Deere & Company — Q2 2012 Form 10-Q
Reporting period: Fiscal second quarter and six months ended April 30, 2012. Unaudited interim results; comparisons are with the corresponding 2011 periods unless noted. Amounts are in U.S. dollars.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total sales and revenues | $10.009B | $8.910B | $16.775B | $15.029B |
| Equipment net sales | $9.405B | $8.328B | $15.524B | $13.841B |
| Net income attributable to Deere | $1.056B | $904M | $1.589B | $1.418B |
| Diluted EPS | $2.61 | $2.12 | $3.91 | $3.32 |
| Equipment operations operating profit | $1.522B | $1.268B | $2.220B | $1.914B |
- Q2 total revenues rose 12%; equipment sales rose 13%. Segment sales increased 11% in agriculture and turf and 26% in construction and forestry.
- Management attributed stronger equipment results mainly to shipment volumes and price realization. Equipment sales included price realization of 5% in Q2 and 4% year to date; foreign currency translation reduced growth by 2% and 1%, respectively.
- Cost of sales was 72.7% of net sales in Q2 and 73.5% year to date, versus 73.3% and 73.7% in 2011. Price realization and lower postretirement health-care costs helped, partly offset by new-product and emissions-related costs, raw materials, and higher R&D spending.
- Financial Services net income attributable to Deere was $109M in Q2 and $228M for six months, versus $105M and $223M. Portfolio growth supported results; year-to-date gains also reflected wind energy credits and lower credit-loss provisions, partly offset by higher expenses, crop insurance claims, and narrower financing spreads.
Cash flow, balance sheet, debt and liquidity
- For the first six months, operating cash flow was negative $1.527B, compared with negative $665M in 2011. Management cited seasonal inventory and trade-receivable increases alongside higher demand. Inventories increased $1.742B from October 31, 2011.
- Investing cash outflow was $1.329B; financing cash inflow was $2.255B. Cash and cash equivalents fell $627M to $3.020B. Cash plus marketable securities totaled $4.359B at April 30, 2012.
- Total assets were $51.405B and stockholders’ equity was $7.396B at April 30. Reported borrowings were $7.910B short-term and $18.719B long-term; short-term securitization borrowings added $3.033B.
- Worldwide credit lines totaled $5.088B, of which $2.723B was unused. Management said it expected sufficient global funding and liquidity; all stated credit-agreement requirements were met.
- Equipment operations’ interest-bearing debt was $4.767B, with debt-to-total-capital of 39%, versus 35% at October 31, 2011. Financial Services’ external interest-bearing debt was $24.896B; its debt-to-equity ratio, including intercompany debt, was 7.8:1.
- Share repurchases were $746M and dividends paid were $333M in the first six months. The board declared a quarterly dividend of $0.46 per share payable August 1, 2012.
Outlook, risks and contingencies
- Management forecast fiscal 2012 equipment sales growth of about 15%, including an unfavorable currency impact of about 3%, and Q3 equipment sales growth of about 25%, including an unfavorable currency impact of about 4%. Fiscal-year net income attributable to Deere was projected at about $3.350B.
- Agriculture and turf sales were forecast to rise about 15% for fiscal 2012; construction and forestry sales about 20%. Financial Services net income was expected to be approximately $465M, slightly below the prior year.
- Risks highlighted include global economic and sovereign-debt uncertainty; commodity-price volatility and weather; customer and supplier access to credit; funding-market disruption; supply and component constraints; emissions requirements; foreign exchange and interest rates; and credit delinquencies and defaults.
- At April 30, the company had $255M of third-party retail-financing guarantees, with an $8M accrued liability; $484M of property and equipment commitments; and $45M of miscellaneous contingencies considered substantially remote. Management said reasonably possible additional losses from unresolved legal actions were not expected to materially affect the consolidated financial statements.
- The filing reports no material change in risk factors or market-risk disclosures from the latest Form 10-K. Management stated disclosure controls were effective and there were no material second-quarter changes to internal control over financial reporting.
Most important facts for investors to verify
- Whether equipment shipment growth and price realization can sustain the full-year sales and earnings outlook amid currency headwinds and rising production, R&D, and emissions-compliance costs.
- How much of the negative operating cash flow reflects seasonal working capital, and whether inventory and receivables convert to cash as expected.
- Funding availability and cost for Financial Services, including refinancing and securitization exposure, given its large debt and receivables portfolio.
- Credit quality trends: past-due financing receivables were $239M and non-performing receivables $141M at April 30, 2012; compare subsequent delinquency, loss, and allowance trends.
- Potential effects of the disclosed guarantees, legal matters, and other contingencies, and whether actual outcomes remain consistent with management’s assessments.