Business context and reporting period
Deere & Company’s unaudited Form 10-Q covers the third quarter and first nine months of fiscal 2020, ended August 2, 2020. The comparable 2019 periods ended July 28, 2019; each quarter contained 13 weeks. Deere operates agriculture and turf, construction and forestry, and financial services businesses. Dollar amounts below are in millions unless stated otherwise.
Financial results and key metrics
- Third quarter: Net sales and revenues were $8,925, down 11% year over year; equipment net sales were $7,859, down 12%. Net income attributable to Deere was $811, down 10%, and diluted EPS was $2.57 versus $2.81. Pretax income rose to $1,270 from $1,113, but the income-tax provision increased to $457 from $221.
- First nine months: Net sales and revenues were $25,809, down 12%; equipment net sales were $22,612, down 14%. Net income attributable to Deere was $1,993, down 21%, and diluted EPS was $6.30 versus $7.87.
- Profitability: Third-quarter equipment cost of sales was 74.2% of net sales, compared with 76.6% a year earlier; the nine-month ratio was 76.1% versus 76.6%. Agriculture and turf operating margin increased to 16.6% from 10.3% in the quarter and to 13.1% from 11.0% year to date. Construction and forestry margin declined to 9.4% from 12.5% in the quarter and to 6.1% from 11.5% year to date.
- Segment results: Third-quarter agriculture and turf sales declined 5%, while operating profit increased 54% to $942. Construction and forestry sales declined 28% and operating profit fell 46% to $205. Financial services operating profit rose 19% to $243 for the quarter; for nine months it fell 12% to $498.
- Cash flow: Nine-month operating cash flow was $4,057, versus $404 in 2019. Investing activities used $1,517 and financing activities provided $1,724. Cash, cash equivalents, and restricted cash increased $4,344 to $8,300; balance-sheet cash and cash equivalents were $8,190 at quarter-end. Management attributed the cash build principally to added liquidity amid COVID-related uncertainty.
- Balance sheet and liquidity: Total assets were $77,264 and total stockholders’ equity was $12,891. Short-term borrowings were $9,075, short-term securitization borrowings $5,361, and long-term borrowings $34,037. Cash and marketable securities totaled $8,830. Worldwide credit lines were $8,487, of which $6,052 were unused; the company said revolving credit facilities were undrawn. Credit-agreement requirements were met.
- Debt by business: Equipment operations’ interest-bearing debt, excluding finance lease liabilities, was $11,056, with debt-to-capital of 46% versus 36% at November 3, 2019. Financial services’ external interest-bearing debt was $37,366, and its debt-to-equity ratio was 7.9-to-1.
Material changes versus the prior comparable period
- Lower equipment shipment volumes, particularly in construction, forestry, and roadbuilding, drove much of the sales decline. Price realization partly offset volume and unfavorable currency effects.
- Agriculture and turf operating profit improved despite lower sales, supported by price realization, lower selling and administrative costs, lower R&D and warranty expenses, and lower production costs year to date. Construction and forestry results weakened materially with lower volumes and mix, impairments, and separation-program costs.
- Financial services’ third-quarter profit benefited from lower interest expense, lower credit-loss provision, lower expenses, and reduced operating-lease residual losses. Nine-month profit was pressured by higher credit-loss provision, less favorable financing spreads, and lease residual losses and impairments.
- The financing-receivable credit-loss allowance increased to $200 from $150 at November 3, 2019. Deere cited COVID-related and other macroeconomic pressure, particularly among construction-equipment retail borrowers. Payment relief outstanding at August 2 covered about 4% of trade receivables, 5% of financing receivables, and 4% of operating leases.
Outlook, commentary, risks, and unusual items
- Market outlook: For fiscal 2020, management expected agricultural machinery industry sales to decline 5–10% in the U.S. and Canada and Europe, and 10–15% in South America; Asian sales were forecast to be slightly lower. U.S. and Canadian turf and utility sales were expected to decline about 5%. North American construction equipment sales were expected to fall about 20%, and global forestry sales 20–25%.
- Financial services outlook: Full-year results were expected to decline because of higher credit-loss provision and less favorable financing spreads, partly offset by lower operating-lease residual losses and impairments. The filing does not provide a clear consolidated full-year net-income or EPS forecast in the supplied text.
- Management commentary and strategy: Most factories operated during the third quarter, some at reduced capacity because of component shortages or lower demand. Management said expense-reduction actions had been effective and described the smart industrial operating model as intended to improve customer solutions and operating efficiency. The company would continue evaluating organizational design, product portfolio, and production footprint.
- Separation programs: The first-quarter voluntary program incurred about $138 pretax expense and was expected to yield about $85 in annual savings. Additional programs were expected to incur about $175 pretax expense and generate about $175 in annual savings. Total estimated annual savings from programs expected to be completed in 2020 were $260.
- Impairments and transactions: Third-quarter charges totaled $37 pretax and after tax, including $24 to write down the German walk-behind mower business under an agreement to sell it and $13 related to a China factory closure and severance. Second-quarter impairment charges included a $62 German asphalt-plant impairment, $32 related to operating-lease equipment and inventory, and a $20 minority investment impairment. A voluntary contribution of up to $700 to a U.S. OPEB plan was approved; Deere anticipated contributing $600 in the fourth quarter.
- Key risks: The filing emphasizes uncertainty around COVID’s duration and effects on customer demand, operations, suppliers, logistics, payment deferrals, used-equipment values, credit losses, and access to funding. Other cited risks include commodity and farm economics, trade and tariffs, foreign exchange, interest rates, capital-market conditions, and regulatory and supply-chain developments.
- Contingencies: Deere reported ordinary-course legal matters, including product liability, retail credit, employment, patent, and trademark claims, and said the reasonably possible loss range was not expected to materially affect the financial statements. An Argentina environmental fine was approximately $285,000; the company had not yet accessed administrative files to determine its response.
Most important facts for an investor to verify
- Whether the recovery in agriculture and turf operating profit can continue despite lower industry sales, and whether construction and forestry volumes and margins stabilize.
- Whether COVID-related payment relief converts into higher delinquencies, defaults, and credit-loss provisions; track the allowance, past-due balances, and receivables granted relief.
- Whether used-equipment prices and lease return rates recover or prompt further residual-value impairments.
- Whether announced separation savings are achieved and offset the related charges, and whether additional restructuring or footprint changes arise.
- How the planned $600 OPEB contribution, equipment-operations debt increase, and cash accumulation affect liquidity, leverage, and capital allocation.
- Whether the company issues updated full-year earnings guidance; this filing gives market-industry forecasts but no clear consolidated earnings forecast in the supplied text.