Deere & Company — Q3 2013 Form 10-Q
Business context and period: Unaudited results for the quarter and nine months ended July 31, 2013. Deere operates agriculture and turf, construction and forestry, and financial services businesses. Unless noted, amounts are in millions of dollars.
Financial results and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total net sales and revenues | $10,010 | $9,590 | $28,345 | $26,365 |
| Net sales, equipment operations | $9,316 | $8,930 | $26,374 | $24,454 |
| Income before income taxes | $1,549 | $1,215 | $4,239 | $3,612 |
| Net income attributable to Deere | $997 | $788 | $2,731 | $2,377 |
| Diluted EPS | $2.56 | $1.98 | $6.97 | $5.88 |
| Operating cash flow | Not presented separately for the quarter | Not presented separately for the quarter | $588 | $(1,135) |
- Q3 revenue increased 4% and Deere-attributable net income increased 26%; nine-month revenue increased 8% and net income increased 15% year over year.
- Equipment cost of sales was 73.4% of net sales in Q3 and 73.3% for nine months, versus 75.7% and 74.3%, respectively, in 2012. Deere cited improved price realization as the main benefit.
- Nine-month operating cash flow improved from a use of $1,135 to a source of $588. Consolidated investing cash outflow was $2,903; financing cash inflow was $746. Cash declined $1,562 to $3,090.
- At July 31, cash and cash equivalents were $3,090 and marketable securities were $1,706. Commercial paper outstanding was $2,836; worldwide credit lines totaled $6,270, of which $3,164 was unused.
- Balance-sheet borrowings were $8,213 short-term, $3,780 short-term securitization, and $21,699 long-term. Total liabilities were $49,745 and stockholders’ equity was $8,592. Equipment-operations debt-to-capital was 41%; Financial Services’ debt-to-equity ratio was 7.6:1.
Material changes and segment performance
- Agriculture and turf: Sales rose 8% in Q3 and 12% year to date; operating profit increased 32% and 23%, respectively. Higher shipment volumes and price realization drove improvement.
- Construction and forestry: Sales declined 11% in Q3 and 8% year to date. Operating profit fell 5% and 27%, respectively, primarily reflecting lower shipments; year-to-date results also faced higher production and selling costs and unfavorable product mix.
- Financial Services: Operating profit rose 38% in Q3 and 21% year to date, supported by portfolio growth and improved crop-insurance margins. Higher Q3 credit-loss provisions partly offset gains. Average receivables and leases financed were 17% higher year over year.
- Equipment operations’ nine-month operating profit increased to $3,943 from $3,347. The filing attributes gains to pricing and volume, partly offset by higher production, selling, warranty and currency costs.
Outlook, risks and unusual items
- Management forecast fiscal 2013 Deere-attributable net income of approximately $3,450 and equipment sales growth of about 5% for the year, with sales expected to decline about 5% in Q4. Agriculture and turf sales were forecast to rise about 7%; construction and forestry sales to fall about 8%; Financial Services net income was expected to be approximately $560.
- Outlook assumptions included strong farm incomes and demand in parts of the Americas. Risks identified include commodity prices and farm income, weather and drought, global economic and sovereign-debt conditions, currencies, interest rates and funding access, customer credit quality, government policies, emissions regulation, supply constraints, product execution and competition.
- A $50 pretax impairment charge ($44 after tax) related to John Deere Water assets was recognized in Q3 and the first nine months, following a decline in forecast performance. A separate $56 income-tax charge in Q2 arose from a German operating-structure change and write-off of deferred tax balances.
- Legal matters arise in the ordinary course; management said reasonably possible additional losses beyond accrued amounts were not expected to materially affect consolidated financial statements. The filing also reports $286 of third-party financing guarantees, $419 of property-and-equipment commitments, and a $1,186 warranty liability.
- Deere reported that it met its credit-agreement requirements and that disclosure controls were effective at July 31, 2013. Management stated there had been no material change in the annual-report risk factors or market-risk disclosures.
Important facts for investors to verify
- Whether the full-year earnings and segment sales outlook remains achievable given the projected Q4 equipment-sales decline and changing agricultural and construction markets.
- How seasonal receivables and inventory growth affect cash generation, and whether Financial Services’ funding and leverage remain manageable as its portfolio expands.
- Credit quality trends, including past-due and non-performing financing receivables, and the adequacy of credit-loss provisions.
- Whether the John Deere Water impairment, German tax charge, and elevated warranty costs have further effects in subsequent periods.
- Availability and cost of funding, covenant compliance, and exposure from securitizations, guarantees, derivatives and unresolved legal matters.