Deere & Co (DE.N) on Friday cut its fiscal-year profit outlook further and reported lower quarterly earnings on weak demand for its farming and construction equipment, sending its shares down nearly 5 percent.
Sales of the company’s agricultural machinery have stalled as the U.S. farm economy is in the third straight down year. Deere’s sales have also suffered in Brazil, the world’s largest exporter of soybeans, during a recession and political turmoil.
In the smaller construction and forestry segment, sales of new machines have fallen because of abundant supplies of used equipment.
Also, profitability at the John Deere Capital Corp financial services arm has been hurt by declines in the value of leased equipment, unfavorable financing spreads and higher provisions for credit losses.
Deere reduced its fiscal-year net income forecast to $ 1.2 billion. In February, it had cut the outlook to $ 1.3 billion from $ 1.4 billion.
On a conference call with analysts, Chief Financial Officer Raj Kalathur said maintaining Deere’s single-A credit rating was the company’s highest priority.
While research and development as well as dividends remain key, Kalathur said cash would be allocated to “higher priorities” before share repurchases.
J.P Morgan analyst Ann Duignan said on Friday that Deere, along with other agriculture, construction and mining equipment companies, could face higher costs due to increased cold rolled steel prices, which were up 64 percent year to date.
“Given these industries are already under significant pressure, … the opportunity to offset higher costs with price increases is likely very limited,” Duignan wrote in a research note.
Executives on the conference call said steel prices would have minimal impact for fiscal 2016 but posed more of a risk for 2017.
Deere forecast a fiscal-year sales decline of 9 percent, less steep than the 10 percent it had previously expected.
Net income attributable to Deere fell to $ 495.4 million, or $ 1.56 per share, in the second quarter ended on April 30 from $ 690.5 million, or $ 2.03 per share, a year earlier.
Analysts on average had expected $ 461.46 million, according to Thomson Reuters I/B/E/S.
Net revenue decreased by 4 percent to $ 7.88 billion, while analysts had expected $ 6.72 billion.
In the agriculture and turf segment, sales were flat at $ 5.7 billion. Global sales in the construction and forestry segment fell 16 percent to about $ 1.4 billion.
Equipment sales fell 6 percent in the United States and Canada and decreased 1 percent internationally.
John Deere Capital’s net income dropped 40 percent to $ 69.6 million. Deere cut the unit’s net income outlook to $ 480 million from $ 525 million for the fiscal year.
Shares of Deere were down 4.8 percent at $ 78.29 in afternoon trading.
(Reporting by Meredith Davis; Editing by Lisa Von Ahn)