Net income attributable to Deere & Company for the first quarter ended January 29 plunged 23.8% to $193.8 million, or $0.61 per share, compared with the period ended January 31, 2016. Worldwide net sales and revenues for the first quarter increased 2%, to $5.625 billion, compared with $5.525 billion last year. Net sales of the equipment operations fell 1.5% to $4.698 billion for the quarter. Sales of construction and forestry equipment decreased 6% for the quarter, mainly as a result of lower shipment volumes and higher sales-incentive costs.
"John Deere has started out the year on a positive note in the continued face of soft market conditions," said Samuel R. Allen, chairman and chief executive officer. "Although the quarter's sales and earnings were somewhat lower than last year, all of our businesses remained solidly profitable. Deere's performance showed further benefits from the sound execution of its operating plans, the strength of a broad product portfolio and the impact of a more flexible cost structure. At the same time, we are seeing signs that after several years of steep declines key agricultural markets may be stabilizing."
Summary of Operations
Net sales of the worldwide equipment operations declined 1% for the quarter. Sales included price realization of 2% and a favorable currency-translation effect of 1%. Equipment net sales in the United States and Canada decreased 8%. Outside the U.S. and Canada, net sales increased 11%, with a favorable currency-translation effect of 1%.
Deere's equipment operations reported a 15.5% increase in operating profit to $247 million for the quarter. The improvement was primarily driven by price realization, partially offset by expenses associated with the previously announced voluntary employee-separation program, higher warranty costs and the unfavorable effects of foreign-currency exchange. Additionally, the current quarter benefited from a gain on the sale of a partial interest in the unconsolidated affiliate SiteOne Landscape Supply Inc.
Net income of the company's equipment operations fell 37% to 80 million for the quarter. In addition to the operating factors mentioned above, a higher effective tax rate in 2017 reduced quarterly results.
Financial services reported an 11.6% drop in net income attributable to Deere & Company of $114.4 million. Lower results for the quarter were primarily due to less-favorable financing spreads and voluntary separation expenses.
Company Outlook & Summary
Company equipment sales are projected to increase about 4% for fiscal 2017 and be up about 1% for the second quarter compared with the same periods of 2016. Foreign-currency rates are not expected to have a material translation effect on equipment sales for the year or second quarter. Net sales and revenues are projected to increase about 4% for fiscal 2017 with net income attributable to Deere & Company of about $1.5 billion.
During the fourth quarter of 2016, the company announced voluntary employee-separation programs in the U.S. as part of an effort to reduce operating costs. Total pretax expenses related to the programs are estimated to be $111 million. Of this amount, $11 million was recorded in the fourth quarter of 2016, $94 million was recorded in first-quarter 2017, and $6 million is to be recognized over the remainder of the year. Savings from the separation programs are expected to be approximately $70 million in 2017.
"Deere continues to perform far better than in agricultural downturns of the past," Allen said. "This reflects our ongoing success developing a more durable business model and a wider range of revenue sources. What's more, our efforts to improve operating efficiency are gaining traction and we remain confident that we can deliver at least $500 million of structural cost reductions by the end of 2018. These actions reinforce our belief that Deere is well-positioned to deliver significant value to customers and investors in the future."
Equipment Division Performance
Agriculture & Turf. Sales were unchanged for the quarter with lower shipment volumes and higher warranty costs being offset by price realization and the favorable effects of currency translation. Operating profit leaped 47.9% to $213 million. The quarter's improvement was mainly driven by a gain on the sale of a partial interest in SiteOne Landscape Supply Inc. and price realization. These factors were partially offset by voluntary employee-separation expenses, higher warranty costs and the unfavorable effects of foreign-currency exchange.
Construction & Forestry. Construction and forestry sales decreased 6% for the quarter, mainly as a result of lower shipment volumes and higher sales-incentive costs. Operating profit fell by more than half, compared to the first quarter of 2016, to $34 million. Lower results for the quarter were mainly attributable to higher sales-incentive expenses and the voluntary separation program.
Market Conditions & Outlook
Agriculture & Turf. Deere's worldwide sales of agriculture and turf equipment are forecast to increase by about 3% for fiscal-year 2017, with currency translation not expected to have a material impact. Industry sales for agricultural equipment in the U.S. and Canada are forecast to be down 5 to 10% for 2017. The decline, reflecting weakness in the livestock sector as well as the continuing impact of low crop prices, is expected to affect both large and small equipment.
Full-year 2017 industry sales in the EU28 member nations are forecast to be down about 5%, with the decline attributable to low commodity prices and farm incomes. South American industry sales of tractors and combines are projected to be up 15 to 20% as a result of improving economic and political conditions in Brazil and Argentina. Asian sales are projected to be flat to up slightly, benefiting from higher sales in India.
Industry sales of turf and utility equipment in the U.S. and Canada are expected to be about flat for 2017, with Deere sales outpacing the industry.
Construction & Forestry. Deere's worldwide sales of construction and forestry equipment are forecast to be up about 7% for 2017, with no material currency-translation impact. The forecast reflects moderate economic growth worldwide. In forestry, global industry sales are expected to be flat to down 5%, with soft conditions in North America offsetting strength in other regions.
Financial Services. Fiscal-year 2017 net income attributable to Deere & Company for the financial services operations is expected to be approximately $480 million. In comparison with the division's 2016 performance, the outlook reflects lower losses on lease residual values, partially offset by less-favorable financing spreads and an increased provision for credit losses.
