Business Context and Reporting Period
Company: DEERE & CO
Filing Type: Form 10-Q (Unaudited)
Period Ended: April 30, 2006 (Second Quarter of Fiscal Year 2006)
Business Overview: The Company manufactures and distributes agricultural, commercial, consumer, construction, and forestry equipment. It also provides financial services (credit and leasing) to support equipment sales. The Company recently sold its health care operations, which are now reported as discontinued operations.
Key Financial Metrics
Revenue (Three Months Ended April 30, 2006):
- Total Net Sales and Revenues: $6,561.5 million (vs. $6,440.8 million in 2005)
- Net Sales (Equipment): $6,029.0 million
- Finance and Interest Income: $416.9 million
- Net Income: $744.6 million ($3.13 diluted EPS)
- Income from Continuing Operations: $517.0 million ($2.17 diluted EPS)
- Income from Discontinued Operations: $227.6 million (primarily gain on sale of health care business)
- Operating Profit (Equipment Operations): $786 million
- Net Cash Used for Operating Activities: $(1,392.9) million
- Net Cash Provided by Investing Activities: $453.3 million
- Net Cash Used for Financing Activities: $(128.6) million
- Cash and Cash Equivalents (End of Period): $1,201.9 million
- Total Assets: $34,094.8 million
- Total Liabilities: $26,534.5 million
- Stockholders' Equity: $7,560.3 million
- Short-term Borrowings: $7,584.5 million
- Long-term Borrowings: $11,479.8 million
Material Changes vs. Prior Period
Revenue and Profit:
- Net income increased 23% year-over-year to $744.6 million, driven largely by a $227.6 million gain from discontinued operations (sale of health care business).
- Income from continuing operations decreased 14% to $517.0 million due to lower manufacturing volumes, higher raw material costs, and a $44.2 million after-tax charge for debt repurchases.
- Equipment sales were flat (+0.2%) for the quarter but up 2% for the six-month period.
- Agricultural Equipment: Sales down 7%; Operating profit down 21% due to lower shipments and production inefficiencies.
- Commercial and Consumer: Sales up 7%; Operating profit down 6% due to raw material costs.
- Construction and Forestry: Sales up 10%; Operating profit up 18% driven by increased shipments and price realization.
- Credit: Operating profit up 14% due to portfolio growth, though financing spreads narrowed.
- Trade receivables increased significantly to $4,400.6 million (seasonal).
- Financing receivables increased to $13,082.9 million.
- Cash and cash equivalents decreased by $1,056.3 million over the six-month period.
Guidance, Outlook, and Risks
Management Outlook (Fiscal 2006):
- Net Income: Forecast to be approximately $1.7 billion for the full year.
- Third Quarter Net Income: Forecast in the range of $400 million to $425 million.
- Equipment Sales: Projected to increase 3% to 5% for the full year.
- Production: Expected to be down about 5% for the year to manage inventory levels.
- Credit Operations: Net income forecast at approximately $335 million.
- Raw Materials: Rising costs for steel and other commodities impact margins.
- Market Conditions: Agricultural sales face headwinds from high input costs (fuel/fertilizer) and potential crop issues (Asian rust, aphids). Construction markets depend on housing starts and public spending.
- Restructuring: Closure of a forestry facility in Canada is expected to result in total pretax expenses of approximately $55 million.
- Debt Repurchase: A $500 million tender offer resulted in a $70 million pretax expense.
- Accounting Changes: Adoption of FASB 123(R) resulted in an additional $53 million pretax expense for share-based compensation in the first six months.
Investor Verification Checklist
- Discontinued Operations Impact: Verify the sustainability of earnings by excluding the $227.6 million one-time gain from the sale of the health care business.
- Continuing Operations Decline: Analyze the 14% drop in continuing operations income, specifically the impact of lower production volumes and raw material inflation.
- Cash Flow Usage: Review the $1.39 billion net cash used in operating activities, driven by increases in receivables and inventory and pension contributions.
- Debt Levels: Confirm the total interest-bearing debt position ($19+ billion) and the impact of the recent $500 million debt repurchase on future interest expenses.
- Segment Mix: Assess the divergence between the declining Agricultural segment and the growing Construction/Forestry and Credit segments.
- Restructuring Costs: Monitor the execution of the Canadian facility closure and associated $55 million expense estimate.