Deere & Company — Q3 FY2017 Form 10-Q
Quarter ended July 30, 2017; year-to-date figures cover the first nine months of fiscal 2017. The interim financial statements are unaudited. Both third-quarter comparison periods contained 13 weeks. Dollar amounts are in millions unless otherwise noted.
Financial results
| Metric | Q3 FY2017 | Q3 FY2016 | First 9 months FY2017 | First 9 months FY2016 |
|---|---|---|---|---|
| Total sales and revenues | $7,807.8 (+16%) | $6,724.4 | $21,720.0 (+8%) | $20,124.4 |
| Equipment net sales | $6,833.0 (+17%) | $5,861.4 | $18,790.7 (+6%) | $17,737.1 |
| Net income attributable to Deere | $641.8 | $488.8 | $1,648.8 | $1,238.6 |
| Diluted EPS | $1.97 | $1.55 | $5.11 | $3.91 |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $729.3 | $1,323.7 |
Q3 pretax income was $889.9, versus $705.1 a year earlier. Net income and diluted EPS rose 31% and 27%, respectively, for the quarter; nine-month net income rose 33%. Equipment sales included price realization of 1% for Q3 and 2% year to date. The cost-of-sales ratio was 77.1% in Q3 versus 76.7%; year to date it improved to 77.2% from 78.2%.
Q3 segment operating profit was $685 for Agriculture and Turf, $110 for Construction and Forestry, and $200 for Financial Services. Nine-month amounts were $1,899, $253, and $529, respectively. Financial Services net income attributable to Deere was $131.2 for Q3 and $349.1 year to date.
Cash, debt, and liquidity
- At July 30, 2017, cash and cash equivalents were $6,537.4, marketable securities $426.1, and total assets $62,349.9. Cash and securities totaled $6,963.5, up from $4,789.3 at fiscal year-end.
- Nine-month operating cash flow fell to $729.3 from $1,323.7, primarily reflecting higher inventories and receivables; investing cash outflow was $301.2. Financing provided $1,656.0, including increased borrowings and $488.6 from common-stock issuance, principally option exercises. Cash increased $2,201.6.
- Balance-sheet borrowings were $9,019.4 short-term, $4,780.9 short-term securitization borrowings, and $23,674.3 long-term. Financial Services accounted for most borrowings. Equipment Operations’ interest-bearing debt was $4,866, with debt-to-total-capital of 36%; Financial Services’ external interest-bearing debt was $32,608, with debt-to-equity of 7.7:1.
- Worldwide credit lines totaled $7,056, of which $3,560 was unused. Management said it expected adequate global funding and liquidity; credit-agreement requirements were met. $4,720 of cash and marketable securities was held by foreign subsidiaries, primarily in preparation for the Wirtgen acquisition.
Changes, outlook, and notable items
- Management attributed stronger equipment results mainly to higher shipment volumes and price realization, with improved markets in South America and sharply higher construction equipment sales. Q3 equipment sales rose 17%; Agriculture and Turf sales increased 13% and Construction and Forestry 29%.
- Operating profit benefited from volume and pricing, while higher production costs, warranty costs, and selling expenses were offsets. Financial Services’ Q3 profit improved with lower lease-residual losses, partly offset by higher credit-loss provisions and expenses; year-to-date results were pressured by less favorable financing spreads.
- Fiscal 2017 guidance: net sales and revenues expected to increase about 11%, equipment sales about 10%, and Deere-attributable net income about $2.075 billion. Financial Services net income was expected to be approximately $475. Company equipment sales were forecast to rise about 24% in Q4 year over year.
- Market outlook varied by region: U.S./Canada agricultural machinery industry sales were forecast down about 5%; South American tractor and combine sales up about 20%; worldwide Construction and Forestry sales up about 15%. Global forestry industry sales were expected to decline 5%–10%.
- SiteOne share sales generated $375 pretax gains during the first nine months of FY2017, recorded in other income; the July sale of the remaining interest generated a $94 pretax gain. The filing also reports lower lease-residual losses as a contributor to other income.
- Deere agreed to acquire substantially all Wirtgen Group operations for a €4.357 billion cash purchase price; estimated total transaction value was approximately €4.6 billion, including assumed net debt and the ticking fee. Closing was expected in Q1 FY2018, subject to regulatory approvals and other conditions. Funding was expected from cash and new debt.
- Voluntary employee-separation programs carried approximately $113 pretax expense in total, mostly recorded by Q2 FY2017; estimated 2017 savings were about $70. Early adoption of share-based-payment accounting increased net income by approximately $14 in Q3 and $25 year to date.
Risks and contingencies
Management cited uncertainty in global economic and agricultural conditions, commodity prices, weather, currencies, interest rates, trade and government policies, used-equipment demand and pricing, and access to capital. Other disclosed risks include supply-chain and production constraints, competition, regulation, cybersecurity and technology disruptions, and acquisition execution and integration. The filing says unresolved legal matters—including product liability, retail credit, employment, patent, and trademark claims—were not expected to have a material effect beyond amounts accrued. Deere reported $147 of equipment-financing guarantees, with $3 accrued for losses, and $237 of property and equipment commitments.
Investor verification priorities
- Confirm the drivers and sustainability of earnings growth, particularly shipment volume, pricing, production and warranty costs, and the contribution of SiteOne gains.
- Track operating cash conversion and working-capital needs: nine-month operating cash flow declined while inventories and trade receivables increased.
- Review borrowing levels, refinancing and funding access, especially Financial Services’ leverage, securitization funding, and foreign-held cash.
- Assess Wirtgen closing conditions, final transaction cost, financing mix, and integration risks against the stated timetable.
- Compare FY2017 guidance with subsequent results and monitor agricultural, construction, forestry, credit-loss, and used-equipment assumptions.