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Business Context and Reporting Period

Company: DEERE & CO
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended January 31, 2009
Business Overview: Deere & Company manufactures and distributes agricultural equipment, commercial and consumer equipment, and construction and forestry equipment. Its Financial Services segment provides credit services, crop risk mitigation, and wind energy investments.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: Total net sales and revenues decreased 1% to $5.15 billion. Equipment net sales increased 1% to $4.56 billion, driven by an 18% increase in Agricultural Equipment sales, offset by declines in Commercial and Consumer (-25%) and Construction and Forestry (-28%) segments.
• Profitability: Net income declined 45% to $203.9 million. Consolidated operating profit dropped 39% to $364 million. The deterioration was primarily due to increased raw material costs, unfavorable foreign currency exchange rates, and lower financing spreads in the Credit segment.
• Cash Flow: Operating cash flow turned significantly negative at -$1.62 billion, compared to -$0.83 billion in the prior year, driven by a seasonal increase in inventories and a decrease in accounts payable. However, cash and cash equivalents increased by $2.79 billion due to significant financing inflows ($3.13 billion) and investing inflows ($1.27 billion).
• Balance Sheet: Total debt increased, with short-term borrowings rising to $9.33 billion and long-term borrowings to $16.57 billion. Inventory levels rose to $3.84 billion, reflecting increased agricultural equipment stockpiling.

Guidance, Outlook, and Risks

• Outlook: The Company forecasts worldwide equipment sales to decrease approximately 8% for fiscal year 2009. Net income is forecast to be about $1.5 billion for the year, with noted downside risk. The Company has suspended its practice of providing quarterly net income forecasts due to global economic uncertainty.
• Segment Forecasts:
  • Agricultural Equipment: Sales forecast to decrease ~2% for the year.
  • Commercial and Consumer: Sales forecast to decrease ~14% due to U.S. housing decline.
  • Construction and Forestry: Sales forecast to decrease ~24% due to low construction activity.
  • Credit: Net income forecast to be approximately $250 million for 2009.
• Risks and Contingencies:
  • Economic Conditions: Sharp downturn in global economic activity, financial market turmoil, and credit availability for customers and suppliers.
  • Currency: Significant fluctuations in foreign exchange rates, particularly the U.S. dollar.
  • Restructuring: Closure of the Welland, Ontario, Canada facility is expected to result in total expenses of $107 million, with $11 million recognized in Q1 2009.
  • Legal: Various unresolved legal actions regarding product liability, retail credit, and intellectual property, though management does not expect a material effect.

Investor Verification Checklist

• Liquidity Position: Verify the sustainability of the $5.0 billion cash position given the negative operating cash flow and reliance on financing activities.
• Inventory Levels: Assess the $3.84 billion inventory balance against the forecasted 8% sales decline to evaluate potential write-down risks.
• Debt Structure: Review the increase in short-term borrowings ($9.33 billion) and the reliance on securitization facilities and FDIC guarantees for liquidity.
• Credit Quality: Monitor the Credit segment's provision for credit losses and delinquency rates amidst the global recession.
• Restructuring Costs: Track the remaining $47 million in expected expenses related to the Welland plant closure.