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Business Context and Reporting Period

Company: DEERE & CO
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: January 31, 2002
Business Overview: Deere & Company operates through Equipment Operations (agricultural, commercial/consumer, construction/forestry) and Financial Services (credit and health care). The quarter was characterized by deep production cutbacks at major North American factories to improve asset utilization and reduce inventory levels in a weak market environment.

Key Financial Metrics

Note: Total Debt calculated as Short-term borrowings ($6,455.9M) + Long-term borrowings ($6,407.4M) for Q1 2002.

Material Changes vs. Prior Period

• Revenue Decline: Total net sales and revenues decreased 7% to $2,522.1 million. Net sales of equipment dropped 10% to $1,937.5 million due to lower volumes across all major segments.
• Profitability Reversal: The company reported a net loss of $38.1 million compared to a net income of $56.4 million in the prior year. Equipment operations swung from a $70 million operating profit to a $135 million operating loss.
• Segment Performance:
  • Agricultural Equipment: Sales down 5%; operating loss of $15 million vs. $89 million profit prior year.
  • Commercial & Consumer: Sales down 11%; operating loss of $43 million vs. $6 million profit prior year.
  • Construction & Forestry: Sales down 20%; operating loss of $66 million vs. $8 million loss prior year.
  • Credit: Operating profit increased 48% to $118 million, driven by income from trade receivables purchased from Equipment Operations.
• Liquidity Improvement: Cash and cash equivalents surged to $2,364.8 million from $311.6 million a year ago, driven by a decrease in trade receivables and inventory levels.

Guidance, Outlook, and Risks

Management Commentary and Outlook

• Full Year 2002: Net sales expected to be flat to slightly up. Operating profit projected to range from breakeven to 1% of sales.
• Q2 2002: Sales forecast flat to slightly up. Operating profit margin expected to be 4% to 5% of sales.
• Segment Outlook:
  • Agricultural: U.S./Canada retail sales expected to be flat; Europe flat to slightly higher.
  • Commercial/Consumer: Shipments projected down 5-10%.
  • Construction/Forestry: U.S./Canada sales expected 10-15% lower.
  • Credit: Net income on traditional business expected to increase 7-10%.

Risks and Contingencies

• Credit Ratings: Moody's lowered the long-term rating to "A3" and short-term to "Prime-2" in February 2002. Standard & Poor's placed ratings under review with negative implications in March 2002. A downgrade below Baa3/BBB- could trigger put options on minority interests totaling $150 million.
• Restructuring Costs: The company recognized costs related to exiting the hand-held consumer products business and closing a Tennessee factory ($16 million pretax charge).
• Foreign Exchange: Losses in Argentina due to peso devaluation impacted results ($12 million pretax loss).
• Legal: Various unresolved legal actions exist (product liability, asbestos, etc.), though management does not expect a material effect.

Investor Verification Checklist

• Asset Reduction Strategy: Verify the impact of deep production cutbacks on future inventory levels and manufacturing efficiency.
• Credit Rating Impact: Monitor the outcome of the S&P and Moody's rating reviews and potential triggers for minority interest put options.
• Intersegment Transactions: Review the shift of trade receivables from Equipment Operations to Financial Services and its effect on segment profitability reporting.
• Argentina Exposure: Assess the ongoing financial impact of the Argentine peso devaluation on operations.
• Restructuring Progress: Track the execution of factory closures and the exit from the hand-held consumer products business.