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Earns Deere

FILE - In this Feb. 23, 2018 file photo, John Deere products, including a toy tractor on the sign, are on display at the "Spring into Spring" home and garden trade show in Council Bluffs, Iowa, John Deere, the maker of agricultural and construction equipment, reported a 46 percent boost in profit to $784.8 million, or $2.42 per share. But earnings, adjusted for pretax gains, came to $2.30 per share, 14 cents short of industry analyst projections, according to a survey by Zacks Investment Research. (AP Photo/Nati Harnik, FIle)

Moline-based Deere & Company reported net income of $784.8 million for the fourth quarter ended October 28, 2018, or $2.42 per share, compared with net income of $510.3 million, or $1.57 per share, for the quarter ended October 29, 2017. For fiscal 2018, net income attributable to Deere & Company was $2.368 billion, or $7.24 per share, compared with $2.159 billion, or $6.68 per share, in 2017.

Affecting results for the fourth quarter and full year of 2018 were adjustments to the provision for income taxes due to the enactment of U.S. tax reform legislation on December 22, 2017 (tax reform).

Fourth-quarter results included a favorable net adjustment to income taxes of $37 million, while the full year reflected an unfavorable net income tax expense of $704 million. Without these adjustments, net income attributable to Deere & Company for the fourth quarter and full year would have been $748 million, or $2.30 per share, and $3.073 billion, or $9.39 per share, respectively.

Worldwide net sales and revenues increased 17 percent, to $9.416 billion, for the fourth quarter and rose 26 percent, to $37.358 billion, for the full year. Net sales of the equipment operations were $8.343 billion for the quarter and $33.351 billion for the year, compared with respective totals of $7.094 billion and $25.885 billion in 2017.

"John Deere has concluded another solid year in which the company benefited from a further improvement in market conditions and a favorable customer response to its lineup of advanced products," said Samuel R. Allen, chairman and chief executive officer. "In the fourth quarter, farm machinery sales in the Americas made further gains while construction-equipment sales continued to move higher, helped in part by our Wirtgen road-building business, whose financial contribution has exceeded our original forecasts. At the same time, the company has continued to face cost pressures for raw materials such as steel, which are being addressed through pricing actions and ongoing cost management."

Added Allen, "The company's strong performance has allowed for significant investment in new products, services, and technologies. In addition, the company in 2018 returned almost $1.8 billion to shareholders in higher dividends and the repurchase of over $900 million of stock. These steps reflect the strength of the company and our optimism about its future prospects."

Summary of Operations

Net sales of the worldwide equipment operations increased 18 percent for the quarter and 29 percent for the full year compared with the same periods in 2017. Deere's acquisition of the Wirtgen Group (Wirtgen) in December 2017 added 11 percent to net sales for the quarter and 12 percent for the year. Sales included price realization of 2 percent for the quarter and 1 percent for the year. Results also included an unfavorable currency-translation effect of 3 percent for the quarter, while currency translation did not have a material effect for the full year.

Equipment net sales in the United States and Canada increased by 21 percent for the quarter and 25 percent for the year, with Wirtgen adding 4 percent for both periods. Outside of the U.S. and Canada, net sales rose 13 percent for the quarter and 34 percent for the year, with Wirtgen adding 19 percent and 22 percent for the respective periods. Currency translation had a negative effect of 7 percent on net sales outside the U.S. and Canada for the quarter, but had no material effect for the year.

Deere's equipment operations reported operating profit of $862 million for the quarter and $3.684 billion for the full year, compared with $680 million and $2.859 billion, respectively, in 2017. Wirtgen, whose results are included in these amounts, had operating profit of $79 million for the quarter and $116 million for the year. Excluding Wirtgen results, the improvement for both periods was primarily driven by higher shipment volumes, price realization and lower warranty costs, partially offset by higher production costs and research and development expenses.

Operating profit for the quarter also was affected by the unfavorable effects of foreign currency exchange. Corresponding periods of 2017 included an impairment charge for international construction and forestry operations. Additionally, full-year results in 2017 included a gain on the sale of SiteOne Landscapes Supply, Inc.

Net income of the company's equipment operations was $514 million for the fourth quarter and $1.404 billion for the full year, compared with net income of $417 million and $1.707 billion for the same periods of 2017. In addition to the operating factors previously cited, income tax adjustments related to tax reform had an unfavorable impact of $72 million for the quarter and $1.045 billion for the year.

Financial services reported net income attributable to Deere & Company of $261.4 million for the quarter and $942.0 million for the full year compared with $127.8 million and $476.9 million in 2017. Results for both periods benefited from a higher average portfolio and a lower provision for credit losses, partially offset by less-favorable financing spreads. Full-year results in 2018 also were aided by lower losses on lease residual values. Additionally, income tax adjustments related to tax reform had a favorable effect of $108.8 million for the quarter and $341.2 million for the year.

Company Outlook & Summary

Company equipment sales are projected to increase by about 7 percent for fiscal 2019 compared with 2018. Included will be a full year of Wirtgen sales in 2019 versus 10 months in 2018, adding about 2 percent to the company's sales in the year ahead. Foreign-currency rates are expected to have an unfavorable translation effect on equipment sales of about 2 percent for the year.

Net sales and revenues are expected to increase by about 7 percent for fiscal 2019 with net income attributable to Deere & Company forecast to be about $3.6 billion.

"Deere's performance in 2018 provides further evidence of the company's success executing its strategic initiatives, especially those focused on developing precision technologies and a wider range of revenue sources," commented Allen. "In our view, the company remains well-positioned to capitalize on growth in the world's agricultural and construction equipment markets. The replacement cycle for farm machinery is very much alive, despite tensions over global trade and other geopolitical issues. In addition, we are experiencing a strong response to the advanced features and technology found in our new products, which are helping attract customers throughout the world. Based on these factors, we remain confident in the company's present direction and believe Deere is poised to deliver improved operating performance and significant value to its customers and investors in the future."

Equipment Division Performance

Agriculture & Turf. Sales rose 3 percent for the quarter and 15 percent for the year due to higher shipment volumes and price realization. Additionally, full-year results benefited from lower warranty claims. Currency translation had an unfavorable impact on sales for the quarter but no material effect for the full year.

Operating profit was $567 million for the quarter and $2.816 billion for the year, compared with respective totals of $594 million and $2.513 billion in 2017. Results for the quarter were negatively affected by higher production costs, unfavorable effects of foreign-currency exchange and higher research and development costs, partially offset by higher shipment volumes and price realization. The year's improvement was driven by higher shipment volumes, price realization and lower warranty-related expenses, partially offset by higher production costs and research and development expenses. Full-year results in 2017 included gains on the SiteOne sale.

Construction & Forestry. Construction and forestry sales increased 65 percent for the quarter and 78 percent for the year, with Wirtgen adding 45 percent and 53 percent for the periods. Results for both periods were affected by higher shipment volumes and lower warranty-related claims. Foreign-currency rates had an unfavorable effect on sales for the quarter but had no material translation effect for the year. The quarter's results also benefited from price realization.

Operating profit was $295 million for the quarter and $868 million for the full year, compared with $86 million and $346 million in 2017. Wirtgen contributed operating profit of $79 million for the quarter and $116 million for the full year. Excluding Wirtgen, the improvements were primarily driven by higher shipment volumes and lower warranty expenses, partially offset by higher production costs. Results for the quarter benefited from price realization. Additionally, the respective periods of 2017 included an impairment charge for international operations.

Market Conditions & Outlook

Agriculture & Turf. Deere's worldwide sales of agriculture and turf equipment are forecast to be up about 3 percent for fiscal-year 2019, including a negative currency-translation effect of 2 percent. Industry sales of agricultural equipment in the U.S. and Canada are forecast to be flat to up 5 percent, helped by replacement demand for large equipment and continued demand for small tractors. Full-year industry sales in the EU28 member nations are forecast to be approximately flat as a result of drought conditions in key markets. South American industry sales of tractors and combines are projected to be flat to up 5 percent benefiting from strength in Brazil. Asian sales are forecast to be flat to down slightly. Industry sales of turf and utility equipment in the U.S. and Canada are expected to be flat to up 5 percent for 2019.

Construction & Forestry. Deere's worldwide sales of construction and forestry equipment are anticipated to be up about 15 percent for 2019, with foreign-currency rates having an unfavorable translation effect of 2 percent. The forecast includes a full year of Wirtgen sales, versus 10 months in fiscal 2018, with the two additional months adding about 5 percent to division sales for the year. The outlook reflects continued growth in U.S. housing demand as well as transportation investment and economic growth worldwide. In forestry, global industry sales are expected to be up about 10 percent mainly as a result of improved demand throughout the world, led by the U.S.

Financial Services. Fiscal-year 2019 net income attributable to Deere & Company for the financial services operations is projected to be approximately $630 million. Results are expected to benefit from a higher average portfolio, partially offset by higher selling and administrative expenses, a higher provision for credit losses and less-favorable financing spreads.

Financial services net income for 2018 of $942 million included a tax benefit related to tax reform of $341 million. Excluding the tax benefit, net income for 2018 would have been $601 million.

John Deere Capital Corporation

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

Net income attributable to JDCC was $160.4 million for the fourth quarter and $799.2 million for the full year, compared with $101.4 million and $328.4 million for the respective periods in 2017. Results for both periods benefited from a favorable provision for income taxes associated with tax reform, a higher average portfolio and lower provision for credit losses, partially offset by less-favorable financing spreads. The full year also benefited from lower losses on lease residual values.

Net receivables and leases financed by JDCC were $35.643 billion at October 28, 2018, compared with $33.000 billion at October 29, 2017.

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