Deere Cost Cuts Help Profit -- WSJ
August 20 2016 - 3:02AM
Dow Jones News
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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