The Global Demographic Tailwind

[DewDiligence]

DE Reports (Blowout) FY2Q10 Results

[Deere not only beat analysts’ FY2Q10 consensus estimates—it blew them away! According to the company, this was the second-best fiscal second quarter in the company’s long and storied history. EPS was $1.28 (+15% YoY), and it would have been $1.58 (+43% YoY) if not for a $0.30 non-recurring charge due to tax changes from healthcare reform (a/k/a ObamaCare). The 43% increase in recurring profit came from a 6% increase in YoY sales (0% from volume, 2% from pricing/mix, and 4% from currency). This shows the enormous operating leverage DE is getting from cost-cutting during the prior recession.

More important than the surprisingly good FY2Q10 results is the bullish outlook for FY3Q10 and the full fiscal year ending 10/31/10. DE now expects FY3Q10 sales to increase 21-33% YoY (almost entirely from volume!) and full FY2010 sales to increase 11-13% YoY (6.5-8.5% from volume, 1.5% from pricing/mix, and including 3% from currency). (Note: the above sales numbers are for equipment sales only—i.e. they exclude sales booked by DE’s unconsolidated finance subsidiary.) FY2010 GAAP profit is now expected to be $1.6B; with 429M diluted shares, this equates to FY2010 GAAP EPS of $3.73 (up from the prior guidance of $3.04, which was raised from $2.10 only three months ago!) and FY2010 non-GAAP EPS (excluding the $0.30 hit from ObamaCare) of $4.03.

At the current share price ($58.73), DE’s P/E based on FY2010 non-GAAP EPS is 14.6x. This strikes me as cheap for company that’s the world’s leading vendor of ag equipment and a major beneficiary of The Global Demographic Tailwind. Moreover, DE’s FY2010 guidance is based on a relatively conservative outlook for US farming, as can be seen from CC slides 9-11 (see below).

DE’s FQ2Q10 financial tables are at http://www.deere.com/en_US/ir/media/pdf/financialdata/reports/2010/2010_secondquarter.pdf and the CC slides are at http://www.deere.com/en_US/ir/media/pdf/financialdata/reports/2010/2010_secondquarter_confcallslides.pdf .]

http://www.deere.com/en_US/ir/financialdata/2010/secondqtr10.html

›MOLINE, Illinois (May 19, 2010) –

• Income climbs 16 percent on 6 percent gain in net sales and revenues.

• Results aided by strong demand for large farm machinery and higher shipments in construction and forestry.

• Quarterly earnings include approximately $130 million tax charge related to U.S. health-care legislation; earnings would have been $677 million, or $1.58 share, excluding charge (see appendix).

• Earnings forecast for year increased to $1.6 billion.

Net income attributable to Deere & Company was $547.5 million, or $1.28 per share, for the second quarter ended April 30, compared with $472.3 million, or $1.11 per share, for the same period last year.

Affecting second quarter results was a tax charge of $129.5 million, or $0.30 per share, due to the previously announced impact of the enactment of U.S. health-care legislation. Without this item, earnings for the quarter would have been $677.0 million, or $1.58 per share. (Information on non-GAAP financial measures is included in the appendix.)

For the first six months of the year, net income attributable to Deere & Company was $790.7 million, or $1.85 per share, compared with $676.2 million, or $1.60 per share, last year. Six-month results also were affected by the tax charge.

Worldwide net sales and revenues increased 6 percent, to $7.131 billion for the second quarter [including the unconsolidated finance subsidiary] and were up 1 percent to $11.966 billion for six months. Net sales of the equipment operations were $6.548 billion for the quarter [this is revenue excluding the finance subsidiary] and $10.785 billion for six months, compared with $6.187 billion and $10.747 billion for the corresponding periods last year.

"We're proud of John Deere's strong results, reflecting a disciplined approach to cost and asset management and the solid execution by employees of our business model," said Samuel R. Allen, chairman and chief executive officer. "These actions are helping us extend our competitive advantage and fully capitalize on improving business conditions." Sales of large farm machinery, particularly in the United States and Canada, are making a significant impact on the company's performance, Allen noted, while construction and forestry shipments are rebounding from historic lows.

Summary of Operations

Net sales of the worldwide equipment operations increased 6 percent for the quarter and were essentially unchanged for six months compared with a year ago. Sales included a favorable currency-translation effect of 4 percent for the quarter and 5 percent for six months and price increases of 2 percent for both periods. Equipment net sales in the United States and Canada increased 4 percent for the quarter and declined 1 percent year to date. Outside the U.S. and Canada, net sales were up 9 percent for the quarter and 2 percent for six months, with favorable currency-translation effects of 9 percent and 10 percent for these periods.

Deere's equipment operations reported operating profit of $988 million for the quarter and $1.303 billion for six months, compared with $628 million and $935 million last year.

Results were higher in the quarter primarily due to improved price realization, the impact of higher production volumes, the favorable effects of foreign exchange and lower raw-material costs, partially offset by higher postretirement benefit costs. Six-month results were higher due to lower raw-material costs, improved price realization and the favorable effects of foreign exchange, partially offset by higher postretirement benefit costs and the impact of lower shipment and production volumes.

Net income of the company's equipment operations was $454 million for the quarter and $623 million for six months, compared with $406 million and $560 million for the respective periods last year. The same operating factors mentioned above, along with a higher effective tax rate, affected both quarterly and six-month results. The higher tax rate was mainly due to the tax charge associated with the enactment of U.S. health-care legislation.

The company's focus on disciplined asset management continued to produce solid results. Trade receivables and inventories ended the quarter at $7.017 billion, representing a reduction of $907 million, or 11 percent, from a year ago. Trade receivables and inventories at the end of the quarter were equal to 34 percent of previous 12-month sales compared with $7.924 billion, or 32 percent of sales, last year.

Net income of the company's financial services operations was $86.9 million for the quarter and $172.0 million for six months compared with $68.9 million and $115.8 million last year. Results were higher for both periods primarily due to improved financing spreads, a lower provision for credit losses, growth in the credit portfolio and higher commissions from crop insurance. These factors were partially offset by lower tax credits related to wind energy projects and higher selling, administrative and general expenses.

Company Outlook & Summary

Company equipment sales are projected to be up 11 to 13 percent for fiscal 2010 and up 21 to 23 percent for the third quarter compared with the same periods a year ago. Included is a favorable currency-translation impact of about 3 percent for the year and about 2 percent for the quarter. For the full year, net income attributable to Deere & Company is anticipated to be approximately $1.6 billion. This amount includes the tax charge of approximately $130 million related to U.S. health-care legislation. [This equates to FY2010 GAAP EPS of $3.73 and non-GAAP EPS (excluding the $0.30 hit from ObamaCare) of $4.03.]

According to Allen, a consistent investment in advanced new products and expanded global capacity is helping the company benefit from an improving economy and puts it on a strong footing for the future. "In our view, John Deere is exceptionally well-positioned to help meet the world's increasing need for farm commodities and other renewable resources as well as for shelter and infrastructure," Allen said. "We're confident these developments hold sustainable promise, which supported by our advanced new products, technologies and well-regarded distribution channel, should continue delivering value to our customers, investors and other stakeholders."

Equipment Division Performance

• Agriculture & Turf. Sales increased 1 percent for the quarter largely due to the favorable effects of currency translation and improved price realization, partially offset by lower shipment volumes. Sales were down 2 percent for the six months primarily due to lower shipment volumes, partially offset by the favorable effects of currency translation and improved price realization.

Operating profit was $952 million for the quarter and $1.304 billion year to date, compared with $703 million and $993 million last year. Operating profit was higher in the quarter primarily due to improved price realization, the impact of higher production volumes, the favorable effects of foreign exchange and lower raw-material costs, partially offset by higher postretirement benefit costs. Six-month operating profit was higher largely due to lower raw-material costs, improved price realization and favorable foreign-exchange effects. Partially offsetting these factors was the impact of lower shipment and production volumes and higher postretirement benefit costs.

• Construction & Forestry. Construction and forestry sales were up 52 percent for the quarter and 15 percent for six months mainly due to higher shipment volumes, favorable currency-translation effects and improved price realization. The division had operating profit of $36 million for the quarter and an operating loss of $1 million for six months, compared with last year's operating losses of $75 million in the quarter and $58 million for six months. The improvement in both periods primarily was due to higher shipment and production volumes and improved price realization, partially offset by higher postretirement benefit costs.

Market Conditions & Outlook

• Agriculture & Turf. Worldwide sales of the company's agriculture and turf division are forecast to increase by 9 to 11 percent for full-year 2010, with a favorable currency-translation impact of about 3 percent. Deere's sales are benefiting in particular from strong demand for large tractors and combines.

With support from healthy farm cash receipts, solid commodity prices and low interest rates, industry farm-machinery sales in the United States and Canada now are forecast to be up 5 to 10 percent for the year. In other parts of the world, industry sales in Western Europe are forecast to decline 10 to 15 percent for the year due to general weakness in the livestock, dairy and grain sectors. High levels of used equipment also are weighing on Western European markets. Sales in Central Europe and the Commonwealth of Independent States are expected to remain under pressure as a result of challenging economic conditions. In South America, industry sales are projected to increase by about 25 percent due mainly to improvement in the key Brazilian and Argentinean markets. Conditions in Brazil are receiving support from favorable prices for soybeans and sugarcane and from attractive government-supported financing. The farm economy in Argentina is benefiting from commodity prices and a return to more normal weather conditions.

Industry sales of turf equipment and compact utility tractors in the United States and Canada are expected to be up 5 to 10 percent for the year.

• Construction & Forestry. Deere's worldwide sales of construction and forestry equipment are forecast to increase by about 30 percent for full-year 2010. Sales are benefiting from low inventories, associated with last year's aggressive production cutbacks, and more-steady market conditions. Though remaining depressed as a result of declining non-residential construction and relatively high used-equipment levels, U.S. construction-equipment markets are showing signs of stabilization. Global forestry markets are improving from last year's extremely weak levels, driven by higher worldwide economic output and somewhat-higher U.S. housing starts.

• Credit. Full-year 2010 net income attributable to Deere & Company for the credit operations is forecast to be approximately $300 million. The forecast increase from 2009 is primarily due to more favorable financing spreads and a lower provision for credit losses, partially offset by higher selling, administrative and general expenses.

John Deere Capital Corporation

The following is disclosed on behalf of the company's credit subsidiary, John Deere Capital Corporation (JDCC), in connection with the disclosure requirements applicable to its periodic issuance of debt securities in the public market.

Net income attributable to John Deere Capital Corporation was $69.4 million for the second quarter and $133.4 million year to date, compared with $33.9 million and $69.0 million for the respective periods last year. Results were higher for both periods primarily due to improved financing spreads, a lower provision for credit losses and higher commissions from crop insurance, partially offset by higher selling, administrative and general expenses.

Net receivables and leases financed by JDCC were $19.818 billion at April 30, 2010, compared with $19.292 billion last year. Net receivables and leases administered, which include receivables administered but not owned, totaled $19.922 billion at April 30, 2010, compared with $19.455 billion a year ago.‹