Deere & Company — Q2 FY2022 Form 10-Q
Reporting period: Three and six months ended May 1, 2022; comparative periods ended May 2, 2021. Figures are unaudited and in U.S. dollars. Deere manufactures agricultural, turf, construction and forestry equipment and provides equipment financing.
Financial performance
| Metric | Q2 FY2022 | Change vs. Q2 FY2021 | Six months FY2022 | Change vs. prior year |
|---|---|---|---|---|
| Net sales and revenues | $13.370 billion | +11% | $22.939 billion | +8% |
| Net sales | $12.034 billion | +$1.036 billion | $20.565 billion | +$1.516 billion |
| Net income attributable to Deere | $2.098 billion | +17% | $3.001 billion | Down from $3.013 billion |
| Diluted EPS | $6.81 | Up from $5.68 | $9.72 | Up from $9.55 |
Q2 performance reflected stronger sales and a $326 million noncash gain from remeasuring Deere’s former Deere-Hitachi joint venture investment. For the first six months, net income was nearly flat despite higher revenue. Fewer average diluted shares (308.8 million versus 315.6 million) supported higher year-to-date EPS.
- Costs and margins: Q2 cost of sales was $8.918 billion, up from $7.928 billion. Cost of sales as a share of net sales rose to 74.1% from 72.1%; management cited higher production costs, partly offset by price realization. Q2 R&D was $453 million (+20%) and SG&A was $932 million (+11%).
- Segments, Q2: Production & Precision Agriculture sales were $5.117 billion (+13%), operating profit $1.057 billion (+5%), and margin 20.7% versus 22.2%. Small Agriculture & Turf sales were $3.570 billion (+5%), operating profit $520 million (-20%), and margin 14.6% versus 19.1%. Construction & Forestry sales were $3.347 billion (+9%), operating profit $814 million (+66%), and margin 24.3% versus 15.9%; the increase included the $326 million noncash remeasurement gain. Financial Services net income was $208 million (-6%).
- Cash flow: First-half operating cash flow was negative $1.762 billion, versus positive $1.786 billion a year earlier. Management attributed the outflow mainly to working capital and a $1.0 billion voluntary OPEB contribution. Investing cash outflow was $1.888 billion; financing cash outflow was $386 million. Cash, cash equivalents and restricted cash fell $4.146 billion to $3.979 billion.
- Balance sheet and funding: At May 1, cash and equivalents were $3.878 billion and marketable securities $682 million. Total assets were $84.099 billion; total liabilities were $65.093 billion and stockholders’ equity $18.907 billion. Reported short-term borrowings were $12.413 billion, long-term borrowings $32.447 billion, and short-term securitization borrowings $4.006 billion. Deere reported $8.568 billion in worldwide credit lines, of which $4.608 billion was unused; it said it expected sufficient funding and liquidity for short- and long-term needs.
Material changes and notable items
- Equipment sales growth was supported by price realization and, in several businesses, higher shipment volumes. Supply-chain pressures continued to constrain production and delivery schedules; higher production costs weighed on margins.
- Inventories were $9.030 billion, up $2.249 billion since October 31, 2021 and $2.988 billion year over year, reflecting demand and supply-chain disruption.
- Russia/Ukraine events led Deere to suspend machine and service-parts shipments to Russia. The company recorded $120 million of pretax charges ($106 million after tax) in Q2 for impairments, credit-loss reserves and contractual uncertainties. Net exposure in the region was approximately $454 million at May 1; management said the situation remained fluid.
- Acquisitions included majority ownership of battery-technology company Kreisel and three former Deere-Hitachi excavator factories. The factory acquisition changed Deere’s excavator manufacturing and supply arrangements; related deferred consideration was valued at approximately $262 million net present value at May 1.
- Quarterly dividends declared were $1.05 per share. Subsequent to quarter-end, the board declared a $1.13 quarterly dividend, payable August 8, 2022.
Outlook, risks and contingencies
For fiscal 2022, management expected U.S. and Canadian large agricultural machinery industry sales to rise about 20%, European agricultural machinery sales about 5%, and South American tractor and combine sales about 10%. U.S. and Canadian construction equipment sales were expected to increase about 10%; other regional and product-category forecasts ranged from flat to modest growth or decline. Financial Services net income was expected to be slightly below FY2021, reflecting higher credit-loss provisions and SG&A, partly offset by a larger average portfolio. These are industry and segment expectations, not a consolidated earnings-per-share forecast in the supplied filing text.
Management highlighted inflation, supply constraints, the pandemic, geopolitical and trade conditions, foreign-exchange and commodity volatility, and demand and pricing for new and used equipment. Deere also cited customer credit quality, capital-market access, supply-chain and labor disruption, technology and cybersecurity risks, regulatory changes, and acquisition integration among forward-looking risks. Unresolved legal actions include product liability, retail credit, employment, patent and trademark matters; Deere stated that the reasonably possible losses were not expected to materially affect consolidated financial statements. The filing reported approximately $352 million of equipment-financing guarantees, $392 million of property-and-equipment commitments, and $75 million of other miscellaneous contingent liabilities; accrued losses on the guarantees were $4 million.
Important facts for investors to verify
- How much of Q2 Construction & Forestry profit growth was attributable to the one-time $326 million remeasurement gain, and how segment profitability trends thereafter.
- Whether price realization continues to offset inflation, higher production costs and supply-chain-related production constraints.
- Inventory levels, receivables and working-capital needs, and whether operating cash flow recovers after the OPEB contribution and first-half outflows.
- Further Russia/Ukraine exposure, potential additional charges, and effects of suspended shipments on forecast revenue and assets.
- Financial Services credit-loss provisions, portfolio quality, funding costs and liquidity, alongside the stated FY2022 outlook and upcoming dividend.