Deere & Company — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended July 31, 2011. Unaudited interim results; fiscal year ends October 31. Amounts are U.S. dollars.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total sales and revenues | $8.372B (+22%) | $6.837B | $23.401B (+24%) | $18.803B |
| Equipment net sales | $7.722B (+24%) | $6.224B | $21.563B (+27%) | $17.009B |
| Net income attributable to Deere | $712.3M (+15%) | $617.0M | $2.130B (+51%) | $1.408B |
| Diluted EPS | $1.69 | $1.44 | $5.01 | $3.28 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $636.1M | $1.088B |
Equipment cost of sales was 75.0% of net sales in Q3 and 74.2% for the nine-month period, versus 72.6% and 73.4%, respectively, a year earlier. The corresponding gross margins were approximately 25.0% and 25.8%. Higher raw-material and production costs, including emissions-compliance costs, and compensation expenses weighed on margins; price realization partly offset them.
- Agriculture and turf: Q3 sales $6.371B (+22%) and operating profit $859M (+4%); nine-month sales $17.740B (+23%) and operating profit $2.579B (+21%).
- Construction and forestry: Q3 sales $1.351B (+34%) and operating profit $110M (+67%); nine-month sales $3.823B (+50%) and operating profit $304M, versus $65M.
- Financial services: Q3 operating profit $194M (+31%) and nine-month operating profit $529M (+47%). Gains reflected portfolio growth and lower credit-loss provisions, partly offset by narrower financing spreads.
Balance sheet, cash flow and funding
At July 31, 2011, cash and cash equivalents were $3.618B and marketable securities $459M, totaling $4.078B. Cash declined $172M from fiscal year-end. Total assets were $47.135B and stockholders’ equity $7.540B.
Consolidated borrowings comprised $7.928B of short-term borrowings, $2.381B of short-term securitization borrowings and $15.893B of long-term borrowings, or approximately $26.202B in total. This compares with approximately $24.349B at October 31, 2010. Commercial paper outstanding was $2.830B. Worldwide credit lines totaled $5.062B, of which $2.170B was unused; management said funding and liquidity were expected to be sufficient. Credit agreement requirements were met.
Nine-month operating cash flow fell to $636M from $1.088B, with seasonal inventory growth a major cash use. Investing activities used $1.067B, partly offset by $894M in business-sale proceeds. Financing activities provided $245M; the company repurchased $1.093B of stock and paid $422M in dividends. Inventories rose to $4.688B from $3.063B at fiscal year-end. Equipment operations’ interest-bearing debt was $3.852B, with debt-to-capital of 34%; financial services’ external interest-bearing debt was $22.349B, with debt-to-equity of 7.5 to 1.
Changes, outlook and notable items
- Equipment sales growth reflected higher shipment volumes, improved pricing and favorable currency translation. International equipment sales grew faster than U.S. and Canadian sales.
- For fiscal 2011, Deere forecast equipment sales up about 25%, including roughly 4% favorable currency impact; Q4 equipment sales were forecast up about 20%. Full-year net income was expected to be approximately $2.7B.
- Fiscal 2011 segment sales outlook: agriculture and turf up about 21%; construction and forestry up about 45%. Financial services net income attributable to Deere was expected to be approximately $460M.
- The company estimated the Japanese earthquake and tsunami would reduce full-year sales by about $70M and operating profit by about $10M.
- Deere sold its wind energy business in December 2010 for approximately $900M, generating $894M of net cash proceeds during the nine months. It acquired the remaining 64% of A&I Products for approximately $48M.
- Management cited global economic and sovereign-debt uncertainty, market volatility, customer and supplier credit availability, commodity-price volatility, component availability, and emissions requirements as concerns. The filing also identifies weather, foreign exchange, regulation, supply-chain disruption and market-access risks. A newly highlighted risk is possible disruption to precision GPS services from radio-frequency spectrum reallocations.
- Unresolved ordinary-course legal matters, including product liability, retail credit, software licensing, and patent and trademark issues, were not expected by management to have a material effect. Guarantees of third-party equipment financing totaled about $230M; accrued liability was about $7M. Property and equipment commitments were about $423M.
Most important facts for investors to verify
- Whether the $2.7B full-year net-income forecast and segment sales projections were achieved, and how they compared with later guidance.
- Whether inventory growth, raw-material and production costs, and emissions-related spending continued to pressure equipment margins and operating cash flow.
- Financial-services credit quality and funding: the filing reported $350M of past-due financing receivables and $204M of non-performing financing receivables at July 31, 2011.
- Debt and liquidity trends, including short-term funding reliance, unused credit lines, and compliance with credit covenants.
- Exposure to the stated economic, supply-chain, regulatory, weather, and GPS-spectrum risks, plus any material changes in legal or guarantee contingencies.