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DEERE REPORTS THIRD-QUARTER EARNINGS OF $387 MILLION
- Drought conditions in key markets have negative effect on quarter's results and near-term outlook.
- Factory production rates adjusted in response to changes in retail environment.
- Construction markets continue to show strong growth.
MOLINE, Illinois (August 16, 2005) — Deere & Company today announced worldwide net income of $387.1 million, or $1.58 per share, for the third quarter ended July 31, compared with $401.4 million, or $1.58 per share, for the same period last year. For the first nine months, net income was $1.214 billion, or $4.89 per share, compared with $1.049 billion, or $4.14 per share, last year.
Worldwide net sales and revenues grew 11 percent to $6.005 billion for the third quarter and increased 13 percent to $16.754 billion for the first nine months. Net sales of the equipment operations were $5.370 billion for the quarter and $14.916 billion for nine months, compared with $4.854 billion and $13.061 billion for the corresponding periods last year.
Commenting on results that fell below the company's earlier guidance, Robert W. Lane, chairman and chief executive officer, said, "Deere's third-quarter performance reflects our commitment to balance production with demand and maintain a tight grip on inventories." In addition, he noted that retail sales in several key markets have been negatively affected by dry weather. "Drought has definitely put pressure on our retail-sales forecasts and caused us to accelerate production cuts in several of our key factories late in the quarter," Lane said. "These actions have the effect of lowering earnings in the near term, but they are fully consistent with our longer-range commitments and goals for delivering shareholder value."
In addition, the company's lean inventory position should set the stage for the successful introduction of many new models of equipment in 2006, Lane said. "As a result of our consistent approach to new-product investment, we're coming to market with exciting new lines of farm machinery and lawn equipment. We're confident these advanced products will enhance our market leadership and deliver even more value and productivity to our growing global customer base."
Summary of Operations
Excluding the effect of currency translation and price changes, the company's worldwide equipment sales were up 6 percent for the quarter and 8 percent year to date. On a reported basis, equipment sales in the U.S. and Canada rose 11 percent for the quarter and 14 percent for nine months. Outside the U.S. and Canada, sales increased by 8 percent and 11 percent for the respective periods excluding currency translation and by 11 percent and 16 percent as reported.
Deere's equipment divisions reported operating profit of $500 million for the quarter and $1.618 billion for nine months, compared with $532 million and $1.456 billion last year. Negatively affecting operating profit for the quarter were lower manufacturing volumes in the agricultural equipment and commercial and consumer equipment divisions, where production was reduced in light of changes in demand at the retail level. On a year-to-date basis, operating profit increased primarily due to higher shipments and lower postretirement benefit costs. Improved price realization offset higher raw material costs for both periods.
Deere's asset-management efforts are continuing to yield positive results. Trade receivables and inventories at the end of the quarter were $6.526 billion, or 33 percent of previous 12-month sales, compared with $5.776 billion, or 35 percent of sales, a year ago.
Financial services reported net income of $90.4 million for the quarter and $252.9 million for nine months versus $79.0 million and $221.0 million last year. The company's credit operations benefited from growth in the portfolio, reflecting strong demand for John Deere products, as well as a lower loss provision, partially offset by lower financing spreads. Last year, credit operations benefited from gains on retail notes sold during the quarter and first nine months. Also included in financial services results were improved health-care underwriting margins for both periods.
Company Earnings Outlook
Excluding the impact of currency translation and price changes, company equipment sales are expected to increase by about 2 percent for full-year 2005 and to be down about 13 percent for the fourth quarter. On a reported basis, sales are forecast to be up 8 percent for the year and down 9 percent for the quarter. Production is expected to be off slightly on a full-year basis but down 23 percent in the fourth quarter. Net income is forecast to be about $1.4 billion for the full year and from $175 million to $200 million for the fourth quarter.
Company Summary
"Through our actions to hold down asset levels and costs, we remain focused on achieving superior, sustainable results," Lane said. "At the same time, we are growing the business by investing in new products and services and by extending our brand to a wider global audience." In this regard, Deere recently announced plans to purchase the remaining half of its tractor joint venture in India, expanded its landscapes-supply business through an acquisition, and started up a new business unit devoted to wind-energy services. In addition, the company expanded its productive and popular line of automated guidance equipment and broke ground for a new drivetrain facility in China. Said Lane, "We're confident we are building a better business that will prove beneficial to investors well into the future."
Equipment Division Performance
- Agricultural Equipment.
Division sales increased 9 percent for the quarter and 16 percent for nine months. Factors supporting the quarter's increase included improved price realization, higher shipments and currency translation. Year-to-date sales were higher mainly due to increased shipments, as well as the impact of improved price realization and currency translation. Operating profit was $262 million for the quarter and $913 million for nine months, compared with $290 million and $805 million last year. Quarterly profit was down primarily due to inefficiencies related to lower worldwide production volumes. The operating-profit improvement for nine months was primarily driven by higher worldwide sales, the effect of stronger production volumes, and lower postretirement benefit costs. Improved price realization offset the increase in raw material costs for the third quarter and largely offset the increase experienced year to date.
- Commercial & Consumer Equipment.
Sales declined 3 percent for the quarter and 5 percent for nine months, reflecting the impact of unfavorable weather conditions on the sale of consumer riding lawn equipment during both periods. Operating profit was $60 million for the quarter and $193 million for nine months, compared with $87 million and $258 million last year. Operating profit was down for both periods primarily due to lower shipments and production in response to a weaker retail environment. In addition, production was lower in the quarter as division factories made preparation for new products. Improved price realization offset an increase in raw material costs for both the quarter and year to date.
- Construction & Forestry.
Division sales rose 29 percent for the quarter and 30 percent for nine months reflecting strong activity at the retail level. Operating profit improved to $178 million for the quarter and $512 million for the year to date, compared with $155 million and $393 million last year. The profit increases were mainly a result of higher sales and efficiencies related to stronger production volumes. Improved price realization offset the impact of higher raw material costs in both periods. Nine-month operating profit last year included a $30 million pretax gain from the sale of an equipment rental company.
Market Conditions & Outlook
- Agricultural Equipment.
Despite solid overall financial conditions in the U.S. farm sector, dry weather centered in important farm machinery markets has caused the company to turn more cautious with respect to its near-term outlook. As a result, industry sales of agricultural equipment in the U.S. and Canada are now forecast to be up 5 percent for the year. Despite the drought impact, farm cash receipts for 2005 are still expected to remain near last year’s record, while the decline in corn and soybean production currently being forecast has benefited commodity prices.
In other parts of the world, industry retail sales in Western Europe are now forecast to be down more than 5 percent for the year. Farmers across the region are seeing income levels comparable with last year, however severe drought in parts of southern Europe and escalating concerns over government agricultural-subsidy programs have put further downward pressure on tractor sales. In South America, the market in Brazil has weakened further due to drought, lower farm income and a stronger currency. Industry sales there are down more than 30 percent for tractors and more than 70 percent for combines year to date. However, the outlook for sales in Argentina has improved due in part to higher commodity prices. As a result, industry sales in the region are now projected to be down about 35 percent for the year.
Based on these factors and market conditions, worldwide sales of John Deere agricultural equipment are forecast to be up about 6 percent for the year excluding the impact of exchange rates. Currency is expected to add about two percentage points to farm-machinery sales for the year.
- Commercial & Consumer Equipment.
Sales of John Deere commercial and consumer equipment are now forecast to be down about 5 percent for the year. Although commercial markets have been stronger than those for residential products, extreme weather patterns have contributed to a sharp drop in the sale of many types of lawn equipment.
- Construction & Forestry.
Markets for construction equipment are continuing to experience growth as a result of positive U.S. economic conditions, a strong housing market, and an overall increase in construction spending. In this regard, the recent passage of U.S. federal highway legislation ensures a good level of infrastructure spending for the next few years and is supportive of improved contractor confidence. Worldwide forestry-equipment markets have expanded mainly due to rising global demand for paper products and lumber. On this basis, Deere sales of construction and forestry equipment are forecast to rise about 21 percent for fiscal 2005.
- Financial Services.
Full-year net income is expected to be about $330 million, which is above the previous forecast due in large part to a further improvement in the company's credit-portfolio quality.
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.
JDCC's net income was $76.3 million for the quarter and $206.0 million for the year to date, compared with net income of $64.7 million and $201.4 million last year. Results for the third quarter and first nine months of 2005 benefited from growth in the portfolio and a lower provision for credit losses, partially offset by lower financing spreads. Last year's results benefited from gains on retail notes sold during the quarter and first nine months.
Net receivables and leases financed by JDCC were $15.789 billion at July 31, 2005, compared with $12.734 billion one year ago. Net receivables and leases administered, which include receivables previously sold, totaled $17.703 billion at July 31, 2005, compared with $15.843 billion one year ago.
Safe Harbor Statement
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: Statements under "Company Earnings Outlook," "Company Summary," "Market Conditions & 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 segment the many interrelated factors that affect farmers' confidence, including worldwide demand for agricultural products, world grain stocks, weather and soil conditions, harvest yields, prices realized for commodities and livestock, crop production expenses (most notably fuel and fertilizer costs), availability of transport for crops, the growth of non-food uses for some crops, real estate values, available acreage for farming, the land ownership policies of various governments, changes in government farm programs, international reaction to such programs, animal diseases (including 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 commercial and consumer equipment segment include weather conditions, general economic conditions in these markets, consumer confidence, consumer borrowing patterns, consumer purchasing preferences, housing starts, and spending by municipalities and golf courses.
The number of housing starts, interest rates and consumer spending patterns are especially important to sales of the Company's construction 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 stability of global markets in which the Company operates; production, design, and technological difficulties, including capacity and supply constraints and prices, including for supply commodities such as steel and rubber; the success of new product introduction 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; 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 regulatory agencies, including those related to engine emissions and the risk of global warming; actions by other regulatory bodies; actions by rating agencies; capital market disruptions; investor sentiment; inflation and deflation rates, interest rate levels and foreign currency exchange rates; customer borrowing and repayment practices, and the number of customer loan delinquencies and defaults; 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; changes to accounting standards; the effects of terrorism and the response thereto; and legislation affecting the sectors in which the Company operates. Company results are also affected by changes in market values of investment assets and the level of interest rates, which impact postretirement benefit costs, and significant changes in health care costs.
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, however, 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 and other filings with the U.S. Securities and Exchange Commission.
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For further information, the news media should call:
Ken Golden
Manager, Public Relations
Deere & Company
309-765-5678
309-765-5682 (fax)
For general information, learn more
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