Record 2Q Deere earnings fall short of some expectations

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By Jennifer DeWitt | Wednesday, May 14, 2008 11:32 PM CDT | () comments

A combine is on display at Deere & Co. headquarters located in Moline. The maker of tractors and harvesting machinery said its second quarter profit jumped to $763.5 million, up from $623.6 million, during the same period last year. (Times file photo) Buy this Photo

(Graphic by Joe Kelley/Quad-City Times) Buy this Photo

Equipment maker Deere & Co. announced Wednesday that profits reached an all-time high in the second quarter as the company continued to expand its global footprint with new investments domestically and abroad.

Deere’s worldwide net income rose 22 percent to $763.5 million, or $1.74 per share, for the quarter ended April 30. The results compared with net income of $623.6 million, or $1.36 per share, for the same period last year.

In a conference call with analysts, Michael Mack, Deere’s chief financial officer, said the quarter produced the highest sales and profits of any quarter in the company’s history. However, he warned that the Moline-based manufacturer will face “cost pressures” in the second half of the year, particularly from rising costs of raw materials and increased freight costs.

Despite the record results, Wall Street responded to the report by sending Deere’s stock down 9.9 percent, or $8.94, to $81.25 in trading on the New York Stock Exchange. Analysts surveyed by Thomson Financial had expected earnings of $1.75 per share on sales of $7.6 billion.

Worldwide net sales and revenues increased 18 percent in the second quarter to $8.097 billion, the company said. They also were up 18 percent for the first six months to $13.298 billion.

Detailing key global investments in facilities announced by Deere in the quarter, Mack said “this year, for the first time, our agricultural equipment sales outside the United States and Canada are expected to surpass those in the U.S. and Canada — truly historic.”

In the second quarter, Deere announced plans to increase its equipment capacity around the globe. Those included expansion of its tractor manufacturing facility in Waterloo, Iowa; building a new operations and training facility in Kaluga, Russia; and partnering in a construction manufacturing operation in China.

“Our business strategy has been to work on building a great business and to grow the company both in new business and new geographic markets,” Ken Golden, Deere’s public relations director, said in an interview. The latest results, he said, are a reflection of that strategy.

Golden said the quarter’s performance exceeded even the second quarter of 2006, which was boosted by the sale of John Deere Health Care to UnitedHealth.

“The results of second quarter show strong evidence that our aspiration to build a better business is working because the percent of increase in net income outpaces the percent of increase in net sales,” he said. While sales rose 18 percent in the second quarter, net income increased 22 percent and earnings per share were up 28 percent.

“This means the company is more effective and efficient and it’s a tribute to the hard work of our employees,” Golden added.

But at least one analyst questioned whether Deere has lost momentum. “Deere had really been leaping over earnings estimates for years, and that came to an end today,” said Matt Collins, an analyst at St. Louis-based Edward Jones. “It was a good solid quarter, but investors were looking for more.”

Collins added that Deere’s tendency to be conservative in its earnings guidance has helped it consistently top Wall Street’s estimates. “I think investors now are wondering if it’s over,” he said.

According to Deere, favorable conditions across the global farm sector have helped drive the company’s record financial results even amid a slowing U.S. economy. Deere now expects worldwide sales of its agricultural equipment to increase by about 35 percent for the full year. The industry is forecasting a 20 percent increase in farm machinery sales, the company said.

“Advanced offerings that help efficiently meet the world’s growing need for farm products are lending strong support to our performance and are bringing John Deere quality and value to a growing global audience,” Robert Lane, Deere’s chairman and chief executive officer, said in a news release.

Deere has reaped the benefits of strong commodity prices paid to its farmer customers as well as an increased demand for their products due to the ethanol boom and more sophisticated diets around the globe. Golden said as more people are eating meat-based diets it is increasing the demand for grain, which in turn is driving up demand for more productive agricultural equipment.

Lane said the company will continue to focus on disciplined growth and attracting customers all over the world. “We are making the investments necessary to serve a range of new customers throughout our various businesses and respond to rising global demand,” he said.

In the conference call, Mack warned that raw material costs — particularly steel — “are racing ahead” of Deere’s projections and will impact earnings for the fiscal year. Despite moves to increase prices and other measures, “the effect of these efforts won’t have much impact before next year,” he said, adding that the company also could face “some spot shortages in various components,” such as agricultural tires.

The company said the cost of raw materials costs is expected to increase between $400 million and $500 million for the fiscal year over last year. Deere previously had forecast costs to increase by $250 million for the year. By division, the cost increases could be as much as $300 million in agricultural; $50 million in commercial and consumer equipment; and $100 million in construction and forestry.

The downturn in the U.S. economy also is impacting Deere’s construction and lawn care divisions. Deere said U.S. markets for construction and forestry equipment will face continued pressure with housing starts expected to reach a 60-year low this year. In addition, sales of lawn and turf care equipment have been hit by a late spring.

Construction sales declined 7 percent in the quarter and year to date. Although the U.S. housing sector is negatively impacting forestry equipment markets in North America, sales of forestry equipment worldwide are expected to rise.

“There’s no doubt the ag business has the wind at its sails, but the rest of the company is fighting the housing recession here, a weakening U.S. economy that may or may not be in a recessions,” Collins said. “But the ag story is very bullish globally, and everybody knows it. That’s why (Deere’s) stock had performed so well, and that’s why expectations were running so high.”

John Deere dealer Roger Goodrich, co-owner of Holland & Sons in western Illinois, can attest to the strong sales of ag equipment. In fact, his biggest concern is running out of equipment to sell.

“We’re looking for a very robust harvest season if we can get this crop in,” said Goodrich, whose company operates four dealerships, including one in Geneseo, Ill. “We ran out of new and used tractors to sell and I know our competitors did too because we had a lot of crossover customers — who might have bought red or blue coming over to us.”

To combat the situation, Goodrich said Deere is rolling out its early-order programs in June — two months ahead of previous years — to give its factories additional time to build. “We’re talking to farmers and they’re saying ‘what should I be buying now?’ We say ‘planters’ and they say ‘You’ve got to be kidding.’ Normally, they’re thinking combines for fall now.”

(The Associated Press contributed to this story.)

Jennifer DeWitt can be contacted at (563) 383-2318 or jdewitt@qctimes.com.

Deere by division

Here’s a look at the performance and outlook of Deere & Co.’s divisions:

Agricultural: Sales in Deere’s largest division increased 34 percent for both the quarter and the first six months. The company credited the improvement to higher shipment volumes, favorable currency translation and improved price realization.

Operating profit was $782 million for the quarter and $1.114 billion for six months, which compared with $487 million and $624 million for the respective periods last year. The improved operating profit was due to higher sales and production volumes as well as improved price realization. The performance was offset by higher selling, administrative and general expenses, and higher raw-material costs.

Deere now projects worldwide sales of its farm equipment to increase by about 35 percent in 2008. It expects industry sales of farm machinery in the United States and Canada to be up about 20 percent for the year.

Sales are being helped by an expanded product line and additional tractor capacity in Brazil, and by rising demand for sugarcane harvesting equipment. Deere’s sales for the year also are expected to move significantly higher in key Asian markets, such as India and China, as well as in Australia.

Commercial & Consumer: Division sales were up 8 percent for the quarter and 11 percent for the year to date.

Operating profit was $154 million for the quarter and $162 million year to date, compared with $150 million and $188 million a year ago. Operating profit was up slightly for the quarter due to a more favorable product mix, improved price realization and higher sales volumes. The improvements have been largely offset by higher selling, administrative and general expenses related to LESCO, which was acquired by Deere last year.

Deere’s sales of lawn and turf care equipment are projected to be up about 4 percent for the year, including about 6 percent from a full year of LESCO sales. The company said sales gains from new products are being offset by the impact of the U.S. housing slowdown and weakening economy. Division sales to date also have been negatively impacted by a late spring in much of the United States.

Construction & Forestry: Sales in the division declined 7 percent for both the quarter and the first six months. Operating profit was $166 million for the quarter and $283 million for six months, versus $192 million and $287 million a year ago.

Deere said the operating profit decline was due to lower shipment volumes, partially offset by improved price realization. For the first half of the year, operating profit was down slightly due to lower shipment volumes and higher raw-material costs.

U.S. markets for construction and forestry equipment are forecast to remain under continued pressure due to a sharp decline in housing starts, which are expected to reach 60-year lows in 2008. Non-residential construction is projected to remain in line with last year’s relatively healthy levels.

Deere is forecasting worldwide construction and forestry equipment sales to decline by approximately 3 percent for the year. Company sales are expected to benefit from new products and production levels in closer alignment with retail demand.

Credit: Full-year 2008 net income for Deere’s credit operations is forecast to be approximately $350 million. The decrease from 2007 is primarily due to an increase in leverage, an increase in the provision for credit losses and higher costs in support of growth initiatives. Results will be partially offset by growth in the credit portfolio and increased crop insurance income.

John Deere Capital Corp.: Net income was $77.3 million for the second quarter and $154.5 million year to date. That compares with net income of $76.3 million and $149.5 million for the respective periods last year.

The quarter’s improvement was primarily due to growth in the credit portfolio and increased crop insurance income, partially offset by an increase in leverage, and lower income from receivable sales. Net income improved for the six months largely due to growth in the credit portfolio and increased crop insurance income, partially offset by an increase in leverage, increased selling, administrative and general expenses and lower income from receivable sales.

Net receivables and leases financed by John Deere Capital Corp. were $19.296 billion at April 30, compared with $18.245 billion last year. Net receivables and leases administered, which include receivables previously sold, totaled $19.452 billion at April 30, which compared with $18.830 billion one year ago.

— Source: Deere & Co.