Deere & Company — Q3 2014 Form 10-Q
Reporting period: Fiscal third quarter and nine months ended July 31, 2014; unaudited. Comparisons are with the corresponding 2013 periods unless stated otherwise. Amounts are in millions of dollars except per-share data.
Business context and results
Deere operates agriculture and turf, construction and forestry, and financial services businesses. Softer global farm-equipment demand weighed on results; construction and forestry and financial services improved.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total net sales and revenues | $9,500 | $10,010 | $27,102 | $28,345 |
| Equipment net sales | $8,723 | $9,316 | $24,918 | $26,374 |
| Net income attributable to Deere | $851 | $997 | $2,513 | $2,731 |
| Diluted EPS | $2.33 | $2.56 | $6.79 | $6.97 |
| Operating cash flow | Not reported separately | Not reported separately | $682 | $588 |
Equipment net sales declined 6% in both periods year to date and Q3; total revenues declined 5% in Q3 and 4% year to date. The cost-of-sales ratio rose to 75.8% from 73.4% in Q3 and to 75.0% from 73.3% year to date. Deere attributed pressure mainly to lower shipment volumes, emissions-related production costs, foreign exchange and, year to date, less favorable product mix; price realization partly offset these factors.
Segments and material changes
- Agriculture and turf: Sales decreased 11% in Q3 and 8% year to date; operating profit was $941 million and $2,967 million, down 30% and 19%, respectively. Lower volumes, emissions-related costs and currency effects weighed on results.
- Construction and forestry: Sales rose 19% in Q3 and 8% year to date; operating profit increased to $194 million and $420 million, respectively, supported by shipment growth and, year to date, lower production and selling costs.
- Financial services: Operating profit increased to $249 million in Q3 and $660 million year to date. Deere-attributable net income was $162 million and $452 million. Portfolio growth helped, partly offset by higher credit-loss provisions and expenses; lower crop-insurance margins also affected year-to-date results.
- Deere sold 60% of John Deere Landscapes in December 2013 and stopped consolidating it in January 2014. It sold its Water operations in May 2014 for about $35 million, recording a $10 million sale loss and a separate $36 million pretax impairment charge (reported after tax as $4 million).
Financial position, liquidity and cash flow
At July 31, 2014, cash and cash equivalents were $3,035 million and marketable securities were $1,489 million, a combined $4,524 million. Cash declined $469 million over the first nine months. Investing activities used $1,567 million, while financing activities provided $433 million. Operating cash flow increased to $682 million from $588 million, with working-capital demands including receivables and inventory partly offsetting earnings and noncash adjustments.
Total assets were $61,749 million and total liabilities were $50,916 million. Borrowings comprised $8,581 million short-term, $4,143 million short-term securitization borrowings and $24,036 million long-term. The equipment operations reported $5,721 million of interest-bearing debt; financial services reported $31,038 million of external interest-bearing debt. Worldwide credit lines totaled $6,502 million, of which $3,081 million was unused. Deere said it expected sufficient global funding and liquidity and reported compliance with credit-agreement requirements.
Financing receivables, net, were $31,344 million, including securitized receivables; total past-due receivables were $322 million and non-performing receivables were $226 million. The credit-loss allowance was $180 million, compared with $173 million at October 31, 2013.
Outlook, risks and unusual items
- For fiscal 2014, Deere forecast equipment sales down about 6%, fourth-quarter equipment sales down about 8%, and Deere-attributable net income of approximately $3.1 billion. It planned to reduce agricultural production to align with demand.
- Agriculture and turf sales were forecast down about 10% for fiscal 2014; construction and forestry sales were forecast up about 10%. Financial services net income was expected to be approximately $600 million.
- Management cited falling commodity prices and lower farm income as pressures on farm-equipment demand. Key uncertainties include global economic conditions, commodity and crop trends, weather, currencies, interest rates, geopolitical events, regulation and emissions requirements, supply-chain conditions, and funding and credit risks.
- Commitments included $415 million for property and equipment and $301 million of guarantees related primarily to third-party equipment financing; an accrued liability for those guarantees was about $7 million. Deere said reasonably possible additional losses from unresolved legal actions were not expected to materially affect consolidated statements.
- Share repurchases totaled $1,631 million in the first nine months. The company had $7,330 million remaining under its announced $8 billion repurchase plan at quarter-end. The board declared a $0.60-per-share dividend in August 2014.
Important facts for investors to verify
- Whether agricultural demand, shipment volumes and production reductions track management’s 2014 outlook.
- How emissions-related costs, currency movements and product mix affect equipment margins.
- Credit portfolio growth, delinquency trends, credit-loss provisions and financial-services funding access.
- Debt and liquidity levels, including securitization funding and availability of committed credit lines.
- The final financial impact of the Landscapes and Water divestitures and related impairment and sale charges.