DEERE & CO quarterly report, Q2 FY2024

Business context and reporting period

Deere & Company’s unaudited Form 10-Q covers the fiscal second quarter and first six months ended April 28, 2024; comparable periods ended April 30, 2023. Each quarter comprised 13 weeks. Deere operates equipment businesses—production and precision agriculture (PPA), small agriculture and turf (SAT), and construction and forestry (CF)—and a financial services business (FS). Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.

Financial performance and position

Metric	Q2 2024	Q2 2023	Six months 2024	Six months 2023
Total net sales and revenues	$15,235	$17,387	$27,420	$30,038
Net sales	$13,610	$16,079	$24,097	$27,481
Net income attributable to Deere	$2,370	$2,860	$4,121	$4,819
Diluted EPS	$8.53	$9.65	$14.74	$16.18
Operating cash flow	Not separately presented for the quarter	$944	$(147)

Q2 total revenue declined 12% and Deere-attributable net income declined 17%; six-month revenue declined 9% and net income declined 14%. Management attributed the profit decline principally to lower equipment sales volumes.
Q2 cost of sales was 67.3% of net sales versus 66.7% a year earlier; the six-month ratio was 67.9% in both periods. Price realization and inbound freight were favorable, while overhead spending was unfavorable.
Segment operating margins declined: PPA to 25.1% from 27.7%, SAT to 17.9% from 20.5%, and CF to 17.4% from 20.4% in Q2. FS reported net income of $162 million versus $28 million, including the effect of a prior-year accounting correction.
Interest expense rose 47% in Q2 to $836 million and 56% year to date to $1,638 million, primarily due to higher average borrowing rates and borrowings.
For the six months, investing cash outflow was $1,670 million and financing cash outflow was $1,162 million. Cash, cash equivalents, and restricted cash fell $1,893 million to $5,727 million; balance-sheet cash and cash equivalents were $5,553 million.
At April 28, total assets were $105,628 million and stockholders’ equity was $22,688 million. Borrowings comprised $17,699 million short-term, $6,976 million short-term securitization, and $40,962 million long-term. The FS business relies substantially on borrowing to fund its receivable and lease portfolios.
Cash, cash equivalents, and marketable securities totaled $6,647 million; unused credit lines were $2,787 million. Management said available liquidity should meet short- and long-term funding needs. FS interest-bearing debt to equity was 8.7:1, up from 8.4:1 at fiscal year-end 2023.
Six-month share repurchases were $2,422 million and dividends paid were $796 million. Deere reported $3,218 million of cash returned to shareholders.

Material changes versus the prior comparable period

Equipment sales declined across all three equipment segments. Q2 net sales fell 16% in PPA, 23% in SAT, and 7% in CF; six-month declines were 12%, 21%, and 4%, respectively. Lower shipment volumes were the main driver, partly offset by price realization in some segments.
FS revenue increased 26% in Q2 and 29% year to date, supported by higher average portfolio balances and financing rates. FS net income improved, but higher credit-loss provision and less favorable financing spreads were offsets.
Average FS receivables and leases financed were 16% higher in Q2 and 18% higher year to date. Financing receivables and operating-lease equipment together increased $8,368 million year over year.
Operating cash flow improved from an outflow in the prior-year six-month period, but the company still forecast lower operating cash flows for full-year 2024 versus 2023. A $1,300 million cash outflow from accounts payable and accrued expenses reflected, among other factors, profit-sharing payments and lower dealer-discount accruals.
External borrowings increased $2,226 million in the first half and $7,538 million year over year, generally reflecting financing portfolio growth and working-capital needs.

Outlook, commentary, risks, and unusual items

Management expects production volumes to continue declining during the remainder of 2024 amid weaker agricultural and turf demand and proactive production and inventory management; construction is expected to be relatively stable.
For 2024, Deere expects large and small agricultural equipment sales to be lower than 2023 in North America, Europe, and South America. The filing cites rising global stocks, lower commodity prices, elevated interest rates, weather uncertainty, used-equipment inventory, and regional conditions. Construction equipment industry sales are forecast flat to down; U.S. infrastructure, manufacturing investment, and housing starts may partly offset weaker areas.
FS net income is expected to be up moderately, with higher average portfolio balances and a favorable comparison to a prior-period item partly offset by credit losses and unfavorable financing spreads. The supplied filing text does not provide a clear numerical full-year company net-income or EPS forecast.
Management expects continued, though moderating, financing-spread compression in 2024. Higher borrowing costs also may weigh on customer demand. Investments in technology and “Solutions as a Service” may increase costs and reduce margins during the transition.
Credit risk warrants attention: Deere said its allowance for credit losses increased due primarily to higher expected losses on agricultural receivables amid elevated delinquencies and weaker market conditions. The allowance was $230 million versus $180 million a year earlier.
Other cited risks include geopolitical conflicts, trade policies and tariffs, foreign exchange, commodity and input prices, supply-chain disruptions, weather and climate, slower growth, technology adoption, cybersecurity, and right-to-repair or right-to-modify regulation.
An unusual prior-year item was a $173 million pretax ($135 million after-tax) Q2 2023 correction of accounting for dealer financing incentives, recorded in FS selling, administrative and general expenses; prior periods were not restated because the adjustment was deemed immaterial. This makes year-over-year SG&A and FS comparisons less directly comparable.
Legal matters include product liability, retail credit, employment, intellectual property, and antitrust claims; Deere said accrued losses were not material and reasonably possible losses would not materially affect the financial statements. Other contingencies included $146 million of retail-financing guarantees and approximately $140 million of miscellaneous contingent liabilities, with $20 million accrued.
In May 2024, Deere entered a retail-note securitization transaction resulting in $319 million of secured borrowings. A quarterly dividend of $1.47 per share was declared May 29, payable August 8, 2024.

Important facts for investors to verify

Whether equipment shipment volumes and segment margins track the expected 2024 declines, and how pricing, inventory management, and costs affect results.
Whether agricultural credit delinquencies and credit-loss provisions continue to rise, and the resulting impact on FS earnings and financing spreads.
How higher interest expense, external borrowing growth, and the FS debt-to-equity ratio evolve alongside receivable and lease portfolio growth.
Whether operating cash flow meets management’s forecast and whether working-capital movements, capital expenditures, dividends, and buybacks remain supportable.
How the prior-year dealer-incentive correction affects comparisons, and whether the stated liquidity sources and credit facilities remain available on acceptable terms.