Deere & Company — Q3 FY2022 Form 10-Q
Business context and reporting period. The quarter ended July 31, 2022, and comprised 13 weeks; the comparable quarter ended August 1, 2021. Deere operates equipment businesses in production and precision agriculture, small agriculture and turf, and construction and forestry, alongside Financial Services. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
- Q3 revenue and earnings: Net sales were $13,000, up 25% from $10,413; total net sales and revenues were $14,102, up 22%. Net income attributable to Deere was $1,884, up 13%, and diluted EPS was $6.16 versus $5.32.
- Year-to-date performance: For the first nine months, net sales were $33,565, up 14%; total revenues were $37,041, up 13%. Deere-attributable net income was $4,885, up 4%, and diluted EPS was $15.88 versus $14.86.
- Costs and margins: Cost of sales equaled 73.2% of net sales in Q3 versus 72.7% a year earlier, and 74.9% year to date versus 72.3%. Management cited higher production costs, partly offset by price realization. Q3 operating margins were 21.2% for Production & Precision Agriculture (21.3% prior year), 15.2% for Small Agriculture & Turf (18.5%), and 15.7% for Construction & Forestry (15.4%).
- Segment trends: Q3 segment net sales and operating profit were, respectively: Production & Precision Agriculture, $6,096 and $1,293 (both up 43%); Small Agriculture & Turf, $3,635 and $552 (sales up 16%, profit down 5%); Construction & Forestry, $3,269 and $514 (sales up 8%, profit up 11%). Financial Services revenue was $903 and segment operating profit was $287; its net income was $209, down 8%.
- Cash flow: Nine-month operating cash flow was $418, compared with $4,314 in 2021. Investing used $4,430, versus $3,102; financing provided $515, versus $851 used in 2021. Cash, cash equivalents, and restricted cash fell $3,640 to $4,485. Operating cash flow was affected by receivables and inventory growth and a $1,000 voluntary OPEB contribution.
- Liquidity and debt: Cash and marketable securities totaled $5,078, compared with $8,745 at October 31, 2021. At July 31, short-term borrowings were $14,176, securitization borrowings $4,920, and long-term borrowings $32,132. Unused credit lines were $1,957, down from $5,770 at fiscal year-end; management attributed the reduction mainly to commercial paper funding growth in the receivables portfolio. Financial Services’ interest-bearing debt-to-equity ratio was 8.2:1. Credit-agreement requirements were met; major agency ratings had stable outlooks.
- Other metrics: Inventories rose to $9,121 from $6,781 at fiscal year-end, reflecting demand and supply-chain effects. Deere repurchased $2,477 of stock and paid $971 in dividends in the first nine months. The quarterly dividend declared was $1.13 per share.
Material changes, outlook, and notable items
- Q3 revenue growth reflected higher shipments and price realization across equipment segments, although supply-chain pressure continued to cause higher costs and production inefficiencies. Foreign currency translation was a headwind in several equipment segments.
- Q3 Small Agriculture & Turf profit declined despite sales growth, largely from higher production, selling, administrative, and R&D expenses and unfavorable currency effects. Financial Services’ Q3 net income also declined, reflecting unfavorable tax adjustments, higher credit-loss provision, and lower gains on operating-lease residual values.
- For fiscal 2022, management forecast U.S. and Canadian large-agriculture industry sales up about 15%, construction equipment up about 10%, and flat-to-down 5% for compact construction. It expected small agriculture and turf sales in the U.S. and Canada to be flat; Europe agriculture flat; South America tractors and combines up about 10–15%; and Asia agriculture down moderately. Global forestry was expected flat to down 5%, and roadbuilding flat to up 5%. Financial Services net income was expected to be slightly below FY2021.
- Management said it was confident favorable conditions would continue into FY2023, citing strong fundamentals and customer responses to early-order programs, while noting that factories and suppliers were preparing for higher demand. This outlook is subject to supply-chain and macroeconomic risks.
- Russia/Ukraine: Deere suspended shipments of machines and service parts to Russia. Net exposure was approximately $436 at July 31, 2022. Nine-month pretax costs for reserves, impairments, separation expenses, and contingencies were $127 ($119 after tax). Russian restrictions on cash transfers led Deere to classify excess Russia-based cash as restricted. The company reported continued monitoring of regional risks.
- Acquisitions and unusual items: Deere acquired the former Deere-Hitachi excavator factories and recognized a $326 noncash pretax and after-tax gain on remeasurement of its prior joint-venture investment. It also acquired majority ownership in Kreisel Electric and made other technology and equipment-related acquisitions. Combined with Russia/Ukraine and the $90 UAW ratification bonus, special items produced a net $109 pretax benefit for the first nine months; the gain should not be treated as recurring operating performance.
- Other risks and contingencies: Management identified inflation, interest rates, currency volatility, supply-chain disruptions, commodity prices, geopolitical conditions, sanctions, customer demand and credit performance, technology execution, and used-equipment values among factors that could affect results. Deere said unresolved legal actions were not expected to have a material effect; disclosure controls were effective and there was no material change in internal control over financial reporting.
- After quarter-end, the Inflation Reduction Act was enacted; Deere had not completed its analysis but did not then expect a material financial-statement impact. The board declared a $1.13-per-share dividend payable in November 2022.
Important facts for investors to verify
- How much of earnings growth is attributable to recurring price, volume, and mix versus the $326 noncash Deere-Hitachi remeasurement gain and other special items.
- Whether production costs, supply constraints, and inventory growth improve or continue to pressure margins and cash conversion.
- Whether the $418 nine-month operating cash flow reflects temporary working-capital and pension-funding effects or a more persistent cash-flow trend.
- How commercial-paper funding, reduced unused credit lines, and growth in Financial Services receivables affect liquidity and borrowing needs.
- How Russia/Ukraine exposure, restricted cash, and credit-loss reserves evolve, and whether the FY2022 and FY2023 industry and management outlooks remain achievable.