Deere Q3 Earnings Top, Profit Up


Deere & Company (DE) reported record third quarter fiscal 2013 (ended Jul 31, 2013) earnings of $996.5 million or $2.56 per share, up roughly 26% from $788 million or $1.98 per share earned in the prior-year quarter. The results were ahead of the Zacks Consensus Estimate of $2.16.

Operational Update

Deere’s worldwide total sales increased 4% year over year to $10 billion, beating the Zacks Consensus Estimate of $9.3 billion. Net sales of equipment operations (which comprise Agriculture and Turf, Construction and Forestry) were $9.3 billion, up 4% year over year, including a price rise of 3%, offset by an unfavorable currency translation effect of 1%. Region-wise, equipment net sales were up 4% in the U.S. and Canada and 5% in rest of the world.

Cost of sales in the quarter climbed 1.2% year over year to $6.83 billion. Gross profit during the quarter was $3.17 billion compared to $2.83 billion in the prior-year quarter. Selling, administrative and general expenses increased 4.7% year over year to $919.8 million. Operating profit improved 20% year over year to $1.9 billion.

Operating income of equipment operations rose 28% year over year to $1.44 billion as price realization and higher shipment volumes helped offset an impairment charge relating to long-lived assets, increased production costs and higher selling, administrative and general expenses and unfavorable currency effects.

Segment Performance

The Agriculture & Turf segment sales increased 8% year over year to $7.84 billion, attributable to higher shipment volumes and improved price realization, partially offset by a negative currency translation. Operating profit of the segment improved 32% year over year to $1.33 billion.

The increase in operating profit was based on higher shipment and improved price realization, partially offset by increases in selling, general and administrative expenses, production costs as well as unfavorable foreign exchange effects.

Construction & Forestry experienced an 11% year over year decline in sales to $1.47 billion, due to lower shipment volumes. The segment operating profit fell 5% year over year to $107 million due to lower shipment, partly offset by price realization and lower research and development expenses.

Net revenues at Deere’s Financial Services operations were $587 million in the reported quarter, up 4% year over year. Operating profit in this segment was $234 million compared with $170 million in the year-ago quarter. The improvement stemmed from growth in the credit portfolio and higher crop insurance margins, partially offset by an increased provision for credit losses and higher selling, administrative and general expenses.

Financial Position

As of Jul 31, 2013, Deere had cash and cash equivalents of $3.09 billion, down from $3.39 billion as of Jul 31, 2012. Long-term borrowings increased to $21.7 billion as of Jul 31, 2013, from $21.1 billion as of Jul 31, 2012. Net cash flow provided by operating activities was $587.8 million for the nine months of fiscal 2013 compared with cash use of $1.13 billion in the prior-year comparable period.

Looking Forward

Deere expects equipment sales to decrease around 5% year over year for the fourth quarter of fiscal 2013. For the full year, the company continues to expect equipment sales gain of 5%. However, net income projection has been revised from $3.3 billion to $3.45 billion for fiscal 2013.

Segment-wise, Deere reiterated worldwide sales growth guidance of Agriculture and Turf equipment at 7% for fiscal 2013. Higher commodity prices and strong farm incomes are expected to boost demand for farm machinery during the year. Furthermore, Deere’s sales are expected to benefit from global expansion and new lines of advanced equipment.

Region-wise, Deere restated that industry farm machinery sales in the U.S. and Canada will increase 5% year over year in 2013. In Europe, sales are projected to be down 5% due to continued deterioration in the overall economy and the poor harvest in the U.K. last year.

Sales in the Commonwealth of Independent States are expected to be moderately lower. Sales in Asia are expected to be flat year over year. Deere expects sales growth of turf and utility equipment in the U.S. and Canada to be about 5%, reflecting improved market conditions.
The company now expects global sales for Construction & Forestry equipment to fall about 8% compared with its earlier expectations for a 5% decline, reflecting a cautious outlook for U.S. economic growth. Global forestry sales are expected to be higher as improved U.S. demand more than offset weakness in European markets. Net income from Financial Services is estimated at around $560 million.

Our View

Given the increased global demand for food, shelter and infrastructure, we believe that the long-term outlook for Deere remains strong. Deere will benefit from relatively high commodity prices and strong farm incomes, recovery in construction sector and strength in Brazil.

Demand for large equipment such as high-horsepower tractors and combines will drive growth. However, continued weakness in the European markets remains concern.

Moline, Ill.-based Deere is engaged in the production and distribution of agricultural and forestry equipment, construction equipment and engines worldwide. The company sells products in the U.S. and Canada through branch offices as well as through distributors and dealers for the resale of products internationally.

Deere currently holds a Zacks Rank #3 (Hold).

Other stocks in the industrial products sector with a favorable Zacks rank are Alamo Group, Inc. (ALG) with a Zacks Rank #1 (Strong Buy) as well as AGCO Corporation (AGCO) and CNH Global NV (CNH) with a Zacks Rank #2 (Buy).

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