- Slowdown in farm economy contributes to lower profits for agricultural equipment.
- Construction and forestry and financial-services businesses have higher results.
- Full-year earnings forecast about $3.1 billion.
Net income attributable to Deere & Company was $850.7 million, or $2.33 per share, for the third quarter ended July 31, compared with $996.5 million, or $2.56 per share, for the same period of 2013. For the first nine months of the year, net income attributable to Deere & Company was $2.513 billion, or $6.79 per share, compared with $2.730 billion, or $6.97 per share, last year.
Worldwide net sales and revenues decreased 5%, to $9.500 billion, for the third quarter and were down 4%, to $27.102 billion, for nine months. Net sales of the equipment operations were $8.723 billion for the quarter and $24.918 billion for nine months, compared with $9.316 billion and $26.373 billion for the same periods last year.
"Deere's third-quarter performance reflected moderating conditions in the global farm sector, which have negatively affected demand for farm machinery and contributed to lower sales and profits for our agricultural-equipment business," said Samuel R. Allen, chairman and chief executive officer. "At the same time, our construction and forestry and financial services divisions had higher profit, showing the benefit of a broad-based business lineup. Overall, it was a quarter of solid performance, with income exceeded only by last year's record for the corresponding period."
Summary of Operations
Net sales of the worldwide equipment operations declined 6% for the quarter and nine months compared with the same periods a year ago. Sales included price realization of 2% for the quarter and nine months. Additionally, sales included an unfavorable currency-translation effect of 1% for the nine months. Equipment net sales in the United States and Canada decreased 8% for the quarter and 7% year to date. Outside the U.S. and Canada, net sales were down 4% for the quarter, including favorable currency-translation effects of 1%, and down 3% for nine months, including unfavorable currency-translation effects of 1%.
Deere's equipment operations reported operating profit of $1.135 billion for the quarter and $3.387 billion for nine months, compared with $1.443 billion and $3.943 billion last year. The decline for the quarter was due primarily to the impact of lower shipment volumes, higher production costs primarily related to engine-emission requirements, and the unfavorable effects of foreign currency exchange. The year-to-date decline was largely due to the impact of lower shipment volumes, unfavorable foreign-exchange effects, higher production costs, and a less favorable product mix. Declines for both periods were partially offset by price realization.
Net income of the company's equipment operations was $680 million for the third quarter and $2.061 billion for the first nine months, compared with $846 million and $2.324 billion in 2013. In addition to the operating factors mentioned above, a lower effective tax rate benefited both quarterly and year-to-date results.
Financial services reported net income attributable to Deere & Company of $162.3 million for the quarter and $452.2 million for nine months compared with $150.0 million and $407.9 million last year. The improvement for the quarter was due to growth in the credit portfolio, partially offset by a higher provision for credit losses and higher selling, administrative and general expenses. Year-to-date results improved as a result of growth in the credit portfolio and a more favorable effective tax rate. These factors were partially offset by lower crop insurance margins, higher selling, administrative and general expenses and a higher provision for credit losses.
Company Outlook & Summary
Company equipment sales are projected to decrease about 6% for fiscal 2014 and to be down about 8% for the fourth quarter compared with the year-ago periods. Included is an unfavorable currency-translation effect of about 1% for the year. For 2014, net income attributable to Deere & Company is anticipated to be about $3.1 billion.
Although Deere's full-year earnings are forecast to be somewhat lower than in 2013, Allen said the company is looking forward to completing another successful year and continues to believe the longer-term outlook for its businesses holds considerable promise. "For the balance of the year, the company will be scaling back production in line with demand for our agricultural products," he stated. "These actions illustrate our commitment to responding with speed and decisiveness to changes in market conditions."
Allen pointed out the company's plans to expand its market presence throughout the world are on track and continuing to move ahead. "We remain confident the company is well-positioned to earn solid returns throughout the business cycle and to realize substantial benefits from the world's growing need for food, shelter and infrastructure well into the future," he said.
Equipment Division Performance
Agriculture & Turf. Sales fell 11% for the quarter and 8% for nine months due largely to lower shipment volumes, and the previously announced sales of John Deere Landscapes and John Deere Water. Additionally, year-to-date sales were lower due to the unfavorable effects of currency translation. These factors were partially offset by price realization in both the quarter and nine months.
Operating profit was $941 million for the quarter and $2.967 billion year to date, compared with $1.336 billion and $3.684 billion, respectively, last year. Lower results for the quarter were driven primarily by the impact of lower shipment volumes, higher production costs largely related to engine-emission requirements, and the unfavorable effects of foreign-currency exchange. The year-to-date decrease was mainly due to lower shipment volumes, unfavorable currency exchange, higher production costs, and a less favorable product mix. Declines for both periods were partially offset by price realization.
Construction & Forestry. Construction and forestry sales increased 19% for the quarter and 8% for nine months mainly as a result of higher shipment volumes and price realization. Increased sales for both periods were partially offset by the unfavorable effects of currency translation.
Operating profit was $194 million for the quarter and $420 million for nine months, compared with $107 million and $259 million last year. Quarterly operating profit improved primarily due to higher shipment volumes and price realization, partially offset by a less favorable product mix. Year-to-date results increased mainly due to higher shipment volumes, lower production costs, and lower selling, administrative and general expenses.
Market Conditions & Outlook
Agriculture & Turf. Deere's worldwide sales of agriculture and turf equipment are forecast to decrease by about 10% for fiscal-year 2014, including a negative currency translation effect of about 1%.
Although the agricultural economy remains in a relatively healthy state, falling commodity prices are contributing to a reduction in farm income. The decline is putting pressure on demand for farm equipment, especially larger models. At the same time, strength in the U.S. livestock sector is providing support to sales of mid- and smaller-size tractors. Based on these factors, industry sales for agricultural machinery in the U.S. and Canada are forecast to be down about 10% for the year.
Full-year industry sales in the EU28 are forecast to be down about 5% due to lower crop prices and farm incomes. In South America, industry sales of tractors and combines are projected to be down about 15% from strong 2013 levels. Market conditions in the Commonwealth of Independent States have deteriorated and industry sales there are expected to be significantly lower for the year. Asian sales are projected to be about flat.
Industry sales of turf and utility equipment in the U.S. and Canada are expected to be flat to up 5% for 2014.
- Construction & Forestry. Deere's worldwide sales of construction and forestry equipment are forecast to increase by about 10% for full-year 2014. The gain reflects further economic recovery and higher housing starts in the U.S. as well as sales increases outside the U.S. and Canada. Global forestry sales are expected to be up for the year due to general economic growth and improved sales in European markets.
- Financial Services. Fiscal-year 2014 net income attributable to Deere & Company for the financial services operations is expected to be approximately $600 million. The outlook reflects improvement over last year due primarily to expected growth in the credit portfolio and a more favorable tax rate. These factors are projected to be partially offset by higher selling, administrative and general expenses, an increase in the provision for credit losses from the low level in 2013, and lower crop insurance margins.
John Deere Capital Corp.
The following is disclosed on behalf of the company's financial services subsidiary, John Deere Capital Corporation (JDCC), in connection with the disclosure requirements applicable to its periodic issuance of debt securities in the public market.
Net income attributable to John Deere Capital Corporation was $129.2 million for the third quarter and $390.0 million year to date, compared with $124.7 million and $335.6 million for the respective periods last year. Results improved for both periods primarily due to growth in the credit portfolio, partially offset by a higher provision for credit losses, and higher selling, administrative and general expenses. In addition, nine-month results benefited from a more favorable effective tax rate. Net receivables and leases financed by JDCC were $33.534 billion at July 31, 2014, compared with $30.096 billion last year.
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