Deere & Company — Q1 FY2012 Form 10-Q
Business context and period. Deere’s unaudited first quarter of fiscal 2012 covered the three months ended January 31, 2012. The company operates agriculture and turf, construction and forestry, and financial services businesses.
Financial results and position
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Total net sales and revenues | $6.767 billion | $6.119 billion | +11% |
| Equipment net sales | $6.119 billion | $5.514 billion | +11% |
| Net income attributable to Deere | $532.9 million | $513.7 million | +4% |
| Diluted EPS | $1.30 | $1.20 | +8% |
| Cash used in operating activities | $1.227 billion | $900.3 million | Greater outflow |
- Segment sales and operating profit: agriculture and turf $4.724 billion and $574 million (+8% and +3%); construction and forestry $1.395 billion and $124 million (+22% and +41%). Financial services operating profit was $175 million, up 2%.
- Cost of sales was 74.8% of equipment net sales, versus 74.3%. Higher production and raw-material costs, including costs associated with new products and stricter engine-emissions requirements, partly offset price realization.
- At January 31, cash and cash equivalents were $3.388 billion and marketable securities were $1.126 billion. Worldwide credit lines totaled $5.056 billion, of which $3.091 billion was unused.
- Balance-sheet borrowings were $8.506 billion short-term, $2.614 billion short-term securitization borrowings, and $16.924 billion long-term. Total assets were $48.577 billion and Deere stockholders’ equity was $6.763 billion.
- Inventory was $5.678 billion, up from $4.371 billion at October 31, 2011. Management attributed the operating cash outflow chiefly to seasonal inventory growth and lower accounts payable and accrued expenses.
Material changes and management commentary
- Net sales outside the U.S. and Canada rose 21%; U.S. and Canada equipment sales increased 5%. Equipment sales included 4% price increases and a 1% unfavorable currency effect.
- Equipment operations operating profit rose to $698 million from $646 million. Financial services net income was $119.1 million, nearly flat year over year; portfolio growth, wind-energy-credit revenue, and lower credit-loss provisions were offset largely by higher crop-insurance claims and expenses.
- Consolidated cash declined $258.9 million during the quarter. Financing cash inflow of $1.040 billion included increased borrowings; the company also repurchased $387.9 million of shares and paid $167.8 million in dividends. The prior-year investing cash inflow included $891.6 million of business-sale proceeds.
Outlook, risks, and contingencies
- Management forecast fiscal 2012 equipment sales growth of about 15%, including an approximately 3% unfavorable currency impact, and Deere-attributable net income of approximately $3.275 billion. Financial services net income was forecast at approximately $460 million, with an anticipated increase in credit-loss provisions toward a more normal level.
- Fiscal-year segment sales forecasts were approximately +15% for agriculture and turf and +18% for construction and forestry. Management cited favorable farm demand and new products, while noting regional variation, including drought-related weakness expected in parts of South America.
- Risks highlighted include global economic and sovereign-debt uncertainty, customer and supplier access to credit, commodity-price volatility, component availability and supply constraints, foreign exchange, and increasingly stringent emissions requirements. The filing states actual results may differ materially from forward-looking estimates.
- Unresolved legal matters arise in the ordinary course; management said reasonably possible additional losses beyond accruals were not expected to materially affect consolidated financial statements. The quarter-end warranty liability was $895 million. Guarantees of third-party equipment-financing receivables were approximately $250 million, with an accrued liability of approximately $8 million.
- After quarter-end, the board declared a quarterly dividend of $0.46 per share, a 12% increase. Financial services also completed approximately $1 billion of securitization borrowings and issued $1.5 billion of medium-term notes in February 2012.
Key investor verification points
- Assess whether planned sales growth, pricing, production costs, and currency effects support the full-year earnings forecast.
- Track inventory levels, seasonal working-capital needs, operating cash flow, and equipment-operation debt.
- Monitor financial-services credit quality and whether provisions rise as management expects; past-due financing receivables totaled $239 million and non-performing receivables $178 million at quarter-end.
- Review funding access, borrowing costs, securitization exposure, and compliance with credit-agreement covenants.
- Evaluate the stated market, supply-chain, commodity, weather, regulatory, and legal risks alongside subsequent results and disclosures.