DE Deere and Co

By Bob Tita 

Deere & Co.'s third-quarter profit tumbled 40% as a glut of used farm equipment at U.S. dealers continued to weigh on sales of new models.

Deere, the world's largest seller of tractors and harvesting combines, trimmed its profit and sales forecasts for the year despite topping profit expectations for the third quarter. Lower crop prices over the past year have cut into farmers' incomes, reducing their interest in buying new equipment. Deere predicted Friday that cash receipts from farming in the U.S., which is a key driver for equipment sales, will fall 7% this year from 2014 and will likely be down again slightly in 2016, suggesting another year of lower equipment sales.

When prices for corn, soybeans and other commodities were running at record highs, many farmers plowed their increased profits into new equipment, buying new tractors and combines every year or two. About 80% of new equipment purchases are accompanied by the trade-in of older equipment that dealers then sell to other farmers.

When the equipment market weakened, however, dealers were left with bulging inventories of late-model used equipment. Without buyers for that equipment, dealers have been turning down purchases of new machinery that involve trade-ins of older equipment.

"Our biggest problem with new equipment is all the used inventory," said Tom Sloan, chief executive of Sloan Implement Co., a Deere dealer with stores in Illinois and Wisconsin.

Iron Solutions Inc., a consultant for the used equipment market, estimates that the supply of used farm machinery in North America is about 30% above sales levels, forcing dealers to slash prices on used models to attract buyers. Iron Solutions estimates prices for used high-horsepower tractors are down 6% from last year.

"Used equipment continues to be a challenge," said Tony Huegel, Deere's director of investor relations, during a conference call with analysts. "We continue to coordinate with our dealers to assist with the movement of the used equipment, especially on large tractors."

Deere has been offering buyers of certified used tractors and combines in the U.S. and Canada free warranty coverage and performance-monitoring software as purchase incentives. Deere said the used-tractor inventory at its dealers was down 10% during July from a year earlier.

Deere's sales of new farm equipment continue to suffer, falling 24% in the third quarter from last year to $5.3 billion. Income from the farm business declined 50% to $472 million as Deere faces a deteriorating demand in major overseas markets as well, particularly in South America. Deere said it expects full-year sales of its farm machinery world-wide to decrease 25% from last year, slightly more than the decline forecast in May.

Deere's construction and forestry equipment business isn't providing an offset to the slumping farm segment. Construction revenue fell 13% during the quarter to $1.53 billion, as profit dropped 34% to $129 million. Moreover, Deere predicted that sales of construction machinery would slip 5% for the year, after forecasting a 2% increase earlier. Deere said a strong U.S. dollar against other currencies, a wet start to the construction season in the U.S. and a downturn in the U.S. energy sector contributed to the reversal in the construction business outlook.

The weakening construction business led Deere to scale back its sales and profit forecasts for its fiscal year ending Oct. 31. The company now expects overall equipment sales to fall by 21% to about $26 billion, after predicting a 19% decline in May. The company also lowered its net income forecast to $1.8 billion from $1.9 billion, implying earnings per share of about $5.33.

For the quarter ended July 31, the company reported a profit of $511.6 million, or $1.53 a share, down from $850.7 million, or $2.33, a year earlier. Overall revenue, which includes the company's equipment-financing business, slid 20% to $7.59 billion. Analysts projected $1.44 in per-share profit on $7.17 billion in revenue.

Deere's stock was trading down 8% at $83.37 in early afternoon trading.

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

Subscribe to WSJ: http://online.wsj.com?mod=djnwires

(END) Dow Jones Newswires

August 21, 2015 14:20 ET (18:20 GMT)

Copyright (c) 2015 Dow Jones & Company, Inc.