Business Context and Reporting Period
Company: DEERE & CO
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: July 31, 2005 (Third Quarter of Fiscal Year 2005)
Business Overview: Deere & Company operates primarily through two segments: Equipment Operations (agricultural, commercial/consumer, and construction/forestry equipment) and Financial Services (credit and health care). The company reported 241,193,199 shares of common stock outstanding as of July 31, 2005.
Key Financial Metrics
| Metric (in millions) | Q3 2005 | Q3 2004 | 9 Months 2005 | 9 Months 2004 |
|---|---|---|---|---|
| Net Sales and Revenues | $6,005.1 | $5,418.4 | $16,753.5 | $14,779.2 |
| Net Income | $387.1 | $401.4 | $1,213.9 | $1,049.4 |
| Diluted EPS | $1.58 | $1.58 | $4.89 | $4.14 |
| Operating Profit (Total) | $640.0 | $653.0 | $2,008.0 | $1,792.0 |
| Cash and Cash Equivalents | $2,139.8 | $3,336.4 | $2,139.8 | $3,336.4 |
| Total Debt (Short + Long Term) | $17,854.1 | $14,246.2 | $17,854.1 | $14,246.2 |
| Net Cash Used in Operating Activities | N/A | N/A | $(127.1) | $(298.2) |
Note: Net cash used in operating activities for the nine months ended July 31, 2004, was reclassified from a previous positive figure of $163.7 million to $(298.2) million to eliminate non-cash intercompany transactions.
Material Changes vs. Prior Period
- Revenue Growth: Total net sales and revenues increased 11% in Q3 2005 and 13% for the nine-month period compared to the prior year. Equipment sales rose 11% in Q3 and 14% year-to-date.
- Segment Performance:
- Agricultural Equipment: Sales up 9% (Q3) and 16% (9 months). Operating profit declined 10% in Q3 due to lower production volumes but increased 13% year-to-date.
- Commercial & Consumer: Sales declined 3% (Q3) and 5% (9 months) due to unfavorable weather impacting lawn equipment sales. Operating profit dropped 31% in Q3.
- Construction & Forestry: Sales surged 29% (Q3) and 30% (9 months) driven by strong U.S. economic conditions and housing markets. Operating profit increased 15% (Q3) and 30% (9 months).
- Credit: Operating profit increased 14% (Q3) and 7% (9 months) due to portfolio growth and lower credit loss provisions.
- Cost Structure: Cost of sales to net sales ratio increased to 79.3% in Q3 2005 from 77.4% in Q3 2004, driven by inefficiencies from lower manufacturing volumes and higher raw material costs.
- Balance Sheet: Total assets increased 24% year-over-year to $33.05 billion. Short-term borrowings increased significantly to $6.12 billion (from $3.57 billion a year ago) due to new securitization accounting rules requiring certain retail notes to be recorded as secured financings rather than sales.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Full Year 2005 Forecast:
- Sales: Expected to increase approximately 8% on a reported basis (2% excluding currency and price changes).
- Net Income: Forecast at approximately $1.4 billion for the full year.
- Q4 Outlook: Sales expected to decline 9% and production down 23% in the fourth quarter. Net income forecast between $175 million and $200 million.
- Market Conditions:
- Agriculture: Drought in key markets (U.S., Southern Europe, Brazil) has pressured retail sales forecasts. However, farm cash receipts remain near record levels.
- Construction: Continued growth expected due to strong housing markets and infrastructure spending.
- Financial Services: Full-year net income expected to be approximately $330 million, exceeding previous forecasts due to improved credit portfolio quality.
Risks and Contingencies
- Weather and Commodities: Drought conditions and volatile commodity prices pose risks to agricultural equipment demand.
- Raw Materials: Availability and pricing of steel, rubber, and large tires remain a concern.
- Legal Proceedings: The company faces various unresolved legal actions, including product liability (asbestos), retail credit, and intellectual property matters. Management believes these will not have a material effect on financial statements.
- Securitization Exposure: Maximum exposure to losses on sold receivables with recourse obligations was $187 million as of July 31, 2005. Maximum exposure under a crop insurance managing general agency agreement was $532 million in a worst-case scenario, though the likelihood is deemed extremely remote.
Investor Verification Checklist
- Reclassification Impact: Verify the impact of the cash flow statement reclassification regarding intercompany financing transactions on the reported operating cash flow for the nine months ended July 31, 2004.
- Debt Composition: Review the increase in short-term borrowings ($6.1 billion) and confirm the portion attributable to securitized retail notes now recorded as secured financings under FASB 140.
- Inventory Levels: Assess the $2.56 billion inventory balance and the LIFO reserve ($1.008 billion) in the context of production cuts announced due to drought.
- Q4 Guidance: Monitor the significant expected decline in Q4 sales (-9%) and production (-23%) against actual results in the upcoming 10-Q.
- Acquisition Integration: Track the financial contribution of the United Green Mark, Inc. acquisition ($120 million cost) and the Ontrac Holdings consolidation.