Deere & Company reported a net loss of $535.1 million for the first quarter ended January 28, 2018, or $1.66 per share, compared with net income of $199.0 million, or $0.62 per share, for the quarter ended January 29, 2017. Affecting first-quarter 2018 results were charges to the provision for income taxes due to the enactment of U.S. tax reform legislation on December 22, 2017 (tax reform).
The provisional income tax expense includes a write-down of net deferred tax assets of $715.6 million, reflecting a reduction in the U.S. corporate tax rate from 35 percent to 21 percent beginning on the enactment date, as well as the cost of a mandatory deemed repatriation of previously untaxed non-U.S. earnings of $261.6 million, partially offset by a favorable reduction in the annual effective tax rate and other adjustments of $12.1 million. Without these adjustments, first-quarter net income would have been $430.0 million, or $1.31 per share.
Worldwide net sales and revenues for the first quarter increased 23 percent, to $6.913 billion, compared with $5.625 billion for the same period last year. Net sales of the equipment operations were $5.974 billion for the quarter compared with $4.698 billion a year ago.
"Deere has continued to experience strong increases in demand for its products as conditions in key markets show further improvement," said Samuel R. Allen, chairman and chief executive officer. "Sales gains for the quarter, however, were moderated by bottlenecks in the supply chain and logistical delays in shipping products to our dealers. In line with strengthening conditions, we have raised our sales and adjusted-earnings forecasts for 2018 and have confidence we will be able to fulfill the needs of our customers over the course of the year."
Summary of Operations
Net sales of the worldwide equipment operations increased 27 percent for the quarter. Deere's completion of the acquisition of the Wirtgen Group (Wirtgen) in December 2017 added 5 percent to net sales for the quarter. Sales also included a favorable currency-translation effect of 3 percent. Equipment net sales in the United States and Canada increased 24 percent, with Wirtgen adding 1 percent. Outside the U.S. and Canada, net sales increased 33 percent, with Wirtgen adding 12 percent, and a favorable currency-translation effect of 5 percent.
Deere's equipment operations reported operating profit of $419 million for the quarter, compared with $255 million for the period in 2017. Results for the quarter included an operating loss for Wirtgen of $92 million, attributable to the unfavorable effects of purchase accounting and acquisition costs. Excluding the Wirtgen loss, the improvement was primarily driven by higher shipment volumes and lower warranty costs, partially offset by higher production costs. In addition, the prior period included a gain on the sale of SiteOne Landscapes Supply, Inc. (SiteOne), and incurred expenses associated with a voluntary employee-separation program.
The company's equipment operations reported a net loss of $964 million for the first quarter, compared with net income of $85 million for the same period last year. In addition to the operating factors mentioned above, the quarter was unfavorably affected by a provisional income tax expense and adjustments of $1.243 billion related to tax reform.
Financial services reported net income attributable to Deere & Company of $425.3 million for the quarter compared with $114.4 million for the same period last year. The increase was largely attributable to a provisional income tax benefit of $278.1 million related to tax reform. Additionally, quarterly results benefited from a higher average portfolio and lower losses on lease residual values. Last year's results included expenses associated with a voluntary employee-separation program.
Company Outlook & Summary
Company equipment sales are projected to increase by about 29 percent for fiscal 2018 and by 30 to 40 percent for the second quarter compared with the same periods of 2017. Of these amounts, Wirtgen is expected to add about 12 percent to Deere's net sales for the full year and about 16 percent for the second quarter. Also included in the forecast is a positive foreign-currency translation effect of about 3 percent for the year and about 4 percent for the second quarter. Net sales and revenues are projected to increase by about 25 percent for fiscal 2018. Net income attributable to Deere & Company is forecast to be about $2.1 billion. The net income outlook includes an unfavorable impact of tax reform estimated at $750 million, representing the net impact of the tax provision recorded at the enactment date of tax reform, partially offset by a lower effective tax rate over the remainder of the year. As a result, adjusted net income without the impact of the tax-reform adjustments is expected to be about $2.85 billion for the year.
"Although net income for the quarter and full year are being affected by the upfront costs of U.S. tax reform legislation, we believe the changes will reduce the company's overall tax rate and be beneficial in the future," said Allen. "At the same time, Deere is in good position to capitalize on the strengthening conditions we see in the world's agricultural and construction equipment markets. This underscores our success developing a more durable business model while making steady investments in new products, businesses, markets and technologies. As a result of these steps, Deere has become more profitable across the business cycle than in the past. We remain confident in the company's present direction and believe Deere is on track to continue delivering significant value to customers and investors in the future."
