Deere Reports Higher Results for Third Quarter; Net Income Reaches $436 Million

MOLINE, Ill., Aug. 15 /PRNewswire-FirstCall/ -- Deere & Company today announced worldwide net income of $436.0 million, or $1.85 per share, for the third quarter ended July 31, compared with $387.1 million, or $1.58 per share, for the same period last year. Income from continuing operations, which excludes the company's discontinued health-care business, was $435.7 million, or $1.85 per share, for the third quarter, versus $378.8 million, or $1.55 per share, last year.

"We are seeing continued benefit from our successful efforts to restrain costs and operate with lower assets," said Robert W. Lane, chairman and chief executive officer. "At the same time, the company's advanced new equipment and service offerings are bringing value and productivity to a growing, increasingly global group of customers."

For the first nine months, net income was $1.416 billion, or $5.96 per share, compared with $1.214 billion, or $4.89 per share, last year. Nine-month net income from continuing operations was $1.177 billion, or $4.95 per share, compared with $1.193 billion, or $4.81 per share, last year.

Worldwide net sales and revenues increased 8 percent to $6.267 billion for the third quarter, compared with a year ago, and increased 5 percent to $17.030 billion for the first nine months. Net sales of the equipment operations were $5.677 billion for the quarter and $15.398 billion for nine months, compared with $5.370 billion and $14.916 billion for the respective periods last year.

Summary of Operations

Excluding the effect of currency translation and price changes, worldwide equipment sales were essentially unchanged for the quarter and first nine months. On a reported basis, equipment sales in the U.S. and Canada increased 6 percent for the quarter and 5 percent for the year to date. Excluding currency translation, sales outside the U.S. and Canada increased 3 percent for the quarter and 2 percent for nine months. As reported, equipment sales outside the U.S. and Canada were up 5 percent for the quarter and down 1 percent for nine months.

Deere's equipment divisions reported operating profit of $583 million for the quarter and $1.630 billion for nine months, compared with $500 million and $1.618 billion for the periods last year. Higher operating profit for the quarter was primarily the result of improved price realization, partially offset by the impact of planned lower manufacturing volumes in the agricultural division. Nine-month operating profit was higher due to improved price realization and lower retirement benefit costs. Partially offsetting these factors were the negative effect of planned lower manufacturing volumes, higher selling and administrative expenses primarily related to growth and share-based compensation expense, and increased raw-material costs.

Deere's ongoing emphasis on rigorous asset management is continuing to yield positive results. Trade receivables and inventories at the end of the quarter were $6.264 billion, or 32 percent of previous 12-month sales, compared with $6.526 billion, or 33 percent of sales, a year ago.

Financial services reported net income of $90.8 million for the quarter and $496.8 million year to date versus $90.4 million and $252.9 million last year. Income from continuing operations was $90.5 million for the quarter and $256.9 million for nine months, versus $82.1 million and $232.2 million a year earlier. For both periods, net income from continuing operations benefited from growth in the portfolio, partially offset by a higher provision for credit losses. Narrower financing spreads had a negative effect on net income from continuing operations for nine months.

Income from discontinued operations was $0.3 million for the quarter and $239.9 million year to date versus $8.3 million and $20.7 million last year. Income from discontinued operations relates primarily to this year's gain on sale of the company's health-care operations.

Company Earnings Outlook

Deere's equipment sales are projected to increase by 2 to 3 percent for full-year 2006 and are expected to be up about 1 percent for the fourth quarter. Consistent with ongoing asset-management initiatives, production levels are expected to be down about 5 percent for the year and about 10 percent in the fourth quarter. Based on the above, net income is forecast to be around $1.625 billion for the year and approximately $200 million in the fourth quarter.

Deere's full-year net income projection includes the impact of the following previously announced items. These are the closure of a forestry- equipment plant in Canada, which is expected to result in an after-tax charge of about $35 million (including approximately $21 million in the fourth quarter), as well as an after-tax charge of $44 million related to the completion of a cash tender offer to repurchase outstanding debt securities. Also included in the company's earnings projection is about $240 million of net income for the discontinued health-care business and approximately $50 million, after tax, related to share-based compensation expense for the full year.

Company Summary

"Our efforts to build and grow a great business are meeting with considerable success and making a major contribution to Deere's financial and operating performance," Lane said. "In addition, we are providing further value by returning cash to shareholders through dividends and stock repurchases. As a result, we're confident the company is positioned to continue delivering strong returns well into the future."

Equipment Division Performance -- Agricultural. Division sales increased 1 percent for the quarter but were down 4 percent through nine months. While the physical volume of shipments declined for the quarter, sales increased due to improved price realization and currency translation. Year-to-date sales were down as a result of lower shipments and currency translation, partially offset by improved price realization. Operating profit was $249 million for the quarter and $739 million for nine months, compared with $262 million and $913 million for the respective periods last year. Operating profit was down for both periods mainly due to lower shipments and worldwide production volumes, as well as higher selling and administrative expenses. Production was down substantially in the third quarter, as planned, in line with Deere's ongoing commitment to asset discipline. Results for both the quarter and nine months received benefit from improved price realization and lower retirement benefit costs. -- Commercial & Consumer. Division sales increased 8 percent for the quarter and 10 percent for nine months, primarily due to higher sales in the landscapes operation. Operating profit was $78 million for the quarter and $225 million year to date, compared with $60 million and $193 million for the respective periods last year. The higher operating profit in both periods reflected improved profitability of the landscapes operation. -- Construction & Forestry. Sales rose 13 percent for the quarter and nine months reflecting strong activity at the retail level. Operating profit was $256 million for the quarter and $666 million for nine months, compared with $178 million and $512 million last year. Higher operating profit for the quarter was primarily due to improved price realization and increased shipments and efficiencies related to stronger production volumes, partially offset by higher raw-material costs. The nine-month operating profit improvement was primarily due to increased shipments, stronger production volumes and improved price realization. These factors were partially offset by higher raw- material costs and expenses to close a facility in Canada. Market Conditions & Outlook -- Agricultural. Global farm-economic conditions remain solid and continue to have a positive long-term outlook. In this regard, demand for crops is benefiting from a global population gaining in both size and affluence, and from a dramatic rise in the use of renewable fuels. As a result, carryover stocks of commodities such as wheat and corn remain low, providing support to crop prices and overall farm fundamentals. In the near term, higher input costs, particularly related to energy prices, are having a negative impact on global farm income and putting pressure on farm machinery sales in key markets. In addition, uncertainty over global trade policies is contributing to a softer retail environment. In the U.S. and Canada, farmers are in sound overall financial condition with support from relatively low debt levels and rising land values. However, cash receipts are forecast to be below last year's record level, while higher interest rates and increased input costs are causing farm incomes to narrow. In addition, dry weather in the U.S. Plains states and Southeast is having a negative effect on farmer sentiment. Based on these factors, Deere projects industry retail sales in the U.S. and Canada to be down at least 5 percent for 2006. Consistent with the company's previous forecast, industry retail sales in Western Europe are forecast to be down about 5 percent for the year due to concerns over input costs, government farm policies and dry conditions in certain areas. In South America, conditions have weakened further and the outlook for industry retail sales is now down about 25 percent for the year. Negative factors include persistent strength in the Brazilian currency as well as higher input costs, primarily related to the treatment of soybean rust. In Australia, dryness is having a negative effect on the wheat crop, with industry retail sales in that region of the world now projected to decline about 15 percent for the year. Based on these factors and market conditions, worldwide sales of John Deere agricultural equipment are forecast to be down about 4 percent for the year. Although benefiting from newly introduced products, sales are being negatively affected by ongoing efforts to reduce inventories and trade receivables. Worldwide farm machinery production is expected to be down about 20 percent in the fourth quarter in comparison with the same period last year. -- Commercial & Consumer. John Deere commercial and consumer sales are forecast to be up about 8 percent for the year. Benefiting the division's sales are growth in the landscapes operation and positive response to the company's advanced line of riding lawn equipment and other new products. -- Construction & Forestry. Markets for construction equipment are experiencing further gains as a result of increased overall construction spending. Higher nonresidential spending for the year is expected to more than offset a slight decline in residential construction. While sales to the rental channel have slowed, sales to the contractor segment have continued to increase as a result of fleet expansion and upgrading. Forestry-equipment markets have softened, and industry sales are expected to be down for the year on a global basis. In this environment, Deere's worldwide sales of construction and forestry equipment are forecast to rise by about 12 percent for fiscal 2006. -- Credit. Full-year net income for Deere's credit operations is now forecast to be approximately $340 million, with the improvement from last year being driven by growth in the credit portfolio. This outlook continues to reflect very strong credit quality. John Deere Capital Corporation

The following is disclosed on behalf of the company's credit subsidiary, John Deere Capital Corporation (JDCC), in connection with the disclosure requirements applicable to its periodic issuance of debt securities in the public market.

JDCC's net income was $78.8 million for the quarter and $217.4 million for the year to date, compared with $76.3 million and $206.0 million for the respective periods last year. Results for both periods benefited from growth in the portfolio, partially offset by a higher provision for credit losses. Narrower financing spreads had a negative effect on net income for nine months.

Net receivables and leases financed by JDCC were $17.746 billion at July 31, 2006, compared with $15.789 billion one year ago. Net receivables and leases administered, which include receivables previously sold, totaled $18.813 billion at July 31, 2006, compared with $17.703 billion one year ago.

Safe Harbor Statement

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: Statements under "Company Earnings Outlook," "Company Summary," "Market Conditions & Outlook," and other statements herein that relate to future operating periods are subject to important risks and uncertainties that could cause actual results to differ materially. Some of these risks and uncertainties could affect particular lines of business, while others could affect all of the Company's businesses.

Forward-looking statements involve certain factors that are subject to change, including for the Company's agricultural equipment segment, the many interrelated factors that affect farmers' confidence. These factors include worldwide demand for agricultural products, world grain stocks, weather and soil conditions, harvest yields, prices realized for commodities and livestock, crop production expenses (most notably fuel and fertilizer costs), availability of transport for crops, the growth of non-food uses for some crops (including ethanol and biodiesel production), real estate values, available acreage for farming, the land ownership policies of various governments, changes in government farm programs (including those that may result from the difficult farm income conditions in Brazil), international reaction to such programs, global trade agreements, animal diseases and their affects on poultry and beef consumption and prices (including bovine spongiform encephalopathy, commonly known as "mad cow" disease, and avian flu), crop pests and diseases (including Asian rust), and the level of farm product exports (including concerns about genetically modified organisms).

Factors affecting the outlook for the Company's commercial and consumer equipment segment include weather conditions, general economic conditions in these markets, consumer confidence, consumer borrowing patterns, consumer purchasing preferences, housing starts, and spending by municipalities and golf courses.

The number of housing starts, interest rates and consumer spending patterns are especially important to sales of the Company's construction equipment. The levels of public and non-residential construction also impact the results of the Company's construction and forestry segment. Prices for pulp, lumber and structural panels are important to sales of forestry equipment.

All of the Company's businesses and its reported results are affected by general economic conditions in and the political and social stability of the global markets in which the Company operates; production, design and technological difficulties, including capacity and supply constraints and prices, including for supply commodities such as steel and rubber; the success of new product initiatives and customer acceptance of new products; oil and energy prices and supplies; inflation and deflation rates, interest rate levels and foreign currency exchange rates; the availability and cost of freight; trade, monetary and fiscal policies of various countries; wars and other international conflicts and the threat thereof; actions by the U.S. Federal Reserve Board and other central banks; actions by the U.S. Securities and Exchange Commission; actions by environmental regulatory agencies, including those related to engine emissions and the risk of global warming; actions by other regulatory bodies; actions by rating agencies; capital market disruptions; customer borrowing and repayment practices, and the number of customer loan delinquencies and defaults; actions of competitors in the various industries in which the Company competes, particularly price discounting; dealer practices especially as to levels of new and used field inventories; labor relations; changes to accounting standards; the effects of terrorism and the response thereto; and legislation affecting the sectors in which the Company operates. Company results are also affected by changes in the level of employee retirement benefits, changes in market values of investment assets and the level of interest rates, which impact retirement benefit costs, and significant changes in health care costs. Other factors that could affect results are changes in Company declared dividends, acquisitions and divestitures of businesses, common stock issuances and repurchases, and the issuance and retirement of Company debt.

The Company's outlook is based upon assumptions relating to the factors described above, which are sometimes based upon estimates and data prepared by government agencies. Such estimates and data are often revised. The Company, except as required by law, undertakes no obligation to update or revise its outlook, whether as a result of new developments or otherwise. Further information concerning the Company and its businesses, including factors that potentially could materially affect the Company's financial results, is included in the Company's most recent annual report on Form 10-K and other filings with the U.S. Securities and Exchange Commission.

Third Quarter 2006 Press Release (millions of dollars) Three Months Ended Nine Months Ended July 31 July 31 % % 2006 2005 Change 2006 2005 Change Net sales and revenues: Agricultural equipment net sales $2,899 $2,869 +1 $7,862 $8,171 -4 Commercial and consumer equipment net sales 1,171 1,081 +8 3,119 2,839 +10 Construction and forestry net sales 1,607 1,420 +13 4,417 3,906 +13 Total net sales * 5,677 5,370 +6 15,398 14,916 +3 Credit revenues 475 376 +26 1,316 1,050 +25 Other revenues * 115 77 +49 316 233 +36 Total net sales and revenues * $6,267 $5,823 +8 $17,030 $16,199 +5 Operating profit: ** Agricultural equipment $249 $262 -5 $739 $913 -19 Commercial and consumer equipment 78 60 +30 225 193 +17 Construction and forestry 256 178 +44 666 512 +30 Credit 135 128 +5 388 363 +7 Other * 3 4 Total operating profit * 721 628 +15 2,022 1,981 +2 Interest, corporate expenses and income taxes (285) (249) +14 (846) (788) +7 Income from continuing operations 436 379 +15 1,176 1,193 -1 Income from discontinued operations 8 240 21 Net income $436 $387 +13 $1,416 $1,214 +17 * Includes equipment operations outside the U.S. and Canada as follows: Net sales $1,709 $1,622 +5 $4,504 $4,546 -1 Operating profit $146 $161 -9 $389 $525 -26 The company views its operations as consisting of two geographic areas, the "U.S. and Canada," and "outside the U.S. and Canada." Other revenues and operating profit in the prior periods as presented above decreased $182 million and $12 million, respectively, in the third quarter and $555 million and $27 million, respectively, in the first nine months from the amounts reported in 2005 due to a reclassification of the health care operations included in ''Other'' last year to discontinued operations this year. ** Operating profit is income from continuing operations before external interest expense, certain foreign exchange gains or losses, income taxes and corporate expenses. However, operating profit of the credit segment includes the effect of interest expense and foreign exchange gains or losses.