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Business Context and Reporting Period

Company: DEERE & CO
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended July 31, 2004
Operations: The Company operates through Equipment Operations (agricultural, commercial/consumer, and construction/forestry equipment) and Financial Services (credit and health care operations).

Key Financial Metrics

Note: Debt figures derived from Balance Sheet short-term and long-term borrowings. Cash flow from operating activities for the nine months ended July 31, 2004, was $163.7 million.

Material Changes vs. Prior Period

• Revenue Growth: Consolidated net sales and revenues increased 23% in Q3 and 27% for the nine-month period compared to the prior year. Equipment net sales rose 27% in Q3 and 31% year-to-date.
• Profitability Surge: Net income increased 62% in Q3 and 83% for the nine-month period. Operating profit grew 52% in Q3 and 72% year-to-date.
• Segment Performance:
  • Agricultural Equipment: Sales up 34% (Q3) and 30% (9 months); Operating profit up 132% (Q3) and 151% (9 months) driven by strong retail demand and price realization.
  • Construction and Forestry: Sales up 40% (Q3) and 51% (9 months); Operating profit up 163% (Q3) and 254% (9 months), aided by fleet replenishment and the consolidation of Nortrax.
  • Commercial and Consumer: Sales up 3% (Q3) and 17% (9 months); Operating profit declined 16% in Q3 due to higher bonus provisions and component costs.
  • Credit: Operating profit declined 15% in Q3 and 3% year-to-date due to lower gains on retail note sales and higher administrative costs.
• Balance Sheet: Inventories increased significantly ($852 million year-to-date) due to seasonal buildup and Nortrax consolidation. Total assets grew 3% year-over-year.

Guidance, Outlook, and Risks

• Full-Year Outlook: Company equipment sales for fiscal 2004 are forecast to increase approximately 32%. Net income is forecast around $1.3 billion. Fourth-quarter sales are expected to be up 35% year-over-year.
• Segment Forecasts:
  • Agricultural: Worldwide sales forecast up 32% (27% excluding currency).
  • Commercial/Consumer: Sales forecast up 15%.
  • Construction/Forestry: Sales forecast up 50% (42% excluding Nortrax consolidation).
  • Financial Services: Credit segment net income forecast at ~$300 million; Health care expected to be breakeven.
• Key Risks and Contingencies:
  • Raw Materials: Rising costs for steel and rubber, though factories have secured adequate supplies.
  • Regulatory: Compliance with EPA Tier 3 and Tier 4 emissions rules requires significant investment.
  • Legal: Unresolved actions regarding product liability (including asbestos), retail credit, and intellectual property. Management believes these will not have a material effect.
  • Guarantees: Maximum exposure to losses on recourse obligations for sold receivables was $213 million; residual value guarantees for operating leases were $40 million.

Investor Verification Checklist

• Inventory Levels: Verify the sustainability of the $852 million inventory increase relative to sales velocity and potential obsolescence risks.
• Raw Material Costs: Monitor the impact of rising steel and rubber prices on future gross margins, as management notes these are items of concern.
• Credit Portfolio Quality: Review the provision for credit losses and the $213 million recourse exposure on sold receivables given the economic environment.
• Segment Mix: Assess the reliance on the Construction and Forestry segment, which saw the highest growth but is sensitive to housing starts and public construction levels.
• Postretirement Benefits: Note the $1,030 million contribution to pension plans and the impact of the Medicare Part D subsidy on future benefit costs.