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| DE > SEC Filings for DE > Form 10-Q on 28-Aug-2009 | All Recent SEC Filings |
28-Aug-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, lawn and turf care equipment, landscaping and irrigation 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. The agricultural equipment segment and the commercial and consumer equipment segment were combined into the agriculture and turf segment at the beginning of the third quarter of 2009 (see Note 19). The Company's other operating segments continue to be the construction and forestry segment and the credit segment.
Trends and Economic Conditions
Industry farm machinery sales for 2009 are forecast to be down slightly for the year in the U.S. and Canada though sales of large tractors, combines, sprayers and seeding equipment are expected to be higher. Industry farm machinery sales in Western Europe are forecast to decline 10 to 15 percent for the year. In other parts of the world, markets are expected to be sharply lower. Industry sales of turf equipment and compact utility tractors in the U.S. and Canada are also expected to be down about 20 percent. The Company's agriculture and turf equipment sales were down 21 percent for the third quarter, 9 percent for the first nine months of 2009 and are forecast to decrease about 15 percent for the full year. This forecast includes a negative currency translation effect of about 5 percent. The Company's construction and forestry sales declined 47 percent in the third quarter and 45 percent in the first nine months of 2009. These sales are expected to decrease approximately 47 percent for the year, attributable to the decline in the global economy and historically low levels of construction activity in the U.S. Net income for the Company's credit operations in 2009 is forecast to decrease to approximately $270 million.
Items of concern include the decline in global economic activity and expected slow recovery, the turmoil in financial markets and the effectiveness of governmental policies to promote economic recovery 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. Designing and producing products with engines that continue to meet high performance standards, yet also comply with increasingly stringent emissions regulations, is one of the Company's major priorities.
The Company continued to benefit from strength in the U.S. market for large farm machinery and from efforts to control costs and inventories. The Company's construction and forestry business, as an example, is executing plans to adjust expenses and asset levels in response to the severe decline in its markets.
2009 Compared with 2008
Deere & Company's net income for the third quarter was $420.0 million, or $0.99 per share, compared with $575.2 million, or $1.32 per share, for the same period last year. For the first nine months, net income was $1,096.3 million, or $2.59 per share, compared with $1,707.7 million, or $3.89 per share, last year.
Worldwide net sales and revenues declined 24 percent to $5,885 million for the third quarter of 2009, compared with $7,739 million a year ago, and were down 15 percent to $17,778 million for the first nine months, compared with $21,036 million a year ago. Net sales of the Equipment Operations were $5,283 million for the third quarter and $16,030 million for the first nine months, compared with $7,070 million and $19,070 million for the respective periods last year. Net sales of the worldwide Equipment Operations decreased 25 percent for the third quarter and 16 percent for the first nine months. Sales included an unfavorable currency translation effect of 4 percent for the quarter and 5 percent for the first nine months and price increases of 6 percent for both periods. Net sales in the U.S. and Canada declined 16 percent for the current quarter and 9 percent for the first nine months. Net sales outside the U.S. and Canada decreased 37 percent for the third quarter and 26 percent for the first nine months with an unfavorable currency translation effect of 7 percent for the quarter and 11 percent year to date.
The Company's Equipment Operations reported operating profit of $452 million for the third quarter and $1,387 million for the first nine months of 2009, compared with $818 million and $2,377 million for the same periods last year. The deterioration in both periods primarily was due to lower shipment and production volumes and the unfavorable effects of foreign currency exchange rates, partially offset by improved price realization and lower selling, administrative and general expenses. In addition, higher raw material costs affected nine-month results.
The Equipment Operations reported net income of $319.2 million for the third quarter and $878.7 million for the first nine months, compared with $478.6 million and $1,408.2 million for the same periods last year. The same operating factors mentioned above, in addition to a lower current year effective tax rate, had an impact on both quarterly and nine-month results.
Trade receivables and inventories at the end of the third quarter were $6,250 million, or 28 percent of the last 12 months' net sales, compared with $7,457 million, or 30 percent of net sales, for the same period a year ago.
Net income of the Company's Financial Services operations for the third quarter and first nine months of 2009 was $102.1 million and $217.8 million, respectively, compared to $83.4 million and $267.5 million for the same periods last year. The results were higher for the third quarter largely due to benefits from investment tax credits for wind energy projects, foreign exchange gains and lower selling, administrative and general expenses. Partially offsetting these factors were a higher provision for credit losses and narrower financing spreads. Nine-month net income was lower primarily due to a higher provision for credit losses, narrower financing spreads and lower commissions from crop insurance, partially offset by benefits from investment tax credits and lower selling, administrative and general expenses. See the following discussion for the credit operations in the Business Segment Results.
Business Segment Results
† Agriculture and Turf. Segment sales declined 21 percent for the third quarter and 9 percent for the first nine months of 2009 largely due to lower shipment volumes and the unfavorable effects of currency translation, partially offset by improved price realization. Operating profit was $480 million for the third quarter and $1,472 million for the year to date, compared with $725 million and $2,001 million for the respective periods last year. Operating profit was lower in both periods primarily due to lower shipment and production volumes and unfavorable impacts of foreign currency exchange rates, partially offset by improved price realization and lower selling, administrative and general expenses. Higher raw material costs also had an unfavorable impact on the nine-month results.
† Construction and Forestry. Construction and forestry sales declined 47 percent for the third quarter and 45 percent for the first nine months of 2009, resulting in operating losses of $28 million in the third quarter and $85 million for the first nine months. Last year, the segment had operating profit of $93 million and $376 million for the same periods. The profit decrease for both periods was primarily due to significantly lower shipment and production volumes, partially offset by lower selling, administrative and general expenses and improved price realization. Higher raw material costs also had an unfavorable impact on year-to-date results.
† Credit. The credit segment had an operating profit of $95 million for the third quarter and $206 million for the first nine months, compared with $111 million and $376 million in the same periods last year. Operating profit was lower for both periods primarily due to a higher provision for credit losses, narrower financing spreads and a higher pretax loss from wind energy projects, partially offset by lower selling, administrative and general expenses and foreign exchange gains. In addition, the nine-month results were affected by lower commissions from crop insurance. Total revenues of the credit operations, including intercompany revenues, decreased 6 percent to $569 million in the current quarter from $606 million in the third quarter of 2008 and 10 percent in the first nine months to $1,639 million this year from $1,823 million last year. The average balance of receivables and leases financed was 1 percent lower in the third quarter and the first nine months of 2009, compared with the same periods last year. Interest expense decreased 6 percent in the current quarter and in the first nine months of 2009 as a result of lower average interest rates, partially offset by higher average borrowings. The credit operations' consolidated ratio of earnings to fixed charges was 1.42 to 1 for the third quarter this year, compared with 1.47 to 1 in the same period last year. The ratio was 1.29 to 1 for the first nine months this year, compared to 1.51 to 1 last year.
The cost of sales to net sales ratios for the third quarter and first nine months of 2009 were 76.8 percent and 77.1 percent, respectively, compared to 76.7 percent and 74.9 percent in the same periods last year. The deterioration was primarily due to lower shipment and production volumes and the unfavorable effects of foreign currency exchange rates, partially offset by improved price realization. Higher raw material costs also affected the percentage for the first nine months of 2009.
Finance and interest income declined in both periods this year due to lower financing rates and a lower average portfolio. Other income decreased in the third quarter primarily due to lower earnings from marketable securities. Nine-month other income declined as a result of lower commissions from crop insurance and the decrease in earnings from marketable securities. Research and development expenses increased in both periods primarily as a result of increased spending in support of new products including designing and producing products with engines to meet more stringent emissions regulations. Selling, administrative and general expenses decreased in both periods primarily due to lower compensation expenses and the effect of currency translation. Interest expense decreased in both periods due to lower borrowing rates, partially offset by higher average borrowings. Other operating expenses were higher in the first nine months primarily due to foreign exchange losses. The effective tax rate for the provision for income taxes was lower in both periods primarily due to benefits from investment tax credits related to wind energy projects and certain discrete items. The equity in income of unconsolidated affiliates decreased in both periods as a result of lower income from construction equipment manufacturing affiliates impacted by the low levels of construction activity.
Market Conditions and Outlook
The Company's equipment sales are projected to be down about 21 percent for the fiscal year and down about 34 percent for the fourth quarter, compared with the same periods last year. This includes a negative currency translation impact of about 4 percent for the year and about 1 percent for the fourth quarter. The Company's net income is anticipated to be approximately $1.1 billion for 2009, despite the largest expected single-year sales decline in at least 50 years. Affecting fourth quarter results will be significant production cutbacks that are being made in line with retail demand. The quarter also will include costs for rationalizing operations, as previously announced.
† Agriculture and Turf. Sales of the agriculture and turf segment in fiscal year 2009 are forecast to decrease by about 15 percent, including a negative currency translation impact of about 5 percent. As previously mentioned, at the beginning of the third quarter of 2009, the Company combined the agricultural equipment and commercial and consumer equipment segments. Voluntary employee separations related to the new organizational structure resulted in pretax charges of $16 million in the third quarter of 2009 and will be approximately $85 million in the fourth quarter. As previously disclosed on Form 8-K dated June 30, 2009, the total estimated charges for the separation program increased approximately $50 million from the estimate included in the second quarter Form 10-Q primarily due to an increase in anticipated acceptances. Annual savings from the separation program are expected to be approximately $50 million to $60 million in 2010.
On an industry basis, farm machinery sales in the U.S. and Canada are forecast to be down slightly for the year, though sales of large tractors, combines, sprayers and seeding equipment are expected to be higher. In other parts of the world, industry farm machinery sales in Western Europe are forecast to decline 10 to 15 percent for the year while markets in Central Europe and the Commonwealth of Independent States are expected to be sharply lower. In South America, industry sales are projected to decrease by 20 to 30 percent for the year. Industry sales of turf equipment and compact utility tractors in the U.S. and Canada are expected to be down about 20 percent.
† Construction and Forestry. The Company's worldwide sales of construction and forestry equipment are forecast to decline by about 47 percent for the year. The decline is attributable to a declining global economy, historically low levels of U.S. construction activity, and further deterioration in forestry markets worldwide.
† Credit. Net income in fiscal year 2009 for the Company's credit operations is forecast to be approximately $270 million. The forecast decrease from 2008 is primarily due to narrower financing spreads, a higher provision for credit losses and lower commissions from crop insurance, partially offset by benefits from investment tax credits related to wind energy projects.
Safe Harbor Statement
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: Statements under "Overview," "Market Conditions and 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 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 turf and utility equipment 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; delays or disruptions in the Company's supply chain due to weather, natural disasters or financial hardship or the loss of liquidity by suppliers (including common suppliers with the automotive industry); 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 housing market credit crisis; 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; 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 H1N1 and other influenzas, 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 including those resulting from governmental action, if any. Other factors that could affect results are acquisitions and divestitures of businesses, the integration of new businesses, the implementation of organizational changes such as combining of the agricultural and commercial and consumer equipment segments, changes in Company declared dividends and common stock issuances and repurchases.
With respect to the global economic downturn and expected slow recovery, 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. 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 economic downturn and market volatility have adversely affected the financial industry in which John Deere Capital Corporation and other credit subsidiaries (Credit) operate. Credit'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 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 Credit'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
Positive cash flows from consolidated operating activities in the first nine months of 2009 were $483 million. The positive cash flows resulted primarily from net income adjusted for non-cash provisions, which were partially offset by a decrease in accounts payable and accrued expenses, an increase in receivables related to sales and the change in accrued income taxes payable/receivable. Cash inflows from investing activities were $484 million in the first nine months of this year, primarily due to proceeds from maturities and sales of marketable securities exceeding the cost of marketable securities by $803 million and collections of receivables and proceeds from sales of equipment on operating leases exceeding the cost of receivables and cost of equipment on operating leases acquired by $403 million. These inflows were partially offset by purchases of property and equipment of $647 million and the acquisitions of businesses of $47 million. Cash inflows from financing activities were $1,100 million in the first nine months of 2009, primarily due to an increase in borrowings of $1,569 million, which were partially offset by dividends paid of $355 million. Cash and cash equivalents increased $2,103 million during the first nine months this year.
Positive cash flows from consolidated operating activities in the first nine months of 2008 were $943 million. This resulted primarily from net income adjusted for non-cash provisions, an increase in accounts payable and accrued expenses and the change in accrued income taxes payable/receivable, which were partially offset by a seasonal increase in inventories and trade receivables, and a decrease in retirement benefit accruals. Cash outflows from investing activities were $383 million in the first nine months of this year, primarily due to purchases of property and equipment of $631 million, the acquisitions of businesses of $241 million, the cost of financing receivables and equipment on operating leases acquired exceeding collections of financing receivables and the proceeds from sales of equipment on operating leases by $200 million. These outflows were partially offset by proceeds from maturities and sales of marketable securities exceeding the cost of marketable securities by $647 million. Cash outflows from financing activities were $93 million in the first nine months of 2008, primarily due to repurchases of common stock of $1,358
million and dividends paid of $328 million, partially offset by an increase in borrowings of $1,428 million, proceeds from issuance of common stock of $107 million (resulting from the exercise of stock options) and excess tax benefits from share-based compensation of $72 million. Cash and cash equivalents also increased $544 million during the first nine months.
Given the downturn in global economic activity and the 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 July 31, 2009, October 31, 2008 and July 31, 2008 was approximately $0.5 billion, $3.0 billion and $3.3 billion, respectively, while the total cash and cash equivalents and marketable securities position was approximately $4.5 billion, $3.2 billion and $3.8 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 . . .
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