Deere & Company — Q1 2023 Form 10-Q
Business context and reporting period. The unaudited first quarter of fiscal 2023 comprised 13 weeks and ended January 29, 2023; comparisons are with the 13 weeks ended January 30, 2022. Deere’s operations include Production & Precision Agriculture (PPA), Small Agriculture & Turf (SAT), Construction & Forestry (CF), and Financial Services (FS). Unless otherwise stated, amounts are in millions of dollars.
Key financial results
- Revenue: Net sales and revenues were $12.652 billion, up 32% from $9.569 billion. Equipment net sales were $11.402 billion, up 34%; finance and interest income was $994 million, up 24%.
- Profit and earnings: Net income attributable to Deere was $1.959 billion, up 117%, and diluted EPS was $6.55 versus $2.92. Income before taxes was $2.493 billion versus $1.151 billion. The filing reports cost of sales at 69.6% of net sales, compared with 78.5%.
- Segment results: PPA operating profit was $1.208 billion (margin 23.2%), SAT $447 million (14.9%), and CF $625 million (19.5%). FS net income was $185 million, down 20%; FS revenue including intercompany amounts rose 36% to $1.244 billion.
- Cash flow: Operating cash flow was negative $1.246 billion, improving from negative $2.553 billion. Investing activities provided $760 million and financing activities used $339 million. Cash, cash equivalents, and restricted cash declined $763 million to $4.178 billion.
- Liquidity and debt: Cash, cash equivalents, and marketable securities totaled $4.828 billion. Unused credit lines were $1.581 billion, out of $8.327 billion of worldwide lines. Short-term borrowings were $14.129 billion, short-term securitization borrowings $4.864 billion, and long-term borrowings $35.071 billion. FS interest-bearing debt to stockholders’ equity was 8.2:1.
- Balance sheet: Total assets were $91.620 billion and total liabilities $70.184 billion. Inventories were $10.056 billion, up from $7.935 billion a year earlier. Trade accounts and notes receivable were $7.609 billion.
- Shareholder returns: Deere repurchased $1.257 billion of common stock and paid $341 million in dividends during the quarter. Dividends declared were $1.20 per share. Subsequent to quarter-end, the board declared a $1.25 quarterly dividend payable May 8, 2023.
Material changes versus the prior comparable period
- Revenue and Deere-attributable net income increased substantially, with growth across all three equipment segments. Operating profit rose 308% in PPA, 20% in SAT, and 130% in CF.
- Management attributed equipment gains to price realization and improved shipment volumes as supply conditions eased. The company-wide cost-of-sales ratio improved, though higher purchased-component, energy, salary, and wage costs remained.
- Interest expense increased to $479 million from $229 million, principally reflecting higher borrowing rates and borrowings in Financial Services.
- R&D expense increased 23% to $495 million; selling, administrative and general expense increased 22% to $952 million, including higher employee pay and profit-sharing incentives.
- The prior-year period included $90 million of UAW contract-ratification bonus costs and labor-related production inefficiencies, affecting comparisons.
- Cash used in operations remained negative, although the outflow narrowed year over year. Inventory increased by $2.121 billion versus a year earlier, which Deere linked to higher expected shipments and ongoing supply-chain disruption.
Outlook, management commentary, and risks
- Management said demand remained strong and order books were full through most of 2023. It expected more large agricultural equipment sales in 2023 than 2022 in North America, Europe, and South America, and expected dealer inventory replenishment in 2024.
- Industry outlooks included U.S./Canada large agricultural machinery sales up 5%–10%; small agriculture and turf down about 5%; European and South American agricultural machinery flat to up 5%; and North American construction equipment flat to up 5%. Global forestry and roadbuilding sales were expected to be flat. These are industry forecasts, not Deere sales guidance.
- Deere expected FS net income to be lower than fiscal 2022, citing less favorable financing spreads amid higher interest rates, higher SG&A, and lower operating-lease disposition gains, partly offset by higher average portfolio balances. Management reported $53 million after-tax of less favorable FS financing spreads in the quarter and expected spread compression to persist in 2023.
- Supply-chain disruptions and inflation continued. Deere reported some improvement in supplier deliveries and production but warned that remaining disruptions could affect its ability to meet demand. Price realization had offset higher costs to date; continued inflation could hurt results if price increases cannot be realized.
- Management forecast higher operating cash flows in 2023, citing higher net income adjusted for non-cash provisions and a favorable working-capital change. Estimated fiscal 2023 capital expenditures were approximately $1.4 billion. The filing text does not provide a clear consolidated full-year net income or EPS forecast.
- In January 2023, Deere agreed to sell its Russian financial-services business, with completion expected in fiscal Q2. Russian-related net exposure was approximately $229 million at quarter-end; the company expected no significant gain or loss on disposal. The filing describes a reversal of the associated credit-loss allowance and a valuation allowance on held-for-sale assets.
- Risks highlighted include supply-chain and component availability, inflation, rising rates, foreign exchange, geopolitical conditions including Russia/Ukraine, changing equipment demand and pricing, commodity and agricultural conditions, climate and weather, technology adoption, cybersecurity, regulation, and legal proceedings. Deere said unresolved legal matters were not expected to have a material effect on consolidated financial statements.
- Other notable items: Deere had $467 million of commitments for property and equipment construction/acquisition. It reported $235 million of guarantees related to third-party equipment financing, with accrued losses not material, and stated that the reasonably possible range of losses from unresolved legal actions would not be material.
Important facts for investors to verify
- Whether strong orders convert to shipments and sales as expected, given continued supplier-delivery risks and inventory buildup.
- How price realization compares with ongoing inflation and whether equipment margins remain resilient.
- Whether higher funding costs and spread compression further reduce Financial Services earnings and affect its highly leveraged funding profile.
- Cash conversion and working-capital trends, including inventory, receivables, and the outlook for operating cash flow.
- Completion and final financial effect of the Russian financial-services sale, including the held-for-sale valuation and credit-loss adjustments.
- Execution of the announced capital returns: the quarter included $1.257 billion of repurchases, and the board authorized an additional $18 billion repurchase plan in December 2022.