- Global farm recession, weak construction-equipment markets lead to lower sales and earnings for fourth quarter and full year.
- Sound execution and broad business lineup aid performance.
- Efforts to establish more efficient cost structure make headway.
- Fiscal 2017 forecast calls for earnings of $1.4 billion on slightly lower sales volumes.
MOLINE, Ill. — Net income attributable to Deere & Co. was $285.3 million, or $0.90 per share, for the fourth quarter ended October 31, compared with $351.2 million, or $1.08 per share, for the same period of 2015. For fiscal 2016, net income attributable to Deere & Company was $1.524 billion, or $4.81 per share, compared with $1.940 billion, or $5.77 per share, in 2015.
Worldwide net sales and revenues decreased 3%, to $6.520 billion, for the fourth quarter and were down 8%, to $26.644 billion, for the full year. Net sales of the equipment operations were $5.650 billion for the quarter and $23.387 billion for the year, compared with respective totals of $5.932 billion and $25.775 billion in 2015.
"John Deere has completed another successful year in spite of continuing weakness in the global agricultural and construction equipment sectors," said Samuel R. Allen, chairman and chief executive officer. "The company in 2016 had one of its ten-best years in both sales and earnings, a noteworthy achievement in light of the difficult business climate. Deere's performance benefited from the adept execution of its operating plans and disciplined cost management as well as the impact of a broad product portfolio. As a result, the company has remained well-positioned to serve its customers while making continued investments in quality and innovation that we're confident will be supportive of growth in the future."
Summary of Operations
Net sales of the worldwide equipment operations declined 5% for the quarter and 9% for the full year compared with the same periods in 2015. Sales included price realization of 3% for the quarter and 2% for the full year. Additionally, sales included a favorable currency-translation effect of 1% for the quarter and an unfavorable currency translation effect of 2% for the full year. Equipment net sales in the United States and Canada decreased 14% for the quarter and 13% for the full year. Outside the U.S. and Canada, net sales increased 11% for the quarter and were down 3% for the full year, with a favorable currency-translation effect of 3% for the quarter and an unfavorable currency-translation effect of 4% for the year.
Deere's equipment operations reported operating profit of $354 million for the quarter and $1.880 billion for the full year, compared with $335 million and $2.177 billion in 2015. The improvement for the quarter was primarily driven by price realization, partially offset by lower shipment volumes, an impairment charge for international construction and forestry operations, and higher production costs. Results were down for the year primarily on account of reduced shipment volumes, the unfavorable effects of foreign-currency exchange and a less-favorable product mix, partially offset by price realization, lower production costs and lower selling, administrative and general expenses. Full-year results also benefited from a gain on the sale of a partial interest in the unconsolidated affiliate SiteOne Landscape Supply, Inc.
Net income of the company's equipment operations was $185 million for the fourth quarter and $1.058 billion for the year, compared with $200 million and $1.308 billion for the corresponding periods in 2015. In addition to the operating factors mentioned above, a higher effective tax rate in 2016 reduced both quarterly and annual results.
Financial services reported net income attributable to Deere & Co. of $109.8 million for the quarter and $467.6 million for the year compared with $153.0 million and $632.9 million in 2015. The decline for both periods was primarily due to less-favorable financing spreads, higher losses on lease residual values and a higher provision for credit losses. Additionally, full-year results in 2015 benefited from a gain on the sale of the crop insurance business.
Company Outlook & Summary
Company equipment sales are projected to decrease about 1% for fiscal 2017 and be down about 4% for the first quarter compared with the same periods of 2016. Included in the forecast is a positive foreign-currency translation effect of about 1% for the year and about 2% for the first quarter. Net sales and revenues are projected to decrease about 1% for fiscal 2017, while net income attributable to Deere & Co. is anticipated to be about $1.4 billion.
During the fourth quarter of 2016, the company announced voluntary employee-separation programs as part of its effort to reduce operating costs. The expense of these programs is recorded in the period in which employees accept their separation offer. Total pretax expenses related to the programs are estimated to be $116 million, of which $11 million was recorded in the fourth quarter of 2016, and $105 million will be recorded in the first quarter of 2017. Savings from the separation programs are expected to be approximately $75 million in 2017.
"Our forecast continues to represent a standard of performance that is considerably higher than in earlier downturns," Allen said. "This illustrates our ongoing success developing a more durable business model and a wider range of revenue sources. At the same time, we are driving further efficiency gains and have confidence we can deliver structural cost reductions of at least $500 million by the end of 2018."
Allen reaffirmed his view that the future is quite promising for the company and its stakeholders. "John Deere remains in a strong position to carry out its growth plans and attract new customers throughout the world," he said. "Thanks to the commitment of employees, dealers and suppliers, our plans for helping meet the world's increasing need for food, shelter and infrastructure are making solid progress. We remain confident in the company's present direction and believe Deere will provide significant value to its customers and investors in the future."
Equipment Division Performance
- Agriculture & Turf. Sales fell 5% for the quarter and 7% for the year due to lower shipment volumes, partially offset by the favorable effects of currency translation for the quarter and unfavorable currency effects for the year. Both periods benefited from price realization.
Operating profit was $371 million for the quarter and $1.700 billion for the year, compared with $271 million and $1.649 billion, respectively, in 2015. The quarter's improvement was mainly driven by price realization, partially offset by lower shipment volumes. Results were higher for the year primarily due to price realization, lower production costs, and lower selling, administrative and general expenses, partially offset by lower shipment volumes, unfavorable effects of foreign-currency exchange and a less favorable product mix. Full-year results benefited from a gain on the sale of a partial interest in the unconsolidated affiliate SiteOne Landscape Supply, Inc.
- Construction & Forestry. Construction and forestry sales decreased 5% for the quarter and 18% for the year, largely as a result of lower shipment volumes and higher sales-incentive costs.
The division had an operating loss of $17 million for the quarter and operating profit of $180 million for the year. This compared with operating profit of $64 million and $528 million for the periods in 2015. Lower results for the quarter were mainly attributable to higher sales-incentive expenses, an impairment charge for international operations and higher production costs. Full-year results decreased primarily due to lower shipment volumes and higher sales-incentive costs, partially offset by a reduction in both selling, administrative and general expenses and production costs.
Market Conditions & Outlook
- Agriculture & Turf. Deere's worldwide sales of agriculture and turf equipment are forecast to decrease by about 1% for fiscal-year 2017, including a positive currency-translation effect of about 1%. Industry sales for agricultural equipment in the U.S. and Canada are forecast to be down 5-10% for 2017. The decline, which reflects the continuing impact of low commodity prices and weak farm incomes, is expected to be felt in the sale of both large and small models of equipment.
Full-year 2017 industry sales in the EU28 member nations are forecast to be down about 5%, with the decline attributable to low commodity prices and farm incomes. South American industry sales of tractors and combines are projected to be up about 15% as a result of improving economic and political conditions in Brazil and Argentina. Asian sales are projected to be flat to up slightly, benefiting from higher sales in India.
Industry sales of turf and utility equipment in the U.S. and Canada are expected to be about flat for 2017, with Deere sales outpacing the industry.
- Construction & Forestry. Deere's worldwide sales of construction and forestry equipment are forecast to be up about 1% for 2017, including a positive currency-translation effect of about 1%. The forecast reflects the impact of generally slow economic growth worldwide. In forestry, global industry sales are expected to be about the same as in 2016 with some moderation in the North American market.
- Financial Services. Fiscal-year 2017 net income attributable to Deere & Company for the financial services operations is expected to be approximately $480 million. The outlook reflects lower losses on lease residual values, partially offset by less-favorable financing spreads and an increased provision for credit losses.
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 JDCC was $81.7 million for the fourth quarter and $341.6 million for the full year, compared with $121.8 million and $498.2 million for the respective periods in 2015. The decline for the quarter and the full year was primarily due to less-favorable financing spreads, higher losses on lease residual values and a higher provision for credit losses.
Net receivables and leases financed by JDCC were $31.999 billion at October 31, 2016, compared with $32.592 billion last year.