Deere & Co. posts record 1Q earnings

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By Jennifer DeWitt | Wednesday, February 13, 2008 11:33 PM CST | () comments

Deere & Co. announced Wednesday that first-quarter profits hit a new record — harvesting a path for an expected 28 percent increase in ag equipment sales for full year 2008.

Led by strong global farm machinery sales, the Moline-based equipment maker said net income rose 54 percent to $369.1 million, or 83 cents per share in the quarter ended Jan. 31. That compared with $238.7 million, or 52 cents per share, for the same period last year, which also had been a record first quarter.

Net sales and revenues of all its divisions rose 18 percent to $5.2 billion in the quarter, which compared with $4.425 billion a year ago.

Deere spokesman Ken Golden said the quarter’s performance “is really indicative of stronger global ag markets and a company that had prepared well to take advantage of those markets.”

“The exciting and good news for John Deere and its employees is that we’re forecasting a better year than we had a quarter ago,” he said. “It continues to show that farmers across the globe are using our machines.”

In a conference call with analysts Wednesday, Bill Ratzburg, Deere’s director of investor relations, said higher commodity prices, increased farm receipts and a growing demand for crops due to ethanol and biofuels all “translates into a stronger order book for John Deere … ”

He added that the U.S. Energy Independence & Security Act, enacted in December, “significantly expanded mandatory levels of renewable fuels” and defined target levels and timelines for advanced biofuels. “This may support significant and exciting new opportunities for Deere equipment and services related to the planting, cultivating, harvesting and handling of cellulosic materials,” Ratzburg told analysts.

With strong global ag fundamentals on solid ground, Deere revised its forecast for the year. It now expects net sales of farm machinery to be up 28 percent in fiscal 2008 — an increase from its previous forecast of 17 percent.

Deere, which also sells construction and forestry equipment and lawn and turf care equipment, expects all its equipment sales to increase by about 17 percent for the year and 23 percent for the second quarter.

Despite the record profits, Deere’s shares fell 94 cents, or 1.1 percent, to $85.54 in trading Wednesday after the second quarter earnings guidance was below what Wall Street expected. Deere now forecast net income to be about $2.2 billion for the year and between $700 million and $725 million for the second quarter — short of Wall Street’s $735 million estimate.

“Advanced product offerings that help John Deere customers be more profitable and productive are supporting the company’s financial performance and helping expand our global market presence,” Deere chairman and chief executive officer Robert Lane said in a news release. “At the same time, the company remains in a prime position to benefit from powerful trends sweeping the world, such as growing affluence, increasing demand for food and infrastructure, and the rising use of biofuels.”

In its revised forecast, Deere was much more positive about global markets, including in Europe and South America, than it has been in the past. “We’re growing globally as part of our efforts to replicate in other parts of the world our success in North America,” Golden said.

But the strong global ag markets come as both Deere’s commercial and consumer division and the construction and forestry division are being challenged by a slowing U.S. housing market. Lane added “Deere’s nonagricultural operations remain on a profitable course in spite of weakening conditions in the United States.”

   The company’s commercial and consumer equipment division saw operating profits slip from $38 million a year ago to $8 million in the first quarter. Sales rose 16 percent. Construction and forestry net sales and revenues dropped 6 percent, while the division’s operating profit rose 23 percent in the quarter to $117 million from $95 million a year ago.

    Deere’s equipment divisions reported operating profit of $457 million for the quarter, compared with $270 million last year.

    Ratzburg told analysts that Deere plans to increase its research and development spending by $60 million this year, $50 million of which would be spent on new agricultural product research. Last year, the company spent $816.8 million on research and development.

   “It’s a vote of confidence of the current momentum that we have decided to increase spending in those areas,” Golden said. “Spending more in research and development will help us more rapidly explore opportunities for products and services.”

   John Deere dealer Roger Goodrich said it is Deere’s innovation and the new technologies that have farmers thirsting for the latest equipment. “It seems like the farmer is on the cutting edge today of technology. The farmer always had the profile and stigma to be the last to get technology. Now I think they’re way ahead of the general consumer,” he said.

   Goodrich, the co-owner of Holland & Sons, which operates four dealerships in western Illinois including Geneseo, said farmers realize what equipment that improves productivity can mean to their bottom line. Global positioning equipment, which can start at $8,000 and cost up to $25,000, can return a payback in just a year, he said.

    “The biggest concern on the horizon of farmers in the Midwest is the cost of inputs, not necessarily the cost of iron (equipment),” he said. “High commodity prices are putting cash in their pockets, but they’re being chewed up by other things … fuel, chemicals, seeds, renting ground.”

Jennifer DeWitt can be contacted at (563) 383-2318 or jdewitt@qctimes.com. Comment on this story at www.qctimes.com.