impairment or disposition effects.