Deere & Company — Q1 FY2024 Form 10-Q
Reporting period: Three months ended January 28, 2024 (13 weeks); compared with the three months ended January 29, 2023. Deere manufactures agricultural, turf, construction and forestry equipment and provides equipment financing through Financial Services.
Financial performance
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Net sales and revenues | $12.185 billion | $12.652 billion | Down 4% |
| Net sales (equipment) | $10.486 billion | $11.402 billion | Down 8% |
| Net income attributable to Deere | $1.751 billion | $1.959 billion | Down 11% |
| Diluted EPS | $6.23 | $6.55 | Down 5% |
| Operating cash flow | $(908) million | $(1.246) billion | Less cash used |
Management attributed lower sales and earnings primarily to lower shipment volumes as demand moderated. The approximate net income margin was 14.4%, versus 15.5% a year earlier. Cost of sales was 68.7% of net sales, compared with 69.6%; the filing cites favorable price realization.
- Production & Precision Agriculture: Sales fell 7% to $4.849 billion; operating profit fell 13% to $1.045 billion; operating margin was 21.6% versus 23.2%.
- Small Agriculture & Turf: Sales fell 19% to $2.425 billion; operating profit fell 27% to $326 million; operating margin was 13.4% versus 14.9%.
- Construction & Forestry: Sales were essentially flat at $3.212 billion; operating profit fell 9% to $566 million; operating margin was 17.6% versus 19.5%.
- Financial Services: Revenue, including intercompany amounts, increased 25% to $1.552 billion; net income rose 12% to $207 million. Higher average portfolio balances supported earnings, partly offset by less favorable financing spreads.
Cash, debt and liquidity
Cash, cash equivalents and marketable securities totaled $6.273 billion at quarter-end, down from $8.404 billion at October 29, 2023 and up from $4.828 billion a year earlier. Operating cash outflow reflected working-capital needs, including a $2.327 billion cash use from accounts payable and accrued expenses. Investing activities provided $1.217 billion; financing activities used $2.645 billion, primarily from net borrowing payments, alongside $1.328 billion of share repurchases and $386 million of dividends paid. Cash, cash equivalents and restricted cash decreased $2.320 billion during the quarter.
Borrowings at January 28, 2024 comprised $17.117 billion of short-term borrowings, $6.116 billion of short-term securitization borrowings and $39.933 billion of long-term borrowings. Combined, these were approximately $63.2 billion, up $9.1 billion year over year; Deere says the increase generally reflected its receivable and lease portfolio and working-capital needs. Financial Services’ interest-bearing debt-to-equity ratio was 8.3 to 1. Worldwide credit lines were $10.310 billion, of which $1.577 billion was unused. Management expects available liquidity sources to cover short- and long-term funding needs.
Outlook, commentary and risks
- Management expects production volumes to decline in fiscal 2024 as demand returns to more normal levels. It expects large and small agricultural equipment sales to be down from 2023 in North America, Europe and South America; construction equipment industry sales are also forecast to decline.
- Management expects Financial Services net income to be up moderately. Higher average portfolio balances and favorable prior-period special-item comparisons are expected to help; financing spreads and credit-loss provisions are expected to be unfavorable.
- Deere forecasts lower operating cash flow in 2024 than in 2023, citing lower net income adjusted for non-cash provisions and an unfavorable working-capital change. Estimated 2024 capital expenditures are approximately $1.9 billion.
- Elevated interest rates are weighing on customer demand and financing spreads. Deere reported Financial Services financing spreads were $27 million less favorable after tax year over year and expects continued, moderating spread compression in 2024.
- Risks highlighted include lower commodity prices and adverse weather, geopolitical conflicts, inflation and interest rates, foreign exchange movements, tariffs and trade policies, supply-chain disruptions, equipment demand and pricing, technology adoption and monetization, cybersecurity, and right-to-repair regulation.
- Unresolved legal matters include product liability, retail credit, employment, intellectual property and antitrust claims; Deere says reasonably possible losses are not expected to materially affect its consolidated financial statements. It reported $166 million of equipment-financing guarantees and approximately $115 million of other miscellaneous contingent liabilities and guarantees; accrued losses were not material.
- The filing reports no material changes to previously disclosed critical accounting estimates, market-risk disclosures or risk factors. Disclosure controls were judged effective. The quarter included no newly reported material legal contingency or special charge; the Russia Financial Services business sale occurred in March 2023, with no additional gain or loss on disposition.
Key facts for investors to verify
- Whether equipment shipment volumes and dealer inventories track management’s forecast of moderating demand, especially in agriculture and turf.
- Whether price realization and lower input costs can continue to offset volume pressure and operating expenses.
- Financial Services credit-loss provisions, receivable quality and financing spreads as interest rates remain elevated.
- Working-capital trends, cash generation and the funding needs of the growing finance and lease portfolio.
- Progress against fiscal 2024 outlook, including the expected decline in operating cash flow and approximately $1.9 billion of capital expenditures.