Deere Third-Quarter Earnings Increase 68 Percent
-- Results boosted by improved profitability in Construction & Forestry and Commercial & Consumer Equipment Divisions. -- New customers and company's focus on operating efficiencies help produce strong quarter. -- As previously forecasted, company reports lower production levels in agricultural equipment.
MOLINE, Ill., Aug. 12 -- Deere & Company today reported worldwide net income of $247.5 million, or $1.02 per share, for the third quarter ended July 31, a 68 percent increase over last year's $147.6 million, or $0.61 per share. For the first nine months, net income was $572.4 million, or $2.37 per share, compared with $251.2 million, or $1.04 per share, last year.
"These results build on the success of prior quarters and reflect strong sales of new products and the company's ongoing efforts to hold down costs and operate more efficiently at lower asset levels," said Robert W. Lane, chairman and chief executive officer. "We have achieved increased profitability in our construction and forestry and commercial and consumer operations, which more than offset our planned lower production volumes in the agricultural equipment division."
Worldwide net sales and revenues grew 11 percent to $4.402 billion for the third quarter compared with a year ago and increased 11 percent to $11.595 billion for the nine months. Net sales were $3.833 billion for the quarter and $9.974 billion for the nine months, compared with $3.410 billion and $8.756 billion, respectively, last year.
Net sales for both periods increased primarily due to higher physical volumes of commercial and consumer equipment and construction and forestry equipment. Exchange rates and price realization also had a favorable impact on this year's sales. Overseas net sales increased 9 percent for the quarter and 16 percent for nine months. Excluding the impact of changes in currency- exchange rates, overseas sales were down 3 percent for the quarter but up 5 percent year-to-date.
Deere's equipment operations reported operating profit of $288 million for the quarter and $669 million for nine months, compared with $247 million and $329 million, respectively, last year. (Operating results exclude the impact of external interest expense, taxes and certain other corporate expenses.) The increases for both periods were primarily due to improved price realization and higher physical volume of sales. Partially offsetting these factors were higher postretirement benefit costs of $68 million for the quarter and $211 million for the nine months. Last year's results for both periods were negatively affected by the costs of closing certain facilities. Both periods last year also were affected by higher costs associated with the company's minority investment in Nortrax Inc., a venture involved in the ownership and development of several Deere construction-equipment dealer locations.
Deere's equipment operations had net income of $152.5 million for the quarter and $329 million for the nine months, compared with $91.3 million and $75.6 million, respectively, last year. The same operating factors mentioned above affected these results. In addition, last year's quarterly and year-to- date net income was negatively impacted by a higher tax rate.
Summary of Equipment Operating Profit
-- Agricultural Equipment. Compared with last year, division sales
increased 4 percent for the quarter and 9 percent for nine months. The
increase for both periods was primarily due to the impact of stronger
foreign-exchange rates and improved price realization. Partially
offsetting the increase in the third quarter was a lower physical
volume of sales. Operating profit was $127 million for the quarter
and $329 million for the nine months, compared with $205 million and
$362 million, respectively, last year. The decrease for the quarter
was primarily due to higher postretirement benefit costs of $52
million as well as lower North American production volumes of tractors
and combines. Lower nine-month operating profit was primarily due to
higher postretirement benefit costs of $147 million. Offsetting these
factors in both periods was the impact of improved price realization.
-- Commercial and Consumer Equipment. Compared with last year, division
sales were up 18 percent for the quarter and 19 percent for the nine
months. The increases were primarily due to strong retail demand for
recently introduced products and the impact of expanded distribution
channels. Operating profit increased to $104 million for the quarter
and $237 million for nine months, compared with $61 million and $97
million, respectively, last year. The improved results were primarily
due to higher sales and production volumes. Partially offsetting these
factors were higher promotional and support costs related to new
products, as well as higher postretirement benefit costs of $7 million
for the quarter and $23 million for nine months. Results for both
periods last year were negatively affected by restructuring costs
related to the closure of certain facilities.
-- Construction and Forestry. Division sales rose 29 percent for the
quarter and 25 percent for the nine months. Excluding sales from the
Deere-Hitachi marketing relationship in the U.S. and Canada, division
sales rose 24 percent and 17 percent, respectively, for the third
quarter and year-to-date. These increases were primarily due to higher
physical volumes, reflective of improved retail activity.
The division's operating profit improved to $59 million for the
quarter and $111 million for the nine months, compared with operating
losses of $10 million and $97 million, respectively, last year. The
improvement for both periods was primarily due to higher sales and
production volumes. Improved price realization also had a favorable
impact on this year's results. Partially offsetting these factors were
higher postretirement benefit costs of $10 million for the quarter and
$41 million for the nine months. Last year's third quarter results
were negatively affected by higher costs related to the company's
investment in Nortrax, which also had an impact on the company's year-
to-date results a year ago as did costs related to the closing of a
factory.
-- Special Technologies. Lower costs and expenses and the absence of
goodwill amortization led to improvements in these operations, which
reported operating losses of $2 million for the quarter and $8 million
for the nine months, compared with operating losses of $9 million and
$33 million, respectively, last year.
Consistent with the company's asset management goals, trade receivables and inventories remained at favorable levels. Trade receivables at the end of third-quarter 2003 were $3.355 billion, representing 26 percent of the previous 12-month sales, compared with $3.302 billion a year ago, equal to 29 percent of prior 12-month sales. Based on constant exchange rates, trade receivables were down by $67 million. Inventories were $1.711 billion, representing 16 percent of the previous 12-month cost of sales, compared with $1.607 billion a year ago, or 17 percent of the previous 12-month cost of sales. Approximately $64 million of the inventory increase was due to the fluctuation of foreign exchange rates.
Summary of Financial Services Net Income
-- Credit. Net income of the credit operations increased to $85.5 million
for the quarter and $227.3 million for the nine months, compared with
$56.9 million and $180.2 million, respectively, last year. The
increase in quarterly net income was primarily due to higher gains
resulting from an increased volume of retail note sales, growth in the
portfolio and lower loan losses. The year-to-date increase was
primarily due to lower loan losses, growth in the portfolio, and the
absence of losses from Argentina, partially offset by lower gains on a
lower volume of note sales and narrower financing spreads.
-- Health Care. Health care operations reported net income of
$5.7 million for the quarter and $13.4 million for the nine months,
compared with $4.9 million and $13.2 million, respectively, last year.
Both periods benefited from increases in administrative service fee
income. Investment income for the quarter was also higher.
Market Conditions and Outlook
Based on the conditions outlined below, Deere's net equipment sales for the fourth quarter of 2003 are currently forecast to be up approximately 5 percent. Excluding the impact of currency and price, sales are forecast to be slightly lower for the fourth quarter, as previously projected. Also consistent with earlier forecasts, production volumes are expected to be down about 5 percent in the fourth quarter from the low levels of last year. For the full year, net income is now projected in a range of $575 to $625 million.
-- Agricultural Equipment. Retail sales of farm machinery in the U.S.
and Canada have moved higher in recent weeks due to increased farmer
cash flow and crop conditions that are more favorable than last year.
New tax legislation that includes expanded depreciation and expense-
write-off provisions is also expected to be supportive of higher farm
machinery sales in coming months. As a result, industry retail sales
in the U.S. and Canada are now expected to be flat to down 5 percent
for the year. In other areas, industry retail sales in Western Europe
are expected to be down by 5 to 7 percent for the year mainly due to
dry weather and lower farm income. Paced by a strong improvement in
Argentina, industry retail sales in South America are now expected to
be about 5 percent higher for the year. On a worldwide basis, net
sales of John Deere agricultural equipment are now forecast to be up 7
to 9 percent for the year. The physical volume of sales is expected to
be down slightly. Production in the U.S. and Canada will be down about
7 percent in the fourth quarter, as inventories are reduced in line
with our asset management objectives.
-- Commercial and Consumer Equipment. John Deere commercial and consumer
equipment sales are expected to continue to benefit from the success
of recently introduced products, particularly compact tractors and
lawn tractors. As a result, sales are expected to be up over
15 percent for the year. As previously projected, fourth quarter
production levels are expected to be down by more than 25 percent,
consistent with the division's build-to-demand strategy.
-- Construction and Forestry. Retail activity in the construction and
forestry sectors has increased dramatically in recent months from
depressed year-ago levels mainly as a result of improved replacement
demand. Deere sales have risen strongly in virtually all market
categories, including forestry and rental. As a result, sales of Deere
construction and forestry equipment are now expected to be up
18 percent for the year (up 13 percent without the inclusion of sales
from the Deere-Hitachi marketing relationship).
-- Credit. Credit results for the full year are expected to benefit from
lower write-offs and further growth in the loan portfolio. On this
basis, the division continues to expect net income for the year of
about $300 million.
Gaining Through Greater Efficiency and New Customers
"Deere's success in simultaneously making major gains in operating efficiency and attracting new customers throughout the world, is helping the company achieve much higher financial results despite softness in the crucial U.S. and Canadian farm sector," Lane said. "Our performance to date is on track and we are delivering higher value for investors. However, we know there is more work to be done to achieve the improvements necessary to reach our goals."
John Deere Capital Corporation
The following is disclosed on behalf of the company's credit subsidiary, John Deere Capital Corporation (JDCC), in connection with the disclosure requirements applicable to its periodic issuance of debt securities in the public market.
JDCC's net income was $79.8 million for the third quarter and $209.6 million for the first nine months of 2003, compared with $58.9 million and $173.4 million, respectively, last year. The increase in quarterly net income was primarily due to higher gains resulting from an increased volume of retail note sales and growth in the portfolio. The year-to-date increase was primarily due to lower loan losses, growth in the portfolio and the absence of losses from Argentina, partially offset by lower gains on the sales of retail notes and narrower financing spreads.
Net receivables and leases financed by JDCC were $11.971 billion at July 31, 2003, compared with $10.747 billion one year ago. The increase resulted from acquisitions exceeding collections during the last twelve months partially offset by sales of retail notes. Net receivables and leases administered, which include receivables previously sold, totaled $14.750 billion at July 31, 2003 compared with $13.576 billion one year ago.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
Statements herein that relate to future operating periods are subject to important 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.
Forward-looking statements involve certain factors that are subject to change, including for the company's agricultural equipment segment the many interrelated factors that affect farmers' confidence, including worldwide demand for agricultural products, world grain stocks, prices realized for commodities and livestock, crop production expenses (most notably fuel and fertilizer costs), weather and soil conditions, real estate values, available acreage for farming, the level, complexity and distribution of government farm programs, animal diseases (including further outbreaks or the spread of "mad cow" and "foot-and-mouth" diseases), crop pests, harvest yields and the level of farm product exports (including concerns about genetically modified organisms). The outlook for harvest prices and the size and condition of the crop especially affect retail sales of agricultural equipment in the fall.
Factors affecting the outlook for the company's commercial and consumer equipment segment include general economic conditions in the United States, consumer confidence, consumer borrowing patterns and weather conditions. Another important assumption is continued consumer acceptance of the company's new products, including the new 100-series lawn tractors.
The number of housing starts is especially important to sales of the company's construction equipment. The levels of public and non-residential construction also impact the results of the company's construction and forestry segment. Prices for pulp, lumber and structural panels are important to sales of forestry equipment.
All of the company's businesses are affected by general economic conditions in and the political stability of the global markets in which the company operates (including Brazil, Argentina and other South American countries); monetary and fiscal policies of various countries; wars and other international conflicts and the threat thereof; actions by the United States Federal Reserve Board and other central banks; actions by the United States Securities and Exchange Commission and other regulatory bodies; actions by rating agencies; capital market disruptions; investor sentiment; inflation and deflation rates; interest rate levels and currency exchange rates; customer borrowing and repayment practices, and the number of customer loan delinquencies and defaults; actions of competitors in the various industries in which the company competes, particularly price discounting; dealer practices, especially as to levels of new and used field inventories; production and technological difficulties, including capacity and supply constraints; oil and energy prices and supplies; labor relations; changes to accounting standards; the effects of terrorism and the response thereto; and legislation affecting the sectors in which the company operates. Company results are also affected by significant changes in health care costs and in market values of investment assets, which impact post-retirement benefit and pension expenses. In addition, further outbreaks or the spread of severe diseases such as Severe Acute Respiratory Syndrome (SARS) could affect the company's businesses and results.
The company's outlook is based upon assumptions relating to the factors described above, which are sometimes based upon estimates and data prepared by government agencies. Such estimates and data are often revised. The company, however, undertakes no obligation to update or revise its outlook, whether as a result of new developments or otherwise. Further information concerning the company and its businesses, including factors that potentially could materially affect the company's financial results, is included in the company's most recent annual report on Form 10-K and other filings with the Securities and Exchange Commission.
Third Quarter 2003 Press Release
(millions of dollars and shares except per share amounts)
Three Months Ended July 31 Nine Months Ended July 31
2003 2002 % Change 2003 2002 % Change
Net sales and
revenues:
Agricultural
equipment
net sales $1,955 $1,872 +4 $5,392 $4,960 +9
Commercial
and consumer
equipment net
sales 1,081 913 +18 2,555 2,154 +19
Construction
and forestry
net sales 788 612 +29 1,997 1,601 +25
Other net sales 9 13 -31 30 41 -27
Total net
sales * 3,833 3,410 +12 9,974 8,756 +14
Credit revenues 355 337 +5 1,007 1,086 -7
Other revenues 214 222 -4 614 636 -3
Total net
sales and
revenues * $4,402 $3,969 +11 $11,595 $10,478 +11
Operating profit
(loss): **
Agricultural
equipment $127 $205 -38 $329 $362 -9
Commercial and
consumer
equipment 104 61 +70 237 97 +144
Construction
and forestry 59 (10) 111 (97)
Credit 132 88 +50 350 285 +23
Other 7 (1) 14 (12)
Total
operating
profit * 429 343 +25 1,041 635 +64
Interest,
corporate
expenses
and income
taxes (181) (195) -7 (469) (384) +22
Net income $248 $148 +68 $572 $251 +128
Per Share:
Net income
- basic $1.03 $.62 +66 $2.39 $1.06 +125
Net income
- diluted $1.02 $.61 +67 $2.37 $1.04 +128
* Includes
overseas
equipment
operations:
Net sales $1,132 $1,034 +9 $3,029 $2,603 +16
Operating
profit $93 $108 -14 $289 $209 +38
**In the third quarter of 2002, the operating profit (loss) of the
agricultural equipment, commercial and consumer equipment, construction
and forestry and other segments included pretax goodwill amortization
of $3, $4, $4 and $3, respectively, for a total of $14. In the first
nine months of 2002, these amounts were $10, $11, $12 and $9,
respectively, for a total of $42. In the third quarter of 2002, the
operating profit (loss) of the agricultural equipment, commercial and
consumer equipment, construction and forestry and other segments also
included pretax costs (income) for special items related to
restructuring of $1, $24, $(2) and $1, respectively, for a total of
$24. In the first nine months of 2002, these amounts were $9, $22, $20
and $7, respectively, for a total of $58. In the first nine months of
2003, there was no goodwill amortization and the costs or income for
special items were not material.
July 31, 2003 October 31, 2002 July 31, 2002
Consolidated:
Trade accounts and notes
receivable - net $3,355 $2,734 $3,302
Inventories $1,711 $1,372 $1,607
Financial Services:
Financing receivables and
leases financed - net $10,868 $10,604 $9,974
Financing receivables and
leases administered - net $13,755 $13,225 $12,908
Average shares outstanding 239.4 238.2 238.0