MOLINE, Ill. – Deere & Co. reported worldwide net income of $147.6 million, or $0.61 per share, for the third quarter ended July 31, more than double last year’s $71.8 million, or $0.30 per share. For the first nine months, net income was $251.2 million, or $1.04 per share, compared with $256.1 million, or $1.08 per share, last year.
“Favorable customer response to new products, particularly in Europe, and a continued emphasis on expense and asset control have led to another quarter of significant profit improvement,” said Robert Lane, chairman and chief executive officer. “This performance is especially encouraging in light of conditions that remain well below normal in many key markets.”
Worldwide net sales and revenues were $3.969 billion for the third quarter and $10.478 billion for the first nine months of 2002, compared with last year’s respective totals of $3.618 billion and $10.132 billion. Net sales were $3.410 billion for the third quarter and $8.756 billion for nine months, compared with $3.070 billion and $8.475 billion a year ago. Increased sales for both periods were mainly due to higher overseas sales of agricultural equipment, primarily in Europe, higher commercial and consumer equipment sales and the impact of acquisitions less divestitures. Partially offsetting these factors were lower sales of farm machinery and construction and forestry equipment in North America. Overseas sales increased 41 percent for the quarter and 20 percent for the first nine months, mostly due to higher agricultural-equipment sales in Europe. Without the effect of foreign exchange, the overseas sales improvement would have been 33 percent for the quarter and 19 percent year-to-date.
Deere’s equipment operations reported operating profit of $247 million for the quarter and $329 million for nine months, compared with $128 million and $413 million, respectively, last year. (Operating results exclude the impact of interest, taxes and other corporate expenses.) The increase in operating profit for the quarter was primarily due to higher overseas sales of agricultural equipment, improved price realization and higher sales of commercial and consumer equipment. Also having a positive effect on the quarter were expense reductions in core operations and the elimination of losses from the Homelite consumer-products business, which was sold last November. Partially offsetting these factors was the compensation paid to the company’s credit operations for financing dealer receivables. As previously announced, Deere’s equipment divisions began selling a significant portion of these receivables to credit at the end of last year.
Also having a negative impact on quarterly results were the costs of closing a commercial and consumer products factory in Virginia and costs associated with the company’s minority investment in Nortrax Inc., a venture involved in the ownership and development of several Deere construction-equipment dealer locations. Higher post-retirement benefit costs affected the quarter’s results as well.
For the first nine months of 2002, the decrease in equipment operating profit was primarily due to deep first-quarter production cutbacks, made in line with the company’s asset-management goals, and the related manufacturing inefficiencies. In addition, year-to-date results were negatively affected by the compensation to credit for dealer receivables sold, higher post-retirement benefit costs, restructuring charges, and the costs related to Nortrax. Also having a negative effect for the period were costs for the start-up of new products, as well as losses in Argentina. Partially offsetting these factors were improved price realization and expense reductions.
Deere equipment operations had net income of $91.3 million for the quarter and $75.6 million for the first nine months, compared with $30.6 million and $123.7 million, respectively, last year. The same operating factors mentioned above affected these results. In addition, the 2002 results benefited from lower interest expense, while a higher year-to-date tax rate had a negative effect.
Operating assets of the equipment operations increased seasonally during the first nine months. However, the company’s total trade receivables and inventories at the end of the quarter were $568 million below a year ago.
Net sales of agricultural equipment increased 14 percent for the quarter and 6 percent for the first nine months compared with last year. The increases were primarily due to higher sales in Europe where a record number of new products were introduced last fall. Operating profit for the quarter was up 78 percent, to $205 million versus $115 million last year. Nine-month operating profit was $362 million compared with $335 million a year ago. The operating profit increases for both periods were mainly due to higher overseas sales, primarily in Europe, as well as improved price realization. Partially offsetting these factors were higher post-retirement benefit costs and the compensation to credit. In addition, year-to-date operating profit for 2002 was negatively affected by lower first-quarter production volumes and related manufacturing inefficiencies, as well as by higher new product start-up costs. Also having an adverse impact for the first nine months were losses in Argentina related to the peso devaluation. Benefiting year-to-date results were lower expenses.
Operating profit of the worldwide commercial and consumer equipment division was $61 million for the third quarter and $97 million for the first nine months, compared with $16 million and $93 million last year. Excluding acquisitions and divestitures, net sales were up 13 percent for the quarter and 3 percent year-to-date over last year. The sales increases for both periods were mostly due to the shipment of products closer to the time of seasonal demand. The improvement in operating profit for the quarter was primarily a result of higher sales, the absence of losses from Homelite, and better price realization. Nine-month operating profit was higher due to improved price realization, the absence of losses from Homelite, expense reductions and the receipt of fire insurance settlements. Partially offsetting these factors for both periods were the compensation to credit and restructuring charges, primarily for a plant closure.
Deere’s construction and forestry division had operating losses of $10 million for the quarter and $97 million for the first nine months, compared with operating profit of $11 million and $29 million last year. Net sales increased 3 percent for the quarter but decreased 5 percent year-to-date compared with last year. Excluding acquisitions, net sales were down 2 percent and 7 percent in the respective periods. Production volumes at core facilities declined 5 percent for the quarter and 15 percent year-to-date. For the quarter, lower operating results were mainly due to higher costs related to the Nortrax investment and increased sales incentives. Contributing to the decline for nine months were higher sales incentives, Nortrax expenses, lower sales and production volumes at core facilities, restructuring charges, and an increase in post-retirement benefit costs. Lower expenses benefited results for both periods.
Net income of the credit operations was $56.9 million for the quarter and $180.2 million for the first nine months, compared with $40.8 million and $133.1 million, respectively, last year. The quarterly increase was primarily due to income earned on dealer receivables, partially offset by a higher provision for bad debts. The year-to-date improvement was mainly a result of the dealer-receivable income, higher gains on retail-note sales and improved interest-rate spreads. Partially offsetting these factors were a higher provision for bad debts and losses incurred in Argentina for the peso devaluation.
The company’s other businesses had operating losses of $1 million for the quarter and $12 million for nine months, compared with operating losses of $7 million and $28 million last year. This year’s results were negatively affected by costs related to restructuring activities, including the closing of an Illinois manufacturing facility. Results for both years reflected new-product development costs and goodwill amortization of the special-technologies group. Positive factors affecting both 2002 periods included higher operating profit of the health-care operations and lower expenses of the technology businesses.
MARKET CONDITIONS & OUTLOOK. Based on the market conditions outlined below, net equipment sales for the fourth quarter are currently forecast to be up 8 to 10 percent from the same period last year. Total company results for the seasonally weak quarter are expected to be approximately breakeven, a significant improvement from last year.
COMMERCIAL & CONSUMER EQUIPMENT. As a result of a somewhat-improved retail climate for the division’s products, shipments of John Deere commercial and consumer equipment are now projected to be flat to up 5 percent in 2002. This forecast excludes the impact of acquisitions and divestitures. Supporting the improved outlook is the market’s enthusiastic response to the many John Deere products introduced for this selling season. At the same time, the division is continuing to manufacture products at below the rate of retail demand and expects to end the year with lower asset levels.
CONSTRUCTION & FORESTRY. For the U.S. and Canadian markets, Deere continues to believe that industry-retail sales of construction and forestry equipment for 2002 will be down 10 to 15 percent from last year and that pricing will remain weak. Sales will continue being hampered by lagging business investment and weakness in sales to independent rental companies. Global sales of forestry products are forecast to continue running below year-earlier levels in response to soft market conditions.
CREDIT. Results for the year are expected to benefit from increased retail note-sale activity and from the financing of Deere-equipment dealer receivables. Partially offsetting these positive factors will be higher loan-loss reserves, as well as losses in Argentina. Credit net income for the full year is expected to be in a range of $220 million to $240 million, a slight increase over the guidance provided last quarter.
IMPROVED MARKETS. According to Lane, the company has made great strides this year improving asset and operating efficiency, while successfully bringing John Deere products to the attention of a wider global audience. “We’re especially gratified by the response to our new products in Europe, which is the focus of a significant effort to grow our market presence,” Lane said. Further, he pointed out that although the general business outlook for 2003 is uncertain at this point, factors such as rising commodity prices, low carryover stocks, and recent legislation are strongly supportive of an eventual recovery in the U.S. farm economy. Deere is well positioned to capitalize on any market strength, he noted. “With our efforts to control costs and reduce assets already yielding clear benefits, we’re confident these same actions will drive dramatically higher levels of performance as business conditions improve and our key markets resume their growth,” Lane stated.