Deere Reports Higher Net Income for 2003 and Expects Further Improvement For 2004
-- Full year net income for 2003 doubles in comparison to 2002. -- Efforts to manage costs and asset intensity help fuel improvements. -- Company expects increased 2004 sales in all equipment divisions.
MOLINE, Ill., Nov. 25 -- Deere & Company today reported worldwide net income of $70.6 million, or $.27 per share, for the quarter and $643.1 million, or $2.64 per share, for the year ended October 31. This compared with net income of $68.0 million, or $.28 per share, and $319.2 million, or $1.33 per share, respectively, last year.
"Deere & Company's 2003 results provide continuing evidence that our plans for building a better business are working," said Robert W. Lane, chairman and chief executive officer. "The success of new products and ongoing efforts to manage costs and asset intensity were evident in our results for the full year. Improved market conditions also contributed to the stronger performance of our construction and forestry and commercial and consumer equipment divisions. Additionally, as a result of our focus on disciplined asset management, trade receivables ended the year at their lowest level in more than a decade."
Worldwide net sales and revenues grew 14 percent to $3.939 billion for the fourth quarter as compared to a year ago and increased 11 percent to $15.535 billion for the year. Net sales were $3.375 billion for the quarter and $13.349 billion for the year, compared with $2.947 billion and $11.703 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. In addition, the increases were due to the translation effect of stronger foreign exchange rates and improved price realization. Net sales outside the U.S. and Canada increased 19 percent for the quarter and 17 percent for the year. Excluding the impact of changes in currency exchange rates, sales outside the U.S. and Canada were up 6 percent for the quarter and up 5 percent for the year.
Deere's equipment operations reported operating profit of $39 million for the quarter and $708 million for the year, compared with $72 million and $401 million, respectively, last year. (Operating profit excludes the impact of external interest expense, taxes and certain other corporate expenses.) The fourth-quarter decrease was primarily due to higher postretirement benefit costs of $89 million and one-time labor agreement ratification costs, partially offset by a higher physical volume of sales and improved price realization. Operating profit rose for the year primarily due to improved price realization and a higher physical volume of sales. Partially offsetting these factors were higher postretirement benefit costs of $306 million for the year. Results for 2002 were negatively affected by the costs of closing certain facilities and higher costs associated with the company's minority investment in Nortrax, a venture involved in the ownership and development of several Deere construction-equipment dealer locations.
Deere's equipment operations had a net loss of $23.9 million for the quarter and net income of $305.1 million for the year, compared with net income of $2.8 million and $78.4 million, respectively, in 2002. The same operating factors mentioned above affected these results. In addition, prior-year results were negatively affected by a higher effective tax rate.
Summary of Equipment Operating Profit
-- Agricultural Equipment. Compared with the previous year, division sales
moved up 10 percent for the quarter and 9 percent for the full-year in
2003. The increases were due to the translation effect of stronger
foreign exchange rates and improved price realization. The physical
volume of shipments for both periods was flat compared with a year ago.
Operating profit was $8 million for the quarter and $337 million for
the year, compared with $77 million and $439 million for the respective
periods of 2002. The decrease for the quarter was primarily due to
higher postretirement benefit costs of $66 million, one-time labor
agreement ratification costs, and lower worldwide production volumes.
Lower operating profit for the year was primarily due to higher
postretirement benefit costs of $216 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 21 percent for the quarter and 19 percent for the year.
The increases were primarily due to strong retail demand for recently
introduced products and the impact of expanded distribution channels.
The division had an operating loss of $10 million for the quarter and
an operating profit of $227 million for the year, compared with an
operating loss of $19 million and an operating profit of $79 million,
respectively, in the prior year. The quarter's improvement was
primarily due to higher sales, partially offset by lower production
volumes, higher promotional and support costs related to new products,
and higher postretirement benefit costs of $7 million. Improved results
for the year were due to higher sales and production volumes, partially
offset by higher promotional and support costs and higher
postretirement benefit costs of $31 million. Results in 2002 were
negatively affected by restructuring costs related to the closure of
certain facilities.
-- Construction and Forestry. Division sales rose 22 percent for the
quarter and 24 percent for the year. The increases were primarily due
to higher physical volumes, reflective of improved retail activity.
Operating profit improved to $41 million for the quarter and
$152 million for the year, compared with an operating profit of
$23 million and an operating loss of $75 million in the respective
periods of 2002. The improvements were 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 $16 million for the quarter and
$59 million for the year. Full-year 2002 results were negatively
affected by higher costs related to the company's investment in Nortrax
and costs for a factory closing.
-- Special Technologies. Lower costs and expenses and the absence of
goodwill amortization led to improvements in these operations, which
reported breakeven results for the quarter and an $8 million operating
loss for the year, compared with operating losses of $9 million and
$42 million, respectively, last year.
Consistent with the company's asset-management goals, trade receivables and inventories remain at favorable levels. Trade receivables at the end of the year were $2.619 billion, representing 20 percent of fiscal-year sales, compared with $2.734 billion a year ago, equal to 23 percent of previous fiscal-year sales. Based on constant exchange rates, trade receivables were down by approximately $235 million. Inventories were $1.366 billion, or 13 percent of the fiscal year cost of sales, compared with $1.372 billion a year ago, or 14 percent of the previous fiscal year cost of sales. Based on constant exchange rates, inventories were down about $110 million.
Summary of Financial Services Net Income
-- Credit. Net income of the credit operations increased to $83.1 million
for the quarter and $310.5 million for the year, compared with
$62.8 million and $243.0 million, respectively, last year. The increase
in quarterly net income was mainly the result of growth in the
portfolio and higher gains from an increased volume of retail note
sales. The full year increase was primarily due to lower loan losses,
growth in the portfolio and the absence of losses from Argentina. This
full year increase was partially offset by narrower financing spreads,
lower gains from a lower volume of retail note sales and higher
selling, administrative and general expenses.
-- Health Care. Health care operations reported net income of $5.9 million
for the quarter and $19.3 million for the year, compared with
$6.0 million and $19.2 million, respectively, last year.
Market Conditions & Outlook
As a result of the factors and conditions outlined below, sales for the full 2004 fiscal year are expected to increase between 9 and 11 percent and net income is forecast to be in a range of $750 million to $850 million. Deere's net equipment sales for the first quarter of 2004 are currently forecast to be up approximately 25 percent in comparison with depressed sales levels in the first quarter of 2003, although production levels are expected to increase only 9 to 11 percent for the first quarter. Company-wide net income for the first quarter in 2004 is forecasted in a range of $100 million to $150 million. Excluding the impact of currency and price, sales are expected to increase 18 to 20 percent for the quarter and 6 to 8 percent for the year.
Deere's yearly earnings estimate also includes higher postretirement benefit costs of approximately $125 million pretax, based on the company's assumptions that reflect recent trends in medical inflation and interest rates.
-- Agricultural Equipment. After hitting a record level in 2003, U.S.
farm income is expected to remain strong in the coming year as a result
of continuing high crop and livestock prices, as well as favorable
levels of carryover stocks in farm commodities. In addition, tax
provisions that offer expanded depreciation and expense write-offs
should lend further support to farm machinery sales. As a result of
these positive factors, industry retail sales in the U.S. and Canada
are now expected to be up 5 to 10 percent for fiscal 2004. In other
parts of the world, industry retail sales in Western Europe are
expected to be flat to down 5 percent for the year mainly as a result
of lower farm income due to the impact of drought on the livestock
sector. Deere believes industry sales in South America will be flat in
2004. While favorable conditions support further industry growth in
South America, Deere believes this could be offset by the timing and
availability of Brazilian-government financing. On a worldwide basis,
sales of John Deere agricultural equipment are now forecast to be up
between 8 to 10 percent for the year with an increase in physical
volume of 5 to 7 percent.
-- Commercial & Consumer Equipment. John Deere commercial and consumer
equipment sales are expected to continue benefiting from the success of
new products, including an expanded utility-vehicle line and the 100
series lawn tractor introduced in the mass and dealer channels in 2003.
As a result, division sales are forecast to be up between 10 to 12
percent for the year.
-- Construction & Forestry. Retail activity in the construction and
forestry sectors rose at a healthy rate in 2003 mainly as a result of
strong replacement demand. Deere sales for 2003 rose sharply in
virtually all market segments and outpaced the industry. Further
replacement demand is expected to lead to modest growth in the industry
in 2004. In 2004, Deere shipments of construction and forestry
equipment are projected to be up 2 to 4 percent. Deere expects to
consolidate Nortrax Inc. during the first quarter of 2004. Including
Nortrax in the consolidated results would add an additional
$275 million to sales for the year.
-- Credit. Although Deere's credit operations are expected to benefit
from further growth in the loan portfolio, net income for 2004 is
forecast to be down slightly as a result of lower gains on receivable
sales. The division expects net income of about $300 million for the
year.
Business improvements on track
"Our efforts are aimed at sustainable improvements and a higher level of value for investors," Lane said. "While more remains to be done, our plans to make continued improvements in operating efficiency and asset management are moving ahead. At the same time, John Deere is attracting entirely new customers through the introduction of exciting new products and services and expanding our presence in geographic regions across the globe. All of these efforts combine to help drive Deere & Company's performance to higher levels as we continue in our mission of building a better business."
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 $70.9 million for the fourth quarter and $280.5 million for the year, compared with $57.2 million and $230.6 million, respectively, last year. The increase in quarterly net income was primarily due to growth in the portfolio. The full year increase was primarily due to lower loan losses, growth in the portfolio and the absence of losses from Argentina, partially offset by narrower financing spreads, lower gains from a lower volume of retail note sales and higher selling, administrative and general expenses.
Net receivables and leases financed by JDCC were $11.856 billion at October 31, 2003, compared with $11.240 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 $14.451 billion at October 31, 2003 compared with $13.773 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 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 success of the fall harvest and the prices realized by farmers for their crops especially affect retail sales of agricultural equipment in the winter.
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 and an expanded utility vehicle line. Sales of commercial and consumer equipment during the winter are also affected by the amount and timing of snowfall.
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. Another important contingency is the company acquiring the majority owners' interest in Nortrax Inc. Prices for pulp, lumber and structural panels are important to sales of forestry equipment.
All of the company's businesses and its reported results 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; actions by environmental regulatory agencies, including those related to engine emissions; actions by 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 postretirement benefit costs.
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.
Fourth Quarter 2003 Press Release
(millions of dollars and shares except per share amounts)
Three Months Ended Twelve Months Ended
October 31 October 31
% %
2003 2002 Change 2003 2002 Change
Net sales and
revenues:
Agricultural
equipment net
sales $1,957 $1,777 +10 $7,349 $6,738 +9
Commercial and
consumer equipment
net sales 676 558 +21 3,231 2,712 +19
Construction and
forestry net sales 731 598 +22 2,728 2,199 +24
Other net sales 11 14 -21 41 54 -24
Total net
sales * 3,375 2,947 +15 13,349 11,703 +14
Credit revenues 339 341 -1 1,347 1,426 -6
Other revenues 225 181 +24 839 818 +3
Total net sales
and revenues* $3,939 $3,469 +14 $15,535 $13,947 +11
Operating profit
(loss): **
Agricultural
equipment $8 $77 -90 $337 $439 -23
Commercial and
consumer equipment (10) (19) -47 227 79 +187
Construction and
forestry 41 23 +78 152 (75)
Credit 124 101 +23 474 386 +23
Other 8 22 (12)
Total operating
profit * 171 182 -6 1,212 817 +48
Interest, corporate
expenses and income
taxes (100) (114) -12 (569) (498) +14
Net income $71 $68 +4 $643 $319 +102
Per Share:
Net income
- basic $.29 $.28 +4 $2.68 $1.34 +100
Net income
- diluted $.27 $.28 -4 $2.64 $1.33 +98
*Includes overseas
equipment
operations:
Net sales $1,072 $901 +19 $4,100 $3,504 +17
Operating profit $33 $22 +50 $322 $231 +39
** In the fourth 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 $5, $3, $5 and $3, respectively, for a total of $16. In the fiscal
year 2002, these amounts were $15, $14, $17 and $12, respectively, for
a total of $58. In the fourth 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 for special items related to restructuring of $3, $2, $7
and $2, respectively, for a total of $14. In the fiscal year 2002,
these amounts were $12, $24, $27 and $9, respectively, for a total of
$72. In fiscal year 2003, there was no goodwill amortization and the
costs or income for special items were not material.
October 31, October 31,
2003 2002
Consolidated:
Trade accounts and notes receivable - net $2,619 $2,734
Inventories $1,366 $1,372
Financial Services:
Financing receivables and leases financed
- net $11,281 $10,604
Financing receivables and leases administered
- net $14,197 $13,225
Average shares outstanding 240.2 238.2
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