Deere Reports 27-Percent Increase in Q2 Earnings

MOLINE, Ill., – Deere & Co. today announced worldwide net income of $604 million, or $2.43 per share, for the second quarter ended April 30, compared with $477.3 million, or $1.88 per share, for the same period last year. For the first six months, net income was a record $826.8 million, or $3.31 per share, compared with $648.1 million, or $2.56 per share, last year.

Worldwide net sales and revenues grew 13 percent to $6.621 billion for the second quarter and increased 15 percent to $10.748 billion for the first six months. Net sales of the equipment operations were $6.019 billion for the quarter and $9.546 billion for six months, compared with $5.296 billion and $8.208 billion for the corresponding periods last year.

Strong customer response to John Deere products and a continuing focus on operating efficiency are contributing to the company's performance. "We're continuing to add new customers worldwide who appreciate the quality and value of our advanced products and services," said Robert Lane, chairman and chief executive officer. "At the same time, our efforts to hold the line on operating costs and asset levels are helping us deliver record financial results."

SUMMARY OF OPERATIONS. Company equipment sales in the U.S. and Canada rose 13 percent for the quarter and 15 percent for the six months. Outside the U.S. and Canada, sales increased by 11 percent and 13 percent for the respective periods excluding currency translation and by 16 percent and 19 percent on a reported basis. Deere's equipment divisions reported operating profit of $856 million for the quarter and $1.118 billion for six months, compared with $726 million and $924 million last year. The improvements were primarily due to improved price realization, increased shipments, efficiencies related to stronger production volumes and lower postretirement benefit costs. Partially offsetting these factors for both periods were higher raw material costs.

Financial services operations reported net income of $74.5 million for the quarter and $162.5 million for six months versus $62.5 million and $142 million last year. The increases were primarily due to growth in the credit portfolio, reflecting strong demand for John Deere products, as well as a lower provision for credit losses, partially offset by lower financing spreads. Last year, Deere's credit operations benefited from gains on retail notes sold during the quarter and first six months. Also included in financial services results were improved health-care underwriting margins for both periods.

COMPANY OUTLOOK. Deere's net income is now projected to be $1.55 billion to $1.6 billion for 2005 and in a range of $450 million to $475 million for the third quarter. Excluding the impact of currency translation, company equipment sales are expected to increase by 9 to 11 percent for the year and by 13 to 15 percent for the third quarter. Currency is forecast to add about two percentage points to sales for both periods. Production levels are expected to be down 7 to 9 percent in the second half of the year with most of the reduction occurring in the fourth quarter. The planned lower production rates are expected to bring down year-end trade receivable and inventory levels as company factories prepare for the introduction of new products in 2006. Production in the second half of last year was unusually high as a result of strong retail demand related in part to expiring tax incentives.

"Our efforts to build, and grow, a great business are moving ahead as planned and are driving our financial and operating performance to new levels," Lane said. "We are also providing value to investors in the form of higher dividends and stock repurchases. As a result of these steps, we're confident the company is in a good position to continue delivering exceptional financial results and solid investor returns over the long term."

EQUIPMENT DIVISON PERFORMANCE.
Agricultural Equipment. Division sales increased 17 percent for the quarter and 20 percent for six months. The increases were mainly due to higher shipments, reflecting continued strong retail demand, as well as improved price realization and the impact of currency translation. Operating profit was $488 million for the quarter and $651 million for six months, compared with $430 million and $516 million last year. The operating-profit improvements were primarily driven by higher worldwide sales, efficiencies related to stronger production volumes, and lower postretirement benefit costs. Improved price realization offset the increase in raw material costs for the quarter and largely offset the increase experienced year to date.

Commercial & Consumer Equipment. Sales declined 6 percent for the quarter and 7 percent for six months, reflecting the impact of unseasonably cold, wet weather on the sale of consumer riding lawn equipment during an important selling period. Operating profit was $135 million for the quarter and $133 million for six months, compared with $152 million and $171 million last year. Having a positive impact for the quarter and six months was improved price realization, which offset an increase in raw material costs.

Sales of John Deere commercial and consumer equipment are now forecast to be flat to up 3 percent for the year. Increased shipments of commercial products are expected to offset weakness in consumer riding lawn equipment, where sales have gotten off to a slow start due to cold, wet weather. Deere's commercial equipment sales are benefiting from the extensive product introductions of recent years.

Construction & Forestry. Division sales rose 28 percent for the quarter and 30 percent for six months reflecting strong activity at the retail level. Operating profit improved to $233 million for the quarter and $334 million for the year to date compared with $144 million and $237 million last year. The operating profit increases were mainly a result of higher sales and efficiencies related to stronger production volumes. Improved price realization offset higher raw material costs in both periods. Six-month operating profit last year included a $30 million pretax gain for the sale of an equipment rental company.

Markets for construction equipment are experiencing further growth as a result of generally positive U.S. economic conditions and an increased level of spending on construction projects. These factors are expected to continue driving fleet replenishment by contractors and rental companies. Forestry markets in the U.S. and Canada have moderated in recent months. However, demand in other parts of the world has continued to grow. In this environment, Deere sales of construction and forestry equipment are forecast to rise by 18 to 20 percent for fiscal 2005.