Business Context and Reporting Period
Company: DEERE & CO
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended July 31, 2003
Business Overview: Deere & Company operates through Equipment Operations (agricultural, commercial/consumer, construction/forestry) and Financial Services. The company reported strong sales of new products and improved efficiency, offsetting planned lower production volumes in the agricultural segment.
Key Financial Metrics
| Metric (in millions) | Q3 2003 | Q3 2002 | 9M 2003 | 9M 2002 |
|---|---|---|---|---|
| Net Sales | $3,833.0 | $3,409.6 | $9,974.1 | $8,756.1 |
| Total Revenues | $4,401.6 | $3,969.0 | $11,595.2 | $10,477.6 |
| Net Income | $247.5 | $147.6 | $572.4 | $251.2 |
| Diluted EPS | $1.02 | $0.61 | $2.37 | $1.04 |
| Operating Cash Flow (9M) | $195.0 (Consolidated) | $195.0 (Consolidated) | ||
| Free Cash Flow (9M) | ||||
| Total Assets | $25,997.8 | $23,486.8 | N/A | |
| Total Debt (Short + Long) | $14,947.8 | $13,284.7 | ||
| Cash & Equivalents | $3,757.2 | $2,327.5 | N/A | |
| Stockholders' Equity | $3,792.2 | $4,183.9 |
Note: Operating cash flow for the nine months ended July 31, 2003, was $195.0 million consolidated. Equipment Operations generated $495.0 million, while Financial Services generated $551.5 million; the consolidated figure reflects eliminations and adjustments.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 12% in Q3 and 14% year-to-date (YTD), driven by higher physical volumes in commercial/consumer and construction/forestry segments. Overseas sales rose 9% in Q3 and 16% YTD.
- Profitability Surge: Net income jumped 68% in Q3 and 128% YTD. This was driven by improved price realization, higher volumes, and the discontinuation of goodwill amortization (FASB 142 adoption).
- Segment Performance:
- Agricultural Equipment: Sales up 4% (Q3) and 9% (YTD), but operating profit declined 38% (Q3) and 9% (YTD) due to higher postretirement benefit costs and lower North American production volumes.
- Commercial & Consumer: Sales up 18% (Q3) and 19% (YTD); operating profit surged 70% (Q3) and 144% (YTD) on strong demand for new products.
- Construction & Forestry: Sales up 29% (Q3) and 25% (YTD); operating profit turned from a loss of $10M to a profit of $59M in Q3.
- Credit: Operating profit increased 50% (Q3) and 23% (YTD) due to lower loan losses and portfolio growth.
- Cost Structure: Cost of sales to net sales ratio improved to 80.0% in both periods (down from 80.6% and 81.9% last year), aided by price realization and the elimination of goodwill amortization.
Guidance, Outlook, and Risks
- Full Year Guidance: Net income is projected in the range of $575 million to $625 million.
- Q4 Forecast: Net equipment sales are forecast to be up approximately 5% in Q4. Excluding currency and price impacts, sales are expected to be slightly lower. Production volumes are expected to be down about 5%.
- Segment Outlook:
- Agricultural: Worldwide net sales forecast up 7-9% for the year; physical volume expected to be down slightly.
- Commercial/Consumer: Sales expected up over 15% for the year.
- Construction/Forestry: Sales expected up approximately 18% for the year.
- Credit: Full year net income expected to be approximately $300 million.
- Risks & Contingencies:
- Legal: Unresolved actions include product liability (including asbestos), retail credit, and intellectual property matters. Management believes these will not have a material effect.
- Guarantees: Maximum exposure to losses on recourse obligations for sold receivables is $222 million. Put options on minority interests could require purchases of $170M-$250M if exercised, or $150M if credit ratings fall below Baa3/BBB-.
- Market Risks: Exposure to currency exchange rates, interest rates, commodity prices, and global economic conditions.
Investor Verification Checklist
- Goodwill Amortization Impact: Verify the extent to which the 128% YTD net income increase is driven by the one-time accounting change (FASB 142) eliminating goodwill amortization versus organic operational growth.
- Postretirement Benefit Costs: Confirm the sustainability of margins given the $68 million (Q3) and $211 million (YTD) increase in postretirement benefit costs.
- Credit Portfolio Quality: Review loan loss provisions and delinquency rates in the Financial Services segment, which holds significant receivables ($9.5 billion net).
- Currency Sensitivity: Assess the impact of foreign exchange rates on reported sales, as overseas sales comprise a significant portion of revenue and were favorable in this period.
- Liquidity Position: Monitor the $14.9 billion total debt load against the $3.8 billion cash position and the company's ability to service debt given the "Negative" outlook from some rating agencies.