United States-John Deere Tractors.
UNITED STATES-JOHN DEERE TRACTORS.
The Company’s Equipment Operations generate revenues and cash primarily from the sale of equipment to John Deere dealers and distributors. The Equipment Operations manufacture and distribute a full line of agricultural equipment; a variety of commercial, consumer and landscapes equipment and products; and a broad range of equipment for construction and forestry. The Company’s Financial Services primarily provide credit services, which mainly finance sales and leases of equipment by John Deere dealers and trade receivables purchased from the Equipment Operations. In addition, Financial Services offer certain crop risk mitigation products and invest in wind energy generation. The information in the following discussion is presented in a format that includes information grouped as consolidated, Equipment Operations and Financial Services. The Company also views its operations as consisting of two geographic areas, the U.S. and Canada, and outside the U.S. and Canada.
Trends and Economic Conditions
Farm conditions in the United States and Canada remain positive, benefitting from the sound financial health of the U.S. farm sector, although the outlook for the current year is uncertain. Industry sales for 2009 are forecast to be flat to up 5 percent for the year in the U.S. and Canada led by an increase in large tractors and combines. Sales in parts of Australia and South America are expected to be hurt by drought. Sales in Western Europe are forecast to be down 10 to 15 percent for the year. Significant sales declines are expected in Central Europe and the CIS (Commonwealth of Independent States) countries, including Russia. South American markets are also expected to have sales declines, with industry sales forecast to decrease by 15 to 25 percent. The Company’s agricultural equipment sales were up 18 percent for the first quarter of 2009 and are forecast to decrease about 2 percent for the full year, which includes a negative effect of about 7 percent for currency translation. The Company’s commercial and consumer equipment sales declined 25 percent for the first quarter. Commercial and consumer equipment sales are projected to decline about 14 percent for the year, reflecting the U.S. housing decline and recessionary economic conditions. U.S. markets for construction and forestry equipment are forecast to remain under continued pressure due in large part to a declining global economy and historically low levels of construction activity in the U.S. The Company’s construction and forestry sales declined 28 percent in the first quarter of 2009, and are expected to decrease approximately 24 percent for the year. Net income for the Company’s credit operations in 2009 is forecast to decrease to approximately $250 million.
Items of concern include the sharp downturn in global economic activity, the turmoil in financial markets and the effectiveness of governmental policies to restore liquidity and the availability of credit for the Company’s customers. The ability of the Company’s suppliers to access credit is a risk. Significant fluctuations in foreign currency exchange rates could also impact the Company’s results. The volatility in the price of many commodities used in the Company’s products is also a concern. The availability of certain components that could impact the Company’s ability to meet production schedules continues to be monitored. Producing engines that continue to meet high performance standards, yet also comply with increasingly stringent emissions regulations is one of the Company’s major priorities.
Ongoing high material costs, the deepening global recession and volatile foreign exchange rates have put downward pressure on the Company’s financial results. However, demand for large productive agricultural machinery has held up well in the U.S. and Canada. The Company’s investment in advanced technology and emphasis on disciplined asset management should benefit the Company. Also of benefit has been the Company’s access to global capital markets, which is helping to ensure that financing remains available for many customers.
2009 Compared with 2008
Deere & Company’s net income was $203.9 million, or $.48 per share for the first quarter of 2009, compared with $369.1 million, or $.83 per share, for the same period last year.
Worldwide net sales and revenues decreased 1 percent to $5,146 million for the first quarter, compared with $5,201 million a year ago. Net sales of the Equipment Operations increased 1 percent to $4,560 million for the first quarter, compared with $4,531 million last year. Included in these sales were price changes of 6 percent, offset by an unfavorable currency translation effect of 6 percent. Equipment sales in the U.S. and Canada increased 1 percent for the first quarter. Net sales outside the U.S. and Canada were basically unchanged for the quarter, which included an unfavorable currency translation effect of 14 percent.
The Company’s Equipment Operations reported operating profit of $307 million for the first quarter, compared with $457 million last year. The deterioration was largely due to increased raw material costs and unfavorable effects of volatile foreign currency exchange rates, partially offset by improved price realization. The Equipment Operations had net income of $153.5 million for the first quarter of 2009, compared with $264.0 million last year. The same factors mentioned above in addition to a lower effective tax rate this year affected these results.
Trade receivables and inventories at the end of the first quarter were $7,312 million, or 28 percent of the last 12 months’ net sales, compared with $6,488 million, or 29 percent of net sales, a year ago.
Net income of the Company’s Financial Services operations for the first quarter of 2009 was $46.8 million, compared with $97.7 million last year. The decrease was primarily due to narrower financing spreads, lower commissions from crop insurance and a higher provision for credit losses. See the following discussion for the credit operations.
