Deere & Company — Q1 FY2011 Form 10-Q
Reporting period: Three months ended January 31, 2011; comparisons are with the three months ended January 31, 2010 unless noted. Deere manufactures agricultural, turf, construction and forestry equipment and provides equipment financing.
Financial performance
| Metric | Q1 FY2011 | Q1 FY2010 | Change |
|---|---|---|---|
| Total net sales and revenues | $6.119 billion | $4.835 billion | +27% |
| Equipment net sales | $5.514 billion | $4.237 billion | +30% |
| Income before income taxes | $746.0 million | $364.3 million | — |
| Net income attributable to Deere | $513.7 million | $243.2 million | +112% |
| Diluted EPS | $1.20 | $0.57 | — |
| Operating cash flow | $(900.3) million | $(318.3) million | — |
The cost of sales ratio improved to 74.3% from 75.6%, reflecting higher volumes and better price realization, partly offset by higher raw-material costs and incentive compensation. Research and development expense rose to $268.9 million from $235.7 million, primarily for new products and Tier 4 emissions requirements. Interest expense fell to $202.5 million from $218.5 million.
- Agriculture and turf: Sales of $4.371 billion, up 21%; operating profit of $558 million, up from $352 million.
- Construction and forestry: Sales of $1.143 billion, up 81%; operating profit of $88 million versus a $37 million loss.
- Financial services: Operating profit of $172 million versus $101 million; Deere-attributable net income was $118.2 million versus $85.1 million. Results benefited from portfolio growth and lower credit-loss provisions.
Balance sheet, liquidity and cash flow
At January 31, 2011, total assets were $42.896 billion, cash and cash equivalents were $3.438 billion, and marketable securities were $234.2 million. Short-term borrowings were $7.458 billion and long-term borrowings were $16.706 billion. Deere stockholders’ equity was $6.579 billion.
Operating cash outflow was primarily attributable to a $1.096 billion inventory increase and lower accounts payable and accrued expenses. Investing activities provided $982.8 million, including $891.6 million of proceeds from business sales, primarily the wind-energy divestiture. Financing activities used $425.0 million, including $302.2 million for share repurchases and $127.2 million for dividends. Cash declined $352.6 million during the quarter.
Equipment operations’ interest-bearing debt was $3.741 billion, with debt-to-capital of 36%. Financial services’ external interest-bearing debt was $20.423 billion, and debt-to-equity was 7.1 to 1. Worldwide credit lines totaled $5.566 billion, of which $2.815 billion was unused. The company reported compliance with its credit agreement requirements.
Material changes and unusual items
- Compared with the prior-year quarter, results improved substantially across equipment operations, led by higher shipments, production volumes and price realization. Equipment sales rose 35% in the U.S. and Canada and 22% outside those markets; foreign exchange reduced international sales growth by 1 percentage point.
- Inventories increased $1.115 billion from October 31, 2010, mainly to support higher agricultural-equipment demand.
- Deere sold John Deere Renewables, LLC, its wind-energy business, in December 2010 for approximately $900 million. The quarter included $891.6 million of business-sale proceeds. The filing does not provide a clear separate gain-on-sale figure.
- Deere acquired the remaining 64% of A&I Products, Inc. for approximately $48 million. Its results were included in agriculture and turf from the acquisition date.
- Deere repurchased $302.2 million of common stock; dividends declared were $0.35 per share, compared with $0.28 a year earlier.
Guidance, outlook and risks
Management forecast fiscal 2011 equipment sales growth of 18%–20%, including an approximately 2% favorable currency effect, and second-quarter equipment sales growth of about 25%. Fiscal 2011 net income attributable to Deere was forecast at approximately $2.5 billion. Segment sales were forecast to rise about 16% for agriculture and turf and about 35% for construction and forestry; financial services net income attributable to Deere was forecast at approximately $400 million.
Management cited strong farm income and commodity demand as supportive of agricultural equipment demand, and some recovery in construction and forestry markets. Risks include global economic and sovereign-debt uncertainty, credit and funding-market conditions, commodity-price volatility, component availability, supply-chain disruption, and production constraints and transition issues from Interim Tier 4 emissions-compliant products. The filing also identifies potential additional costs and funding impacts from Dodd-Frank implementation.
Management said unresolved legal actions arising in the ordinary course of business were not expected to have a material effect, while noting outcomes cannot be predicted with certainty. Guarantees for third-party retail financing totaled approximately $194 million, with a $7 million accrued liability. The company had approximately $300 million of property and equipment commitments.
Key facts for investors to verify
- Whether shipment growth, pricing and agricultural demand support the full-year sales and earnings forecasts, particularly given production and emissions-transition constraints.
- How inventory growth and seasonal working-capital needs affect cash generation in subsequent quarters.
- Financial services portfolio credit quality, credit-loss provisions, funding access and securitization exposure.
- The realized financial impact of the wind-energy sale and the progress and contribution of the A&I Products acquisition.
- Potential effects of regulatory changes, including Dodd-Frank and engine-emissions requirements, and any material change in legal or guarantee exposures.