Dow Jones reports:
Can We Stop Worrying Now?
Deere & Co. said Friday it has tightened conditions for equipment leases as a slump in farming incomes has led customers to prefer leasing machinery over purchasing it.
The slide in global commodity prices has already eaten into Deere's sales and profits for nine straight quarters. The farm and construction machinery market slump has bled into Deere's customer-finance arm, where leases now account for a growing volume, forcing the company to tighten the terms for renting equipment that has rapidly depreciated in value.
Leases have accounted for about a quarter of the company's customer financing deals lately, compared with about 15% in the past, according to estimates by industry analysts.
Farmers in the U.S., South America and elsewhere have cut back sharply on equipment spending over the past two years, despite planting big crops, as lower commodity prices reduced farm income.
Deere has stepped up its leasing activity in recent quarters, but its finance unit and dealers have been left with even more used equipment as customers walk away when leases expire. The company took a write-down on the residual value of used equipment in the latest quarter. Deere said it is restructuring leases to share more of the risk of further declines with dealers.
New leases will likely cost farmers more, as the company lowers residual equipment values at the end of the leases to reflect the depressed prices for used equipment.
"The focus is on how do we reduce some of that risk, primarily around the short-term portion of the business," Deere investor relations director Tony Huegel said on a call after the company reported a 28% drop in second-quarter profit and cut its 2016 guidance for a second time this year.
Deere shares were down 5.4% at $77.74 as its downbeat outlook outweighed quarterly profits that beat analyst expectations.
The company warned of steeper declines in the full-year sales outlook for its construction machinery business and trimmed the profit forecast for its finance unit by 9% to $480 million. Earnings from that business fell 39% to $103 million in the latest quarter.
Deere's overseas sales remain under pressure, especially in Brazil, where like peers it faces a strong U.S. dollar alongside economic and political turmoil. Deere now expects industrywide sales of farm equipment in South America to fall by 15% to 20% from last year, 5 percentage points steeper than its prior forecast.
The Moline, Ill.-based company expects profits of about $1.2 billion for the fiscal year ending Oct. 31, down around $100 million from its February forecast and below analyst expectations.
For the quarter ended April 30, Deere reported a profit of $495.4 million, or $1.56 a share, down from $690.5 million, or $2.03 a share, a year earlier. Equipment sales declined 4% to $7.1 billion.
Deere's construction and forestry equipment unit was especially weak during the latest period as sales fell 16% to $1.4 billion and operating profit plunged 61% to $74 million. Deere now expects construction equipment sales to fall by 13% this year after previously predicting an 11% sales decline.
Its farm-machinery business performed better than expected during the quarter, thanks mostly to the timing of recent sales. Farm equipment sales slipped 0.4% to $5.7 billion, well above analyst expectations for $5.2 billion. Operating profit dropped 4% to $614 million. The company now expects farm equipment sales to decline 8% this year after previously forecasting a 10% decrease.