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Deere and Co.'s 1st-Quarter Earnings Weakened Due to Higher Costs

- By Mayank Marwah

Deere and Co. (DE) came out with its first-quarter financial results on Feb. 15 before market opened. The company's earnings were weaker than what was forecasted owing to an "unsettled" situation in key markets.

In fact, higher raw material and logistics costs as well as rising trade tensions between the U.S. and China weighed on the company's first-quarter earnings. "These latter issues have weighed on market sentiment and caused farmers to become more cautious about making major purchases," said CEO Sam Allen.

Key metrics

The Illinois-based company reported earnings per share of $1.54 in the first quarter, which spiked 17.55% year-on-year but fell shy of the Street consensus of $1.77. Revenue for the same period amounted to $6.941 billion vs. $6.828 expected.

At the end of the first quarter, the company's balance of cash and cash equivalents stood at $3.6 billion. Cash used in operations was $1.7 billion in the reported quarter. Long-term borrowing was roughly $28 billion at the end of the quarter.

Segment performance

Sales in the Agriculture & Turf sector inched up 10% year-over-year to $4.7 billion, thanks to a rise in the shipment volume and price realization that was only partially offset by the unfavorable currency-translation impact and higher warranty-related expenses. Operating profit in the segment plunged 10% to $348 million because of mounting production costs and high research and development expenses.

In the Construction & Forestry division, sales came to $2.26 billion in the first quarter, up 31% from the prior-year's quarter. This sales growth was attributable to the Wirten acquisition, high shipment volume and positive price realization, which was only partly counterbalanced by unfavorable currency rates. Operating profit was $229 million thanks to net positive price realization.

The Financial Services segment saw revenue growth of 10% in the reported quarter to $855 million. By contrast, operating profit declined 12% from the prior-year's first quarter to $192 million.

Impact of trade war

The company's inventory rose approximately $1.3 billion in the first quarter as compared to the year-ago quarter primarily due to the high trade tensions with China. The rising inventory level may hamper the company's 2019 profit projections if the trade quarrel between the U.S. and China is not settled.

China purchased roughly $12 billion of U.S. soy in 2017. However, due to President Trump's tariffs, it shifted its purchase to Brazil in 2018. While China did return to buying U.S. soy of late, purchase volumes have been too small to make up for the lost sales.


The tractor manufacturer said its 2019 net income is projected to be $3.6 billion with a 7% annual growth in euipment sales. For fiscal 2019, the company sees net sales growing by 7%. The Wirten acquisition would make up 1% of the estimated net sales of 2019.

Disclosure: I do not hold any position in the stock mentioned.

This article first appeared on GuruFocus.