DEERE & CO quarterly report, Q2 FY2010

Deere & Company — Q2 2010 Form 10-Q

Reporting period: Fiscal second quarter and six months ended April 30, 2010; comparisons are with the corresponding 2009 periods unless stated otherwise. Deere manufactures and sells agricultural, turf, construction and forestry equipment, and provides equipment financing and related services. Amounts are in U.S. dollars.

Financial results and liquidity

Metric	Three months ended April 30	Six months ended April 30
Total net sales and revenues	$7.131 billion, up 6%	$11.966 billion, up 1%
Equipment net sales	$6.548 billion, up 6%	$10.786 billion, essentially unchanged
Net income attributable to Deere & Company	$547.5 million, up 16%; diluted EPS $1.28 vs. $1.11	$790.7 million, up 17%; diluted EPS $1.85 vs. $1.60
Operating cash flow	Not provided as a quarterly figure in the presented cash-flow statement	$416.6 million, compared with cash used of $1.181 billion

Second-quarter cost of sales was 72.8% of equipment net sales, versus 76.9%; the six-month ratio was 73.9%, versus 77.2%. Management cited price realization, production volumes, currency and lower raw-material costs as principal improvements, partly offset by higher postretirement benefit costs.
At April 30, cash and cash equivalents were $3.615 billion and marketable securities were $234 million. Short- and long-term borrowings totaled $23.636 billion; this consolidated debt includes substantial Financial Services funding.
Worldwide credit lines totaled $5.275 billion, of which $4.945 billion was unused. The company said it had reasonable access to global funding and expected sufficient liquidity.
Total assets were $41.014 billion; total stockholders’ equity was $5.659 billion. Cash declined $1.037 billion in the first six months, reflecting operating, investing and financing outflows.
Operating cash flow benefited from net income, higher payables and accrued taxes, but was partly offset by seasonal increases in receivables and inventories. Investing cash outflow was $450 million; financing cash outflow was $951 million, including $238 million of dividends paid.

Changes versus the prior comparable period

Quarterly equipment sales rose 6%, while six-month equipment sales were flat. Favorable currency translation and price increases supported sales; shipment volumes were weaker in some areas.
Agriculture and Turf segment sales increased 1% for the quarter and declined 2% for six months. Segment operating profit rose to $952 million from $703 million for the quarter and to $1.304 billion from $993 million for six months.
Construction and Forestry sales rose 52% for the quarter and 15% for six months. The segment posted quarterly operating profit of $36 million versus a $75 million loss; its six-month operating loss narrowed to $1 million from $58 million.
Credit segment operating profit increased to $105 million for the quarter from $58 million and to $200 million for six months from $111 million. Management attributed the increase to improved financing spreads, lower credit-loss provisions, portfolio growth and higher crop-insurance commissions.
Financial Services net income was $86.9 million for the quarter and $172.0 million for six months, compared with $68.9 million and $115.8 million. Its external interest-bearing debt was $20.214 billion, down from $22.317 billion a year earlier; its debt-to-equity ratio improved to 7.1:1 from 8.6:1.

Outlook, commentary, risks and unusual items

Management forecast fiscal 2010 equipment sales growth of 11%–13%, including approximately 3% favorable currency translation, and net income of about $1.6 billion. The outlook includes an approximately $130 million health-care-legislation tax charge.
Fiscal-year Agriculture and Turf sales were forecast to increase 9%–11%; Construction and Forestry sales about 30%; and Credit net income approximately $300 million. Management forecast third-quarter equipment sales growth of 21%–23% year over year.
Management described U.S. and Canadian agricultural demand as supported by farm receipts, commodity prices and low interest rates; Western European farm machinery markets remained weak. Construction markets showed signs of stabilization but remained depressed, while forestry markets were improving from very weak levels.
The new U.S. health-care legislation caused approximately $129.5 million of additional second-quarter tax expense, or about $0.30 per share. The effective tax rate was also affected by this charge.
Deere continued restructuring following the Welland, Ontario facility closure. The filing estimated approximately $40 million of fiscal 2010 annual pretax earnings and cash-flow improvement from the closure; it also expected $50–$60 million of 2010 savings from combining agricultural and commercial/consumer equipment operations.
The company retained a financial advisor to review strategic options for its wind-energy entities. It also disclosed risks from economic weakness, sovereign and state debt, funding-market disruption, customer credit quality, currency and commodity volatility, component availability, emissions rules and potential climate regulation.
Contingencies include approximately $173 million of equipment-financing guarantees and up to $162 million of exposure for uncollected crop-insurance premiums. In the combined scenario of widespread U.S. crop failure and reinsurance-company default, the filing described potential reimbursement exposure of approximately $758 million, while management considered the likelihood substantially remote. Deere said unresolved legal actions were not expected to have a material effect.
Management reported that credit-agreement requirements were met and disclosure controls were effective as of April 30, 2010.

Important facts for investors to verify

Whether the $1.6 billion full-year net-income outlook and segment sales forecasts remain achievable, given the stated regional market and economic risks.
The effect of the $129.5 million health-care tax charge on reported earnings, and whether any further tax or regulatory changes are expected.
Financial Services funding access, securitization capacity, credit losses and customer delinquencies; also distinguish financing debt from equipment-operations debt when assessing leverage.
Seasonal receivables and inventory growth, cash generation, and the company’s ability to maintain liquidity as production and shipments recover.
Progress and realized savings from the Welland closure and organizational consolidation, as well as the outcome of the wind-energy strategic review.
Potential exposure from guarantees, crop-insurance arrangements, legal matters and climate or emissions regulation; the filing text does not quantify a likely loss for these matters.