Impact of Deere Strike Appears Minimal in Earnings

The financial toll of a 35-day worker strike at Deere & Co. became clearer last week when the company reported quarterly results and its profit outlook for the fiscal year that started Nov. 1.

The five-week strike straddled the end of the company’s fiscal fourth quarter in October and the start of the first quarter of fiscal 2022 in November. It likely sliced Deere’s production by 10 to 15 percent in both quarters, according to William Blair & Co.

In its earnings report for the quarter that ended Oct. 31, however, Deere reported that worldwide net sales and revenues increased 16 percent for the fourth quarter and rose 24 percent for the full year.

In production and precision agriculture, net sales increased by 23 percent for the quarter, and operating profit increased by 34 percent.

In small agriculture and turf, net sales increased by 17 percent for the quarter, and operating profit increased by 23 percent compared to last year.

For its 2022 outlook, Deere expects net sales to increase by 20 to 25 percent in production and precision agriculture. It also forecasts a 9 percent gain in price realization.

In small ag and turf, the forecast calls for net sales to increase by 15 to 20 percent for the year with a 7 percent gain in price realization.

“Our results reflect strong end market demand and our ability to continue serving customers while managing supply-chain issues and conducting contract negotiations with our largest union,” said Chairman and CEO John C. May. “Looking ahead, we expect demand for farm and construction equipment to continue benefiting from positive fundamentals, including favorable crop prices, economic growth, and increased investment in infrastructure.”

The USDA in September projected net farm income would surge 20 percent this year to $113 billion, the highest since 2013.

U.S. retail sales of high-horsepower tractors and combines this year through October are up 23 and 24 percent, respectively, according to the Association of Equipment Manufacturers.

Labor accounts for about 15 percent of Deere’s overall cost of goods sold, analysts said. The 10 percent pay raise and $8,500 bonus that each UAW member will receive as a result of negotiations, as well as raises awarded to nonunion employees, are expected to cost Deere about $235 million in the first year of the six-year contract, said an analyst for Jefferies Research Services LLC. The analyst estimated that the higher cost will shave nearly 1 percentage point off Deere’s operating margin.

Those profits could easily be recovered by higher prices or greater output at Deere factories, the analyst said.

Deere reported that it increased prices on large farm equipment by about 8 percent during its just-concluded fiscal year.

Sources: Deere, Wall Street Journal