Deere Reports Fourth-Quarter 2005 Earnings
- Results are second-best ever for a fourth quarter despite deep production cuts.
- Construction markets continue to show solid growth.
- Full-year earnings hit record $1.447 billion on 10% revenue gain.
- Next year's profit forecast similar to 2005 results.
MOLINE, Ill., Nov. 22 -- Deere & Company today announced worldwide net income of $232.8 million, or $.96 per share, for the fourth quarter ended October 31, compared with $356.7 million, or $1.41 per share, for the same period last year. For the full year, net income was $1.447 billion, or $5.87 per share, compared with $1.406 billion, or $5.56 per share, last year.
Worldwide net sales and revenues declined 1 percent to $5.177 billion for the fourth quarter and increased 10 percent to $21.931 billion for the full year. Net sales of the equipment operations were $4.486 billion for the quarter and $19.401 billion for the year, compared with $4.612 billion and $17.673 billion for the periods last year.
"We're pleased the company remained solidly profitable for the quarter, even though our results were affected negatively by substantial production cutbacks," said Robert W. Lane, chairman and chief executive officer. "Consistent with our focus on disciplined asset management, field and company- owned inventories have been held in check. This helps set the stage for the successful launch of important new products in 2006 and keeps our longer-range financial goals on track."
Summary of Operations
Excluding the effect of currency translation and price realization, the company's worldwide equipment sales were down 5 percent for the quarter and up 5 percent for the year. On a reported basis, equipment sales in the U.S. and Canada declined 2 percent for the quarter and rose 10 percent for the year. Outside the U.S. and Canada, equipment sales declined by 6 percent for the quarter and rose by 6 percent on a full-year basis excluding currency translation. Equipment sales outside the U.S. and Canada on a reported basis fell 5 percent for the quarter and increased 10 percent for the year.
Deere's equipment divisions reported operating profit of $224 million for the quarter and $1.842 billion for the year, compared with $449 million and $1.905 billion last year. Operating profit for the quarter declined primarily due to lower manufacturing volumes and shipments in the agricultural equipment division, as well as higher warranty costs. The rate of warranty costs for the full year was similar to 2004. Operating profit for the year was down primarily due to higher selling and administrative expenses, increased manufacturing overhead related to production-system improvements, and higher research and development costs. These factors were partially offset by the margin on higher shipments and lower retirement benefit costs. Improved price realization offset higher raw material costs for both periods.
Trade receivables and inventories at the end of the quarter were $5.253 billion, or 27 percent of previous 12-month sales, compared with $5.206 billion, or 29 percent of sales, a year ago.
Financial services, which includes credit and health care operations, reported net income of $92.1 million for the quarter and $345.0 million for the year versus $88.2 million and $309.2 million last year. In the fourth quarter, the company's credit operations had lower net income due to narrower financing spreads, lower gains on retail-note sales, and a higher provision for credit losses, partially offset by growth in the portfolio. For the full year, credit net income was higher as a result of growth in the portfolio and a lower provision for credit losses, partially offset by narrower financing spreads and lower gains on retail-note sales. Also included in financial services results were improved health-care underwriting margins for both periods.
Company Earnings Outlook
Company equipment sales are expected to increase by 1 to 3 percent for full-year 2006 and by 11 to 14 percent for the first quarter. Production levels are expected to be down slightly for the year but up about 4 percent in the first quarter. Based on the above, net income is forecast to be around $1.5 billion for the year and in a range of $175 million to $200 million for the first quarter.
Company Summary
"Deere's 2005 results show we are successfully executing our strategies for building a business that can produce strong levels of cash flow in all types of conditions," Lane said. "In addition to producing record earnings for the year, Deere continued to bring advanced new products to market and fund its global growth plans." The company in 2005 also returned approximately $1.2 billion to stockholders through share repurchases and dividends, he noted.
Equipment Division Performance
- Agricultural Equipment. Division sales declined 10 percent for the
quarter and increased 9 percent for the year. Lower shipments in the
fourth quarter were partially offset by improved price realization and
currency translation. Sales for the year were higher due to improved
price realization, higher shipments and currency translation. Operating
profit was $57 million for the quarter and $970 million for the year,
compared with $267 million and $1.072 billion last year. Quarterly
profit was down primarily due to the margin lost as a result of lower
shipments, inefficiencies related to lower worldwide production volumes,
and higher warranty costs. Lower operating profit for the year was
primarily due to an increase in manufacturing overhead, research and
development, and selling and administrative expenses. Partially
offsetting these factors was the margin on higher shipments and lower
retirement benefit costs. Improved price realization more than offset
the increase in raw material costs for the fourth quarter and offset the
increase experienced for the year.
- Commercial & Consumer Equipment. Sales were up 3 percent for the fourth
quarter primarily due to increased sales in the landscapes business,
which made an acquisition during the third quarter. Sales declined 4
percent for the year reflecting the impact of unfavorable weather
conditions on the sale of consumer riding-lawn equipment during the
critical selling season. The division had an operating loss of $10
million for the quarter and operating profit of $183 million for the
year, versus an operating loss of $12 million and operating profit of
$246 million for the respective periods last year. The quarter's
operating loss was lower primarily due to improved price realization,
offset by the impact of reduced production volumes. For the year,
operating profit was down primarily due to lower shipments and
production in response to a weaker retail environment. Improved price
realization more than offset an increase in raw material costs for the
year.
- Construction & Forestry. Division sales rose 10 percent for the quarter
and 24 percent for the year reflecting strong activity at the retail
level. Operating profit was $177 million for the quarter and $689
million for 12 months, compared with $194 million and $587 million last
year. Lower operating profit for the quarter was primarily due to higher
warranty costs and higher material costs, partially offset by the margin
on increased shipments and improved price realization. The profit
increase for the year was mainly a result of higher sales and
efficiencies related to stronger production volumes. Improved price
realization offset the impact of higher raw material costs for the year.
Operating profit in 2004 included a $30 million pretax gain from the
sale of an equipment rental company.
Market Conditions & Outlook
- Agricultural Equipment. Although the farm sector is expected to remain
in solid financial condition, industry sales in the U.S. and Canada are
forecast to be down 5 to 10 percent in 2006. Factors contributing to the
decline include concerns over higher farm input costs, especially for
fuel and fertilizer, the absence of U.S. tax incentives which helped
sales in the first part of 2005, and slightly lower cash receipts.
Farmers are expected to benefit from debt levels that remain well under
control and from rising land values.
In other parts of the world, industry retail sales in Western Europe are
forecast to be down about 5 percent for the year. Concerns over higher
input costs, government policies and the future direction of farm
subsidies are expected to put downward pressure on sales in the region
for the year. In South America, industry sales are forecast to be down
about 5 percent as a result of a relatively strong Brazilian currency, a
reduction in soybean acreage in Brazil and concerns regarding foot-and-
mouth disease.
Based on these factors and market conditions, worldwide sales of John
Deere agricultural equipment are forecast to be down 2 to 4 percent for
the year. Company sales are expected to benefit from a number of newly
introduced products, including a line of more-powerful and fuel-
efficient large tractors.
- Commercial & Consumer Equipment. Sales of John Deere commercial and
consumer equipment are forecast to be up 10 to 12 percent for the year
with benefit from newly introduced products, an assumed return to more
normal weather patterns and a full year of sales from the division's
recent landscapes-business acquisition. Division sales are also expected
to be helped by an expanded presence of John Deere products in the mass
channel.
- Construction & Forestry. Markets for construction equipment are
forecast to experience further growth in 2006 as a result of U.S.
economic conditions conducive to a healthy level of construction
spending, especially in the nonresidential sector. On this basis,
contractors and rental companies are expected to continue updating and
expanding their fleets. Forestry equipment markets are projected to
remain near last year's level in the U.S. and Canada and to be lower in
Europe. In this environment, Deere's worldwide sales of construction and
forestry equipment are forecast to rise by 5 to 7 percent for fiscal
2006.
- Financial Services. Full-year net income for Deere's financial-services
operations is forecast to be about $350 million. The improvement is
expected to be driven by growth in the credit portfolio.
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 $68.8 million for the quarter and $274.7 million for the year, compared with net income of $69.2 million and $270.6 million last year. Results for the fourth quarter were affected by narrower financing spreads, a higher provision for credit losses and lower gains on retail-note sales, almost fully offset by growth in the portfolio. Results for the full year benefited from growth in the portfolio and a lower provision for credit losses, partially offset by narrower financing spreads and lower gains on retail-note sales.
Net receivables and leases financed by JDCC were $15.906 billion at October 31, 2005, compared with $13.230 billion one year ago. Net receivables and leases administered, which include receivables previously sold, totaled $17.625 billion at October 31, 2005, compared with $16.282 billion one year ago.
Fourth Quarter and 2005 Press Release
(millions of dollars and shares except per share amounts)
Three Months Ended Twelve Months Ended
October 31 October 31
% %
2005 2004 Change 2005 2004 Change
Net sales and revenues:
Agricultural
equipment net sales $2,396 $2,664 -10 $10,567 $9,717 +9
Commercial and
consumer equipment
net sales 766 745 +3 3,605 3,742 -4
Construction and
forestry net sales 1,324 1,203 +10 5,229 4,214 +24
Total net sales * 4,486 4,612 -3 19,401 17,673 +10
Credit revenues 400 330 +21 1,450 1,276 +14
Other revenues 291 265 +10 1,080 1,037 +4
Total net sales
and revenues * $5,177 $5,207 -1 $21,931 $19,986 +10
Operating profit (loss): **
Agricultural equipment $57 $267 -79 $970 $1,072 -10
Commercial and
consumer equipment (10) (12) -17 183 246 -26
Construction and
forestry 177 194 -9 689 587 +17
Credit 128 127 +1 491 466 +5
Other 14 8 +75 41 5 +720
Total operating
profit * 366 584 -37 2,374 2,376
Interest, corporate
expenses and income
taxes (133) (227) -41 (927) (970) -4
Net income $233 $357 -35 $1,447 $1,406 +3
Per Share:
Net income - basic $.97 $1.44 -33 $5.95 $5.69 +5
Net income - diluted $.96 $1.41 -32 $5.87 $5.56 +6
* Includes equipment operations outside the U.S. and Canada as follows:
Net sales $1,344 $1,410 -5 $5,890 $5,340 +10
Operating profit $18 $128 -86 $544 $621 -12
The company views its operations as consisting of two geographic areas,
the "U.S. and Canada", and "outside the U.S. and Canada".
** Operating profit is income before external interest expense, certain
foreign exchange gains or losses, income taxes and corporate expenses.
However, operating profit of the credit segment includes the effect of
interest expense and foreign exchange gains or losses.