Deere Announces Q3 Earnings of $642 Million

OREANDA-NEWS. Net income attributable to Deere & Company (NYSE: DE) was $641.8 million, or $1.97 per share, for the third quarter ended July 30, 2017, compared with $488.8 million, or $1.55 per share, for the quarter ended July 31, 2016.

For the first nine months of fiscal 2017, net income attributable to Deere & Company was $1.649 billion, or $5.11 per share, compared with $1.239 billion, or $3.91 per share, for the same period last year.

Worldwide net sales and revenues increased 16 percent, to $7.808 billion, for the third quarter and increased 8 percent, to $21.720 billion, for the first nine months. Net sales of the equipment operations were $6.833 billion for the third quarter and $18.791 billion for nine months, compared with $5.861 billion and $17.737 billion for the periods last year.

"John Deere reported another quarter of strong performance as the company continued to benefit from improving market conditions throughout the world," said Samuel R. Allen, chairman and chief executive officer. "We are seeing higher overall demand for our products with farm machinery sales in South America experiencing strong gains and construction equipment sales rising sharply. Deere's performance also is being assisted by an advanced product portfolio and the continuing impact of a flexible cost structure and lean asset base."

Summary of Operations

Net sales of the worldwide equipment operations increased 17 percent for the quarter and 6 percent for the first nine months compared with the year-ago periods. Sales included price realization of 1 percent for the quarter and 2 percent year to date. Foreign-currency rates did not have a material translation effect on net sales for either period compared with last year. Equipment net sales in the United States and Canada increased 11 percent for the quarter and were down 1 percent for the first nine months. Outside the U.S. and Canada, net sales increased 25 percent for the quarter and 17 percent for nine months, with favorable currency-translation effects of 1 percent for both periods.

Deere's equipment operations reported operating profit of $795 million for the quarter and $2.152 billion for nine months, compared with $625 million and $1.526 billion, respectively, last year. The improvement for the quarter was primarily driven by higher shipment volumes and price realization, partially offset by increased production costs, higher selling, administrative and general expenses and warranty costs. On a year-to-date basis, results benefited from higher shipment volumes, price realization and a favorable product mix, partially offset by increased production costs, higher warranty costs and higher selling, administrative and general expenses. Results for both periods were aided by a gain on the sale of a partial interest in SiteOne Landscape Supply, Inc. (SiteOne).

Net income of the company's equipment operations was $506 million for the third quarter and $1.291 billion for nine months, compared with $353 million and $873 million for the corresponding periods of 2016. In addition to the operating factors mentioned above, a lower effective tax rate improved results for the third quarter of 2017.

Financial services reported net income attributable to Deere & Company of $131.2 million for the quarter and $349.1 million for nine months compared with $125.9 million and $357.9 million last year. Results for the quarter benefited from lower losses on lease residual values, partially offset by a higher provision for credit losses and higher selling, administrative and general expenses. Year-to-date results were affected by less-favorable financing spreads and higher selling, administrative and general expenses, partially offset by lower losses on lease residual values.

Company Outlook & Summary

Company equipment sales are projected to increase about 10 percent for fiscal 2017 and be up about 24 percent for the fourth quarter compared with the same periods of 2016. Included in the forecast is a positive foreign-currency translation effect of about 1 percent for the full year and about 2 percent in the fourth quarter. Net sales and revenues are projected to increase about 11 percent for fiscal 2017 with net income attributable to Deere & Company of about $2.075 billion.

"Deere's ability to deliver consistently strong financial results is proof of our success building a more durable business model," Allen said. "We are continuing to find ways to make our operations more efficient and profitable while providing even more value to our global customers. As a result, we're confident Deere is well-positioned to continue its strong performance and to fully capitalize on the world's increasing need for advanced machinery and services in the future."

Equipment Division Performance

Agriculture & Turf. Sales increased 13 percent for the quarter and 5 percent for nine months primarily due to higher shipment volumes and price realization, partially offset by higher warranty costs. 

Operating profit was $685 million for the quarter and $1.899 billion year to date, compared with respective totals of $571 million and $1.329 billion last year. Results for the quarter benefited from higher shipment volumes and price realization, partially offset by increases in production costs, warranty expenses and selling, administrative and general expenses. Year-to-date results received support from higher shipment volumes, price realization and a more-favorable sales mix, partially offset by increased production costs and higher warranty expenses. The gain on the sale of a partial interest in SiteOne contributed to the division's results for both periods.

Construction & Forestry. Construction and forestry sales increased 29 percent for the quarter and 10 percent for nine months mainly as a result of higher shipment volumes. Results were negatively affected by higher sales-incentive expenses for the quarter and by higher warranty costs year to date.

Operating profit was $110 million for the quarter and $253 million for nine months, compared with $54 million and $197 million last year. Results for the quarter were helped by increased shipment volumes, partially offset by higher selling, administrative and general expenses, higher sales-incentive expenses and increased production costs. Benefiting nine-month results were higher shipment volumes, partially offset by increases in warranty costs, 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 increase by about 9 percent for fiscal-year 2017, including a positive currency-translation effect of about 1 percent. Industry sales for agricultural equipment in the U.S. and Canada are forecast to be down about 5 percent for 2017, reflecting weakness in the livestock sector and the continuing impact of low crop prices. The decline is affecting both large and small equipment.

Full-year 2017 industry sales in the EU28 member nations are forecast to be flat to down 5 percent, 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 20 percent as a result of improving economic and political conditions in Brazil and Argentina. Asian sales are projected to be flat to down slightly.

Industry sales of turf and utility equipment in the U.S. and Canada are expected to be about flat for 2017.

Construction & Forestry. Deere's worldwide sales of construction and forestry equipment are forecast to be up about 15 percent for 2017, with no material currency-translation impact. The forecast reflects moderate economic growth worldwide. In forestry, global industry sales are expected to be down 5 to 10 percent due to soft conditions in North America.

Financial Services. Fiscal-year 2017 net income attributable to Deere & Company for the financial services operations is expected to be approximately $475 million. In comparison with performance in 2016, the outlook reflects lower losses on lease residual values, partially offset by higher selling, administrative and general expenses, less-favorable financing spreads and an increased provision for credit losses. 

John Deere Capital Corporation

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 $88.3 million for the third quarter and $227.0 million year to date, compared with $90.4 million and $259.9 million for the respective periods last year. The decline for both periods was primarily due to less-favorable financing spreads, higher selling, administrative and general expenses and a lower average portfolio, partially offset by lower losses on lease residual values.

Net receivables and leases financed by JDCC were $32.929 billion at July 30, 2017, compared with $32.928 billion at July 31, 2016.

Safe Harbor Statement

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995:  Statements under "Company Outlook & Summary," "Market Conditions & Outlook," and other forward-looking statements herein that relate to future events, expectations, and trends involve factors that are subject to change, and 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.

The company's agricultural equipment business is subject to a number of uncertainties including the factors that affect farmers' confidence and financial condition.  These factors include demand for agricultural products, world grain stocks, weather conditions, soil conditions, harvest yields, prices for commodities and livestock, crop and livestock production expenses, availability of transport for crops, the growth and sustainability of non-food uses for some crops (including ethanol and biodiesel production), real estate values, available acreage for farming, the land ownership policies of governments, changes in government farm programs and policies, international reaction to such programs, changes in environmental regulations and their impact on farming practices; changes in and effects of crop insurance programs, global trade agreements, animal diseases and their effects on poultry, beef and pork consumption and prices, crop pests and diseases, and the level of farm product exports (including concerns about genetically modified organisms). 

Factors affecting the outlook for the company's turf and utility equipment include consumer confidence, weather conditions, customer profitability, consumer borrowing patterns, consumer purchasing preferences, housing starts, infrastructure investment, spending by municipalities and golf courses, and consumable input costs.

Consumer spending patterns, real estate and housing prices, the number of housing starts, interest rates and the levels of public and non-residential construction are important to sales and results of the company's construction and forestry equipment.  Prices for pulp, paper, lumber and structural panels are important to sales of forestry equipment.

All of the company's businesses and its results are affected by general economic conditions in the global markets and industries in which the company operates; customer confidence in general economic conditions; government spending and taxing; foreign currency exchange rates and their volatility, especially fluctuations in the value of the U.S. dollar; interest rates; inflation and deflation rates; changes in weather patterns; the political and social stability of the global markets in which the company operates; the effects of, or response to, terrorism and security threats; wars and other conflicts; natural disasters; and the spread of major epidemics.

Significant changes in market liquidity conditions, changes in the company's credit ratings and any failure to comply with financial covenants in credit agreements could impact access to funding and funding costs, which could reduce the company's earnings and cash flows.  Financial market conditions could also negatively impact customer access to capital for purchases of the company's products and customer confidence and purchase decisions, borrowing and repayment practices, and the number and size of customer loan delinquencies and defaults.  A debt crisis, in Europe or elsewhere, could negatively impact currencies, global financial markets, social and political stability, funding sources and costs, asset and obligation values, customers, suppliers, demand for equipment, and company operations and results.  The company's investment management activities could be impaired by changes in the equity, bond and other financial markets, which would negatively affect earnings.

The potential withdrawal of the United Kingdom from the European Union and the perceptions as to the impact of the withdrawal may adversely affect business activity, political stability and economic conditions in the United Kingdom, the European Union and elsewhere. The economic conditions and outlook could be further adversely affected by (i) the uncertainty concerning the timing and terms of the exit, (ii) new or modified trading arrangements between the United Kingdom and other countries, (iii) the risk that one or more other European Union countries could come under increasing pressure to leave the European Union, or (iv) the risk that the euro as the single currency of the Eurozone could cease to exist. Any of these developments, or the perception that any of these developments are likely to occur, could affect economic growth or business activity in the United Kingdom or the European Union, and could result in the relocation of businesses, cause business interruptions, lead to economic recession or depression, and impact the stability of the financial markets, availability of credit, currency exchange rates, interest rates, financial institutions, and political, financial and monetary systems. Any of these developments could affect our businesses, liquidity, results of operations and financial position.

Additional factors that could materially affect the company's operations, access to capital, expenses and results include changes in, uncertainty surrounding and the impact of governmental trade, banking, monetary and fiscal policies, including financial regulatory reform and its effects on the consumer finance industry, derivatives, funding costs and other areas, and governmental programs, policies, tariffs and sanctions in particular jurisdictions or for the benefit of certain industries or sectors; actions by central banks; actions by financial and securities regulators; actions by environmental, health and safety regulatory agencies, including those related to engine emissions, carbon and other greenhouse gas emissions, noise and the effects of climate change; changes to GPS radio frequency bands or their permitted uses; changes in labor regulations; changes to accounting standards; changes in tax rates, estimates, and regulations and company actions related thereto; compliance with U.S. and foreign laws when expanding to new markets and otherwise; and actions by other regulatory bodies.