Deere & Company — Q2 2021 Form 10-Q
Business context and period. The quarter ended May 2, 2021 (13 weeks); year-to-date covers 26 weeks. Deere manufactures and distributes agricultural, turf, construction and forestry equipment, and provides equipment financing. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
- Q2 revenue: $12,058, up 30% year over year. Equipment net sales were $10,998, up 34%; financial services revenue was $892, up 2%.
- Q2 earnings: Net income attributable to Deere was $1,790 versus $666; diluted EPS was $5.68 versus $2.11. Income before tax was $2,312 versus $928.
- First six months: Revenue was $21,170, up 25%; net income attributable to Deere was $3,013 versus $1,182; diluted EPS was $9.55 versus $3.73.
- Equipment segments, Q2: Production and precision agriculture sales were $4,529 (+35%) and operating profit $1,007 (+77%), with a 22.2% margin. Small agriculture and turf sales were $3,390 (+30%) and operating profit $648 (+187%), margin 19.1%. Construction and forestry sales were $3,079 (+36%) and operating profit $489 (+409%), margin 15.9%.
- Financial services: Q2 operating profit was $295 versus $75, and net income $222 versus $60. Management cited lower credit-loss provisions, improved lease residual values, more favorable financing spreads and lower borrowing rates.
- Cash flow, first six months: Operating cash flow was $1,786 versus $776; investing cash flow was $(1,387) versus $30; financing cash flow was $(441) versus $4,343. Cash, cash equivalents and restricted cash increased $109 to $7,281.
- Margins and costs: Equipment operations’ cost of sales was 72.1% of net sales, compared with 76.5% in Q2 2020 and 77.1% for the prior-year six-month period. Lower ratio reflected price realization and prior-year impairments; 2020 comparisons also included separation-program costs.
- Balance sheet and funding: At May 2, cash and equivalents were $7,182 and marketable securities $668. Short-term borrowings were $9,911, short-term securitization borrowings $4,106 and long-term borrowings $33,346. Total liabilities were $63,883 and Deere stockholders’ equity $15,092.
Changes versus prior period
- Broad-based higher equipment shipments, price realization and favorable currency effects drove sales growth. Segment operating profit rose substantially across equipment operations.
- Production costs increased and partially offset price and volume benefits. R&D and selling, administrative and general expenses declined year over year.
- Year-ago results included $114 of Q2 impairments and $136 of first-half voluntary employee-separation costs. Q2 2021 included a $58 favorable Brazil indirect-tax ruling, partly offset by $50 of long-lived asset impairments; these items affect comparability.
- Cash generation improved, while investing cash flow turned negative, largely reflecting financing receivable and operating-lease asset activity. The large prior-year financing cash inflow included borrowing to add liquidity amid COVID uncertainty.
- Fiscal 2021 brought a new reporting structure splitting agriculture and turf into two segments. Wirtgen’s reporting lag was also eliminated, adding $270 of sales to first-quarter and first-half 2021 results; Deere said the annual construction and forestry sales impact was immaterial. Prior segment data was recast, but prior consolidated results were not restated.
Outlook, risks and unusual items
- Management forecast 2021 industry sales growth of approximately 25% for large agricultural machinery in the U.S. and Canada; 10% for turf and utility equipment there; 10% for agricultural machinery in Europe; 20% for tractors and combines in South America; and 15–20% for U.S. and Canadian construction and global forestry. U.S. and Canadian compact construction was forecast up 20–25%. These are industry forecasts, not Deere revenue guidance.
- Management said Deere was on track for a strong year, supported by robust farm and construction markets and its smart industrial strategy, but expected increased supply-chain pressures through year-end. The company was working with suppliers to secure parts and components.
- Major uncertainties include COVID’s duration and effects, supply and logistics constraints, commodity and used-equipment prices, customer demand and credit performance, currencies, interest rates, trade policy, and geopolitical and regulatory developments.
- COVID payment relief outstanding at May 2 represented about 4% of financing receivables and 3% of operating leases; affected trade receivables were not material. Deere reported that most relieved financing customers had resumed payments or were assessed under modified schedules.
- Deere expected to contribute a further $33 to pension plans and $757 to OPEB plans in fiscal 2021, including a voluntary $700 contribution to a U.S. OPEB plan in Q4. It also estimated $925 of 2021 equipment-operations capital expenditures.
- Credit facilities totaled $8,211, of which $5,741 was unused; the company reported compliance with applicable covenants. Legal actions were described as ordinary-course matters with no reasonably possible material financial-statement effect. An Argentina environmental fine of approximately $357,000 was under appeal and being evaluated.
Important facts for investors to verify
- How much of equipment growth and profit improvement is sustainable after price realization, favorable currency, prior-year charges and the Brazil tax benefit?
- Whether supply-chain constraints, higher production costs and logistics expenses limit deliveries or margins in the remainder of 2021.
- Credit quality and residual values in Financial Services, including trends in delinquency, customer relief balances and used-equipment prices.
- Funding costs, debt levels, available liquidity and covenant headroom, particularly for the finance subsidiaries.
- The timing and funding of the planned $700 OPEB contribution and other expected 2021 pension/OPEB contributions.