The Research and Development expense was up 16% in the third quarter, ahead of upcoming new product launches.

The company is forecasting an increase of around 12% for 2007. This increased spending relates to the continued emphasis on advanced new products and technology, to drive future growth and ever increasing productivity to the customers.

Selling, Administrative and General expenses for the equipment operations was up 9% in the third quarter, with global growth initiatives and currency translation.

The fiscal year 2007 forecast now includes SA&G increases of about 14%, including about ten points related to growth and currency. This includes about $100 million for LESCO.

- The forecast for tax rate for fiscal year 2007 still assumes a full-year tax rate of approximately 33%.
- The currency translation added about $16 million to operating profit in the quarter, and about $52 million on a year-to-date basis, mostly in the agricultural division.
- Actual shares outstanding at the end of the quarter were $221.9 million, and average diluted shares outstanding for the quarter were $226.8 million.
- On May 30th of this year, Deere’s Board of Directors authorized a new $20 million share repurchase program. With the 2005 program almost complete at the end of July, it is likely that during the fourth quarter of 2007, the company will conclude that program and begin to repurchase shares under the new authorization. During the third quarter of 2007, the company repurchased 4.3 million shares with an expenditure of about half a billion dollars.

Performance Analysis of Segments

Agricultural Equipment

Deere’s worldwide agricultural sales were up 16% including approximately three points of positive currency translation.

Operating profit rose 73% in the quarter to $431 million, with incremental margins of approximately 40%. The quarter benefited from 15% higher production tonnage, contributing to improved operating efficiencies and the strength in large tractors as well as positive price realization. Somewhat offsetting these factors were higher raw material costs of $24 million and higher Research and Development expense in the quarter, relating to advanced new products, ahead of a major product launch.

Looking ahead, global agricultural fundamentals are very encouraging as reflected in strong farm income.

Worldwide stocks-to-use ratios remain at very low levels for corn and wheat, in fact at the lowest levels in over thirty years. This supports crop prices which in turn supports good levels of farm income in all geographies. For the US, with total cash received for 2007 increasing to about $282 million, a rise of over $22 million compared to 2006, driven primarily by the combination of crops and lifestyle.

The company’s outlook for industry sales of agricultural equipment in the US and Canada remains up about 5% for fiscal year 2007 versus fiscal year 2006, reflecting continued strength in large tractors. In addition, the outlook for South America increased to up 30% from up about 20% last quarter. A strong recovery continues in Brazil, certainly helped by the proposed resolution on 2007 benami payments. Customers widely anticipate that this will be approved by Congress. It is very important because this clears up a major area of uncertainty and it is reflected in the improved outlook.

In Western Europe, the current outlook is for industry sales to be up about 2% for the fiscal year compared to previous outlook of flat to up 2%, with strength in the overall farm sector, primarily due to higher crop and dairy prices. Earlier there were concerns about emerging drought conditions. Since then, excessive rains have fallen in some areas. Despite this, generally the mood of farmers is more positive, which is encouraging. The company continues to see good sales but from a small base, in Eastern Europe and the Commonwealth of Independent States countries including Russia, and continues to be optimistic about the future. In Australia rains have come, alleviating some of the severe drought conditions. While they occurred late and will not help 2007 retail activity, it bodes well for 2008.

The company now projects 2007 Deere Agricultural equipment sales to be up approximately 16%, including about three points of currency translation, versus its previous outlook of up about 13%. Production tonnage is expected to be about 14% higher this year, compared to the previous projection of up about 11%, reflecting the strengthening of all global markets, and the company’s plan to pre-build some components to support what the firm believes will be better markets in 2008.

Commercial and Consumer Equipment

The reported net sales were up 15% for the quarter, and with a $125 million coming from LESCO. However operating profit rose 63%. In the third quarter performance, the firm clearly sees the benefit of new offerings like the residential zero-turn radius mowers, utility vehicles and compact tractors with their positive contribution to price realization and volume and mix in an otherwise difficult market.

LESCO is in the process of being integrated into John Deere landscapes and the integration pace is proceeding as planned.

In fact, while still very early, LESCO was slightly profitable in the third quarter, and for their first six months as part of Deere, instead of generating a small loss, the firm now anticipates it to be slightly profitable.

For the full year, the firm continues to anticipate sales up about 11% for 2007, or up about 2% excluding LESCO.

Construction and Forestry