Deere & Company — Q1 FY2010 Form 10-Q
Reporting period: Three months ended January 31, 2010; comparisons are with the three months ended January 31, 2009 unless noted. Deere manufactures agricultural, turf, construction and forestry equipment and provides equipment financing and related services. Amounts are in U.S. dollars.
Financial results and liquidity
| Metric | Q1 FY2010 | Q1 FY2009 | Change |
|---|---|---|---|
| Total sales and revenues | $4.835 billion | $5.146 billion | Down 6% |
| Equipment net sales | $4.237 billion | $4.560 billion | Down 7% |
| Income before income taxes | $364.3 million | $273.8 million | Up |
| Net income attributable to Deere | $243.2 million | $203.9 million | Up 19% |
| Diluted earnings per share | $0.57 | $0.48 | Up |
| Net cash used for operating activities | $318.3 million | $1.616 billion | Cash use narrowed |
Management reported the cost of sales ratio at 75.6% of equipment net sales, versus 77.7% a year earlier. Equipment Operations operating profit was $315 million, compared with $307 million. Financial Services net income was $85.1 million, versus $46.8 million.
At January 31, 2010, cash and cash equivalents were $5.043 billion and marketable securities were $206 million. Cash increased $392 million during the quarter. Total borrowings were approximately $24.770 billion: $7.679 billion short-term and $17.091 billion long-term. Total stockholders’ equity was $4.986 billion. Global credit lines totaled $4.529 billion, of which $3.169 billion was unused. Management said it expected adequate funding and liquidity; the filing does not provide a conventional current ratio, and consolidated liquidity includes the financing business.
Material changes and segment performance
- Agriculture and turf: Sales declined 6% to $3.607 billion; operating profit rose to $352 million from $289 million. Lower raw-material costs, pricing, currency and product mix helped, partly offset by lower volumes and higher postretirement costs.
- Construction and forestry: Sales declined 15% to $630 million; the segment recorded a $37 million operating loss versus $18 million profit. Lower shipment and production volumes and higher postretirement costs were cited.
- Credit: Operating profit increased to $94 million from $53 million, mainly on improved financing spreads. Interest expense fell 24%; average financed receivables and leases rose 3% year over year.
- Equipment sales benefited from 5% favorable currency translation and 2% improved price realization. Trade receivables and inventories together were $5.873 billion, down 20% from a year earlier.
- Operating cash outflow was substantially lower than the prior-year quarter, but remained negative, primarily reflecting seasonal inventory growth and decreases in accounts payable and accrued expenses. Investing cash inflow was $373 million and financing cash inflow was $346 million.
Outlook, risks and unusual items
- Fiscal 2010 equipment sales were forecast to increase 6%–8%; second-quarter sales were forecast to rise 4%–6%. Deere forecast fiscal 2010 net income attributable to the company of approximately $1.3 billion.
- Agriculture and turf sales were forecast to rise 4%–6% for the year, including about 4% favorable currency impact. Construction and forestry sales were forecast to rise about 21%, reflecting the comparison with prior-year inventory reductions. Credit operations net income was forecast at approximately $260 million.
- Management cited weak global economic activity and a slow recovery, credit availability and capital-market conditions, currency and commodity-price volatility, component availability, and increasingly stringent emissions requirements as concerns. Actual results could differ materially from the outlook.
- The Welland, Ontario facility closure was expected to result in total pretax expenses of $109 million, including $5 million in Q1 FY2010 and $7 million expected in the future. The company estimated approximately $40 million of annual pretax earnings and cash-flow benefit in 2010 from the restructuring. A separate segment-combination program was expected to save $50–$60 million in 2010.
- First-quarter contributions were approximately $170 million to pension plans and $37 million to other postretirement plans; additional FY2010 contributions were anticipated at $339 million and $40 million, respectively. Postretirement benefit costs rose year over year.
- Warranty liability was $700 million at January 31, down from $801 million a year earlier. The company disclosed $167 million of equipment-financing guarantees and $22 million maximum exposure for uncollected crop-insurance premiums. It said unresolved legal actions were not expected to have a material effect; outcomes and potential losses cannot be predicted with certainty.
- Financing-receivable securitizations are accounted for as secured borrowings. At January 31, restricted securitized assets were $2.709 billion and related liabilities were $2.675 billion. The company also disclosed exposure to unconsolidated conduits, including $867 million of restricted assets and stated maximum exposure to loss.
- The company adopted several accounting standards during the quarter; it said adoption had no material effect on its consolidated financial statements.
Key facts for investors to verify
- Whether forecast equipment sales and approximately $1.3 billion full-year net income were achieved, and how much depended on currency, pricing and market recovery.
- Whether operating cash flow improved beyond the seasonal first-quarter outflow and whether inventory and receivables remained controlled.
- Credit quality, delinquencies, loss provisions, funding access and financing spreads, given Financial Services’ leverage and reliance on external funding.
- Progress and realized savings from the Welland closure and segment-combination programs, alongside remaining restructuring and pension obligations.
- Changes in securitization, conduit, guarantee, warranty and legal exposures, and the company’s capacity to meet debt covenants and funding needs.