Deere (DE 137.48, +0.13, +0.1%) touched three-month lows this morning, though now trades higher off those levels, after continued cost pressures culminated in a third quarter earnings miss and worse than expected fourth quarter guidance.
Management stated Deere, “continued to face cost pressures for raw materials and freight” during the third quarter, though added the caveat that cost management actions are being implemented. Specifically, in Q3 Deere’s cost of sales increased 36.3% to $7.15 billion with a 14.2% increase in SG&A.
Cost pressures led to Deere reporting worse than expected third quarter net income of $2.59 on revenue growth of 35.8% to $9.29 billion. 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).
Equipment net sales in the United States and Canada increased by 29% for the quarter and 27% year to date, with Wirtgen adding 6% and 4% for the respective periods. Outside of the U.S. and Canada, net sales rose 45% for the quarter and 42% for the first nine months, with Wirtgen adding 31% and 23% for the periods. Net sales included an unfavorable currency-translation effect of 1% for the quarter and a favorable effect of 3% for nine months.
Financial services reported net income attributable to Deere & Company of $151.2 million for the quarter. Results benefited from a higher average portfolio and a lower provision for credit losses, partially offset by less-favorable financing spreads. Additionally, provisional income tax adjustments related to tax reform had favorable effects of $3.6 million for the quarter.
- Agriculture & Turf. Sales rose 18% for the quarter and 19% for the first nine months due to higher shipment volumes as well as lower warranty expenses and price realization. Currency translation had an unfavorable impact on sales for the quarter and a favorable effect for nine months. Operating profit was $806 million for the quarter and $2.249 billion year to date, compared with respective totals of $693 million and $1.920 billion last year. The improvement was driven by higher shipment volumes, lower warranty-related expenses and price realization, partially offset by higher production costs and research and development expenses.
- Construction & Forestry. Construction and forestry sales increased 100% for the quarter and 83% for nine months, with Wirtgen adding 77% and 56% for the respective periods. Foreign-currency rates did not have a material translation effect on sales for the quarter but had a favorable impact for nine months. Both periods were favorably affected by lower warranty expenses and negatively affected by higher sales-incentive expenses. Operating profit was $281 million for the quarter and $573 million for nine months, compared with $111 million and $259 million last year. Wirtgen contributed operating profit of $88 million for the quarter and $37 million year to date. Excluding Wirtgen, the improvements were primarily driven by higher shipment volumes and lower warranty expenses, partially offset by higher production costs and sales-incentive expenses.
- Company equipment sales are projected to increase by about 30% for fiscal 2018 and by about 21% for the fourth quarter compared with the same periods of 2017. Of these amounts, Wirtgen is expected to add about 12% 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% for the fourth quarter.
- Net sales and revenues are expected to increase by about 26% 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.
- Deere's worldwide sales of agriculture and turf equipment are forecast to increase by about 15% for fiscal-year 2018, with foreign-currency rates not expected to have a material translation effect. Industry sales of agricultural equipment in the U.S. and Canada are forecast to be up about 10% for 2018, led by higher demand for large equipment.
- Deere's worldwide sales of construction and forestry equipment are anticipated to be up about 81% for 2018, with foreign-currency rates not expected to have a material translation effect. In forestry, global industry sales are expected to be up about 10% mainly as a result of improved demand throughout the world, led by North America.
- Fiscal-year 2018 net income attributable to Deere & Company for the financial services operations is projected to be approximately $815 million, including a provisional income tax benefit of $232 million associated with tax reform. Excluding the tax benefit, adjusted net income attributable to Deere & Company is forecast to be $583 million.
Deere’s red-to-green move isn't enough for the stock to recoup the 50-day simple moving average yet (142.22).