Deere reports solid third quarter income, earnings
Deere & Company reported net income of $910.3 million for the third quarter ended July 29, 2018, or $2.78 per share, compared with net income of $641.8 million, or $1.97 per share, for the quarter ended July 30, 2017. For the first nine months of the year, net income attributable to Deere & Company was $1.584 billion, or $4.82 per share, compared with $1.649 billion, or $5.11 per share, for the same period last year.
Affecting results for the third quarter and first nine months of 2018 were provisional adjustments to the provision for income taxes due to the enactment of U.S. tax reform legislation on December 22, 2017 (tax reform). Third-quarter results included a favorable net adjustment to provisional income taxes of $62 million, while the first nine months reflected an unfavorable net provisional income tax expense of $741 million. Without these adjustments, net income attributable to Deere & Company for the third quarter and first nine months of the year would have been $849 million, or $2.59 per share, and $2.325 billion, or $7.08 per share, respectively.
Worldwide net sales and revenues increased 32 percent, to $10.308 billion, for the third quarter and rose 29 percent, to $27.942 billion, for nine months. Net sales of the equipment operations were $9.286 billion for the third quarter and $25.007 billion for the first nine months, compared with $6.833 billion and $18.791 billion for the same periods last year.
"Deere's third-quarter performance benefited from favorable market conditions and positive response to our advanced product lineup," said Samuel R. Allen, chairman and chief executive officer. "Farm machinery sales in North America and Europe made solid gains, while construction equipment sales moved sharply higher and received significant support from our Wirtgen road-building unit. At the same time, we have continued to face cost pressures for raw materials and freight, which are being addressed through a combination of cost management and pricing actions."
Summary of Operations
Net sales of the worldwide equipment operations increased 36 percent for the quarter and 33 percent for the first nine months compared with the same periods a year ago. Deere's acquisition of the Wirtgen Group (Wirtgen) in December 2017 added 17 percent to net sales for the quarter and 12 percent year to date. Sales included an unfavorable currency-translation effect of 1 percent for the quarter and a favorable effect of 2 percent for nine months. Equipment net sales in the United States and Canada increased by 29 percent for the quarter and 27 percent year to date, with Wirtgen adding 6 percent and 4 percent for the respective periods. Outside of the U.S. and Canada, net sales rose 45 percent for the quarter and 42 percent for the first nine months, with Wirtgen adding 31 percent and 23 percent for the periods. Net sales included an unfavorable currency-translation effect of 1 percent for the quarter and a favorable effect of 3 percent for nine months.
Deere's equipment operations reported operating profit of $1.087 billion for the quarter and $2.822 billion for the first nine months, compared with $804 million and $2.179 billion, respectively, last year. Wirtgen, whose results are included in these amounts, had operating profit of $88 million for the quarter and $37 million year to date. Excluding Wirtgen results, the improvement for both periods was primarily driven by higher shipment volumes, lower warranty costs, and price realization, partially offset by higher production costs and research and development expenses. The corresponding periods of 2017 included a gain on the sale of SiteOne Landscapes Supply, Inc. (SiteOne).
Net income of the company's equipment operations was $751 million for the third quarter and $889 million for the first nine months, compared with net income of $506 million and $1.291 billion for the same periods of 2017. In addition to the operating factors previously cited, the quarter was favorably affected by $58 million and the nine-month period unfavorably affected by $974 million due to provisional income-tax adjustments related to tax reform.
Financial services reported net income attributable to Deere & Company of $151.2 million for the quarter and $680.6 million for the first nine months compared with $131.2 million and $349.1 million last year. Results for both periods benefited from a higher average portfolio and a lower provision for credit losses, partially offset by less-favorable financing spreads. Nine-month results also were helped by lower losses on lease residual values. Additionally, provisional income tax adjustments related to tax reform had favorable effects of $3.6 million for the quarter and $232.4 million for nine months.
Company Outlook & Summary
Company equipment sales are projected to increase by about 30 percent for fiscal 2018 and by about 21 percent for the fourth quarter compared with the same periods of 2017. Of these amounts, Wirtgen is expected to add about 12 percent to Deere sales for both the full year and fourth quarter. Foreign-currency rates are not expected to have a material translation effect on equipment sales for the year but are anticipated to have an unfavorable effect of about 3 percent for the fourth quarter.
Net sales and revenues are expected to increase by about 26 percent for fiscal 2018 with net income attributable to Deere & Company forecast to be about $2.360 billion. The company's net income forecast includes $741 million of provisional income tax expense associated with tax reform, representing discrete items for the remeasurement of the company's net deferred tax assets to the new U.S. corporate tax rate and a one-time deemed earnings repatriation tax. Adjusted net income attributable to Deere & Company, which excludes the provisional income-tax adjustments associated with tax reform, is forecast to be about $3.1 billion.
The current outlook for adjusted net income compares with previous guidance of $3.1 billion, which included $803 million of provisional income tax expense.
"We continue to believe Deere is well-positioned to capitalize on growth in the world's agricultural and construction equipment markets," Allen said. "Replacement demand for large agricultural equipment is driving sales even in the face of tensions over global trade and other geopolitical issues. At the same time, we are heartened by our customers' enthusiastic response to the advanced features and technology found on our new products. What's more, the powerful global trends of population growth and increased urbanization remain quite vibrant and are putting a positive light on the company's prospects for the future. As a result, we're confident Deere is on track to continue its strong performance and deliver significant value to customers and investors in the years ahead."
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