DE Deere and Co

By Bob Tita 

Deere & Co. said on Friday it has tightened conditions for renting equipment as a slump in farming incomes has led customers to prefer leasing rather than buying its agricultural machinery.

In the face of lower crop prices, farmers in the U.S., South America and elsewhere have cut back sharply on equipment spending despite planting big crops. For nine straight quarters, the slump has eaten into Deere's sales and profits, and it is now bleeding into the company's customer-finance arm,

Deere has stepped up its leasing activity in recent quarters, with leases accounting for about a quarter of its customer-financing deals lately, compared with about 15% in the past, according to estimates by industry analysts.

But its finance unit and dealers have been burdened with used equipment as customers walk away when short-term leases expire. That has forced the company to tighten the terms for renting equipment that has rapidly depreciated in value.

Deere, which took a write-down on used equipment in the latest quarter, said it is restructuring leases to share more of the risk of further declines with dealers. New leases also will likely cost farmers more as the company lowers residual equipment values at the end of the leases to reflect the depressed prices for used equipment.

"The focus is on how do we reduce some of that risk, primarily around the short-term portion of the business," Deere investor relations director Tony Huegel said on a call after the company reported a 28% drop in second-quarter profit and cut its 2016 outlook for a second time this year.

Deere shares fell 5.4% to $77.74 on Friday as the downbeat outlook outweighed quarterly results that beat analyst expectations.

The company warned of steeper sales declines for its construction machinery business in the current fiscal year and trimmed the profit forecast for its finance unit. Earnings from that business fell 39% to $103 million in the latest quarter.

Deere's overseas sales remain under pressure, especially in Brazil, where like peers it must deal with a strong U.S. dollar as well as economic and political turmoil. Deere now expects industrywide sales of farm equipment in South America to fall by 15% to 20% this year, 5 percentage points steeper than its prior forecast.

The Moline, Ill.-based company expects a profit of about $1.2 billion for the fiscal year ending Oct. 31, down around $100 million from its February forecast and below analyst expectations. Deere last year earned $1.9 billion.

For the quarter ended April 30, Deere reported a profit of $495.4 million, or $1.56 a share, down from $690.5 million, or $2.03 a share, a year earlier. Equipment sales declined 4% to $7.1 billion.

Deere's construction and forestry equipment unit was especially weak, as sales fell 16% to $1.4 billion and operating profit plunged 61% to $74 million. Deere now expects construction equipment sales to fall 13% this year after previously predicting an 11% sales decline.

Its farm machinery business performed better than expected during the quarter, thanks mostly to the timing of recent sales. Farm equipment sales slipped 0.4% to $5.7 billion, well above analyst expectations for $5.2 billion. Operating profit dropped 4% to $614 million. The company now expects farm equipment sales to decline 8% this year; it had previously forecast a 10% decrease.

Lisa Beilfuss contributed to this article.

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

(END) Dow Jones Newswires

May 21, 2016 02:48 ET (06:48 GMT)

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