Deere & Company — Q3 FY2019 Form 10-Q
Reporting period: Three and nine months ended July 28, 2019; comparative periods ended July 29, 2018. Dollar amounts are in millions unless stated otherwise.
Business context and reporting period
Deere manufactures and sells agricultural, turf, construction, road-building and forestry equipment, and provides equipment financing and related services. The filing reports three operating segments: Agriculture and Turf; Construction and Forestry; and Financial Services. Both third-quarter periods contained 13 weeks.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | First 9 months 2019 | First 9 months 2018 |
|---|---|---|---|---|
| Total net sales and revenues | $10,036 | $10,308 | $29,362 | $27,942 |
| Equipment net sales | $8,969 | $9,286 | $26,182 | $25,007 |
| Net income attributable to Deere | $899 | $910 | $2,532 | $1,584 |
| Diluted EPS | $2.81 | $2.78 | $7.87 | $4.82 |
| Operating cash flow | Not stated separately for quarter | Not stated separately for quarter | $404 | $(672) |
Q3 consolidated net income was approximately 9.0% of revenue, versus 8.8% a year earlier. Equipment cost of sales was 76.6% of equipment net sales, compared with 77.0%. Segment operating margins in Q3 were 10.3% for Agriculture and Turf (12.8% prior year) and 12.5% for Construction and Forestry (9.4% prior year).
At July 28, 2019, cash and cash equivalents were $3,383 and marketable securities were $565. Balance-sheet borrowings were $11,142 short-term, $5,048 short-term securitization borrowings and $29,242 long-term. Total liabilities were $61,246 and stockholders’ equity was $12,270. Worldwide credit lines totaled $8,543, of which $5,332 was unused; management stated it expected sufficient global funding and liquidity.
Material changes versus prior periods
- Q3 revenue declined 3% and Deere-attributable net income declined 1%, while diluted EPS increased to $2.81 from $2.78, partly reflecting fewer average shares.
- For the first nine months, revenue increased 5% and Deere-attributable net income rose 60%. The comparison was strongly affected by tax items: 2019 net income benefited by $27 from discrete tax adjustments, while 2018 included $741 of discrete tax expense.
- Agriculture and Turf Q3 sales fell 6% and operating profit fell 24%, reflecting lower volumes, higher production costs and unfavorable currency effects. Construction and Forestry sales rose 1% and operating profit rose 35%; Wirtgen contributed materially to year-to-date growth.
- Financial Services revenue increased 10% year to date, but operating profit declined 4%. Higher portfolio income was offset by less favorable financing spreads and greater operating-lease residual-value losses.
- Nine-month operating cash flow improved to $404 from an outflow of $672. Investing cash outflow was $2,129, versus $6,493, which included the prior-year Wirtgen acquisition. Balance-sheet borrowings increased from $42,256 at October 28, 2018 to $45,432 at July 28, 2019.
Outlook, commentary, risks and unusual items
- Management projected FY2019 equipment sales to increase about 4%, total net sales and revenues about 5%, and Deere-attributable net income of about $3.2 billion. The equipment-sales outlook included a roughly 2% unfavorable currency effect and a contribution from Wirtgen’s additional months.
- FY2019 Agriculture and Turf sales were forecast to rise about 2%; Construction and Forestry sales about 10%; Financial Services net income attributable to Deere was expected to be approximately $620.
- Management cited farmer caution related to export-market access, commodity demand and crop conditions, leading to postponed major equipment purchases. Construction and forestry conditions were described as generally positive. Risks include trade policy and tariffs, commodity and currency volatility, used-equipment values and lease residuals, credit losses, funding conditions and geopolitical or regulatory developments.
- In August 2019, a board committee approved a voluntary contribution of up to $500 to a U.S. postretirement-benefit plan; management anticipated a $300 contribution in Q4. It also expected an additional $340 of OPEB contributions and $20 of pension contributions during the remainder of FY2019.
- Unrecognized tax benefits were $630, up from $279 at October 28, 2018, primarily related to interpretation of repatriation-tax regulations. Management did not expect a significant reasonably possible change over the next 12 months.
- The company reported approximately $325 of equipment-financing guarantees, with $14 accrued losses, and $452 of commitments for property and equipment. It said reasonably possible losses from unresolved legal actions were not expected to materially affect the financial statements. A groundwater-contamination notice in Argentina remained subject to corrective actions; the company had paid a Brazil environmental fine of approximately $120,000.
Important facts for investors to verify
- Whether the FY2019 earnings and segment-sales outlook was achieved, and how much results depended on tax adjustments and Wirtgen’s contribution.
- Trends in Agriculture and Turf shipment volumes, production costs and margins, given weaker Q3 results and customer caution.
- Financial Services credit quality, delinquency trends, financing spreads, residual-value losses and its debt-to-equity ratio, reported at 8.0 to 1.
- Funding, liquidity and debt developments, including the increase in borrowings and the availability and terms of unused credit facilities.
- The timing and cash impact of the planned OPEB contribution, and any material developments in tax exposures, guarantees or legal contingencies.