Deere & Company — Form 10-Q Summary
Business context and reporting period. This unaudited filing covers the quarter and nine months ended July 31, 2010. Deere reports equipment operations—agriculture and turf, and construction and forestry—and Financial Services, which provides equipment financing and related services. Comparisons are with the corresponding 2009 periods unless noted.
Financial performance
| Metric | Three months ended July 31 | Nine months ended July 31 |
|---|---|---|
| Total net sales and revenues | $6.837 billion, up 16% | $18.803 billion, up 6% |
| Net sales, equipment operations | $6.224 billion, up 18% | $17.010 billion, up 6% |
| Net income attributable to Deere | $617 million, versus $420 million | $1.408 billion, versus $1.096 billion |
| Diluted earnings per share | $1.44, versus $0.99 | $3.28, versus $2.59 |
| Operating cash flow | Nine-month amount: $1.088 billion, versus $483 million |
Margins and segments. Cost of sales was 72.6% of net sales in the quarter and 73.4% year to date, compared with 76.8% and 77.1%, respectively, in 2009. Equipment Operations operating profit was $890 million for the quarter and $2.193 billion year to date. Agriculture and turf operating profit was $824 million for the quarter; construction and forestry earned $66 million, compared with a year-earlier loss of $28 million. Credit operating profit was $138 million, versus $95 million.
Balance sheet and liquidity. At July 31, cash and cash equivalents were $3.754 billion; cash plus marketable securities totaled $3.986 billion. Total assets were $41.810 billion and stockholders’ equity was $6.126 billion. Short- and long-term borrowings totaled $23.860 billion; this consolidated figure includes Financial Services funding debt. Cash declined $898 million during the first nine months. Deere reported $5.256 billion in worldwide credit lines, of which $4.145 billion was unused, and said it expected adequate funding and liquidity.
Changes versus prior periods
- Quarterly revenue and earnings rose, supported by higher equipment shipment and production volumes and improved price realization. Construction and forestry returned to operating profitability.
- Year-to-date equipment sales benefited from price increases, favorable currency translation, and stronger construction and forestry demand; lower raw-material costs also supported results. Higher postretirement benefit costs partly offset these gains.
- Financial Services quarterly income attributable to Deere was $102 million, unchanged year over year; its nine-month income rose to $274 million from $218 million, mainly from improved financing spreads and lower credit-loss provisions.
- Receivables and inventories used cash: nine-month operating cash flow included increases of $1.169 billion in trade, notes and financing receivables related to sales and $1.068 billion in inventories. Cash outflows from investing and financing activities were $1.016 billion and $923 million, respectively.
- Equipment Operations debt was $3.274 billion, versus $3.563 billion at October 31, 2009. Financial Services external interest-bearing debt was $20.586 billion, versus $20.988 billion at October 31, 2009 and $22.371 billion a year earlier.
Outlook, commentary and risks
- Management forecast fiscal 2010 equipment sales up about 12%, with fourth-quarter sales up about 32% year over year; forecast fourth-quarter net income attributable to Deere was approximately $375 million.
- Fiscal-year segment sales forecasts were approximately 8% growth for agriculture and turf, including about 2% favorable currency translation, and approximately 35% growth for construction and forestry. Financial Services income attributable to Deere was forecast at approximately $325 million.
- Management cited healthy farm cash receipts, solid commodity prices and low interest rates in North America, while noting weakness in Western Europe and continuing pressure in parts of Central Europe and the Commonwealth of Independent States. Construction and forestry demand had improved but remained below normal levels.
- Risks highlighted include global economic and sovereign-debt conditions, customer and supplier access to credit, currency and commodity-price volatility, component availability and supply constraints, regulatory and emissions requirements, and changes in customer demand, credit delinquencies and defaults.
- The 2010 tax expense included an approximately $130 million year-to-date charge related to U.S. health-care legislation affecting the tax treatment of future retiree drug costs. Deere also disclosed a strategic review of its wind-energy entities with a financial advisor.
- Contingencies include $162 million of guarantees on certain third-party equipment financing, a maximum $159 million exposure for uncollected crop-insurance premiums, and a stated potential exposure of approximately $901 million in a combined catastrophic-crop-failure and reinsurer-default scenario. Management considered that scenario remote. The company said unresolved legal actions were not expected to have a material effect.
Key facts for investors to verify
- Whether equipment-sales growth and the stated fourth-quarter earnings outlook were achieved, and how much growth came from volume, pricing and currency.
- Credit quality, delinquencies, defaults and provisions for credit losses as Financial Services receivables and leases expanded.
- Cash conversion and seasonal inventory and receivables needs, alongside the composition and refinancing requirements of Financial Services debt and securitizations.
- The effect of the health-care-related tax charge, pension and postretirement costs, and wind-energy strategic options on subsequent results.
- The scope and possible outcomes of disclosed guarantees, crop-insurance exposures, legal matters and other contingencies.