Business context and reporting period
Deere & Company’s unaudited Form 10-Q covers the fiscal quarter ended April 30, 2023 (13 weeks) and six months ended that date (26 weeks). Its operations comprise Production & Precision Agriculture (PPA), Small Agriculture & Turf (SAT), Construction & Forestry (CF), and Financial Services (FS). Unless noted, amounts below are in millions of dollars.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales and revenues | $17,387 | $13,370 | $30,038 | $22,939 |
| Net sales (equipment) | $16,079 | $12,034 | $27,481 | $20,565 |
| Net income attributable to Deere | $2,860 | $2,098 | $4,819 | $3,001 |
| Diluted EPS | $9.65 | $6.81 | $16.18 | $9.72 |
| Operating cash flow | Not stated for quarter | $(147) | $(1,762) |
- Q2 revenue rose 30% and Deere-attributable net income rose 36%; six-month revenue rose 31% and net income rose 61%. Management cited higher shipment volumes and price realization. Share repurchases also reduced average diluted shares to 296.5 million for Q2 from 308.1 million.
- The cost of sales to net sales ratio improved to 66.7% in Q2 from 74.1%, and to 67.9% for the six months from 75.9%, mainly reflecting price realization, partly offset by higher production costs.
- Segment operating results, Q2 / six months: PPA sales were $7,822 / $13,021 and operating profit $2,170 / $3,378; SAT sales $4,145 / $7,146 and profit $849 / $1,296; CF sales $4,112 / $7,314 and profit $838 / $1,463. FS revenue was $1,107 / $2,147 and net income $28 / $212. Q2 operating margins were PPA 27.7%, SAT 20.5%, and CF 20.4%.
- FS net income declined 87% in Q2 and 52% for the six months. Higher average portfolio balances and financing rates lifted revenue, but higher borrowing costs, less-favorable financing spreads, credit-loss provision and other costs weighed on earnings.
- Six-month investing cash outflow was $1,494, principally reflecting growth in retail financing receivables and property and equipment purchases. Financing provided $2,017, including increased borrowings; Deere repurchased $2,546 of stock and paid $697 of dividends. Cash, cash equivalents and restricted cash increased $446 to $5,387.
- At April 30, cash and cash equivalents were $5,267, marketable securities $856, and total assets $98,347. Total liabilities were $75,846 and stockholders’ equity $22,399. Borrowings included $17,109 short-term, $5,379 short-term securitization and $35,611 long-term. These consolidated totals include the financing business and should not be interpreted as equipment-operations debt alone.
- FS interest-bearing debt to stockholders’ equity was 8.0 to 1, versus 7.8 to 1 a year earlier. Worldwide credit lines totaled $10,309, of which $785 was unused; management said the reduction in unused lines reflected increased commercial paper outstanding. Cash, cash equivalents and marketable securities totaled $6,123.
Material changes versus comparable periods
- Equipment-segment sales and operating profits generally grew on higher volumes and pricing. PPA was the strongest contributor: Q2 sales rose 53% and operating profit 105% year over year. CF Q2 operating profit rose only 3%, partly because the prior-year comparison included a $326 noncash gain from remeasurement of the Deere-Hitachi investment.
- FS interest expense increased sharply: $540 in Q2 versus $112, and $983 for six months versus $270. Management attributed the increase primarily to higher average borrowing rates and borrowings. It reported $84 after-tax of less-favorable FS financing spreads in the first six months year over year.
- Research and development expense rose 21% in Q2 and 22% for six months; selling, administrative and general expense rose 43% and 33%, respectively. The filing cites technology investment, inflation-related compensation, profit sharing, dealer commissions, and the financing-incentive accounting correction.
- At April 30, trade receivables were $9,971 versus $6,258 a year earlier; inventories were $9,713 versus $9,030. Management attributed increases to seasonal and higher sales volumes, forecasted demand, and supply-chain disruption.
Guidance, management commentary, risks and unusual items
- Outlook: Management said order books were full through 2023 and customer orders extended into 2024. It expected North American and European large-agriculture volumes to exceed 2022; small agriculture and turf volumes to be lower, mainly due to weaker consumer-oriented demand; and construction markets to be steady. Industry forecasts included U.S./Canada large agriculture up about 10%, small agriculture and turf down about 5%, and U.S./Canada construction flat to up 5% for 2023. No company-wide full-year earnings or EPS guidance is stated in the provided filing text.
- Management expected FS net income below fiscal 2022, citing financing-spread pressure, the incentive correction, derivative valuation adjustments, higher credit-loss provision and expenses, and lower gains on operating-lease dispositions; higher average portfolio income was expected to provide a partial offset. It expected spread compression to persist during 2023.
- Supply conditions improved in Q2 and supported higher production, but remaining constraints were expected to limit second-half production increases. Management said 2023 schedules would more closely follow historical seasonal patterns. It forecast higher 2023 operating cash flows, supported by higher net income adjusted for noncash provisions and favorable working-capital changes, and approximately $1,500 of capital expenditures.
- Accounting correction: Deere recorded a cumulative $173 pretax ($135 after-tax) Q2 charge to correct the timing and presentation of dealer financing incentives. Prior periods were not restated because the adjustment was considered immaterial; management said it was unrelated to current market conditions or FS portfolio credit quality.
- Other unusual items: Q2 included a $36 noncash pretax pension settlement charge related to transferring most benefits and administration for retired participants in an international plan; participant benefits were not affected. Deere sold its Russian financial-services business for $36 net proceeds, with no additional disposal gain or loss. In 2022, results included a $326 noncash Deere-Hitachi remeasurement gain, $120 of Russia/Ukraine-related charges, and $90 of UAW ratification bonuses for the six-month period.
- Risks and contingencies: Disclosed risks include supply-chain and component availability, inflation and interest rates, foreign exchange, demand and commodity volatility, geopolitical and trade developments, banking-sector stress, U.S. debt-ceiling uncertainty, labor, cybersecurity, regulation, weather and technology adoption. Management said recent banking events had not materially affected Deere’s bank exposure or capital-market access. The company reported ordinary-course legal matters and said reasonably possible losses were not expected to materially affect consolidated financial statements. It also disclosed $524 of property and equipment commitments and $207 of guarantees of third-party retail financing receivables; accrued losses on guarantees were not material.
Most important facts for investors to verify
- Assess how much of the strong revenue and earnings growth reflects sustainable shipment volumes and pricing versus seasonal timing, price realization, and share-count reduction.
- Track whether equipment margins can hold as elevated component, energy and labor costs persist and supply constraints affect second-half production.
- Monitor FS funding costs, financing spreads, credit-loss trends and the high debt-to-equity ratio; compare borrowing needs with available liquidity and unused credit lines.
- Review the $173 pretax financing-incentive correction, its immateriality determination and the effect on expense timing and segment comparisons.
- Reconcile negative operating cash flow despite higher earnings, particularly the large receivables and inventory working-capital uses, and evaluate management’s cash-flow outlook.
- Check subsequent developments in the stated industry outlook, customer order book, supply chain, legal contingencies and material macroeconomic risks.