(Dow Jones) — Deere & Co.'s fiscal second-quarter profit fell 9.5{0a3336b3da8cf935de4f3eb78fe29508c4b8b5ebd27d01af2d815614325d533e}, as demand for farm tractors and harvesting combines remained under pressure from farmers' increasing reluctance to buy new equipment.
Deere's profit from the quarter topped expectations as the world's largest seller of farm machinery trimmed its overhead costs and benefitted from lower taxes. But the Moline, Ill.,-based company pared its equipment sales outlook further from its February estimate, while reiterating its earlier income forecast.
After years of purchasing machinery at record volumes, farmers are taking a breather. Last year's bumper harvests of corn and soybeans in North America pushed down crop prices, leaving farmers with less money to spend on machinery. The U.S. Department of Agriculture has forecast that U.S. farm incomes are likely to drop this year to their lowest levels since 2010. The elimination of U.S. tax incentives for equipment investments is also discouraging farm-equipment purchasing. Retail sales of high-horsepower, two-wheel drive tractors in the U.S. and Canada are down 5{0a3336b3da8cf935de4f3eb78fe29508c4b8b5ebd27d01af2d815614325d533e} since the start of the year, according to the Association of Equipment Manufacturers. Deere said its orders for large tractors and combines are down at least 10{0a3336b3da8cf935de4f3eb78fe29508c4b8b5ebd27d01af2d815614325d533e} from a year earlier.
Deere's second-quarter sales of farm and landscaping equipment dropped 12{0a3336b3da8cf935de4f3eb78fe29508c4b8b5ebd27d01af2d815614325d533e} from a year ago $7.64 billion, while operating income from the business declined 22{0a3336b3da8cf935de4f3eb78fe29508c4b8b5ebd27d01af2d815614325d533e} to $1.22 billion. Deere further lowered its sales outlook for farm and landscaping equipment, predicting a 7{0a3336b3da8cf935de4f3eb78fe29508c4b8b5ebd27d01af2d815614325d533e} decrease this year, compared with a 6{0a3336b3da8cf935de4f3eb78fe29508c4b8b5ebd27d01af2d815614325d533e} decline forecast earlier. The company cited the prolonged cold winter weather in North America as contributing to lower sales of landscaping equipment. Analysts said they weren't surprised by the pullback in sales guidance.
“Everybody knows that ag equipment is going to moderate off the impressive [sales] levels of the past couple of years, but there's no reason to believe it's going to get out of hand,” said Matt Arnold, an analyst for brokerage firm Edward Jones in St. Louis.
Deere said sales of farm machinery in Eastern Europe are being hampered by the territorial dispute between Russia and Ukraine. Deere said industry-wide sales of farm equipment in the region this year will be “down significantly” from last year, as the ongoing dispute depresses crop plantings, fertilizer usage and crop yields, especially in Ukraine. Central and eastern Europe accounted less than 5{0a3336b3da8cf935de4f3eb78fe29508c4b8b5ebd27d01af2d815614325d533e} of Deere's machinery sales last year.
“Credit availability because of that conflict is becoming even more of a difficult situation for our customers and dealers,” said Tony Huegel, director of investor relations, during a conference call Wednesday with analysts.
For the rest of the year, analysts will be looking for Deere to deliver better sales and profit growth from construction and forestry equipment to help offset sluggish farm machinery markets. The company anticipates construction sales rising 10{0a3336b3da8cf935de4f3eb78fe29508c4b8b5ebd27d01af2d815614325d533e} this year to about $6.5 billion, or about 20{0a3336b3da8cf935de4f3eb78fe29508c4b8b5ebd27d01af2d815614325d533e} of total equipment sales. But second-quarter construction sales increased just 2{0a3336b3da8cf935de4f3eb78fe29508c4b8b5ebd27d01af2d815614325d533e} to $1.6 billion, putting pressure on Deere to notch robust sales growth in the second half of the year to reach its forecast. Deere's operating profit from the construction business rose 63{0a3336b3da8cf935de4f3eb78fe29508c4b8b5ebd27d01af2d815614325d533e} from a year earlier to $132 million.
“As you look at our order book, it is up strong,” said Mr. Huegel, noting that orders are up 10{0a3336b3da8cf935de4f3eb78fe29508c4b8b5ebd27d01af2d815614325d533e} or more. “We feel pretty good about that.” About three-quarters of the Deere's construction equipment sales come from North America, where demand for bulldozers and excavators is being fueled by rising volumes of new homes.
For the quarter ended April 30, the company reported income of $980.7 million, or $2.65 a share, down from $1.08 billion, or $2.76 a share, a year earlier. Overall revenue, which includes Deere's financing business, decreased 8.9{0a3336b3da8cf935de4f3eb78fe29508c4b8b5ebd27d01af2d815614325d533e} to $9.95 billion. Analysts polled by Thomson Reuters expected earnings of $2.47 a share and revenue of $9.65 billion.
The company now expects equipment sales this year to slip about 4{0a3336b3da8cf935de4f3eb78fe29508c4b8b5ebd27d01af2d815614325d533e} from a year ago to about $33.6 billion, compared with a 3{0a3336b3da8cf935de4f3eb78fe29508c4b8b5ebd27d01af2d815614325d533e} decline forecast earlier. Deere reiterated its earlier forecast for net income for the full fiscal year of $3.3 billion.
Deere's stock was recently trading down 2.2{0a3336b3da8cf935de4f3eb78fe29508c4b8b5ebd27d01af2d815614325d533e} at $91.49 a share.
Source: Dow Jones
Posted by Haylie Shipp
