RERMAG

Deere Reports 2Q07 Earnings of $624 Million

Moline, Ill.-based Deere & Co. last week announced worldwide net income of $623.6 million, or $2.72 per share, for the second quarter ended April 30. Last year's second-quarter net income of $744.6 million, or $3.13 per share, included $227.6 million from the company's discontinued health-care business. Income from continuing operations was $623.6 million, or $2.72 per share, for the second quarter, versus $517.0 million, or $2.17 per share, last year.

For the first six months, net income was $862.3 million, or $3.76 per share, compared with $980.5 million, or $4.11 per share, last year. Six-month income from continuing operations was $862.3 million, or $3.76 per share, compared with $740.9 million, or $3.11 per share, last year. Income from continuing operations for both the quarter and six months last year included an after-tax charge of $44.2 million related to the completion of a cash tender offer to repurchase outstanding debt securities.

Worldwide net sales and revenues increased 5 percent to $6.9 billion for the second quarter and were up 5 percent to $11.3 billion for the first six months. Net sales of the equipment operations were $6.3 billion for the quarter and $10.1 billion for six months, compared with $6.0 billion and $9.7 billion for the respective periods last year.

Improving conditions in the global farm sector, coupled with a positive customer response to the company's innovative product lineup, are continuing to drive strong results, the company said.

“Advanced product offerings that help John Deere customers be more profitable and productive are supporting our positive financial performance and expanded global market presence,” said Robert Lane, chairman and CEO. “At the same time, we are making further progress holding the line on asset levels while effectively serving the needs of customers throughout the world.”

Net sales of the worldwide equipment operations increased 4 percent for both the quarter and six months. This included positive effects for currency translation and price changes of 4 percent for both the quarter and six months. Equipment net sales in the U.S. and Canada were down 3 percent for the quarter and down 4 percent for the year to date. Net sales outside the U.S. and Canada increased by 22 percent for the quarter and 23 percent for six months, including a positive currency-translation effect of 7 percent for both periods.

Deere’s equipment divisions reported operating profit of $829 million for the quarter and $1.1 billion for six months, compared with $786 million and $1.0 billion for the periods last year. Higher operating profit for the quarter and six months was primarily the result of improved price realization, partially offset by higher selling and administrative expenses and increased raw material costs. The impact of higher sales volumes from the company's agricultural-equipment division largely offset lower construction-equipment volumes in both periods.

Company equipment sales are projected to increase by approximately 6 percent for full-year 2007 and to be up about 5 percent for the third quarter. Included in the yearly forecast is about two percentage points of positive currency translation. Net income is forecast to be around $1.55 billion for the year and in a range of $400 million to $425 million for the third quarter.

“Our efforts to grow a great business are meeting with considerable success,” Lane said. “As a result, the company is poised to realize substantial benefits from powerful global economic trends, such as growing affluence, increasing demand for food, and the rising use of biofuels. In our view, these global developments hold great long-range potential for the company and its investors. On the basis of these factors, we believe John Deere is in an increasingly attractive position to deliver more sustainable, strong levels of performance over the long term.”

Commercial & Consumer Division sales were largely unchanged for the quarter and six months compared with the prior year. Operating profit was $150 million for the quarter and $188 million year to date, compared with $127 million and $146 million for the respective periods last year. The profit increase for both periods was due to improved price realization, a favorable product mix and lower operating costs, partially offset by lower shipment volumes.

John Deere commercial and consumer equipment sales are projected to be up about 11 percent for the year, including about $350 million of sales from LESCO Inc. Acquired by Deere earlier this month, LESCO is a supplier of consumable lawn care, landscape, golf course and pest control products. Division sales also are expected to benefit from the success of new lines of residential zero-turn radius mowers and utility vehicles among other products.

In Construction & Forestry, sales declined 12 percent for the quarter and 10 percent for six months. Operating profit was $192 million for the quarter and $287 million for six months, compared with $274 million and $410 million a year ago. Lower operating profit for both periods was primarily due to lower sales volumes and higher raw-material costs, partially offset by improved price realization year to date. Last year's results included expenses related to the closure of a Canadian forestry-equipment facility.

U.S. markets for construction and forestry equipment are expected to remain under pressure for the year. While nonresidential spending in the U.S. is forecast for improvement, the outlook for residential construction remains lower than last year. Further, sales to the independent rental channel are expected to decline significantly. In this environment, Deere's worldwide sales of construction and forestry equipment are forecast to decrease by about 11 percent for the year.

John Deere Capital Corp.’s net income was $76.3 million for the quarter and $149.5 million for the year to date, compared with net income of $68.5 million and $138.6 million for the respective periods last year. Results for the second quarter and for the first six months benefited from growth in the portfolio, partially offset by a higher provision for credit losses.

Analysts calculate incremental margins for Deere & Co. were roughly 18 percent, as strength in farm equipment offset a decline in construction results, according to UBS Investment Research.

In addition Deere raised its full-year 2007 forecast net income to $1.55 billion, which the analysts calculate to roughly $6.80 per share. For the fiscal third quarter, Deere expects net income of $400-$425 million, equivalent to EPS of $1.74-$1.85.

According to UBS, its price target on Deere reflects a 5 to10 percent discount to the market on its FY08 EPS estimate, plus roughly $10 of excess cash on the balance sheet. UBS maintains its Neutral 2 rating on Deere & Co.

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