Deere Reports 2Q08 Record Earnings of $763 Million

May 16, 2008
Deere & Co. last week announced worldwide net income of $763.5 million, or $1.74 per share, for the second quarter ended April 30, compared with $623.6 million, or $1.36 per share, for the same period last year. For the first six months, net income was ...

Deere & Co. last week announced worldwide net income of $763.5 million, or $1.74 per share, for the second quarter ended April 30, compared with $623.6 million, or $1.36 per share, for the same period last year. For the first six months, net income was $1.1 billion, or $2.56 per share, compared with $862.3 million, or $1.88 per share, last year.

Worldwide net sales and revenues increased 18 percent to $8.1 billion for the second quarter and were also up 18 percent to $13.3 billion for the first six months. Net sales of the equipment operations were $7.5 billion for the quarter and $12.0 billion for six months, compared with $6.3 billion and $10.1 billion for the respective periods last year.

Favorable conditions across the global farm sector are helping to drive the company's record financial results even at a time of a slowing U.S. economy.

“Advanced offerings that help efficiently meet the world’s growing need for farm products are lending strong support to our performance and are bringing John Deere quality and value to a growing global audience,” said Robert Lane, chairman and CEO. “All our businesses are benefiting from the consistent execution of our plans to create a fundamentally more resilient enterprise. As a result, the company’s non-agricultural operations have remained solidly profitable in spite of the economic downturn in the United States, while our performance overall continues on a record pace.”

Deere’s equipment divisions reported operating profit of $1.1 billion for the quarter and $1.6 billion for six months, compared with $829 million and $1.1 billion for the respective periods last year. The improvements were largely due to the favorable impact of higher sales and production volumes and improved price realization, partially offset by higher selling, administrative and general expenses and raw-material costs.

Financial services reported net income of $86.4 million for the quarter and $184.1 million for six months versus $86.4 million and $174.6 million last year. Quarterly results were comparable while the year-to-date improvement was primarily the result of growth in the credit portfolio and increased crop insurance income.

Company equipment sales are projected to increase by about 20 percent for both the full year and the third quarter of 2008. Included in the forecast is about 5 percent of currency translation impact for the year and about 4 percent for the quarter. Deere’s net income is forecast to be about $2.2 billion for full-year 2008 and in a range of $550 million to $575 million for the third quarter. Escalating raw-material costs and the availability of various parts and components are expected to have an impact on operations for the balance of the year.

Deere’s performance is expected to receive continued support from a focus on disciplined growth and actions to attract customers all over the world, Lane noted. “We are making the investments necessary to serve a range of new customers throughout our various businesses and respond to rising global demand,” he said. Over the past quarter, the company announced a large-tractor capacity expansion in the United States, disclosed plans for an increased presence in Russia, and agreed to become part of a joint venture for the production of construction equipment in China.

“We believe John Deere is in a prime position to achieve further growth, generate strong levels of cash flow, and deliver solid investor value well into the future,” Lane said.

Commercial & Consumer division sales were up 8 percent for the quarter and 11 percent for the year to date. LESCO operations, acquired in the third quarter of 2007, accounted for a sales increase of 12 percent for the quarter and six months. Operating profit was $154 million for the quarter and $162 million year to date, compared with $150 million and $188 million a year ago.

Construction & Forestry division sales declined 7 percent for both the quarter and year to date. Operating profit was $166 million for the quarter and $283 million for six months, versus $192 million and $287 million a year ago.

John Deere commercial and consumer equipment sales are projected to be up about 4 percent for the year, including about 6 percent from a full year of LESCO sales. Sales gains from new products are partially offsetting the impact of the U.S. housing slowdown and weakening economy. Division sales to date have been negatively affected by a late spring in much of the United States.

U.S. markets for construction and forestry equipment are forecast to remain under continued pressure due to a sharp decline in housing starts, which are expected to reach 60-year lows in 2008. Non-residential construction is projected to remain in line with last year’s relatively healthy levels. Although the U.S. housing sector is negatively affecting forestry equipment markets in the United States and Canada, forestry sales worldwide are expected to rise in 2008.

In this relatively weak environment, Deere’s worldwide sales of construction and forestry equipment are forecast to decline by approximately 3 percent for the year. Company sales are expected to benefit from new products and from factory-production levels in closer alignment with retail demand.

According to UBS’ David Bleustein, managing director of U.S. equities research, “We calculate Deere’s net income guidance as roughly equivalent to EPS of $5.05 (vs. $5.20 consensus). For Q3, Deere forecast net income of $550-$575 million, roughly equivalent to EPS of $1.26-$1.32 (vs. $1.49 consensus). We believe that supply constraints could limit upside to elevated expectations for fiscal 2008.”

UBS reports a price target of $89 per share on Deere & Co. common stock and maintains a Neutral rating. The price target of $89 per share reflects a 5 to 10-percent premium to the market multiple on UBS’ 2009 EPS estimate, plus $4 per share of excess cash.

Deere & Co. is headquartered in Moline, Ill.