DEERE & CO quarterly report, Q3 FY2009

Deere & Company — Q3 2009 Form 10-Q

Reporting period: Fiscal quarter and nine months ended July 31, 2009. Interim financial statements are unaudited. Deere manufactures agricultural, turf, construction and forestry equipment and provides equipment financing and related services.

Financial performance and position

Metric	Q3 2009	Q3 2008	Nine months 2009	Nine months 2008
Total sales and revenues	$5.885 billion	$7.739 billion	$17.778 billion	$21.036 billion
Net income	$420 million	$575 million	$1.096 billion	$1.708 billion
Diluted earnings per share	$0.99	$1.32	$2.59	$3.89
Operating profit, segments	$552 million	$934 million	$1.602 billion	$2.765 billion

Worldwide equipment net sales fell 25% in the quarter and 16% year to date. Total revenues declined 24% and 15%, respectively; net income declined 27% and 36%.
Equipment Operations operating profit was $452 million for Q3 and $1.387 billion year to date, down from $818 million and $2.377 billion. Construction and Forestry recorded operating losses of $28 million in Q3 and $85 million year to date. Agriculture and Turf operating profit was $480 million and $1.472 billion, respectively.
Financial Services net income was $102.1 million in Q3, up from $83.4 million, but $217.8 million year to date, down from $267.5 million. Credit-loss provisions, narrower financing spreads and lower crop-insurance commissions weighed on results; Q3 benefited from wind-energy investment tax credits and foreign-exchange gains.
Cost of sales was 76.8% of net sales in Q3 versus 76.7%; year to date it was 77.1% versus 74.9%. Lower shipment and production volumes and currency effects pressured performance; improved pricing and lower selling, administrative and general expenses partly offset them.
Net cash provided by operating activities was $483 million for the first nine months, versus $943 million. Investing activities provided $484 million, compared with $383 million used; financing activities provided $1.100 billion, versus $93 million used. Cash increased $2.103 billion to $4.315 billion.
At July 31, cash and marketable securities totaled about $4.496 billion. Short-term borrowings were $8.048 billion and long-term borrowings $16.721 billion. Total liabilities were $33.963 billion; stockholders’ equity was $7.424 billion.
Worldwide credit lines totaled $4.741 billion, of which $4.006 billion was unused. Management said liquidity sources were expected to be sufficient for funding needs. Commercial paper outstanding was about $0.5 billion, down from $3.0 billion at October 31, 2008.

Material changes and management commentary

Equipment demand weakened sharply, particularly in Construction and Forestry and markets outside the U.S. and Canada. Equipment sales outside the U.S. and Canada fell 37% in Q3 and 26% year to date; unfavorable currency translation affected results.
Financial Services credit-loss provision for doubtful receivables was $138.7 million year to date, versus $65.1 million. Credit operations’ external interest-bearing debt reached $22.371 billion, including $3.712 billion of secured borrowings related to securitizations.
Deere combined its agricultural equipment and commercial and consumer equipment organizations into Agriculture and Turf at the start of Q3. Voluntary separations produced $16 million of Q3 pretax charges; approximately $85 million of charges were expected in Q4, with estimated annual savings of $50–$60 million in 2010.
The planned Welland, Ontario facility closure was expected to generate total pretax expenses of $97 million, including $17 million recognized in the first nine months of 2009 and $31 million expected in the remainder. Estimated future annual earnings and cash-flow improvement was about $40 million.

Outlook, risks and contingencies

For fiscal 2009, management projected equipment sales down about 21%, including a negative currency effect of about 4%, and net income of approximately $1.1 billion. Fourth-quarter equipment sales were projected down about 34% year over year, with significant production cutbacks and rationalization costs.
Agriculture and Turf sales were forecast to decline about 15% for the year; Construction and Forestry sales about 47%. Credit operations net income was forecast at approximately $270 million.
Management cited the global downturn and slow recovery, financial-market disruption and funding access, customer credit availability and defaults, supplier liquidity, currency and commodity volatility, and component availability as important risks. Farm demand also depends on commodity prices, yields, weather and government policies; construction demand is sensitive to housing and public and non-residential construction.
Potential exposures include approximately $160 million of equipment-retail financing guarantees, a maximum $179 million exposure for uncollected crop-insurance premiums, and approximately $915 million of contingent exposure in the remote scenario of widespread U.S. crop failure combined with reinsurer default. The filing says the latter likelihood is substantially remote. Unresolved legal actions were not expected to materially affect consolidated financial statements.
Warranty liability was $773 million at July 31, 2009. The company also reported $248 million of property and equipment commitments. It stated that credit-agreement requirements were met and disclosure controls were effective.

Most important facts for investors to verify

Whether full-year sales and approximately $1.1 billion net-income projections were achieved, given further expected Q4 declines and production cuts.
Whether credit losses, financing spreads and funding access stabilized, particularly as securitized borrowings and Financial Services debt increased.
Whether restructuring charges remained within estimates and the projected 2010 savings were realized.
Whether operating cash flow improved from the year-to-date $483 million and whether liquidity remained adequate amid ongoing market stress.
Whether contingent exposures, warranty costs and customer or supplier credit risks changed materially after the quarter.