Deere & Company — Q2 2015 Form 10-Q
Reporting period: Three and six months ended April 30, 2015. The unaudited filing covers Deere’s equipment operations—agriculture and turf, and construction and forestry—and its financial services operations. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total net sales and revenues | $8,171 | $9,948 | $14,554 | $17,602 |
| Equipment net sales | $7,399 | $9,246 | $13,004 | $16,195 |
| Net income attributable to Deere | $691 | $981 | $1,077 | $1,662 |
| Diluted earnings per share | $2.03 | $2.65 | $3.14 | $4.46 |
| Operating cash flow | Not presented separately for the quarter | Not presented separately for the quarter | $(155) | $(832) |
- Q2 total revenue declined 18% and Deere-attributable net income fell 30%. For the first six months, revenue declined 17% and net income fell 35%.
- Q2 net margin was approximately 8.5%, compared with 9.9% a year earlier; six-month net margin was approximately 7.4%, versus 9.4%. These are calculated as Deere-attributable net income divided by total net sales and revenues.
- Cost of sales was 77.0% of equipment net sales in Q2 and 77.8% for six months, versus 74.3% and 74.5%, respectively, in 2014. Management cited weaker product mix and unfavorable currency effects, partly offset by price realization.
- Segment operating profit in Q2: agriculture and turf $639 (down 48%); construction and forestry $189 (up 43%); financial services $265 (up 16%). Six-month figures were $907 (down 55%), $335 (up 48%), and $498 (up 21%), respectively.
Cash, debt and liquidity
- Cash and cash equivalents were $4,355 at April 30, 2015, up from $3,787 at October 31, 2014. Cash plus marketable securities totaled $4,748, compared with $5,002 at fiscal year-end.
- Six-month operating cash use was $155; investing activities provided $1,152 and financing activities used $325. Operating cash use reflected seasonal inventory and sales-receivable increases, lower payables and tax-payment changes.
- At April 30, total reported borrowings included $8,989 of short-term borrowings, $4,703 of short-term securitization borrowings, and $23,623 of long-term borrowings. Financial services external interest-bearing debt was $32,276; equipment operations interest-bearing debt was $5,039.
- Worldwide credit lines totaled $7,255, of which $3,430 was unused. Deere reported compliance with its credit-agreement requirements. It stated that it expected sufficient funding and liquidity to meet its needs.
- Stockholders’ equity was $8,176, down from $9,066 at October 31, 2014. Deere attributed the decrease chiefly to repurchases, currency translation losses and dividends, partly offset by earnings.
- Six-month share repurchases were $1,174 and dividends paid were $416. The Board declared a quarterly dividend of $0.60 per share, payable August 3, 2015.
Business changes and management outlook
- Agriculture and turf was pressured by weak global agricultural demand, lower commodity prices and farm incomes, reduced large-equipment demand, and unfavorable currency translation. Segment sales fell 25% in Q2 and 26% for six months.
- Construction and forestry sales rose 2% in Q2 and 7% for six months, supported by shipment volumes and pricing. Management cited U.S. housing and economic growth, partly offset by weakness in energy-related markets and outside the U.S. and Canada.
- Financial services benefited from portfolio growth and the Crop Insurance business sale, but faced less favorable financing spreads. Its Q2 results included the divestiture gain.
- Deere completed the Crop Insurance operations sale in March 2015 for approximately $154 million of proceeds and recognized a $41 million pretax ($38 million after-tax) gain. In May 2014, Deere sold its Water operations; 2014 results included related impairment charges.
- Management forecast fiscal 2015 Deere-attributable net income of approximately $1.9 billion and equipment sales down about 19%; third-quarter equipment sales were expected to be about 17% lower year over year. Fiscal 2015 agriculture and turf sales were forecast down about 24%, while construction and forestry sales were forecast up about 2%. Financial services net income was forecast at approximately $630 million.
- The financial services outlook included expected higher credit-loss provisions than the low 2014 level and less favorable financing spreads. Agriculture outlook reflected industry declines forecast across major markets, including about 25% lower agricultural machinery sales in the U.S. and Canada.
Risks, contingencies and notable items
- Management highlighted exposure to commodity prices, weather and crop conditions, global economic activity, foreign exchange, interest rates, funding-market access, customer credit quality, energy-sector weakness, regulation and geopolitical events. More stringent engine-emissions requirements and supply-chain and product-innovation risks were also identified.
- Financing-receivable past-due balances still accruing interest were $392 at April 30, 2015, versus $313 a year earlier; non-performing financing receivables were $137, versus $137. The allowance for credit losses was $163, compared with $171 a year earlier.
- Legal matters arise in the ordinary course, including product liability, retail credit, intellectual property and environmental matters. Deere said reasonably possible losses beyond amounts accrued were not expected to have a material effect.
- Warranty liability and unearned premiums totaled $1,242 at April 30, 2015. Deere also disclosed $199 of equipment-financing guarantees, with approximately $6 accrued for losses, and $209 of commitments for property and equipment.
- Six-month other comprehensive loss was $511, driven primarily by a $577 cumulative translation loss. This reduced reported equity but was separate from net income.
Important facts for investors to verify
- Whether the sharp agriculture and turf downturn and weaker product mix persist, and how currency movements affect sales and margins.
- Whether management’s fiscal 2015 sales and earnings forecasts remain achievable, particularly the $1.9 billion net-income outlook and segment forecasts.
- Whether credit quality, delinquencies and provisions for credit losses deteriorate as expected, and how financing spreads affect financial services earnings.
- How seasonal working-capital needs, buybacks and dividends affect cash generation, borrowing levels and liquidity.
- The effect of the Crop Insurance sale gain and other unusual items on comparisons with recurring operating performance; also review the filing’s detailed debt, securitization and contingency disclosures.