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Business Context and Reporting Period

Company: DEERE & CO
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and nine months ended July 31, 2002
Filing Date: September 10, 2002
Business Overview: Deere & Company operates in Agricultural Equipment, Commercial and Consumer Equipment, Construction and Forestry, and Financial Services (Credit and Health Care). The company reported strong third-quarter results driven by overseas agricultural sales and expense control, despite weak North American markets.

Key Financial Metrics

Note: Debt figures represent the sum of Short-term borrowings and Long-term borrowings from the Consolidated Balance Sheet.

Material Changes vs. Prior Period

• Revenue Growth: Total net sales and revenues increased 10% in Q3 2002 and 3% for the nine-month period compared to the prior year. Overseas sales surged 41% in the quarter, primarily driven by agricultural equipment in Europe.
• Profitability Surge: Q3 Net Income more than doubled to $147.6 million from $71.8 million. Operating profit increased 72% to $343 million. This was driven by higher overseas sales, improved price realization, and the elimination of losses from the sold Homelite consumer products business.
• Cash Flow Improvement: Operating cash flow for the nine months turned positive at $678.6 million, a significant improvement from a negative $217.0 million in the prior year, due to better working capital management and higher dividends from Financial Services.
• Segment Performance:
  • Agricultural Equipment: Operating profit up 78% in Q3.
  • Commercial & Consumer: Operating profit up 281% in Q3.
  • Construction & Forestry: Reported an operating loss of $10 million in Q3 (vs. $11 million profit prior year) due to lower volumes and Nortrax investment costs.
  • Credit: Operating profit increased 38% in Q3 due to income on trade receivables.
• Restructuring Costs: The company recognized $58 million in restructuring costs during the first nine months of 2002 related to facility closures and employee terminations.

Guidance, Outlook, and Risks

Management Commentary and Outlook

• Q4 Forecast: Net equipment sales for the fourth quarter are forecast to be up 8% to 10% year-over-year. Total company results for the seasonally weak fourth quarter are expected to be approximately breakeven.
• Market Conditions:
  • Agricultural: U.S. and Canada retail sales expected to be flat to down 5% for the year due to dry weather. Western Europe sales expected to be up 5%.
  • Commercial & Consumer: Shipments projected flat to up 5% for 2002.
  • Construction & Forestry: U.S. and Canada industry retail sales expected to be down 10% to 15%.
  • Credit: Full-year net income expected in the range of $220 million to $240 million.

Risks and Contingencies

• Minimum Pension Liability: Due to declining equity markets, the company expects to record a non-cash adjustment at year-end that would decrease stockholders' equity by approximately $610 million after-tax. This will not affect net income.
• Credit Ratings: Standard & Poor's lowered the senior long-term rating to "A-" and short-term to "A-2" in May 2002. Moody's lowered ratings to "A3" and "Prime-2" in February 2002. Management states liquidity remains sufficient despite rating changes.
• Legal Proceedings: Subject to various unresolved legal actions including product liability (asbestos), credit matters, and intellectual property. Management does not believe these will have a material effect.
• Argentina Exposure: Losses incurred in Argentina related to peso devaluation negatively impacted results.

Investor Verification Checklist

• Overseas Sales Sustainability: Verify the durability of the 41% overseas sales increase, particularly in Europe, given the reliance on new product introductions.
• Pension Liability Impact: Confirm the exact magnitude of the year-end minimum pension liability adjustment and its impact on the balance sheet and equity ratios.
• Construction Segment Turnaround: Monitor the Construction and Forestry segment for continued losses and the impact of the Nortrax investment.
• Credit Quality: Review the provision for bad debts in the Financial Services segment, which increased in the quarter, and the impact of the trade receivable transfer from Equipment Operations.
• Restructuring Execution: Track the execution of the $58 million in restructuring costs and the associated employee terminations to ensure cost savings are realized.