Deere & Co Feels the Sting of Global Farm Recession

Equipment maker’s worldwide net sales and revenues fell 11% Y-o-Y to $6.72 billion

j1Agricultural equipment manufacturer Deere & Company (NYSE: DE) announced its Q3 FY16 financial results on August 19th, 2016.

The Moline, Illinois-based Company is engaged in equipment operations and financial services and operates through three segments: Agriculture and Turf, Construction and Forestry, and Financial Services. The Company’s Agriculture and Turf segment manufactures and distributes a range of agriculture and turf equipment and related service parts, along with a line of associated implements, and integrated agricultural management systems. The Company’s Construction and Forestry segment primarily manufactures and distributes a range of machines and service parts used in construction, earthmoving, material handling and timber harvesting and related attachments. These products are marketed primarily through independent retail dealer networks and retail outlets. The Company’s Financial Services segment primarily provides credit services, which include finance sales and leases by John Deere machinery.

Source: Company's Website
Source: Company’s Website

Read more about Deere’s financial results below.

Q3 FY16 financial highlights

During Q3 FY16, Deere’s worldwide net sales and revenues slipped 11% Y-o-Y to $6.72 billion, while net sales of the equipment (comprising Agriculture and Turf, Construction and Forestry) fell 14% to $5.86 billion for the quarter under review. Sales included price realization of 2% and an unfavorable currency-translation effect of 2% for the reporting quarter. Region-wise, equipment net sales were down 16% in the U.S. and Canada, and 12% in the rest of the world. The results for Q3 FY16 reflected the continuing impact of the global farm recession as well as difficult conditions in construction equipment markets.

Deere’s cost of sales in Q3 FY16 decreased 16% Y-o-Y to $4.49 billion, while gross profit fell 6.8% Y-o-Y to $1.37 million. Selling, administrative, and general expenses dropped 6% to $709 million, while operating profit declined around 9% Y-o-Y to $658 million.
On the other hand, during Q3 FY16, Deere’s operating income from equipment operations increased 4% Y-o-Y to $625 million, driven by price realization, lower production costs, and a decrease in selling, administrative, and general expenses, partially offset by reduced shipment volumes and the unfavorable effects of foreign-currency exchange.

In all, lower price realizations and sales weighed on Deere’s net income, which fell to $488.8 million, or $1.55 per share, for Q3 FY16, compared to $511.6 million, or $1.53 per share, for the same period last year.

Segmental highlights

Agriculture & Turf: This segment’s sales fell 11% Y-o-Y to $4.7 billion during the reporting quarter. Revenues were impacted by lower shipment volumes and the unfavorable effects of currency translation, partially offset by price realization. On the brighter side, operating profit jumped 21% Y-o-Y to $571 million, mainly driven by price realization, lower production costs and lower selling, administrative, and general expenses, partially offset by lower shipment volumes and unfavorable effects of foreign-currency exchange.

Construction & Forestry: This segment’s sales fell 24% Y-o-Y to $1.16 billion during the reporting quarter, impacted by lower shipment volumes. Moreover, operating profit of the segment declined significantly Y-o-Y to $54 million from $129 million due to reduced shipment volumes and a less favorable product mix, partially offset by lower production costs, a decrease in selling, administrative, and general expenses, and price realization.

Financial Services: This segment’s net revenues grew 5% Y-o-Y to $667 million in the reporting quarter. However, operating profit plummeted to $191 million compared to $239 million in the prior-year’s quarter. Consequently, net income fell to $125.9 million compared to $153.4 million in the year-ago quarter, due to higher losses on residual values, less favorable financing spreads, and a higher provision for credit losses. Net receivables and leases financed by this segment were $32.92 billion as of July 31st, 2016, compared with $33.40 billion in the year-ago period.

Other highlights

Deere had cash and cash equivalents of $3.13 billion at the end of Q3 FY16 compared to $2.91 billion in the year-ago period. The Company’s cash from operations was at $1.64 billion for the nine months ended July 31st, 2016, compared to cash usage of $1.95 billion in the comparable year-ago period. As of July 31st, 2016, long-term borrowings totaled $4.58 billion compared to $4.48 billion in the prior-year’s quarter.

Share repurchasesj3

Deere’s cost of share repurchases during 2004-Q3 FY16 was $16.4 billion, during which Deere repurchased 245 million shares at an average price of $66.96. The remaining share repurchase authorization remaining was $3.3 billion as of July 31st, 2016.

Guidance for full year FY16

Deere’s Q3 FY16 performance reflected the continuing impact of the global farm recession as well as difficult conditions in construction equipment markets. However, its equipment business continued to remain profitable due to its effective cost cutting and other measures. For the full year FY16, Deere’s performance is heavily reliant on the performance of the agricultural sector at large and the grain production/consumption balance, which is predicted to be stable, but sensitive to currency values, broader policy shifts, farm program subsidies, and most importantly, market prices of various crops under cultivation.j4

While the U.S. farm sector is projected to grow at a steady pace and has a strong balance sheet, the risk factors are adverse weather conditions and production cost decreases.

For FY16, Deere’s net income is predicted to be about $1.35 billion, higher than the earlier forecast of $1.2 billion to $1.3 billion. Deere projects total equipment sales to decline by about 10% Y-o-Y in FY16. For Q4 FY16, sales are likely to deteriorate about 8% from the year-ago quarter. The projection includes a negative currency-translation effect of about 2% for the full year FY16 and a positive translation effect of about 1% for Q4 FY16.

Source: Company's Website
Source: Company’s Website

Segment-wise, Deere expects Agriculture and Turf equipment sales to decline 8% in FY16, including an unfavorable currency-translation impact of about 2%. Industry sales for agricultural equipment in the U.S. and Canada are expected to be down 15% to 20% in FY16 owing to low commodity prices and stagnant farm income.

In the EU28, sales are projected to be flat to down 5% due to low commodity prices and farm income, including pressure on the dairy sector.

In South America, sales of tractors and combines are expected to decline 15% to 20% Y-o-Y due to economic uncertainty in Brazil.

Sales in Asia are projected to remain flat due in part to weakness in China. Deere expects sales growth of turf and utility equipment in the U.S. and Canada to range to rise about 5%, gaining from new products and general economic growth.

Deere foresees global sales for Construction & Forestry equipment to be down about 18% in FY16, including an unfavorable currency-translation effect of about 1%. The decline reflects the uncertainty in the North American energy sector.

In forestry, global sales are expected to be down 5% to 10% from year-ago levels. The outlook for net income from Financial Services has been reaffirmed at $480 million for FY16, and reflects less-favorable financing spreads, higher losses on lease residual values, and an increased provision for credit losses.

Stock Performance

j6Deere’s stock ended the day at $86.93, gaining 0.22%, at the close on Monday, August 29th, 2016, having vacillated between an intraday high of $87.05 and a low of $86.35 during the session. The stock’s trading volume was at 2,000,980 for the day. The Company’s market cap was at $27.49 billion as of Monday’s close.

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