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Deere (DE) Lays Off 163 Employees to Cope With Low Demand

Zacks Equity Research

Deere & Company DE has announced indefinite layoffs for 163 employees at its plants in Illinois and Iowa, per a Reuters report. Slump in demand owing trade uncertainties and weak agricultural sector has compelled the company to take such a step.

Deere will place about 50 employees on indefinite layoff effective Oct 28 at Harvester Works in East Moline, IL, which makes large agriculture equipment. Additionally, 113 workers would be laid off indefinitely effective Nov 18 at its Davenport, IA construction and forestry plant.

The U.S Agriculture industry has been grappling with low commodity prices and sluggish farm incomes. Tariffs imposed by China on U.S. agricultural exports last year dealt a severe blow given that China is the largest export market for U.S. agriculture producers. Per American Farm Bureau, the trade war led to a plunge of 50% in agricultural exports to China to $9.1 billion in 2018. Per the latest available data, farm bankruptcy filings have gone up 13% in the 12-month period ended June 2019. Moreover, delinquency rates for commercial agricultural loans are at a six-year high.

Per the U.S. Department of Agriculture's (USDA) latest available projections, net farm income (inflation adjusted) is anticipated to increase 3% year over year to $2.5 billion in 2019. However, it remains well below the high of $136.5 billion in 2013.

This has weighed on farmer sentiment, making them more cautious about spending on farm equipment. This has impacted the Manufacturing - Farm Equipment industry’s performance and the players in the industry like Deere, Lindsay Corporation LNN, AGCO Corporation AGCO and Alamo Group, Inc. ALG. Tariffs imposed by the Trump administration last year on steel and aluminum added to equipment manufacturers’ woes by inflating raw-material costs.

During third quarter fiscal 2019 conference call, Deere trimmed its expectation for net income for fiscal 2019 to $3.2 billion from the prior $3.3 billion. For the Agriculture & Turf segment, the company anticipates industry sales of agricultural equipment in the United States and Canada to be flat in fiscal 2019 compared with the prior fiscal year.

Nevertheless, strong results from the Construction & Forestry segment will help negate the impact of a weak agricultural sector and tariffs. With order books extending into the fourth quarter, the segment is poised for improved results for fiscal 2019. Deere projects global sales for Construction & Forestry equipment to rise 10% in fiscal 2019.

For the fiscal, U.S. GDP, total construction investments, housing starts and oil activity remains at levels that will sustain equipment demand.  Equipment rental utilization remains high and rental rates are likely to trend higher in 2019. Global transportation investment this year is expected to be up 5%, spurring demand for road construction equipment, which bodes well for Wirtgen.

As a reminder, Deere acquired the world’s leading road-construction equipment maker, Wirtgen, for $5.2 billion in cash and debt in December 2017. The buyout significantly enhanced Deere's exposure to global transportation infrastructure as evident from its updated synergy target of 125 million euro by 2022.

Deere is also assessing cost structure by reviewing organization efficiency and footprint assessment, which in turn will help improve margins. The company will benefit from concerted focus on launching products with advanced technologies and features, which provides it a competitive edge. The company remains focused on revolutionizing agriculture with technology in an effort to make farming automated, easy to use and more precise across the production process. Consequently, Deere continues to invest in technology leadership and data analytics.

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