Deere & Company — Q2 2013 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended April 30, 2013. Deere operates agriculture and turf, construction and forestry, and financial services businesses. Unless noted, amounts below are in millions of dollars.
Financial performance
| Metric | Three months ended Apr. 30, 2013 | Year-over-year change | Six months ended Apr. 30, 2013 | Year-over-year change |
|---|---|---|---|---|
| Total net sales and revenues | $10,914 | +9% | $18,335 | +9% |
| Equipment net sales | $10,265 | +9% | $17,058 | +10% |
| Net income attributable to Deere | $1,084 | +3% | $1,734 | +9% |
| Diluted EPS | $2.76 | +$0.15 | $4.41 | +$0.50 |
- Quarterly equipment operating profit was $1,663, versus $1,522 a year earlier; first-half profit was $2,500, versus $2,220. Higher volumes and price realization helped, while higher production and selling costs and unfavorable foreign exchange partly offset gains.
- Agriculture and turf sales rose 12% in the quarter and 14% in the first half; operating profit increased 13% and 19%, respectively. Construction and forestry sales fell 6% in both periods, while operating profit fell 32% in the quarter and 37% in the first half.
- Financial services operating profit increased 13% in both periods, to $198 for the quarter and $395 for the first half, primarily on credit-portfolio growth. Average receivables and leases financed were 16% higher year over year.
- Cost of sales was 72.9% of net sales for the quarter, compared with 72.7%; the first-half ratio improved to 73.3% from 73.5%. Research and development expense increased, mainly to support new products and emissions requirements.
Cash flow, balance sheet, and liquidity
- First-half operating cash flow was negative $1,156, compared with negative $1,527 in 2012. Investing cash flow was negative $979; financing cash flow was positive $1,151. Cash declined $1,001 to $3,651.
- At April 30, cash and cash equivalents were $3,651 and marketable securities were $1,399, together $5,050. Worldwide credit lines totaled $6,148, of which $3,653 was unused. Commercial paper outstanding was $2,347.
- Balance-sheet borrowings comprised $8,414 short-term borrowings, $3,788 short-term securitization borrowings, and $21,753 long-term borrowings. Total stockholders’ equity was $8,267; total assets were $58,155.
- Equipment operations’ interest-bearing debt was $6,294, with debt-to-total-capital of 43%. Financial services’ external interest-bearing debt was $27,662; its debt-to-equity ratio, including intercompany debt, was 7.5 to 1.
- Financing receivables were $26,709 before the $176 credit-loss allowance. Past-due balances were $225 and non-performing receivables were $131. The filing reports no significant troubled-debt restructurings that subsequently defaulted and were written off during the first half.
Changes, outlook, and risks
- Management forecast fiscal 2013 net income attributable to Deere of approximately $3,300, equipment sales growth of about 5%, and third-quarter equipment sales growth of about 3%. Full-year agriculture and turf sales were forecast to rise about 7%; construction and forestry sales to decline about 5%; financial services net income was forecast at approximately $550.
- Market assumptions included agricultural machinery sales up about 5% in the U.S. and Canada and 15%–20% in South America, but down about 5% in the EU27. Management cited strong farm incomes and demand, tempered by global financial pressures and adverse weather. Construction outlook reflected cautious U.S. growth and weather conditions.
- A $56 tax-provision charge in Q2 followed a change in the tax status of most German operations after their restructuring as a subsidiary. The change also resulted in write-offs of deferred tax assets and liabilities for U.S. taxable temporary differences.
- Deere cited risks including commodity and weather volatility, global economic and sovereign-debt conditions, foreign exchange, interest rates and funding access, customer credit quality, supply constraints, emissions regulation, and product acceptance. Management said it expected adequate funding and liquidity and reported compliance with credit-agreement requirements.
- Unresolved legal matters arise in the ordinary course, including product liability, intellectual property, and environmental matters; management said reasonably possible additional losses were not expected to materially affect consolidated financial statements. The filing also reports $310 of equipment-financing guarantees and $426 of property and equipment commitments.
Important facts for investors to verify
- Whether the projected $3.3 billion fiscal-year net income and segment sales forecasts were achieved, given the stated market and weather assumptions.
- Whether seasonal receivables and inventory growth converted to cash; first-half operating cash flow remained negative despite improved year-over-year results.
- How financing-portfolio growth, credit performance, and continued access to commercial paper, securitizations, and other funding affect financial-services leverage and earnings.
- The effect of higher production, warranty, R&D, and benefit costs, unfavorable currency movements, and the German tax charge on subsequent margins and tax rates.
- The filing states that legal exposures were not expected to be material; investors should monitor developments in litigation, guarantees, and other contingencies.