May 22, 2015

Deere Profit Falls as Equipment Sales Drop

Source: Wall Street Journal
By: 

Farm-equipment maker Deere & Co. posted a 30% drop in fiscal second-quarter net income and lowered its full-year sales outlook as demand for its farm machinery continues to slump.

But the Moline, Ill.-based company’s stock rose 4.3% to $93.35 in 4 p.m. trading Friday as sales and profit exceeded Wall Street’s expectations, the latter in part on proceeds from the sale of the company’s crop-insurance business and lower overhead expenses.

Deere, the world’s largest seller of tractors and harvesting combines, is struggling as lower crop prices in the U.S., weaker demand overseas and reduced U.S. tax incentives have driven down demand for its products.

Continued high yields from crops planted this year in the U.S. and Canada are likely to push down commodity prices further and keep farmers’ incomes contained, say analysts, extending the slump in equipment demand into next year.

“We’re facing the deepest downturn in North American large ag equipment in 25 years,” said Chief Financial Officer Rajesh Kalathur during a conference call with analysts on Friday. “We’re managing our inventories aggressively.”

Deere has scaled back production of high-horsepower models typically used in corn, wheat and soybean farming by about 40% to whittle inventories of unsold machines. The company said it intends to continue running its factories below sales demand to further reduce inventories of unsold equipment.

Its farm-equipment operating profit plunged 48% from a year earlier to $639 million as farm-equipment sales fell 25% to $5.8 billion. Operating margin on its farm equipment slipped to 11% from 16% a year earlier. Deere expects full-year sales of its farm machinery to decrease 24% from last year, compared with a prior forecast of a 23% drop. It attributed the change to unfavorable currency-exchange rates caused by a strong U.S. dollar against the value of foreign currencies.

Deere continues to forecast lower industrywide sales across nearly all its geographic markets and sees a worsening market in South America, where Deere now sees sales falling by between 15% and 20% this year because of weak demand in Brazil. The company previously forecast a between 10% and 15% decrease in that region.

“Deere’s performance in the downcycle has been good,” said Rob Wertheimer, an analyst for Vertical Research Partners LLC. “But it’s going to last a while. We don’t think there is an easy way out” of the slump.

Improved results from Deere’s construction- and forestry- equipment business blunted some of weakness in farm machinery. Second-quarter sales of construction and forestry equipment rose 2% in the quarter to $1.6 billion, while operating income in that business surged 43% to $189 million on higher pricing and lower expenses. For the year, Deer expects construction and forestry machinery sales to rise 2% after forecasting a 5% increase previously.

Operating profit in Deere’s financial services unit rose 16% to $265 million while revenue increased 14% to $653 million. The company’s overhead costs fell 14% during the quarter, and research and development expenses decreased 4%, both over a year earlier.

For the quarter ended April 30, the company reported an overall profit of $690.5 million, or $2.03 a share, down from $980.7 million, or $2.65 a share a year ago. Profit included $38 million from the sale of Deere’s crop-insurance business. Overall revenue slid 18% to $8.2 billion. Analysts had expected $1.56 in per-share profit and $7.5 billion in revenue.

Deere expects fiscal 2015 equipment sales to fall about 19% to $26.7 billion after previously forecasting a 17% decrease. But the company raised its net income forecast to $1.9 billion from $1.8 billion, implying earnings per share of about $5.60. Analysts have been expecting $5.31 a share.

“Deere management [is] proactively attacking costs and defending earnings power,” saidMatt Arnold, an analyst for Edward D. Jones & Co. “While more tough quarters are likely, we believe the agriculture downturn is well understood.”