Deere & Company — Q3 FY2023 Form 10-Q
Reporting period: Third quarter ended July 30, 2023 (13 weeks); year-to-date period was 39 weeks. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and results
Deere operates production and precision agriculture, small agriculture and turf, construction and forestry, and financial services businesses. The quarter’s growth reflected price realization, shipment volumes and mix, and higher financial services revenue.
- Q3: Net sales were $14.284 billion, up 10% year over year; total net sales and revenues were $15.801 billion, up 12%. Deere-attributable net income rose 58% to $2.978 billion; diluted EPS rose to $10.20 from $6.16.
- First nine months: Net sales were $41.765 billion, up 24%; total net sales and revenues were $45.839 billion, up 24%. Deere-attributable net income increased 60% to $7.797 billion; diluted EPS was $26.35 versus $15.88.
- Margins: Cost of sales as a percentage of net sales improved to 67.4% from 73.2% in Q3 and to 67.7% from 74.9% year to date. Segment operating margins were 26.2% for production and precision agriculture, 19.6% for small agriculture and turf, and 19.1% for construction and forestry in Q3.
- Segment trends: Q3 operating profit increased 38% in production and precision agriculture, 33% in small agriculture and turf, and 39% in construction and forestry. Financial services Q3 net income was $216 million, up 3%; its first-nine-month net income fell 34% to $429 million.
Cash flow, balance sheet and liquidity
- For the first nine months, operating cash flow was $2.896 billion versus $418 million; investing cash outflow was $4.563 billion and financing cash inflow was $3.379 billion. Cash, cash equivalents and restricted cash increased $1.837 billion to $6.778 billion.
- At July 30, cash and cash equivalents were $6.576 billion and marketable securities were $841 million. Total assets were $103.397 billion; stockholders’ equity was $23.051 billion.
- Borrowings comprised $17.143 billion short term, $6.608 billion short-term securitization borrowings, and $38.112 billion long term. Financial Services’ interest-bearing debt-to-equity ratio was 8.1:1. Deere reported $950 million of unused credit lines and said it expected adequate funding and liquidity for short- and long-term needs.
- Financing receivables and equipment on operating leases increased $5.819 billion during the first nine months. Management attributed this to strong retail sales. The allowance for credit losses, excluding Russia, was 0.36% of financing receivables, compared with 0.40% a year earlier.
Material changes and notable items
- Higher equipment prices and volumes, improved shipment mix, and lower supply-chain-related costs supported results; higher purchased-component, energy, and labor costs, currency effects, and higher R&D and administrative expenses were offsets.
- Third-quarter results included a favorable Brazil tax ruling: a $243 million reduction in income tax provision and $47 million of interest income.
- Second-quarter results included a $173 million pretax ($135 million after-tax) correction to the timing and presentation of dealer financing incentives; prior periods were not restated because the adjustment was deemed immaterial. Management said the correction was unrelated to portfolio credit quality or current market conditions.
- Year-to-date comparisons also reflect the absence of the prior-year $326 million noncash gain on remeasurement of a Deere-Hitachi joint-venture investment. Deere repurchased $4.663 billion of shares and paid $1.065 billion in dividends during the first nine months.
Outlook, risks and contingencies
- Management reported strong demand and full order books through 2023. It expected North American large agricultural equipment sales volumes to exceed 2022, while small agriculture and turf volumes were expected to be lower. Construction markets were forecast to remain steady.
- Industry forecasts for 2023 included U.S. and Canadian large agricultural machinery growth of about 10%; small agriculture and turf declines of 5%–10%; and construction, compact construction, and global roadbuilding markets flat to up 5%. These are industry estimates, not company revenue guidance.
- Financial Services’ full-year net income was expected to be below fiscal 2022, reflecting less favorable financing spreads, the incentive accounting correction, higher credit-loss provisions and expenses, and lower gains on lease dispositions, partly offset by a larger average portfolio. Management expected spread compression to persist through the rest of 2023.
- Supply-chain conditions had improved, but management said residual disruptions and rising interest rates remained outside its control. Other risks include inflation and slower growth, commodity prices and farm conditions, weather, foreign exchange, trade and geopolitical developments, customer demand, technology adoption, cybersecurity, and access to funding.
- Unresolved ordinary-course legal matters were not expected by the company to have a material financial statement effect. The filing reports $649 million of commitments for property and equipment acquisition/construction and $201 million of guarantees related to third-party equipment financing; accrued losses were not material. Estimated FY2023 capital expenditures were approximately $1.65 billion.
Important facts for investors to verify
- How much earnings growth reflects ongoing pricing, volume, and operating performance versus the Brazil tax benefit and other special items.
- Whether full order books convert to deliveries and sales as agricultural and construction market conditions evolve.
- Financial Services’ spread trends, funding costs, credit quality, and ability to maintain liquidity amid portfolio growth and higher rates.
- Whether operating cash generation remains strong as receivables, inventories, and seasonal working-capital needs change.
- Progress on the $18 billion share-repurchase authorization, dividends, and capital spending priorities.