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Business Context and Reporting Period

Company: DEERE & CO
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended January 31, 2005 (First Quarter of Fiscal Year 2005)
Business Overview: Deere & Company operates through Equipment Operations (agricultural, commercial/consumer, and construction/forestry equipment) and Financial Services (credit and health care operations).

Key Financial Metrics

Cash Flow Summary (Q1 2005):
- Net cash used for operating activities: $(405.7) million
- Net cash used for investing activities: $(125.9) million
- Net cash provided by financing activities: $203.4 million
- Net decrease in cash and cash equivalents: $(315.6) million

Material Changes vs. Prior Period

• Revenue Growth: Total net sales and revenues increased 18% to $4,127.1 million, driven by a 21% increase in equipment net sales ($3,526.5 million vs. $2,911.6 million).
• Profitability: Net income rose 30% to $222.8 million. Operating profit increased 24% to $398.0 million.
• Segment Performance:
  • Agricultural Equipment: Sales up 26%; Operating profit nearly doubled to $163 million.
  • Construction and Forestry: Sales up 33%; Operating profit increased 9% to $101 million.
  • Commercial and Consumer: Sales declined 8%; Operating profit turned negative at $(2) million due to lower volumes.
  • Credit: Operating profit increased 8% to $126 million, aided by a lower provision for credit losses.
• Balance Sheet: Inventories increased significantly to $2,802.0 million (from $1,999.1 million at Oct 31, 2004) due to seasonal buildup. Financing receivables grew to $11,352.3 million.
• Cost Structure: Cost of sales to net sales ratio improved to 78.4% from 78.8% in the prior year, despite higher raw material costs, due to manufacturing efficiencies and price realization.

Guidance, Outlook, and Risks

Management Outlook (Fiscal 2005):
- Equipment Sales: Forecast to increase 6% to 8% (excluding currency) for the full year; 9% to 11% for Q2. Currency is expected to add ~2 percentage points.
- Net Income: Forecast to be approximately $1.5 billion for the full year and $500 million to $525 million for Q2.
- Financial Services: Net income expected to be approximately $305 million for the year.

Key Risks and Contingencies:
- Raw Materials: Rising prices for steel and rubber impact margins, though factories have secured adequate supplies.
- Regulatory: Investments required to meet EPA Tier 3 and Tier 4 emissions rules for off-road diesel engines.
- Agricultural Factors: Uncertainty regarding Asian rust impact on soybean crops and commodity prices.
- Legal: Unresolved legal actions regarding product liability (including asbestos), retail credit, and intellectual property; management believes these will not have a material effect.
- Accounting Changes: Reclassification of cash flows related to trade receivables and operating leases to comply with SEC staff concerns (eliminating intercompany cash flows).

Investor Verification Checklist

• Cash Flow Reclassification: Verify the impact of the reclassification of cash flows from operating to investing activities (and vice versa) regarding trade receivables and operating leases as detailed in Note 1.
• Inventory Levels: Assess the $803 million increase in inventories and its alignment with seasonal demand forecasts.
• Raw Material Costs: Monitor the trajectory of steel and rubber prices and their effect on the cost of sales ratio.
• Dividend Increase: Note the Board's decision on Feb 23, 2005, to increase the quarterly dividend from $0.28 to $0.31 per share.
• Stock Repurchases: Review the $162.3 million spent on repurchases in Q1 2005 under the $1 billion authorization.
• Postretirement Benefits: Verify the $73 million contribution to postretirement benefit plans and the projected $617 million additional contribution for the remainder of the fiscal year.