Deere & Company — Q1 Fiscal 2020 Form 10-Q
Business context and period. The unaudited first quarter ended February 2, 2020, and covered 13 weeks; comparisons are with the 13 weeks ended January 27, 2019. Deere reports Agriculture and Turf, Construction and Forestry, and Financial Services. Unless stated otherwise, amounts are in millions of dollars.
Financial results and liquidity
- Revenue: Net sales were $6,530, down 6%; total net sales and revenues were $7,631, down 4%. Finance and interest income rose to $896 from $815.
- Profit: Net income attributable to Deere & Company was $517, up 4%; diluted EPS was $1.63 versus $1.54. Pretax income fell to $569 from $677, while income tax provision declined to $50 from $184, principally due to discrete tax benefits.
- Margins: Cost of sales was 77.7% of net sales versus 78.3%. Agriculture and Turf operating margin was 8.3% versus 7.4%; Construction and Forestry was 4.5% versus 10.1%.
- Segment operating profit: Agriculture and Turf was $373, up 7%; Construction and Forestry was $93, down 59%; Financial Services was $179, down 7%. Equipment operations operating profit overall fell 19% to $466. Financial Services net income declined 11% to $137.
- Cash flow: Operating activities used $508, compared with $1,651 used a year earlier. Investing activities provided $1,026 and financing activities used $763. Cash, cash equivalents, and restricted cash decreased $246 to $3,710.
- Balance sheet and debt: At February 2, total assets were $71,821 and stockholders’ equity was $11,930. Cash and marketable securities totaled $4,211. Short- and long-term borrowings were $40,483, excluding $4,416 of short-term securitization borrowings. Financial Services external interest-bearing debt was $38,343; Equipment Operations interest-bearing debt was $6,556.
- Funding access: Worldwide credit lines totaled $8,484, of which $5,692 were unused. The company reported compliance with its credit-agreement requirements. The filing states that it expects sufficient global funding and liquidity.
Material changes and management commentary
- Worldwide equipment sales declined amid lower shipment volumes; price realization partly offset the decline. Agriculture and Turf profit improved on pricing, production costs, and lower warranty expense, while Construction and Forestry was pressured by lower volumes and mix, slower construction activity, and inventory-reduction efforts.
- Financial Services profit was affected by higher lease residual-value losses, a higher credit-loss provision, and increased selling and administrative expenses. Its average financed receivables and leases were 7% higher year over year.
- Deere recorded $127 of the estimated $136 pretax cost of a voluntary U.S. salaried employee-separation program in Q1; most payments were substantially made during the quarter. Estimated annual savings are about $85, including about $65 in fiscal 2020.
- The reported quarter’s tax provision included a $43 benefit from a tax-status change involving foreign subsidiaries and a $24 benefit from share-based compensation tax benefits.
- The company adopted the new lease accounting standard. Adoption added recognized lease assets and liabilities but did not materially affect operating results or cash flows.
Outlook, risks, and contingencies
- Fiscal 2020 net income attributable to Deere & Company was forecast at $2,700–$3,100. Financial Services net income was forecast at approximately $600.
- Management forecast Agriculture and Turf sales down 5%–10% and Construction and Forestry sales down 10%–15% for fiscal 2020. Construction and Forestry guidance reflected slowing activity and efforts to reduce field inventories.
- Management cited trade and geopolitical uncertainty, foreign-exchange and commodity volatility, capital-market conditions, used-equipment demand and pricing, and epidemics—including coronavirus—as risks. Other disclosed exposures include customer credit quality, lease residual values, supply-chain and production constraints, regulation, and cybersecurity.
- Commitments and contingencies included $360 of guarantees primarily related to third-party equipment financing, $264 of commitments for property and equipment, and unresolved legal matters. Deere said the reasonably possible losses from unresolved legal actions were not expected to materially affect its financial statements. An Argentina environmental fine of approximately $328,000 was disclosed; Deere was determining its response.
- Deere expected approximately $1,100 of fiscal 2020 Equipment Operations capital expenditures. A proposed acquisition of Brazilian aftermarket parts company Unimil, for an expected R$375 million (about $90), remained subject to customary regulatory approval.
Most important facts for investors to verify
- Whether the forecast earnings range and segment sales outlook remain achievable as agricultural and construction markets evolve.
- Whether Construction and Forestry profitability stabilizes and field-inventory reductions proceed as planned.
- How credit losses, past-due receivables, used-equipment prices, and lease residual values develop in Financial Services.
- Whether the $127 separation-program charge yields the stated savings, and how much of the earnings increase reflects the quarter’s discrete tax benefits.
- Whether seasonal working-capital needs and the financing subsidiary’s borrowing requirements remain manageable, including access to credit markets and compliance with credit covenants.