Business Context and Reporting Period
Company: DEERE & CO
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended July 31, 2008
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 risk mitigation products.
Key Financial Metrics
| Metric (in millions) | Q3 2008 | Q3 2007 | 9M 2008 | 9M 2007 |
|---|---|---|---|---|
| Net Sales and Revenues | $7,738.7 | $6,633.7 | $21,036.5 | $17,941.3 |
| Net Income | $575.2 | $537.2 | $1,707.7 | $1,399.5 |
| Diluted EPS | $1.32 | $1.18 | $3.89 | $3.06 |
| Operating Profit (Consolidated) | $934.0 | $850.0 | $2,765.0 | $2,213.0 |
| Operating Cash Flow (9M) | $942.6 | $1,285.2 | ||
| Total Assets | $41,687.7 | $37,630.6 | N/A | |
| Total Liabilities | $34,147.7 | $29,569.5 | ||
| Stockholders' Equity | $7,540.0 | $8,061.1 | N/A | |
| Cash & Equivalents | $2,822.8 | $1,773.2 | ||
| Short-term Borrowings | $10,114.2 | $10,179.6 | N/A | |
| Long-term Borrowings | $13,397.4 | $11,096.1 |
Margins (9M 2008 vs 9M 2007):
- Net Income Margin: 8.1% vs 7.8%
- Operating Profit Margin: 13.1% vs 12.3%
Material Changes vs. Prior Period
- Revenue Growth: Consolidated net sales and revenues increased 17% in Q3 and 17% for the nine months ended July 31, 2008, compared to the prior year. This was driven by a 35% increase in Agricultural Equipment sales and a 38% increase in sales outside the U.S. and Canada.
- Profitability: Net income rose 7% in Q3 and 22% for the nine-month period. Operating profit increased 10% in Q3 and 25% for the nine months.
- Segment Performance:
- Agricultural Equipment: Sales up 35% (Q3) and 34% (9M); Operating profit up 47% (Q3) and 66% (9M).
- Commercial & Consumer: Sales down 1% (Q3) but up 6% (9M); Operating profit declined 28% (Q3) and 20% (9M) due to higher expenses and raw material costs.
- Construction & Forestry: Sales down 7% (Q3 and 9M); Operating profit declined 38% (Q3) and 14% (9M) due to U.S. housing market pressure.
- Credit: Operating profit declined 21% (Q3) and 7% (9M) due to higher expenses and credit loss provisions.
- Balance Sheet: Total assets increased to $41.7 billion. Inventories rose significantly to $3.47 billion (up $1.14 billion from Oct 2007) to meet demand. Total debt increased, with long-term borrowings rising to $13.4 billion.
- Cash Flow: Operating cash flow for the nine months decreased to $943 million from $1.29 billion in the prior year, primarily due to a seasonal increase in inventories and receivables.
Guidance, Outlook, and Risks
- Full Year 2008 Outlook:
- Company equipment sales projected to increase ~21% for the full year.
- Agricultural equipment sales forecast to increase ~38%.
- Commercial and consumer equipment sales forecast to increase ~4%.
- Construction and forestry sales forecast to decline ~5%.
- Credit operations net income forecast at ~$335 million (down from 2007).
- Q4 2008 Forecast: Net income forecast at approximately $425 million. This forecast does not include charges related to the Welland facility closure announced in September 2008.
- Unusual Items & Contingencies:
- Welland Facility Closure: The company announced the closure of its Welland, Ontario plant by end of 2009. Expected after-tax charges are ~$90 million, with ~$45 million recorded in Q4 2008.
- Acquisitions: Acquired T-Systems ($85M), Plastro ($120M), and a 50% stake in Xuzhou Xuwa Excavator ($45M) in 2008.
- Stock Repurchase: Board authorized an additional $5 billion share repurchase program in May 2008.
- Risks:
- Rising raw material costs (steel, rubber, fuel) impacting margins.
- U.S. housing market slowdown affecting construction equipment demand.
- Credit market conditions and potential increases in credit loss provisions.
- Foreign currency exchange rate fluctuations.
- Regulatory changes regarding emissions and renewable fuel standards.
Investor Verification Checklist
- Inventory Levels: Verify the rationale for the $1.1 billion increase in inventories and assess potential obsolescence risks given economic headwinds in non-agricultural segments.
- Welland Closure Impact: Confirm the timing and magnitude of the $90 million charge and its effect on Q4 2008 earnings and cash flow.
- Credit Portfolio Quality: Monitor the provision for credit losses and delinquency rates in the Financial Services segment, given the forecasted decline in net income.
- Raw Material Costs: Assess the company's ability to pass on rising input costs to customers without significantly dampening demand.
- Debt Structure: Review the increase in long-term borrowings and the company's leverage ratios, particularly within the Financial Services segment (9.6 to 1 debt-to-equity).
- Share Repurchases: Track the execution of the new $5 billion buyback program and its impact on diluted EPS.