Business Context and Reporting Period
Company: Deere & Company
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three months ended January 31, 2008
Business Overview: Deere & Company operates through two primary segments: Equipment Operations (agricultural, commercial/consumer, and construction/forestry equipment) and Financial Services (credit and risk mitigation products). The company reported strong performance in agricultural equipment driven by global farm sector conditions, while construction and forestry faced headwinds from the U.S. housing market.
Key Financial Metrics
| Metric (in millions, except per share) | Q1 2008 | Q1 2007 |
|---|---|---|
| Net Sales and Revenues | $5,201.0 | $4,425.2 |
| Net Income | $369.1 | $238.7 |
| Diluted Earnings Per Share | $0.83 | $0.52 |
| Operating Profit (Total) | $593.0 | $404.0 |
| Net Cash Used in Operating Activities | ($825.0) | ($686.0) |
| Cash and Cash Equivalents (Ending) | $1,496.3 | $1,341.1 |
| Total Assets | $38,215.3 | $34,147.1 |
| Total Liabilities | $31,176.9 | $26,571.2 |
| Stockholders' Equity | $7,038.4 | $7,575.9 |
Segment Performance (Operating Profit):
- Agricultural Equipment: $332.0 million (up 142% vs. prior year)
- Commercial and Consumer Equipment: $8.0 million (down 79% vs. prior year)
- Construction and Forestry: $117.0 million (up 23% vs. prior year)
- Credit: $133.0 million (up 1% vs. prior year)
Material Changes vs. Prior Period
- Revenue Growth: Total net sales and revenues increased 18% to $5.2 billion, driven by a 33% surge in agricultural equipment sales and a 16% increase in commercial/consumer equipment. Construction and forestry sales declined 6%.
- Profitability: Net income rose 54% to $369.1 million. Equipment Operations operating profit increased significantly due to higher volumes and improved price realization, partially offset by higher raw material costs and selling expenses.
- Cash Flow: Operating cash flow was negative $825 million, primarily due to a seasonal inventory build-up of $1.01 billion to meet demand, a decrease in accounts payable, and retirement benefit contributions. This compares to negative $686 million in the prior year.
- Balance Sheet: Inventories increased to $3.29 billion from $2.48 billion a year ago. Total debt (short-term and long-term borrowings) increased to $21.8 billion from $19.6 billion a year ago, reflecting growth in the credit portfolio.
- Accounting Change: Adoption of FASB Interpretation No. 48 (Accounting for Uncertainty in Income Taxes) resulted in a $48 million reduction to beginning retained earnings and a $170 million increase in liability for unrecognized tax benefits.
Guidance, Outlook, and Risks
Management Outlook:
- Full Year 2008: Equipment sales projected to increase ~17%. Net income forecast at approximately $2.2 billion.
- Q2 2008: Equipment sales expected to rise ~23%. Net income forecast in the range of $700 million to $725 million.
- Segment Forecasts: Agricultural equipment sales expected to rise 28% for the year. Commercial/consumer sales up 8%. Construction/forestry sales expected to be flat. Credit operations net income forecast at $365 million.
Key Risks and Contingencies:
- Economic Conditions: Continued pressure in the U.S. housing market negatively impacts construction and forestry demand. Global economic conditions and consumer confidence affect commercial equipment sales.
- Supply Chain: Raw material prices and supply constraints remain a concern. Compliance with increasingly stringent global emissions regulations requires significant investment.
- Geopolitical/Regulatory: Uncertainty regarding U.S. farm legislation and government-sponsored financing programs in Brazil. Potential impact of drought conditions in the southeastern U.S.
- Credit Risk: Exposure to sub-prime credit market crises and customer loan delinquencies, though the company maintains a strong credit rating (A2/Prime-1 by Moody's, A/A-1 by S&P).
Investor Verification Checklist
- Inventory Levels: Verify the sustainability of the $952 million inventory increase and its impact on future working capital needs.
- Raw Material Costs: Monitor the impact of rising steel and other commodity costs on gross margins, particularly in the Equipment Operations segment.
- Construction Sector Exposure: Assess the duration of the U.S. housing slump and its specific impact on the Construction and Forestry segment's sales volume.
- FIN 48 Impact: Review the $207 million liability for unrecognized tax benefits and potential future adjustments to the effective tax rate.
- Credit Portfolio Quality: Monitor the provision for credit losses and delinquency rates within the Financial Services segment amidst broader credit market volatility.
- Share Repurchases: Note the $481.5 million spent on stock repurchases in Q1 and the remaining capacity under the current program ($29.1 million remaining).