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Business Context and Reporting Period

Company: Deere & Company
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: April 30, 2003
Business Overview: The Company operates in two primary segments: Equipment Operations (agricultural, commercial/consumer, and construction/forestry equipment) and Financial Services (credit and health care operations). The report covers the second quarter and first six months of fiscal year 2003.

Key Financial Metrics

Note: Total Debt calculated as Short-term borrowings ($5,056.9M) + Long-term borrowings ($10,412.5M) as of April 30, 2003.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 13% in Q2 and 15% year-to-date (YTD) compared to the prior year, driven by higher physical volumes across all equipment segments and favorable currency exchange rates.
• Profitability Surge: Net income increased 81% in Q2 and 213% YTD. This was significantly aided by the adoption of FASB Statement No. 142, which eliminated goodwill amortization (saving $14M pretax in Q2 and $28M YTD).
• Segment Performance:
  • Construction & Forestry: Turned from an operating loss of $22M in Q2 2002 to a profit of $35M in Q2 2003.
  • Commercial & Consumer: Operating profit rose 38% in Q2 due to strong demand for new products.
  • Agricultural: Profits increased despite a weak domestic U.S./Canada market, supported by strong overseas sales.
• Cash Flow: Consolidated operating cash flow was negative $892.8M for the six months ended April 30, 2003, primarily due to a seasonal increase in inventories and significant contributions to employee benefit plans ($475M).

Guidance, Outlook, and Risks

Management Guidance

• Q3 2003 Forecast: Net equipment sales expected to be up ~5% (based on current exchange rates). Net income forecast range: $175M - $225M.
• Full Year 2003 Forecast: Equipment sales expected to be up 6-8%. Net income forecast range: $500M - $600M.
• Segment Outlook:
  • Agricultural: Worldwide sales forecast up 4-6% for the year; U.S./Canada retail sales expected down ~5%.
  • Commercial & Consumer: Sales expected up 13-15% for the year.
  • Construction: Sales expected up ~7% for the year (including Hitachi sales).
  • Credit: Net income expected to be about $300M for the year.

Risks and Contingencies

• Credit Ratings: Standard & Poor's placed the Company's senior long-term ratings on "CreditWatch with negative implications" on April 14, 2003. Moody's and Fitch maintain "Stable" or "Negative" outlooks.
• Guarantees: The Company has recourse obligations on sold financing receivables with a maximum exposure of $178M. Additionally, there are put options from minority owners in unconsolidated affiliates totaling $170M-$250M, exercisable if credit ratings fall below Baa3/BBB-.
• Legal: Subject to various unresolved legal actions including product liability (asbestos), retail credit, and intellectual property matters, though management does not expect a material effect.
• Market Risks: Exposure to global economic conditions, currency exchange rates, commodity prices, and interest rate fluctuations.

Investor Verification Checklist

• Goodwill Accounting Impact: Verify the specific contribution of the cessation of goodwill amortization (FASB 142) to the reported net income increase.
• Cash Flow vs. Net Income: Investigate the significant divergence between strong net income ($324.9M) and negative operating cash flow ($892.8M), specifically regarding inventory buildup and pension contributions.
• Credit Rating Status: Monitor the outcome of the Standard & Poor's "CreditWatch" review and its potential impact on borrowing costs and the exercise of put options by minority affiliates.
• Inventory Levels: Review the $635M increase in inventories to ensure it aligns with seasonal demand and does not indicate future write-down risks.
• Overseas Exposure: Assess the reliance on foreign exchange rates for sales growth, as organic volume growth in key regions (U.S./Canada agriculture) is forecast to be negative.