Business Context and Reporting Period
Company: DEERE & CO
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended April 30, 2007
Business Overview: Deere & Company operates primarily through Equipment Operations (agricultural, commercial/consumer, and construction/forestry equipment) and Financial Services (credit and financing). The company reported strong results in agricultural equipment driven by global commodity demand, while construction and forestry segments faced headwinds.
Key Financial Metrics
| Metric (in millions) | Q2 2007 | Q2 2006 | 6-Month 2007 | 6-Month 2006 |
|---|---|---|---|---|
| Net Sales and Revenues | $6,882.5 | $6,561.5 | $11,307.6 | $10,763.6 |
| Net Income | $623.6 | $744.6 | $862.3 | $980.5 |
| Income from Continuing Ops | $623.6 | $517.0 | $862.3 | $740.9 |
| Diluted EPS (Continuing Ops) | $2.72 | $2.17 | $3.76 | $3.11 |
| Operating Profit (Equipment Ops) | $829.0 | $786.0 | $1,099.0 | $1,047.0 |
| Cash and Cash Equivalents | $1,983.7 | $1,201.9 | $1,983.7 | $1,201.9 |
| Total Debt (Short + Long Term) | $21,085.3 | $19,064.3 | $21,085.3 | $19,064.3 |
Note: Net Income for 2006 includes significant gains from discontinued operations (sale of health care unit). Income from Continuing Operations is the primary metric for year-over-year operational comparison.
Material Changes vs. Prior Period
- Revenue Growth: Total net sales and revenues increased 5% year-over-year for both the quarter and six-month periods. Equipment net sales rose 4%.
- Profitability: Income from continuing operations increased 21% for the quarter and 16% for the six months, driven by improved price realization and higher agricultural volumes.
- Segment Performance:
- Agricultural Equipment: Sales up 14% (Q2) and 12% (6-month); Operating profit up 26% (Q2) and 27% (6-month).
- Construction & Forestry: Sales down 12% (Q2) and 10% (6-month); Operating profit down 30% due to lower volumes and higher raw material costs.
- Commercial & Consumer: Sales largely flat; Operating profit up 18% (Q2) and 29% (6-month) due to price realization and product mix.
- Cash Flow: Consolidated operating cash flow was negative $160 million for the six months ended April 30, 2007, compared to negative $1,393 million in the prior year. The improvement was driven by net income and tax accruals, though offset by seasonal increases in receivables and inventories.
- Discontinued Operations: The prior year included a $227.6 million gain from the sale of the health care operations, which is not present in the current period.
Guidance, Outlook, and Risks
- Full Year 2007 Outlook:
- Equipment Sales: Forecast to increase approximately 6% for the fiscal year.
- Net Income: Forecast to be around $1.55 billion for the year.
- Q3 Net Income: Forecast in the range of $400 million to $425 million.
- Credit Operations: Net income forecast at approximately $355 million for the year.
- Market Conditions:
- Agriculture: Strong global demand for commodities and renewable fuels supports sales. South America expected to grow 20%; Australia expected to decline 20% due to drought.
- Construction: U.S. markets remain under pressure due to the housing market; worldwide sales forecast to decrease 11%.
- Risks and Contingencies:
- Raw Materials: Rising costs of steel and rubber impact margins.
- Regulatory: Compliance with increasingly stringent global emissions regulations for off-road diesel engines requires significant investment.
- Legal: Unresolved legal actions regarding product liability (including asbestos), retail credit, and intellectual property are ongoing, though management does not expect a material effect.
- Guarantees: Approximately $190 million in guarantees issued to banks for third-party receivables; maximum exposure for crop insurance uncollected premiums is $79 million.
Investor Verification Checklist
- Continuing vs. Discontinued Ops: Verify that year-over-year comparisons exclude the one-time gain from the 2006 sale of the health care unit to assess true operational growth.
- Seasonality of Cash Flow: Confirm that negative operating cash flow is consistent with seasonal inventory and receivable build-up typical for the first half of the fiscal year.
- Debt Levels: Review the increase in total debt (Short-term borrowings rose to $9.8 billion) and ensure it aligns with the growth in the credit portfolio and seasonal financing needs.
- Raw Material Costs: Monitor the impact of rising steel and rubber prices on the cost of sales ratio, which improved slightly to 75.1% in Q2 but remains a key margin risk.
- Acquisition Integration: Track the integration and revenue contribution of the LESCO acquisition (completed May 2007) to the Commercial and Consumer segment.