Deere & Company — Q1 FY2013 Form 10-Q
Business context and reporting period. The unaudited quarter ended January 31, 2013. Deere operates equipment businesses in agriculture and turf and construction and forestry, alongside equipment financing and related financial services. Comparisons are with the three months ended January 31, 2012 unless noted.
Financial performance and position
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Net sales and revenues | $7.421 billion | $6.767 billion |
| Equipment net sales | $6.793 billion | $6.119 billion |
| Net income attributable to Deere | $649.7 million | $532.9 million |
| Diluted EPS | $1.65 | $1.30 |
| Operating cash flow | $(1.249) billion | $(1.227) billion |
- Revenue rose 10%; equipment sales rose 11%. The cost-of-sales ratio improved to 73.8% from 74.8%, reflecting better price realization, partly offset by higher production and warranty costs.
- Segment sales and operating profit: agriculture and turf sales increased 16% to $5.491 billion and operating profit rose 33% to $766 million; construction and forestry sales declined 7% to $1.302 billion and operating profit fell 43% to $71 million. Financial Services operating profit rose to $197 million from $175 million.
- Operating cash outflow principally reflected seasonal inventory growth and lower accounts payable and accrued expenses. Investing activities provided $217 million and financing activities provided $48 million. Cash and cash equivalents declined $980 million during the quarter to $3.672 billion.
- At January 31, cash plus marketable securities totaled $5.048 billion, versus $6.123 billion at October 31, 2012. Total reported short- and long-term borrowings, including securitization borrowings, were approximately $32.546 billion, compared with $32.420 billion at October 31, 2012 and $28.044 billion a year earlier.
- Equipment Operations debt-to-capital was 47%, versus 46% at October 31, 2012. Financial Services debt-to-equity was 6.8:1, down from 7.2:1 at October 31, 2012. Worldwide credit lines were $5.112 billion, of which $2.472 billion was unused; the company reported compliance with credit-agreement requirements.
- Financing receivables past due totaled $235 million, compared with $239 million a year earlier; non-performing receivables were $138 million, versus $178 million. The allowance for credit losses was $175 million.
Changes, outlook and risks
- Year-over-year earnings growth was led by higher equipment shipments and price realization. Equipment Operations net income increased to $525 million from $416 million. Financial Services net income increased to $132.9 million from $119.1 million, supported by portfolio growth and higher crop insurance margins; prior-year results included wind-energy-credit revenue.
- Management forecast FY2013 Deere-attributable net income of approximately $3.3 billion, equipment sales growth of about 6% for the year and about 4% for Q2. Agriculture and turf sales were forecast up about 6%; construction and forestry sales up about 3%. Financial Services net income was forecast at approximately $540 million.
- Management cited strong farm incomes and commodity prices as demand supports, while noting uncertainty around economic, fiscal and trade conditions. Risks include weather and crop conditions, commodity prices, global demand, currency and interest-rate changes, customer and supplier credit access, funding-market disruption, regulation and emissions requirements, supply constraints, product execution, and credit losses.
- In Q1, Deere deconsolidated a supplier variable-interest entity after the consolidation criteria ceased to apply. Assets, liabilities and noncontrolling interests fell by approximately $26 million, $15 million and $11 million, respectively, with no gain or loss. The filing reports warranty liabilities and unearned premiums of $1.091 billion, and approximately $250 million of guarantees on third-party equipment financing, with an $8 million accrued liability.
- Management said reasonably possible additional losses from unresolved legal actions were not expected to materially affect consolidated financial statements. A quarterly dividend of $0.51 per share was declared after quarter-end, an increase of $0.05 per share.
Important facts for investors to verify
- Whether the forecast growth in agriculture and turf offsets weakness in construction and forestry, and whether the full-year earnings outlook is achieved.
- How seasonal inventory and payables movements affect operating cash flow and liquidity in subsequent quarters.
- Funding costs, credit-market access, securitization availability and leverage across Equipment Operations and Financial Services.
- Trends in customer delinquencies, defaults, credit-loss provisions and crop insurance claims.
- Potential effects of weather, commodity prices, foreign exchange, regulation and emissions-related product costs.