Business Context and Reporting Period
Company: DEERE & CO
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended April 30, 2009
Business Overview: Deere & Company manufactures and distributes agricultural equipment, commercial and consumer equipment, and construction and forestry equipment. It also provides financial services, including credit and crop insurance products.
Key Financial Metrics
| Metric (in millions) | Q2 2009 | Q2 2008 | 6 Months 2009 | 6 Months 2008 |
|---|---|---|---|---|
| Net Sales | $6,187.0 | $7,468.9 | $10,747.1 | $11,999.5 |
| Total Revenues | $6,747.8 | $8,096.7 | $11,893.8 | $13,297.8 |
| Net Income | $472.3 | $763.5 | $676.2 | $1,132.5 |
| Diluted EPS | $1.11 | $1.74 | $1.60 | $2.56 |
| Operating Profit (Equipment Ops) | $628.0 | $1,102.0 | $935.0 | $1,559.0 |
| Cash & Equivalents (End of Period) | $4,797.2 | $2,287.8 | $4,797.2 | $2,287.8 |
| Short-term Borrowings | $8,929.7 | $10,417.3 | $8,929.7 | $10,417.3 |
| Long-term Borrowings | $16,850.2 | $12,752.0 | $16,850.2 | $12,752.0 |
| Stockholders' Equity | $6,868.2 | $7,349.6 | $6,868.2 | $7,349.6 |
Cash Flow (Six Months Ended April 30, 2009):
- Operating Activities: Net cash used of $1,180.9 million.
- Investing Activities: Net cash provided of $1,144.3 million.
- Financing Activities: Net cash provided of $2,604.7 million.
- Net Increase in Cash: $2,585.8 million.
Material Changes vs. Prior Period
- Revenue Decline: Worldwide net sales and revenues decreased 17% in Q2 2009 and 11% for the first six months compared to the prior year. This was driven by lower shipment volumes, unfavorable currency translation (approx. 6% impact), and a sharp downturn in global economic activity.
- Profitability Compression: Net income fell 38% in Q2 and 40% for the six-month period. Equipment Operations operating profit declined 43% year-over-year for the six months due to lower volumes, higher raw material costs, and foreign exchange impacts.
- Segment Performance:
- Agricultural Equipment: Sales down 4% in Q2; operating profit down 19%.
- Commercial & Consumer: Sales down 24%; operating profit down 56%.
- Construction & Forestry: Sales down 55%; segment reported an operating loss of $75 million in Q2 compared to a profit of $166 million in Q2 2008.
- Credit: Operating profit down 56% due to higher provisions for credit losses and narrower financing spreads.
- Liquidity Position: Cash and cash equivalents increased significantly to $4.8 billion, up from $2.2 billion a year ago, bolstered by financing activities and reduced capital expenditures.
Guidance, Outlook, and Risks
- Full Year 2009 Outlook:
- Equipment Sales: Projected to be down approximately 19% for the fiscal year.
- Net Income: Expected to be approximately $1.1 billion, with management noting "more risk on the downside."
- Agriculture & Turf: Sales forecast to decrease about 14% for the year.
- Construction & Forestry: Sales forecast to decline about 42% for the year.
- Credit Operations: Net income forecast at approximately $250 million.
- Restructuring & Costs:
- Voluntary employee separations related to the new organizational structure (combining agricultural and commercial/consumer segments) are expected to result in pretax charges of approximately $50 million in the second half of 2009.
- Closure of the Welland, Ontario facility is expected to result in total expenses of $104 million, with $42 million remaining to be recognized.
- Risks and Contingencies:
- Economic Conditions: Sharp downturn in global economic activity and financial market turmoil pose significant risks to customer demand and credit availability.
- Currency: Significant fluctuations in foreign exchange rates continue to impact results.
- Credit Risk: Increased delinquencies and defaults could materially impact the Credit segment's write-offs and provisions.
- Legal: Unresolved legal actions regarding product liability (including asbestos), retail credit, and intellectual property exist, though management does not believe they will have a material effect.
Investor Verification Checklist
- Credit Loss Provisions: Verify the adequacy of the provision for credit losses in the Financial Services segment given the economic downturn and rising delinquency risks.
- Inventory Levels: Monitor inventory turnover and potential write-downs, particularly in the Construction and Forestry segment where sales have collapsed.
- Foreign Exchange Exposure: Assess the impact of currency translation on future earnings, as it negatively impacted sales by approximately 6% in the current period.
- Restructuring Costs: Track the timing and magnitude of the $50 million in expected restructuring charges related to the segment combination.
- Liquidity Sources: Confirm continued access to capital markets and the status of the FDIC Temporary Liquidity Guarantee Program for debt issuances.