Farm equipment giant posts strong earnings on expense reductions, will trim production

By Bob Tita 

Deere & Co. plans to cut additional production of its trademark green tractors and harvesting combines this fall in response to the continued downturn in the global farm economy.

The world's largest maker of farm equipment by sales said the cuts will affect plants in Illinois and Iowa, blaming weak demand in North America and markets in Europe and South America for the moves.

Falling crop prices have hit farmer incomes and made them more reluctant to buy new machinery, while Deere and its rivals face a glut of used equipment from a near decadelong sales boom that ended three years ago.

Investors cheered the new expense cuts and a much-better-than-expected fiscal third quarter profit. Deere shares jumped 13% to $87.32 at 4 p.m. on Friday on the stronger results and its improved outlook for the full year.

The company faces a fourth year of falling sales in 2017 and plans to cut output at the East Moline, Ill., plant that assembles combines. It also plans to layoff 11% of the plant's workforce next month. At the Waterloo, Iowa, factory that builds high-horsepower tractors output also will be cut, said Tony Huegel, Deere's director of investor relations.

Sales of large tractors in the U.S. and Canada, a market that Deere leads, has been particularly weak. Industrywide retail sales so far this year are down 24% from 2015, according to the Association of Equipment Manufacturers, a trade group.

U.S. farmers' cash receipts from major crops are forecast to drop 9% to $95.4 billion for the current growing season even as farmers are set to bring in record corn and soybean harvests, according to J.P. Morgan.

The Moline, Ill.-based company has been throttling back on production to avoid swelling inventories of new machinery at its dealers. The company reported on Friday that fiscal third-quarter sales of its farm equipment slipped 11% to $4.7 billion, though profit from the business rose 21% to $571 million as cuts boosted farm equipment margins.

The outlook for its construction and forestry equipment business has weakened further. Lower demand for equipment from the North American energy industry contributed to a 24% drop in segment sales to $1.16 billion and a 58% plunge in profit to $54 million. The company expects construction business sales for the year to be down 18% from 2015, compared with its prior forecast of a 13% drop.

For the quarter ended July 31, Deere reported a profit of $488.8 million compared with $511.6 million in the same period a year earlier. On a per-share basis, earnings rose to $1.55 from $1.53 because of a lower number of shares outstanding. Analysts had expected a profit of 94 cents a share. Overall, farm and construction equipment sales fell 14% to $5.86 billion.

The company's overall expenses in the quarter fell 12% from a year earlier, as lower overhead costs accounted for much of the improvement. Deere raised its profit outlook for year, even as it widened its forecast sales decline.

The company said it now expects to earn $1.35 billion this fiscal year, up from its May forecast of $1.2 billion. But it expects net sales to slip about 10% for the year, compared with a 9% decrease forecast previously.

Joshua Jamerson contributed to this article.

Write to Bob Tita at robert.tita@wsj.com

 

(END) Dow Jones Newswires

August 20, 2016 02:47 ET (06:47 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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