Deere Third-Quarter Net Up 11% But Cuts Profit, Sales Outlooks
Deere & Co.’s (DE) fiscal third-quarter earnings rose 11%, but higher manufacturing expenses and sluggish sales in international markets caused lower-than-expected profit from the farm-machinery manufacturer.
Deere, the world’s largest seller of tractors and harvesting combines, missed analysts’ profit estimate for the quarter and lowered its sales and profit outlooks for fiscal 2012. Deere now expects equipment sales for the year to increase 13% from 2011, down from a 15% increase forecast in May. The company forecast net income of about $3.1 billon, implying per-share earnings of about $7.70, compared with $3.35 billion, or about $8.30 a share, in May. Analysts expected the company to earn $8.16 a share.
Investors shaken by the third-quarter earnings miss and lower guidance have been unloading their shares since the start of Wednesday’s trading session. The stock was recently down 7.5% at $74.10 a share on heavy volume.
The Moline, Ill., company said this summer’s drought in the U.S. corn belt has altered its outlook on the global agricultural economy, but added the drought had a minimal effect on Deere’s third-quarter results. Rising prices for farm commodities and widespread use of crop insurance will likely keep incomes for drought-stricken farmers from collapsing this year.
“The financial health of the farm sector is as strong as it’s been in modern times,” said Deere’s Chief Economist J.B. Penn during a conference call Wednesday with analysts.
Mr. Penn said the “precarious levels” of global supplies of farm commodities should keep crop prices high for the next couple of years, causing a quick recovery in cash receipts from corn and soybeans that typically underpin demand for high-horsepower farm machinery.
“Gross cash receipts are the best predictor of large equipment sales,” Mr. Penn said, noting that equipment sales have historically risen sharply after droughts or other calamities that reduce harvests.
Deere left its industrywide sales growth outlook for farm machinery in the U.S. and Canada unchanged from May, saying it expects sales to increase by more than 10% this year.
In Europe, where favorable market conditions for grain farmers have been countering a dismal economic environment, the company expects flat sales, compared with its earlier forecast of flat to up 5% from 2011. In Latin America, the company left its sales forecast unchanged at down 5% to 10% from 2011.
Deere’s own sales of farm machinery for the third quarter rose 14% to $7.27 billion, while operating profit climbed 18% to $1.01 billion. The operating margin on farm equipment rose slightly to 13.9%, as higher costs for materials, new model introductions and expenses for complying with tougher U.S. engine-emission regulations offset higher prices on farm machinery.
Sales of construction and forestry machinery increased 23% to $1.66 billion. Profit from the construction business rose 3% to $113 million, but the segment’s operating margin shrank to 6.8% from 8.1% a year earlier on higher costs for materials, overhead and research and development.
Deere said rising manufacturing costs should ease as the company completes new model introductions, especially for its combines, which caused problems for Deere during the third quarter.
“We experienced some hiccups,” said Chief Financial Officer Jim Field. “We just had a tough time ramping up production [of new combines] to meet our aggressive production schedules. We did not executive to the usual John Deere standards.”
The company also attributed disappointing quarterly results to weakening demand for equipment in overseas markets, particularly in China, India and Europe. Deere’s third-quarter machinery sales outside the U.S. and Canada were flat, as the stronger value of the stronger value of the U.S. dollar against other currencies, clipped international sales by about 11%.
Meanwhile, farm and construction equipment in U.S. and Canada rose 28% from a year ago. Strengthening demand in the U.S. is particularly beneficial for Deere because about 60% of its sales comes from North America.
Overall for the quarter ended July 31, Deere reported a profit of $788 million, or $1.98 a share, compared with $712 million, or $1.69 share, a year earlier.
Total revenue, which also includes the company’s finance unit, rose 15% to $9.59 billion. Equipment sales alone rose 16% to $8.93 billion.
Analysts polled by Thomson Reuters expected the company to earn $2.31 a share on revenue of $9.52 billion.
-Saabira Chaudhuri contributed to this article.
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