Business Context and Reporting Period
Company: DEERE & CO
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: July 31, 2001
Business Overview: Deere & Company operates in agricultural equipment, commercial and consumer equipment, construction and forestry, and financial services (credit and health care). The company reported results for the third quarter and first nine months of fiscal year 2001, noting a general economic slowdown, low farm commodity prices, and a stronger U.S. dollar impacting sales.
Key Financial Metrics
| Metric (Millions USD) | Q3 2001 | Q3 2000 | 9 Months 2001 | 9 Months 2000 |
|---|---|---|---|---|
| Net Sales and Revenues | $3,584.3 | $3,632.1 | $10,040.7 | $9,761.1 |
| Net Income | $71.8 | $172.4 | $256.1 | $414.4 |
| Diluted EPS | $0.30 | $0.72 | $1.08 | $1.75 |
| Operating Profit (Total) | $199.0 | $328.0 | $638.0 | $818.0 |
| Cash and Equivalents | $252.7 | $351.7 | $252.7 | $351.7 |
| Total Debt (Short + Long Term) | $12,237.4 | $10,252.1 | $12,237.4 | $10,252.1 |
| Stockholders' Equity | $4,330.5 | $4,351.8 | $4,330.5 | $4,351.8 |
Note: Debt figures represent the sum of short-term borrowings and long-term borrowings from the Consolidated Balance Sheet.
Material Changes vs. Prior Period
- Revenue: Consolidated net sales and revenues decreased 1% in Q3 2001 compared to Q3 2000. Year-to-date (YTD) revenues increased 3%. Net sales (excluding finance/health care) decreased 3% in Q3 but increased 1% YTD.
- Profitability: Net income dropped significantly, down 58% in Q3 and 38% YTD. Operating profit declined 39% in Q3 and 22% YTD.
- Segment Performance:
- Agricultural Equipment: Operating profit fell 27% in Q3 due to lower large tractor sales and higher R&D costs, though YTD profit was flat (+1%).
- Commercial & Consumer: Operating profit plummeted 74% in Q3 and 55% YTD due to weak economic conditions and weather.
- Construction & Forestry: Operating profit dropped 75% in Q3 and 70% YTD, driven by a weak economy and competitive pricing.
- Credit: Operating profit decreased 14% in Q3 but increased 8% YTD due to a larger average portfolio.
- Cash Flow: Net cash used for operating activities was $217.0 million for the nine months ended July 31, 2001, compared to $201.2 million provided in the prior year period. This shift was primarily due to increases in trade receivables and inventories.
Guidance, Outlook, and Risks
- Full Year Outlook: Management projects breakeven performance for the full fiscal year 2001. This projection includes an estimated $140 million after-tax charge for an early-retirement program.
- Production Cuts: Physical volume of sales is forecast to be down 14% in Q4 and 2% for the full year. Significant production cutbacks are planned for Q4, including a six-week shutdown of large tractor production in North America and a one-month shutdown of the Horicon, Wisconsin factory.
- Restructuring Charges:
- Early Retirement: A voluntary program for ~2,500 employees expected to cost $140 million after-tax in Q4.
- Homelite Exit & Construction Restructuring: Plans to exit the Homelite consumer products business and restructure the construction segment, resulting in a pretax charge of up to $240 million ($150 million after-tax) primarily in Q4.
- Market Risks: Key risks include weak grain market fundamentals, adverse weather, a strong U.S. dollar, and a slowdown in residential and non-residential construction. The company also faces risks related to "foot-and-mouth" disease and genetically modified organisms (GMOs) affecting agricultural exports.
- Accounting Changes: The company adopted FASB Statement No. 133 (Derivatives) and No. 140 (Transfers of Financial Assets). Future adoption of FASB No. 142 (Goodwill) will eliminate goodwill amortization, potentially increasing reported earnings in future periods.
Investor Verification Checklist
- Q4 Restructuring Impact: Verify the final magnitude of the $150 million after-tax charge related to the Homelite exit and construction restructuring, and the $140 million early retirement cost.
- Inventory Levels: Monitor inventory build-up, which increased $372 million YTD, to assess potential future write-downs or obsolescence risks given the production cutbacks.
- Credit Portfolio Quality: Review the ratio of earnings to fixed charges (1.50 to 1 YTD) and receivable write-offs, as the credit segment is highly leveraged (6.5 to 1 debt-to-equity).
- Production vs. Sales Alignment: Track the effectiveness of the aggressive production cutbacks in Q4 to align with the forecasted 14% drop in physical sales volume.
- Acquisition Integration: Assess the performance of recent acquisitions (McGinnis Farms, Vapormatic, Great Dane) and the pending Richton International acquisition ($125 million).