Deere & Co. (DE) delivered third-quarter earnings per share (EPS) of $1.44, moving ahead of the Zacks Consensus Estimate of $1.25 as well as EPS of 99 cents last year. The outperformance was driven by positive conditions in the U.S. farm sector, particularly in terms of demand for large equipment, somewhat offset by increased postretirement benefit costs.
Deere’s worldwide total sales increased 16% year over year to $6.84 billion, beating the Zacks Consensus Estimate of $6.81 billion. Net sales of equipment operations (which comprise Agriculture & Turf, Construction & Forestry) were $6.2 billion, an 18% year-over-year increase including a favorable currency translation effect of 3% and a price increase of 2%. Deere had projected higher equipment sales in the range of 21%–23%, including a favorable currency translation of 2% during its second quarter earnings call in May. On a geographic basis, equipment net sales were up 19% in the United States and Canada and 16% in rest of the world.
Segment performance
In terms of annualized sales growth, Construction & Forestry was the star performer with a 59% climb to reach $1 billion due to higher shipment and production volumes. The increase in sales (partially offset by increased postretirement benefit costs) was instrumental in the segment delivering an operating profit of $66 million, reversing its loss of $28 million in the prior-year period.
The Agriculture & Turf segment followed with sales increasing 12% to $5.2 billion, led by higher shipment volumes and improved price realization. Operating profit at the segment was $824 million, a 72% jump from $480 million in the year-ago quarter. The benefit from increased sales was partially offset by increased postretirement benefit costs.
Net revenues at Deere’s Financial Services operations were $503 million, compared with $501 million in the year-ago quarter. Net income in the segment remained on par with the year-ago level at $102.1 million due to improved financing spreads and a lower provision for credit losses, partially offset by lower tax credits related to wind energy projects.
Financial Position
As of July 31, 2010, Deere had cash and cash equivalents of $3.75 billion, up from $3.6 billion as of April 30, 2010. Net cash from operating activities was an outflow of $188.9 million in the third quarter of fiscal 2010 compared with an inflow of $190 million in the year-ago period.
The debt-to-capitalization ratio improved marginally to 79.6% as of July 31, 2010 from 80.7% as of Apr 30, 2010.
Outlook
Equipment sales growth is expected to be about 32% in the fourth quarter of fiscal 2010, including a negative 1% foreign currency impact. Net income in the fourth quarter is expected to be approximately $375 million. For fiscal 2010, equipment sales growth is projected to be about 12% in fiscal 2010, which includes a favorable currency translation impact of 2%.
Segment-wise for fiscal 2010, Agriculture & Turf sales are expected to increase by about 8% (including a favorable currency-impact of 2%) and construction and forestry sales are expected to go up by about 35%. The Credit operation is expected to generate net income of approximately $325 million in fiscal 2010.
Regionally, the company expects industry wide sales of agricultural equipment in the United States and Canada to rise 5% to 10% in fiscal 2010, driven by solid commodity prices and low interest rates, which are boosting farm incomes. In South America, industry sales are projected to increase by 25 to 30% driven by improvement in the key Brazilian and Argentinean markets.
However, sales in Western Europe are expected to drop in the range of 15% to 20% due to weakness in the livestock and dairy sectors. Further sales will be affected by a high level of inventory of used equipment, especially harvesting machinery. Challenging economic and drought conditions are expected to be detrimental to sales in Central Europe and the Commonwealth of Independent States.
Illinois-based Deere & Company is engaged in the production and distribution of agricultural and forestry equipment, construction equipment and engines worldwide. It also provides financial and other related services. The company operates through three segments: Agriculture & Turf, Construction & Forestry and the Financial Services segment. Deere sells products through branch offices in the U.S. and Canada as well as through distributors and dealers for the resale of products internationally.
Performance of Competitor
Deere’s competitor Caterpillar Inc. (CAT) reported EPS that more than doubled to $1.09 in the second quarter ended June 30, 2010 from 50 cents in the first quarter, marking one of the most stellar increases in its history.
Caterpillar topped the Zacks Consensus Estimate by 24 cents and was up 82% from 60 cents in the year-ago period. The outperformance was driven by improved demand across all regions, particularly in the developing economies. Revenues in the quarter were $10.4 billion, a 31% jump from $8 billion in the year-ago period.
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