Deere's Fiscal 2Q16 Results Are Out, but No One's Celebrating
Tapping trends in leasing equipment
In our company overview on Deere & Company (DE), we discussed how in a depressed agriculture (DBA) economy, farmers were increasingly opting to rent equipment, rather than purchase them, in bids to cut back excess capital tied up in equipment purchases.
With an eye on tapping these trends, Deere increased its rental offerings in recent quarters with leases accounting for an estimated 25% of customer-financing deals, as compared to the historical figure of 15%.
However, it seems now that this decision has come back to haunt Deere, because customers are walking away from short-term leases, and dealers are getting burdened with used equipment, which has rapidly depreciated in value.
As a result of losses on residual values of leased equipment, Deere & Company (DE) took an impairment charge of $37.1 million in its financing unit, whereas there were no such writedowns in 2Q15. Construction (ITB) equipment accounted for more than half of the impairment. Although short-term leases of 12 months or less make up only 15%–20% of the operating lease portfolio, they accounted for more than 60% of the impairment charges.
Deere also anticipates its annualized provision for credit losses as a percentage of average owned portfolio to increase from 17 basis points at the end of April to 23 basis points by the end of fiscal 2016. While this is lower than the ten-year average of 26 basis points, this will likely hurt YoY comparisons in the Financial Services unit.
Deere tightens conditions
In its attempt to restrict losses stemming from leased equipment, Deere stated that it was taking a number of steps, including severely restricting short-term lease offerings, increasing risk-sharing with dealers, and lowering residual values for future leases. Lower residual values at the end of leases would mean new leases will now cost farmers more.
Deere’s major competitors include AGCO (AGCO) and CNH Industrial in the agriculture equipment space and Caterpillar (CAT) in the construction equipment market.
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