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| DE > SEC Filings for DE > Form 10-Q on 26-Feb-2009 | All Recent SEC Filings |
26-Feb-2009
Quarterly Report
RESULTS OF OPERATIONS
Overview
Organization
The Company's Equipment Operations generate revenues and cash primarily from the sale of equipment to John Deere dealers and distributors. The Equipment Operations manufacture and distribute a full line of agricultural equipment; a variety of commercial, consumer and landscapes equipment and products; and a broad range of equipment for construction and forestry. The Company's Financial Services primarily provide credit services, which mainly finance sales and leases of equipment by John Deere dealers and trade receivables purchased from the Equipment Operations. In addition, Financial Services offer certain crop risk mitigation products and invest in wind energy generation. The information in the following discussion is presented in a format that includes information grouped as consolidated, Equipment Operations and Financial Services. The Company also views its operations as consisting of two geographic areas, the U.S. and Canada, and outside the U.S. and Canada.
Trends and Economic Conditions
Farm conditions in the United States and Canada remain positive, benefitting from the sound financial health of the U.S. farm sector, although the outlook for the current year is uncertain. Industry sales for 2009 are forecast to be flat to up 5 percent for the year in the U.S. and Canada led by an increase in large tractors and combines. Sales in parts of Australia and South America are expected to be hurt by drought. Sales in Western Europe are forecast to be down 10 to 15 percent for the year. Significant sales declines are expected in Central Europe and the CIS (Commonwealth of Independent States) countries, including Russia. South American markets are also expected to have sales declines, with industry sales forecast to decrease by 15 to 25 percent. The Company's agricultural equipment sales were up 18 percent for the first quarter of 2009 and are forecast to decrease about 2 percent for the full year, which includes a negative effect of about 7 percent for currency translation. The Company's commercial and consumer equipment sales declined 25 percent for the first quarter. Commercial and consumer equipment sales are projected to decline about 14 percent for the year, reflecting the U.S. housing decline and recessionary economic conditions. U.S. markets for construction and forestry equipment are forecast to remain under continued pressure due in large part to a declining global economy and historically low levels of construction activity in the U.S. The Company's construction and forestry sales declined 28 percent in the first quarter of 2009, and are expected to decrease approximately 24 percent for the year. Net income for the Company's credit operations in 2009 is forecast to decrease to approximately $250 million.
Items of concern include the sharp downturn in global economic activity, the turmoil in financial markets and the effectiveness of governmental policies to restore liquidity and the availability of credit for the Company's customers. The ability of the Company's suppliers to access credit is a risk. Significant fluctuations in foreign currency exchange rates could also impact the Company's results. The volatility in the price of many commodities used in the Company's products is also a concern. The availability of certain components that could impact the Company's ability to meet production schedules continues to be monitored. Producing engines that continue to meet high performance standards, yet also comply with increasingly stringent emissions regulations is one of the Company's major priorities.
Ongoing high material costs, the deepening global recession and volatile foreign exchange rates have put downward pressure on the Company's financial results. However, demand for large productive agricultural machinery has held up well in the U.S. and Canada. The Company's investment in advanced technology and emphasis on disciplined asset management should benefit the Company. Also of benefit has been the Company's access to global capital markets, which is helping to ensure that financing remains available for many customers.
2009 Compared with 2008
Deere & Company's net income was $203.9 million, or $.48 per share for the first quarter of 2009, compared with $369.1 million, or $.83 per share, for the same period last year.
Worldwide net sales and revenues decreased 1 percent to $5,146 million for the first quarter, compared with $5,201 million a year ago. Net sales of the Equipment Operations increased 1 percent to $4,560 million for the first quarter, compared with $4,531 million last year. Included in these sales were price changes of 6 percent, offset by an unfavorable currency translation effect of 6 percent. Equipment sales in the U.S. and Canada increased 1 percent for the first quarter. Net sales outside the U.S. and Canada were basically unchanged for the quarter, which included an unfavorable currency translation effect of 14 percent.
The Company's Equipment Operations reported operating profit of $307 million for the first quarter, compared with $457 million last year. The deterioration was largely due to increased raw material costs and unfavorable effects of volatile foreign currency exchange rates, partially offset by improved price realization. The Equipment Operations had net income of $153.5 million for the first quarter of 2009, compared with $264.0 million last year. The same factors mentioned above in addition to a lower effective tax rate this year affected these results.
Trade receivables and inventories at the end of the first quarter were $7,312 million, or 28 percent of the last 12 months' net sales, compared with $6,488 million, or 29 percent of net sales, a year ago.
Net income of the Company's Financial Services operations for the first quarter of 2009 was $46.8 million, compared with $97.7 million last year. The decrease was primarily due to narrower financing spreads, lower commissions from crop insurance and a higher provision for credit losses. See the following discussion for the credit operations.
Business Segment Results
† Agricultural Equipment. Segment sales increased 18 percent for the first quarter, primarily as a result of higher shipment volumes and improved price realization, partially offset by unfavorable effects of currency translation. Operating profit was $348 million for the quarter, compared with $332 million in the same period last year. The operating profit increase was primarily due to improved prize realization and the favorable impact of higher shipment and production volumes, partially offset by higher raw material costs. Also having a negative impact on operating profit was sharp volatility in foreign currency exchange rates.
† Commercial and Consumer Equipment. Segment sales declined 25 percent for the first quarter. The segment had an operating loss of $59 million for the quarter, compared with $8 million operating profit a year ago. The operating loss was primarily due to the unfavorable impact of lower shipment and production volumes and higher raw material costs, partially offset by lower selling, administrative and general expenses and improved price realization.
† Construction and Forestry. Segment sales were down 28 percent, while operating profit declined to $18 million for the first quarter, compared to $117 million a year ago. The operating profit decrease was mainly due to the unfavorable impact of lower shipment and production volumes and higher raw material costs, partially offset by improved price realization and lower selling, administrative and general expenses.
† Credit. The credit segment had an operating profit of $53 million for the first quarter, compared with $133 million in the same period last year. The decline was primarily due to narrower financing spreads, lower commissions from crop insurance and a higher provision for credit losses. Total revenues of the credit operations, including intercompany revenues, decreased 12 percent to $541 million in the current quarter from $614 million in the first quarter of 2008. The average balance of receivables and leases financed was 1 percent lower in the first quarter, compared with the same period last year. Interest expense decreased 6 percent in the current quarter, compared with last year, as a result of lower average interest rates, partially offset by an increase in average borrowings. The credit operations' consolidated ratio of earnings to fixed charges was 1.21 to 1 for the first quarter this year, compared with 1.52 to 1 in the same period last year.
The cost of sales to net sales ratios for the first quarter of 2009 and 2008 were 77.7 percent and 74.2 percent, respectively. The deterioration was primarily due to increased raw material costs and unfavorable effects of volatility in foreign currency exchange rates, partially offset by improved price realization.
Finance and interest income declined in the first quarter this year due to lower financing rates and a lower average portfolio. Other income decreased this year primarily due to lower investment income on a smaller marketable securities portfolio, decreased gains on sales of property and lower crop insurance commissions. Research and development expenses increased primarily as a result of increased spending in support of new products. Selling, administrative and general expenses decreased primarily due to the effect of currency translation. Interest expense decreased due to lower borrowing rates, partially offset by higher average borrowings. Other operating expenses were higher primarily due to foreign exchange losses.
Market Conditions and Outlook
The Company's equipment sales are projected to decrease by about 8 percent for fiscal year 2009 and to be down approximately 9 percent for the second quarter, compared to the same periods last year. Included in the forecast is a negative currency translation impact of approximately 6 percent of the forecasted sales for both periods. Net income is forecast to be about $1.5 billion for the year, with more risk on the downside. The Company is suspending its practice of providing a quarterly net income forecast in light of highly uncertain conditions in the global economy, including volatility in foreign exchange rates. The impact on the Company's three equipment businesses and on the net income of the credit operations is difficult to assess.
† Agricultural Equipment. Worldwide segment sales of the Company's agricultural equipment are forecast to decrease by about 2 percent for fiscal year 2009. This includes a negative currency translation impact of about 7 percent. Farm machinery industry sales in the U.S. and Canada are forecast to be flat to up 5 percent for the year, led by an increase in large tractors and combines. The Company expects agricultural commodity prices to remain healthy in 2009 and for fuel and fertilizer costs to moderate. Sales of certain types of equipment are expected to be down significantly for the year. These include small tractors, cotton equipment and machinery used by livestock producers.
In other parts of the world, industry sales are expected to be generally lower as a result of deteriorating economic conditions, credit cost and availability and changes in currency values. In addition, sales in parts of Australia and South America are expected to be hurt by drought. On this basis, industry sales in Western Europe are forecast to be down 10 to 15 percent for the year, while sales are expected to decline significantly in Central Europe and the CIS (Commonwealth of Independent States) countries, including Russia. In South America, industry sales are projected to be lower by 15 to 25 percent.
† Commercial and Consumer Equipment. Reflecting the U.S. housing decline and recessionary economic conditions, commercial and consumer equipment segment sales are projected to be down about 14 percent for the year.
† Construction and Forestry. Largely as a consequence of a declining global economy and historically low levels of construction activity in the U.S., the segment's worldwide sales of construction and forestry equipment are forecast to decline by approximately 24 percent for the year. Included in the outlook is a substantially lower level of global forestry equipment sales as a result of the economic slowdown.
† Credit. Net income for 2009 for the Company's credit operations is forecast to be approximately $250 million. The forecast decrease from 2008 is primarily due to narrower financing spreads related to the current funding environment, a higher provision for credit losses and lower commissions from crop insurance.
Safe Harbor Statement
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: Statements under the "Overview," "Market Conditions & Outlook," and other statements herein that relate to future operating periods are subject to important risks and uncertainties that could cause actual results to differ materially. Some of these risks and uncertainties could affect particular lines of business, while others could affect all of the Company's businesses.
Forward-looking statements involve certain factors that are subject to change, including for the Company's agricultural equipment segment the many interrelated factors that affect farmers' confidence. These factors include worldwide economic conditions, demand for agricultural products, world grain stocks, weather conditions, soil conditions, harvest yields, prices for commodities and livestock, crop and livestock production expenses, availability of transport for crops, the growth of non-food uses for some crops (including ethanol and biodiesel production), real estate values, available acreage for farming, the land ownership policies of various governments, changes in government farm programs and policies (including those in the U.S. and Brazil), international reaction to such programs, global trade agreements, animal diseases and their effects on poultry and beef consumption and prices (including avian flu and bovine spongiform encephalopathy, commonly known as "mad cow" disease), crop pests and diseases (including Asian rust), and the level of farm product exports (including concerns about genetically modified organisms).
Factors affecting the outlook for the Company's commercial and consumer equipment segment include general economic conditions, consumer confidence, weather conditions, customer profitability, consumer borrowing patterns, consumer purchasing preferences, housing starts, infrastructure investment, spending by municipalities and golf courses, and consumable input costs.
General economic conditions, consumer spending patterns, real estate and housing prices, the number of housing starts and interest rates are especially important to sales of the Company's construction and forestry equipment. The levels of public and non-residential construction also impact the results of the Company's construction and forestry segment. Prices for pulp, lumber and structural panels are important to sales of forestry equipment.
All of the Company's businesses and its reported results are affected by general economic conditions in, and the political and social stability of, the global markets in which the Company operates, especially material changes in economic activity in these markets; customer confidence in the general economic conditions; foreign currency exchange rates, especially fluctuations in the value of the U.S. dollar, interest rates and inflation and deflation rates; capital market disruptions; significant changes in capital market liquidity, access to capital and associated funding costs; changes in and the impact of governmental banking, monetary, and fiscal policies and governmental programs in particular jurisdictions or for the benefit of certain sectors; actions by rating agencies; customer access to capital for purchases of the Company's products and borrowing and repayment practices, the number and size of customer loan delinquencies and defaults, and the sub-prime credit market crises; changes in the market values of investment assets; production, design and technological difficulties, including capacity and supply constraints and prices; the availability and prices of strategically sourced materials, components and whole goods; delays or disruptions in the Company's supply chain due to weather, natural disasters or financial hardships or the loss of liquidity
by suppliers (including common suppliers with the automotive industry); start-up of new plants and new products; the success of new product initiatives and customer acceptance of new products; oil and energy prices and supplies; the availability and cost of freight; trade, monetary and fiscal policies of various countries (including protectionist policies that disrupt international commerce); wars and other international conflicts and the threat thereof; actions by the U.S. Federal Reserve Board and other central banks; actions by the U.S. Securities and Exchange Commission; actions by environmental, health and safety regulatory agencies, including those related to engine emissions (in particular Tier 4 emission requirements), noise and the risk of climate change; actions by other regulatory bodies; actions of competitors in the various industries in which the Company competes, particularly price discounting; dealer practices especially as to levels of new and used field inventories; labor relations and regulations; changes to accounting standards; changes in tax rates and regulations; the effects of, or response to, terrorism; and changes in laws and regulations affecting the sectors in which the Company operates. The spread of major epidemics (including influenza, SARS, fevers and other viruses) also could affect Company results. Changes in weather patterns could impact customer operations and Company results. Company results are also affected by changes in the level of employee retirement benefits, changes in market values of investment assets and the level of interest rates, which impact retirement benefit costs, and significant changes in health care costs. Other factors that could affect results are acquisitions and divestitures of businesses, the integration of new businesses, changes in Company declared dividends and common stock issuances and repurchases.
With respect to the current global economic downturn, changes in governmental banking, monetary and fiscal policies to restore liquidity and increase the availability of credit may not be effective and could have a material impact on the Company's customers and markets. Recent significant changes in market liquidity conditions could impact access to funding and associated funding costs, which could reduce the Company's earnings and cash flows. The Company's investment management operations could be impaired by changes in the equity and bond markets, which would negatively affect earnings.
General economic conditions can affect the demand for the Company's equipment as well. Current negative economic conditions and outlook have dampened demand for certain equipment. Furthermore, governmental programs providing assistance to certain industries or sectors could negatively impact the Company's competitive position.
The current economic downturn and market volatility have adversely affected the financial industry in which John Deere Capital Corporation (Capital Corporation) operates. Capital Corporation's liquidity and ongoing profitability depend largely on timely access to capital to meet future cash flow requirements and fund operations and the costs associated with engaging in diversified funding activities and to fund purchases of the Company's products. If current levels of market disruption and volatility continue or worsen or access to governmental liquidity programs decreases, funding could be unavailable or insufficient. Additionally, under current market conditions customer confidence levels may result in declines in credit applications and increases in delinquencies and default rates, which could materially impact Capital Corporation's write-offs and provisions for credit losses.
The Company's outlook is based upon assumptions relating to the factors described above, which are sometimes based upon estimates and data prepared by government agencies. Such estimates and data are often revised. The Company, except as required by law, undertakes no obligation to update or revise its outlook, whether as a result of new developments or otherwise. Further information concerning the Company and its businesses, including factors that potentially could materially affect the Company's financial results, is included in the Company's most recent annual report on Form 10-K (including the factors discussed in Item 1A. Risk Factors) and other filings with the U.S. Securities and Exchange Commission.
Critical Accounting Policies
See the Company's critical accounting policies discussed in the Management's Discussion and Analysis of the most recent annual report filed on Form 10-K. There have been no material changes to these policies.
CAPITAL RESOURCES AND LIQUIDITY
The discussion of capital resources and liquidity has been organized to review separately, where appropriate, the Company's consolidated totals, Equipment Operations and Financial Services operations.
Consolidated
Negative cash flows from consolidated operating activities in the first three months of 2009 were $1,616 million. This resulted primarily from a decrease in accounts payable and accrued expenses, a seasonal increase in inventories and trade receivables, which were partially offset by net income adjusted for non-cash provisions. Cash inflows from investing activities were $1,272 million in the first three months of this year, primarily due to collections of financing receivables and proceeds from sales of equipment on operating leases exceeding the cost of financing receivables and equipment on operating leases acquired by $811 million and proceeds from the maturities and sales of marketable securities exceeding the cost of these securities by $757 million, which were partially offset by purchases of property and equipment of $262 million. Cash inflows from financing activities were $3,132 million in the first three months of 2009, primarily due to an increase in borrowings of $3,346 million, which were partially offset by dividends paid of $118 million. Cash and cash equivalents increased $2,793 million during the current quarter.
Negative cash flows from consolidated operating activities in the first three months of 2008 were $825 million. This resulted primarily from a seasonal increase in inventories, a decrease in accounts payable and accrued expenses, and a decrease in retirement benefit accruals, which were partially offset by net income adjusted for non-cash provisions and the change in accrued income taxes payable/receivable. Cash inflows from investing activities were $657 million in the first three months of 2008, primarily due to the proceeds from the maturities and sales of marketable securities exceeding the cost of these securities by $472 million and collections of financing receivables and proceeds from sales of equipment on operating leases exceeding the cost of financing receivables and equipment on operating leases acquired by $441 million, which were partially offset by purchases of property and equipment of $233 million. Cash outflows from financing activities were $608 million in the first three months of 2008, primarily due to the repurchases of common stock of $482 million, a decrease in borrowings of $118 million and dividends paid of $110 million, which were partially offset by issuances of common stock of $69 million (resulting from the exercise of stock options). Cash and cash equivalents also decreased $782 million during the first quarter of 2008.
Given the downturn in global economic activity and the recent significant changes in credit market liquidity, sources of funds for the Company have been impacted. However, the Company expects to have sufficient sources of liquidity to meet its funding needs. Sources of liquidity for the Company include cash and cash equivalents, marketable securities, funds from operations, the issuance of commercial paper and term debt, the securitization of retail notes (both public and private markets) and committed and uncommitted bank lines of credit. The Company's commercial paper outstanding at January 31, 2009, October 31, 2008 and January 31, 2008 was approximately $2.3 billion, $3.0 billion and $3.0 billion, respectively, while the total cash and cash equivalents and marketable securities position was approximately $5.2 billion, $3.2 billion and $2.6 billion, respectively.
On December 4, 2008, John Deere Capital Corporation (Capital Corporation) and FPC Financial, f.s.b., a wholly-owned subsidiary of Capital Corporation, elected to continue to participate in the debt guaranty program that is part of the Federal Deposit Insurance Corporation's (FDIC's) Temporary Liquidity Guarantee Program (TLGP). During December 2008, Capital Corporation issued $2.0 billion of fixed-rate medium-term notes due June 19, 2012 at a rate of 2.875%, which are guaranteed by the FDIC under the TLGP. At January 31, 2009, $428 million of commercial paper of Capital Corporation was also guaranteed by the FDIC under the TLGP. The FDIC has notified Capital Corporation that it needs additional review and written determination from the FDIC prior to issuing additional guaranteed debt. Accordingly, Capital Corporation has submitted documentation to the FDIC and will continue to seek further guidance.
During January 2009, the Capital Corporation entered into a new revolving credit agreement to utilize bank conduit facilities to securitize retail notes (see Note 6). At January 31, 2009, this facility had a total
capacity, or "financing limit," of up to $2,250 million of secured financings at any time. After a 364 day revolving period, unless the banks and the Capital Corporation agree to renew for an additional 364 days, the Capital Corporation would liquidate the secured borrowings over time as payments on the retail notes are collected. At January 31, 2009, $1,862 million of secured short-term borrowings was outstanding under the agreement. On February 20, 2009, the financing limit of this facility was increased to $2,500 million of secured financings at any time.
Lines of Credit. The Company also has access to bank lines of credit with various banks throughout the world. Some of the lines are available to both Deere & Company and Capital Corporation. Worldwide lines of credit totaled $4,663 million at January 31, 2009, $2,163 million of which were unused. For the purpose of computing unused credit lines, commercial paper and short-term bank borrowings, excluding secured borrowings and the current portion of long-term borrowings, were considered to constitute utilization. Included in the total credit lines at January 31, 2009 was a long-term credit facility agreement of $3.75 billion, expiring in February 2012. The credit agreement requires the Capital Corporation to maintain its consolidated ratio of earnings to fixed charges at not less than 1.05 to 1 for each fiscal quarter and the ratio of senior debt, excluding securitization indebtedness, to capital base (total subordinated debt and stockholder's equity excluding accumulated other comprehensive income (loss)) at not more than 11 to 1 at the end of any fiscal quarter. The credit agreement also requires the Equipment Operations to maintain a ratio of total debt to total capital (total debt and stockholders' equity excluding accumulated other comprehensive income (loss)) of 65 percent or . . .
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