Deere Posts Record Third-Quarter Earnings Of $537 Million
* EPS from continuing operations climbs 28%; net sales and revenues up 6%.
* Ongoing actions to manage costs and assets producing strong results.
* Agricultural, commercial and consumer equipment businesses pace improvement.
* New products and services receiving positive response from global customer base.
Deere & Company today announced worldwide net income of $537.2 million, or $2.37 per share, for the third quarter ended July 31, compared with $436.0 million, or $1.85 per share, for the same period last year. Income from continuing operations was $537.2 million, or $2.37 per share, for the third quarter, versus $435.7 million, or $1.85 per share, last year. Net income was the highest for any third quarter in the company’s history.
For the first nine months, net income was $1.400 billion, or $6.12 per share, compared with $1.416 billion, or $5.96 per share, last year. Nine-month income from continuing operations was $1.400 billion, or $6.12 per share, in comparison with $1.177 billion, or $4.95 per share, a year ago.
“Deere’s efforts to grow a great business, particularly with the support of improving conditions across the global farm sector, are gaining strong momentum and producing powerful results,” said Robert W. Lane, chairman and chief executive officer. “Advanced new products and services are helping expand the company’s market presence throughout the world. At the same time, our focus on rigorous asset management allows us to serve this growing customer base at the highest level while maintaining lean, efficient inventory levels.” With Deere’s third-quarter results, trade receivables and inventories in relation to sales have declined for each of the last 29 quarters, compared with the same period of the prior year.
Worldwide net sales and revenues increased 6 percent to $6.634 billion for the third quarter and were up 5 percent to $17.941 billion for the first nine months. Net sales of the equipment operations were $5.985 billion for the quarter and $16.066 billion for nine months, versus $5.677 billion and $15.398 billion for the respective periods last year.
Summary of Operations
Net sales of the worldwide equipment operations increased 5 percent for the quarter and rose 4 percent for nine months. This included positive effects for currency translation and price changes of 5 percent for the quarter and 4 percent for nine months. Equipment sales in the U.S. and Canada were down 5 percent for the quarter and down 4 percent for the year to date, while net sales outside the U.S. and Canada increased by 30 percent for the quarter and 25 percent for nine months. Currency translation added 6 percentage points to sales outside the U.S. and Canada for the quarter and 7 points for nine months.
Deere’s equipment divisions reported operating profit of $708 million for the quarter and $1.807 billion for nine months, compared with $583 million and $1.630 billion for the same periods last year. Higher operating profit for both periods was primarily the result of improved price realization and, for the quarter, the favorable impact of higher agricultural-equipment production volumes. Increased raw-material costs and higher selling and administrative expenses partially offset the improvement in both periods.
Deere’s ongoing emphasis on rigorous asset management is continuing to produce solid results. Trade receivables and inventories at the end of the quarter were $6.227 billion, or 30 percent of previous 12-month sales, compared with $6.264 billion, or 32 percent of sales, a year ago.
Financial services reported net income of $92.1 million for the quarter and $266.8 million year to date versus $90.8 million and $496.8 million for the comparable periods last year, which included results from the discontinued health-care business. Income from continuing operations was $92.1 million for the quarter and $266.8 million for nine months, versus $90.5 million and $256.9 million a year earlier. The improvement for both periods was primarily due to growth in the credit portfolio, partially offset for the nine months by a higher provision for credit losses and increased selling and administrative expenses.
Company equipment sales are projected to increase by about 16 percent for the fourth quarter and 7 percent for the full year. Included in the fourth-quarter forecast is about 5 percentage points due to sales made by LESCO, Inc., and 3 points of positive currency translation. LESCO is a supplier of consumable lawn care, landscape, golf course and pest control products that was acquired in the third quarter. For the full year, Deere’s net income is forecast to be about $1.700 billion.
“Deere’s recent performance reflects the impact of our focus on economic profit as a central theme in managing the company,” said Lane. “We have shown significant progress in this regard containing costs and assets while making disciplined, growth-related investments. As a result, the company is well-positioned to benefit from secular economic trends taking shape throughout the world such as growing affluence and increasing demand for food, feed and biofuels. We remain quite optimistic about these developments and believe they hold considerable promise for the company, its investors and others with a stake in our continued success.”
Equipment Division Performance
* Agricultural. Division sales increased 16 percent for the quarter and 14 percent for nine months. Sales increased due to higher volumes, improved price realization, and the favorable effects of currency translation. Operating profit was $431 million for the quarter and $1.055 billion for nine months, compared with $249 million and $739 million for the respective periods last year. The quarter’s operating profit increase was mainly due to higher sales and production volumes and improved price realization, partially offset by higher raw-material costs and research and development expenses. Operating profit was higher for nine months primarily due to improved price realization and higher sales volumes, partially offset by higher selling and administrative expenses attributable in large part to the division’s growth initiatives and currency translation. Also affecting nine-month profit were increased raw-material costs and higher research and development expenses.
* Commercial & Consumer. Division sales rose 15 percent for the quarter and 6 percent for nine months compared with the prior year. LESCO operations accounted for 11 percentage points of the quarter’s increase and 4 points year to date. Sales increased primarily due to the higher LESCO volumes and improved price realization. Operating profit was $127 million for the quarter and $315 million for nine months, compared with $78 million and $225 million last year. For both periods, the profit increase was primarily due to improved price realization. The impact of higher sales volumes, largely associated with LESCO operations, was mainly offset by higher selling and administrative expenses attributable to LESCO.
* Construction & Forestry. Sales declined 20 percent for the third quarter and were down 13 percent for nine months. Operating profit was $150 million for the quarter and $437 million year to date, compared with $256 million and $666 million a year ago. Lower operating profit for both periods was primarily due to lower sales and production volumes and higher raw-material costs, partially offset by positive price realization. Last year’s results included expenses related to the closure of a Canadian forestry-equipment facility.
Market Conditions & Outlook
* Agricultural. Global farm conditions remain positive, driven by growing economic prosperity, relatively high commodity prices, and robust demand for renewable fuels. Ethanol, biodiesel, wind energy and other renewable energy sources are continuing to receive strong support throughout the world from government policies and legislative actions. Consistent with the company’s earlier expectations, retail activity in the U.S. and Canada has continued to gain momentum as the year has progressed. Industry sales for the region are forecast to be up about 5 percent for the year, led by increases in high-horsepower tractors.
European markets are benefiting from solid farm fundamentals, though difficult weather conditions have had a moderating impact on machinery demand. Industry sales in Western Europe are forecast to be up about 2 percent for the year. Markets in Eastern Europe and the CIS (Commonwealth of Independent States) countries, including Russia, are experiencing higher sales as a result of increased demand for productive farm machinery. Conditions in South America have continued to improve with industry sales for the year expected to be up by about 30 percent. The Brazilian market is receiving support from higher commodity prices and a proposed resolution of issues concerning government-backed FINAME financing of farm machinery. Industry sales in Australia are expected be down 20 to 25 percent largely as a result of extreme drought conditions earlier in the year. Based on these factors and market conditions, worldwide sales of the company’s agricultural equipment are forecast to increase by about 16 percent for full-year 2007, including about 3 points of currency impact.
* Commercial & Consumer. John Deere commercial and consumer equipment sales are projected to be up about 11 percent for the year, including about $350 million of sales from LESCO. Division sales are continuing to benefit from new lines of residential zero-turn radius mowers, utility vehicles, and compact tractors, among other products.
* Construction & Forestry. U.S. markets for construction and forestry equipment are remaining under pressure. Although nonresidential spending is growing, housing construction has experienced a significant downturn. Further, sales to the independent rental channel are expected to be well below last year’s levels. In forestry equipment, sales have declined substantially in the U.S. but moved higher in Europe and other areas. In this environment, Deere’s worldwide sales of construction and forestry equipment are forecast to decrease by about 12 percent for the year.
* Credit. Full-year 2007 net income for Deere’s credit operations is forecast to be approximately $355 million. The improvement is being driven by growth in the credit portfolio, partially offset by increased selling and administrative expenses in support of the division’s growth initiatives and a higher provision for credit losses.
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