Deere 1Q profit falls 45 percent, outlook weak

Feb 18, 2009      Associated Press Online

By DANIEL LOVERING

PITTSBURGH, Feb. 18, 2009 (AP Online delivered by Newstex) -- Deere & Co.'s (NYSE:DE) quarterly profit tumbled 45 percent as the global economic slowdown and stronger dollar hurt demand for its farm tractors and construction equipment.

The world's largest maker of farm machinery also slashed its 2009 earnings outlook by 21 percent and suspended quarterly profit forecasts, citing limited visibility amid the deteriorating economy.

Deere had been weathering the housing slump by offsetting a drop in construction equipment sales with strong sales of farming machinery. Indeed, worldwide agricultural equipment sales -- Deere's biggest operation -- jumped 18 percent during the quarter. But the global credit crunch is making it difficult to obtain the financing needed for such purchases, and with farmers getting ever-lower prices for wheat, soybeans and corn amid ethanol's demise, its unlikely they will have as much money to buy tractors and other equipment.

Meanwhile, Moline, Ill.-based Deere also faces record-low levels of housing construction.

Deere, which makes its iconic yellow-and-green lawn movers and forestry equipment, on Wednesday posted net income of $203.9 million, or 48 cents per share, for its fiscal first quarter ended Jan. 31. That was down sharply from $369.1 million, or 83 cents per share, a year earlier. Revenue slipped 1 percent to $5.15 billion.

Analysts surveyed by Thomson Reuters (NYSE:TRI) (TSX:TRI) had expected higher profit of 63 cents per share, on average, on revenue of $4.64 billion. Those estimates typically exclude one-time items.

High steel costs continued to drag down results of the Moline, Ill.-based company. Prices for the metal soared to historic highs last year, and orders from companies like Deere may be based on those prices.

The agricultural equipment division "did incur higher-than-forecast material costs in the quarter, approximately $80 million more than projected in August," Susan Karlix, manager of investor communications, said in a conference call. "This simply reinforces the fact that the underlying commodity markets are volatile and extremely hard to predict."

Deere's North America sales edged up 1 percent. Sales in the rest of the world remained virtually flat, but would have been 14 percentage points higher if a stronger dollar hadn't discouraged overseas buying. About 40 percent of Deere's equipment sales come from outside North America.

Deere's worldwide agricultural equipment sales -- its biggest operation -- did jump 18 percent as higher prices and increased volumes offset greater raw material costs and a stronger dollar. Robert W. Lane, Deere's chairman and chief executive, said demand for large farming machinery has held up well largely due to the financial health of U.S. agriculture.

But sales of commercial and consumer equipment -- including products such as riding mowers and chain saws -- slumped 25 percent, while construction and forestry sales slid 28 percent, both hurt by lower volumes amid the continued housing slump.

And net income in the company's credit unit plunged by more than half on a higher provision for bad debt, lower commissions from crop insurance and narrower financing spreads.

Inventory and outstanding payments rose in the quarter to $1.4 billion. As the credit markets tightened, order cancellations surged in central Europe and eastern Europe as well as Russia. South American cancellations were "somewhat higher than typical" while customers in the U.S., Canada and western Europe canceled very few orders.

A strengthening dollar and European economic woes pose more problems for Deere. The dollar has risen against the euro this week as ratings agency Moody's said faltering economic conditions in eastern Europe will likely hit local subsidiaries of major Western banks, hurting their corporate parents in Austria, Italy, France, Belgium, Germany and Sweden.

Furthermore, farmers are finding credit harder to come by. For example, Brazil's soybean farmers this year had to double the amount of their own money they used for planting, Deere said, illustrating global financial tightness.

The company lowered its fiscal 2009 forecast for net income to about $1.5 billion from the $1.9 billion it forecast in November. Analysts, on average, have projected earnings of $1.77 billion, according to a Thomson Reuters poll.

Deere also reduced its forecast for worldwide agricultural equipment sales this fiscal year to a decline of 2 percent from a previous forecast for a 5 percent increase. The company more than doubled its projection for a fiscal 2009 sales decline in its worldwide commercial and consumer business to 14 percent from 6 percent.

Deere also doubled its outlook for a sales decline in its worldwide construction and forestry business to 24 percent. Net income from its lending business is expected to be about $250 million, not the $300 million previously forecast.

Capital expenditures this fiscal year will be $800 million, down from the $1 billion previously forecast.

The company's outlook remains "unusually uncertain," particularly because of foreign exchange rates. It suspended its practice of providing quarterly net income forecasts. The recently signed $787 billion federal stimulus spending bill is expected to have only a "minimal impact" on Deere in this fiscal year because of the time lag entailed in planned infrastructure spending.

Despite the challenges, Sterne Agee analyst Lawrence T. De Maria upgraded the stock to "Neutral" from "Sell," saying in a client note that rising raw material costs should begin to moderate in the second fiscal quarter before turning neutral in the second half of this fiscal year.

The analyst, who said Deere's "financial condition, liquidity and cash generation remain in excellent shape," also raised his price target to $30 from $27.

Shares of Deere fell $1.34, or 4 percent, to close at $32.15. The stock is worth about one-third of $94.89 it traded at last April.

On the Net:

Deere & Co.: http://deere.com/en_US/deerecom/usa_canada.html

Newstex ID: AP-0001-31942832

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