By Bob Tita
Deere & Co. reported a 30% drop in fiscal second-quarter
profit, with no end in sight this year to the severe slump in
demand for farm machinery.
Deere managed to handily beat profit expectations for the
quarter, as proceeds from the sale of the company's crop insurance
business and the lower overhead expenses helped offset plunging
income from tractors and harvesting combines. But the company
slightly expanded its forecasted sales decline for the year.
Moline, Ill.-based Deere, the world's largest seller of farm
equipment, dominates the market for large, high-horsepower
machinery typically used in corn, wheat and soybean farming. Lower
crop prices in the U.S., weaker overseas sales and the curtailment
of U.S. tax incentives to encourage equipment purchases have driven
down demand for farm machinery. Continued high yields from crops
planted this year in the U.S. and Canada would likely push down
commodity prices further and keep farmers' incomes contained,
extending the slump in equipment demand into 2016.
"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 Friday. "We're
managing our inventories aggressively."
Deere has scaled back production of high-horsepower models by
about 40% to whittle inventories of unsold machines. The company
said it intends to continue producing equipment at volumes below
retail sales levels in the industry to further push down
inventories.
Deere reported a 25% drop in farm-equipment sales during the
quarter to $5.8 billion, while operating profit plunged 48% to $639
million. The operating margin on farm equipment slipped to 11% from
16% a year earlier. Deere now expects full-year sales of farm
machinery to decrease 24% from last year, compared with a 23%
decline forecast previously. 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 expanded the decline for
South America, where Deere now sees sales falling by 15% to 20%
this year because of difficult market conditions in Brazil. The
company previously forecast a 10% to 15% decrease.
"Deere's performance in the downcycle has been good," said Rob
Wertheimer, an analyst for Vertical Research Partners. "But it's
going to last awhile. We don't think there's an easy way out" of
the slump.
Improving 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 surged 43%
to $189 million because of higher prices and lower overhead
expenses. For the year, Deer expects construction and forestry
machinery sales to rise 2% after forecasting a 5% increase
previously.
Revenue from Deere's financial services unit increased 14% to
$653 million. Operating profit from the business rose 16% to $265
million. Deere's overhead costs fell 14% during the quarter, while
research and development expenses decreased 4%.
Overall for the quarter ended April 30, the company reported a
profit of $690.5 million, or $2.03 a share, down from a
year-earlier profit of $980.7 million, or $2.65 a share. Profit
from the quarter included $38 million from the sale of Deere's
crop-insurance business. Overall revenue slid 18% to $8.2 billion.
Analysts expected $1.56 in per-share profit and $7.5 billion in
revenue.
Deere expects fiscal 2015 sales to fall about 19% after
previously forecasting a 17% decrease. But the company improved 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's success so far at avoiding a free fall in profit is
keeping some analysts and investors devoted to the company's stock,
which was recently trading up 4.2% at $93.23
"Deere management [is] proactively attacking costs and defending
earnings power," said Matt Arnold, an analyst for Edward D. Jones
& Co. "While more tough quarters are likely, we believe the
agriculture downturn is well understood."
Write to Bob Tita at robert.tita@wsj.com
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