Deere & Co. reported another weak quarter as net equipment sales fell 17% YoY, with overall profit falling 39% on the quarter.  Operating margins in manufacturing dropped 450 basis points to 10.2%, largely driven by weak cost absorption, increased input costs and a weakening currency market for the global company. The weakest geographic areas on the quarter were outside of the U.S. and Canada, which has been perpetuated by DE’s recent expansion globally. Despite DE’s ongoing problems across all operating segments, earnings on the quarter of $1.11 EPS did beat street expectations of $1.07, although this is hardly cause for celebration.

The financial services segment profit, which continues to falter in the weak credit market, fell another 20% YoY as charge offs on outstanding loans continued to increase, weak demand for crop insurance persisted and tight financing spreads in the market remained. The company noted that conditions in all segments remain uncertain into the end of the fiscal year.

DE continues to be hit by weak demand in the agricultural segment as farmers globally have reduced spending driven by the drop in crop prices and weak demand for product. Beyond crop prices, which we note are still above average levels, input costs for farmers remain elevated as fertilizer and fuel prices continue to remain above historic levels putting further pressure on DE sales.

Challenges Remain Ahead

DE revised FY2009 earnings guidance from an already reduced number, $1.5B to $1.1B. This earnings number translates into roughly a 19% drop in sales on the year, with an approximate 26% drop YoY in 3Q.

Sales in the newly formed Global Ag and Turf segment for the year are expected to be down 14% on the year, which is inline with previous forecasts. DE also expects farm industry sales to be relatively flat in the U.S. and Canada with large reductions ranging from 15%-30% in Europe and South America. The Construction and Forestry division is now expected to be down 42% on the year, previous forecasts were  -24%.

The one positive that DE showed for the quarter was a recall of workers who had been previously laid off or furloughed. Although the number of workers returning to the production line was minimal, it does offer some hope that the company may see some relief from current market conditions sooner rather than later.

-GDH