Business Context and Reporting Period
Company: DEERE & CO
Filing Type: Form 10-Q (Unaudited)
Period Ended: January 31, 2007 (First Quarter of Fiscal Year 2007)
Business Overview: Deere & Company manufactures and distributes agricultural equipment, commercial and consumer equipment, and construction and forestry equipment. It also provides financial services, primarily financing sales and leases of equipment. The company operates globally, with significant exposure to U.S./Canada and international markets.
Key Financial Metrics
| Metric (in millions, except per share) | Q1 2007 | Q1 2006 |
|---|---|---|
| Net Sales and Revenues | $4,425.2 | $4,202.1 |
| Net Income | $238.7 | $235.9 |
| Diluted EPS | $1.04 | $0.99 |
| Operating Profit (Total) | $404.0 | $390.0 |
| Cash and Cash Equivalents | $1,341.1 | $1,477.2 |
| Total Debt (Short-term + Long-term) | $19,624.2 | $18,731.6 |
| Stockholders' Equity | $7,575.9 | $6,879.1 |
| Net Cash Used in Operating Activities | ($686.0) | ($962.9) |
Note: Total Debt calculated as Short-term borrowings ($9,053.1M) + Long-term borrowings ($10,571.1M) for Q1 2007.
Material Changes vs. Prior Period
- Revenue Growth: Total net sales and revenues increased 5% year-over-year to $4.425 billion. Equipment net sales rose 3% to $3.815 billion, driven by a 10% increase in Agricultural Equipment sales and a 2% increase in Commercial and Consumer Equipment. Construction and Forestry sales declined 7% due to lower volumes in the U.S. and Canada.
- Profitability: Net income increased 1% to $238.7 million. Operating profit for Equipment Operations rose to $270 million (from $261 million) due to improved price realization, partially offset by higher selling and administrative expenses.
- Segment Performance:
- Agricultural Equipment: Sales +10%, Operating Profit +29% ($137M vs $106M).
- Commercial & Consumer: Sales +2%, Operating Profit +100% ($38M vs $19M).
- Construction & Forestry: Sales -7%, Operating Profit -30% ($95M vs $136M).
- Credit: Operating Profit +2% ($132M vs $129M), driven by portfolio growth.
- Cash Flow: Net cash used in operating activities improved (less negative) to $686 million from $963 million in the prior year, primarily due to a smaller seasonal increase in inventories and changes in accounts payable.
Guidance, Outlook, and Risks
Management Guidance
- Fiscal Year 2007 Sales: Projected to be up slightly overall.
- Agricultural Equipment: Forecast to increase ~8%.
- Commercial & Consumer: Forecast to increase ~3%.
- Construction & Forestry: Forecast to decrease ~9%.
- Net Income: Forecast to be around $1.4 billion for the full year. Q2 2007 net income is expected to be in the range of $525 million to $550 million.
- Credit Operations: Fiscal 2007 net income forecast at approximately $355 million.
Key Risks and Contingencies
- Market Conditions: Risks include raw material price inflation, interest rate fluctuations, and global trade uncertainties (e.g., Doha round collapse). Specific regional risks include drought in Australia (expected -25% sales) and potential changes in Brazilian government programs.
- Regulatory: Compliance with increasingly stringent global emissions regulations for off-road diesel engines requires significant investment.
- Legal: Unresolved legal actions regarding product liability (including asbestos), retail credit, and intellectual property are ongoing, though management does not expect a material effect on financial statements.
- Acquisition: The company announced an agreement to acquire LESCO, Inc. for $14.50 per share, expected to close in Q2 2007.
Investor Verification Checklist
- Inventory Levels: Verify the seasonal buildup of inventories ($2.48B) and the impact of LIFO valuation on reported costs.
- Construction Segment Decline: Assess the sustainability of the 7% sales drop in Construction and Forestry and the outlook for the residential housing market.
- Debt Structure: Review the composition of short-term borrowings ($9.05B) and the reliance on securitization of retail notes for liquidity.
- Currency Impact: Confirm the 7% positive currency translation effect on international sales and the sensitivity of future results to exchange rate fluctuations.
- Acquisition Integration: Monitor the closing and integration progress of the LESCO acquisition.