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Business Context and Reporting Period

Company: Deere & Company
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended July 31, 2007
Business Overview: Deere & Company manufactures and distributes agricultural equipment, commercial and consumer equipment, and construction and forestry equipment. It also provides financial services, primarily financing sales and leases of equipment. The company operates globally, with significant exposure to U.S., Canadian, and international markets.

Key Financial Metrics

Note: Q3 cash flow from operations is not explicitly provided in the text; only the nine-month figure is available.

Material Changes vs. Prior Period

• Revenue Growth: Total net sales and revenues increased 6% in Q3 2007 and 5% for the nine months ended July 31, 2007, compared to the prior year. This was driven by a 16% increase in agricultural equipment sales and a 15% increase in commercial and consumer equipment sales.
• Profitability: Net income for Q3 2007 rose 23% to $537.2 million. However, nine-month net income decreased slightly by 1% to $1,399.5 million, primarily due to a $239.9 million gain from discontinued operations (sale of health care business) in the prior year that did not recur.
• Segment Performance:
  • Agricultural Equipment: Sales up 16% (Q3) and 14% (9 months); Operating profit up 73% (Q3) and 43% (9 months).
  • Commercial & Consumer: Sales up 15% (Q3) and 6% (9 months); Operating profit up 63% (Q3) and 40% (9 months).
  • Construction & Forestry: Sales declined 20% (Q3) and 13% (9 months); Operating profit dropped 41% (Q3) and 34% (9 months) due to lower volumes and higher raw material costs.
• Cash Flow: Operating cash flow for the nine months turned positive at $1,285.2 million, a significant improvement from a negative $337.9 million in the prior year period.

Guidance, Outlook, and Risks

• Full Year Guidance:
  • Equipment Sales: Forecast to increase 7% for fiscal year 2007.
  • Net Income: Forecast to be approximately $1,700 million for the year.
  • Credit Operations: Net income forecast at approximately $355 million.
• Market Outlook:
  • Agricultural: Positive global conditions driven by high commodity prices and renewable fuel demand. Sales forecast up 16% for the year.
  • Construction: U.S. markets remain under pressure due to housing downturn; sales forecast down 12% for the year.
• Risks and Contingencies:
  • Raw Materials: Rising costs of steel and rubber impact margins.
  • Credit Environment: Concerns regarding sub-prime credit issues and interest rates.
  • Legal: Unresolved actions related to product liability (including asbestos), retail credit, and intellectual property. Management believes these will not have a material effect.
  • Guarantees: Approximately $196 million in guarantees issued for third-party receivables and potential exposure of $561 million under crop insurance agreements (mitigated by reinsurance).
• Corporate Actions:
  • Stock Split: Board announced a proposed two-for-one stock split pending shareholder approval.
  • Dividend: Quarterly dividend increased to $0.50 per share (pre-split basis).
  • Acquisitions: Acquired LESCO, Inc. ($150 million) and Ningbo Benye Tractor ($70 million).

Investor Verification Checklist

• Discontinued Operations Impact: Verify the exclusion of the $239.9 million gain from the prior year's health care sale when comparing nine-month net income trends.
• Construction Segment Decline: Assess the sustainability of the 20% sales drop in Construction and Forestry and its impact on overall margins.
• Raw Material Costs: Monitor the ability to pass on increased steel and rubber costs to customers to maintain the improved price realization noted in the report.
• Debt Levels: Review the increase in total liabilities to $29.6 billion and the specific debt-to-equity ratios for the Financial Services segment (8.0 to 1).
• Stock Split Timing: Confirm the date and terms of the proposed two-for-one stock split and its effect on share count and per-share metrics.