DEERE & CO quarterly report, Q2 FY2019

Deere & Company — Q2 FY2019 Form 10-Q

Reporting period: Three and six months ended April 28, 2019; each second quarter comprised 13 weeks. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.

Business context and results

Deere manufactures and sells agricultural, turf, construction, road-building and forestry equipment, and provides equipment financing and related services. In Q2, management reported solid results despite caution among farmers; construction and forestry benefited from generally positive economic conditions.

MetricQ2 2019Q2 2018Change
Total net sales and revenues$11,342$10,720+6%
Equipment net sales$10,273$9,747+5%
Income before income taxes$1,473$1,384+6%
Net income attributable to Deere$1,135$1,208-6%
Diluted earnings per share$3.52$3.67-4%

Q2 net margin attributable to Deere was approximately 10.0% of total revenue, versus 11.3% a year earlier. Equipment cost of sales was 75.5% of equipment net sales, compared with 75.2%. The higher tax provision—$344 million versus $177 million—was a key reason earnings fell despite revenue and pretax income growth; Q2 2018 included a $174 million discrete tax benefit related to tax reform.

Six-month performance and segments

For the first six months, total revenues rose 10% to $19,326 million and equipment net sales rose 9% to $17,214 million. Deere-attributable net income was $1,633 million versus $673 million, and diluted EPS was $5.07 versus $2.05. The comparison is substantially affected by 2018 discrete tax-reform adjustments, including $803 million of net tax expense for the six-month period.

SegmentQ2 sales changeQ2 operating profitQ2 operating margin
Agriculture and turf+3%$1,019 million, -4%14.0%, versus 15.0%
Construction and forestry+11%$347 million, +34%11.6%, versus 9.6%
Financial servicesRevenue +12%$170 million, -5%Not stated

Agriculture and turf profit was pressured by production costs, foreign exchange and higher R&D, partly offset by pricing and volume. Construction and forestry improved with pricing, volume and Wirtgen contributions. Financial services profit reflected less favorable financing spreads and higher credit-loss provisions, partly offset by a larger average portfolio. Interest expense increased as borrowing rates and average borrowings rose.

Cash flow, balance sheet and liquidity

  • Six-month cash flow: Operating cash outflow was $1,495 million, compared with $1,220 million in 2018; investing cash outflow was $372 million, versus $5,159 million; financing cash inflow was $1,472 million, versus $1,095 million. Cash, cash equivalents and restricted cash declined $430 million to $3,586 million. Operating outflow mainly reflected seasonal growth in receivables and inventories.
  • Cash and liquidity: Cash and cash equivalents were $3,484 million and marketable securities $545 million, totaling $4,029 million. Commercial paper outstanding was $4,875 million. Worldwide credit lines were $8,384 million, of which $2,925 million was unused; the company reported compliance with credit-agreement requirements.
  • Borrowings: At April 28, short-term borrowings were $11,762 million, short-term securitization borrowings $4,702 million and long-term borrowings $28,255 million. These categories total approximately $44.7 billion; securitization borrowings are secured by related receivables. Financial Services external interest-bearing debt was $38,645 million, with debt-to-equity of 8.0:1.
  • Balance sheet: Total assets were $72,730 million; total liabilities $60,791 million; Deere stockholders’ equity $11,920 million. Trade receivables increased $2,515 million and inventories increased $1,012 million from fiscal year-end, mainly due to seasonality and higher shipments or production.
  • Capital returns and investment: Six-month dividends paid were $462 million and share repurchases $480 million. Equipment-operation capital expenditures were $490 million; full-year 2019 capital expenditures were estimated at approximately $1,150 million.

Outlook, risks and notable items

Management forecast FY2019 equipment sales and total net sales and revenues to increase about 5%, including a negative currency-translation effect of about 3% on company equipment sales and a roughly 1% benefit from a full year of Wirtgen. Deere-attributable net income was forecast at approximately $3.3 billion. Agriculture and turf sales were expected to rise about 2%; construction and forestry sales about 11%, including a roughly 4% contribution from the two additional Wirtgen months. Financial Services net income was forecast at approximately $600 million.

Management cited delayed North American planting, concerns about export access and commodity demand, and farmer caution. Deere planned second-half production below retail sales. Risks discussed include trade policies and tariffs, commodity and used-equipment prices, weather, foreign exchange, interest rates, credit losses, funding access, supply-chain constraints, regulation, geopolitical conditions and customer demand. Outlook is forward-looking and subject to these and other uncertainties.

Other notable items: Deere adopted revenue-recognition guidance with no significant change in revenue timing; adoption changed the presentation of estimated parts returns. The company changed its nonperforming-receivable accrual threshold prospectively from generally 120 to 90 days delinquent, with no significant financial-statement effect. It reported $315 million of equipment-financing guarantees, $12 million accrued losses on those guarantees, and $411 million of property and equipment commitments. Management said reasonably possible losses from unresolved legal actions were not expected to materially affect the financial statements; an Iowa emissions matter was settled for $1 million. The filing also disclosed ratification of prior subsidiary mergers, effective May 2, 2019.

Important facts for investors to verify

  • Whether the FY2019 earnings and segment-sales outlook remains achievable given agricultural-market caution and planned production reductions.
  • How much reported earnings comparisons reflect operating performance versus the unusually large 2018 tax-reform adjustments.
  • Whether seasonal receivables and inventory growth converts to cash, and how dealer inventories and used-equipment values develop.
  • Credit quality, delinquencies and provisions in Financial Services, alongside higher funding costs and its 8.0:1 debt-to-equity ratio.
  • Funding capacity and refinancing needs, including commercial paper, securitization borrowings and availability of unused credit lines.
  • Exposure to trade restrictions, currency movements, commodity prices, weather, supply constraints, guarantees and legal or regulatory matters.