DEERE & CO quarterly report, Q1 FY2022

Deere & Company — Q1 FY2022 Form 10-Q

Business context and reporting period

The filing covers Deere’s first fiscal quarter, ended January 30, 2022, compared with the 13 weeks ended January 31, 2021. Deere manufactures agricultural, turf, construction, roadbuilding, and forestry equipment and provides equipment financing.

Financial performance and liquidity

Metric	Q1 FY2022	Q1 FY2021	Change
Total net sales and revenues	$9.569 billion	$9.112 billion	+5%
Equipment operations net sales	$8.531 billion	$8.051 billion	+6%
Net income attributable to Deere	$903 million	$1.224 billion	-26%
Diluted EPS	$2.92	$3.87	-25%
Total segment operating profit	$1.235 billion	$1.638 billion	-25%
Operating cash flow	-$2.553 billion	$143 million	—

• Cost of sales was 78.5% of equipment net sales, up from 72.1%. Higher production costs more than offset price realization; equipment operating profit fell 32% to $939 million. Deere’s net income margin was approximately 9.4%, versus 13.4% a year earlier.
• By segment, production and precision agriculture operating profit fell 54% to $296 million; small agriculture and turf fell 21% to $371 million; construction and forestry rose 1% to $272 million; financial services net income rose 13% to $231 million.
• Operating cash outflow reflected working-capital needs and a voluntary $1.0 billion contribution to a U.S. other postretirement benefit plan (OPEB). Cash, cash equivalents, and restricted cash declined $3.556 billion during the quarter. Inventory was $7.935 billion, up $1.154 billion from October 31, 2021.
• At January 30, cash and cash equivalents were $4.472 billion and marketable securities were $735 million. Total borrowings were approximately $47.3 billion, including $3.482 billion of securitization borrowings. Worldwide credit lines were $8.519 billion, of which $5.865 billion was unused. Deere said it expected sufficient funding and liquidity for short- and long-term needs.
• Equipment operations debt, excluding finance leases, was $10.229 billion; debt to total capital was 36%. Financial services external interest-bearing debt was $37.026 billion, and its debt-to-equity ratio was 7.4 to 1.
• Quarterly dividends declared and paid were $1.05 per share, versus $0.76 a year earlier. Deere repurchased $623 million of stock.

Material changes versus the prior period

• Revenue growth did not translate into higher earnings: costs of sales increased to $6.695 billion from $5.805 billion, while Deere-attributable net income declined by $321 million.
• Management cited higher production costs, unfavorable mix, supply constraints, and production disruption following delayed UAW contract ratification. Price realization and higher shipments partly offset these pressures.
• The prior-year comparison included a $58 million favorable Brazilian indirect-tax ruling and $50 million of long-lived asset impairments. Q1 FY2022 included the $90 million UAW ratification bonus. These items affect comparisons, alongside other operating changes.
• Construction and forestry’s prior-year sales included an additional $270 million from eliminating Wirtgen’s one-month reporting lag; this complicates year-over-year comparison.
• Other comprehensive loss was $613 million, principally reflecting retirement-benefit and currency translation adjustments, versus comprehensive income of $461 million in the prior-year quarter.

Outlook, commentary, risks, and unusual items

• For fiscal 2022, management forecast industry sales of large agricultural machinery in the U.S. and Canada up 20%; agriculture machinery in Europe up about 5%; South American tractors and combines up 5%–10%; U.S. and Canada construction equipment up 5%–10%; global forestry equipment up 10%–15%; and global roadbuilding equipment up 5%–10%. U.S. and Canada turf and utility sales were expected to be flat; Asia agricultural machinery was also forecast flat. These are industry forecasts, not Deere revenue guidance.
• Financial services net income was expected to be slightly lower than FY2021, reflecting higher credit-loss provisions, lower operating-lease residual-value gains, and higher selling, general, and administrative expenses, partly offset by a larger average portfolio. The filing provides no clear full-year consolidated net income or EPS guidance value.
• Management described demand fundamentals in agriculture and construction as strong, while emphasizing persistent supply-chain and pandemic challenges, higher costs, and production issues. Risks include commodity and currency volatility, inflation, labor and supplier constraints, freight availability and cost, changing customer demand, credit quality, interest rates, geopolitical conditions, and COVID-related disruption.
• The new six-year UAW agreement covers 14 U.S. facilities. Its $90 million ratification bonus was expensed in the quarter. The related U.S. hourly pension-plan remeasurement reduced funded status by approximately $495 million and was expected to add nearly $80 million to FY2022 pension expense.
• After quarter-end, Deere acquired majority ownership of Austrian battery-technology provider Kreisel Electric for an initial cash outlay of €239 million. Deere also expected to pay $275 million in cash for Hitachi’s shares in joint-venture manufacturing entities and certain intellectual property, subject to closing conditions.
• Deere reported $374 million of guarantees related primarily to third-party equipment financing, with $5 million accrued losses; $323 million of property and equipment commitments; and $85 million of miscellaneous contingent liabilities, for which the accrued amount was not material. Management said reasonably possible losses from unresolved legal actions were not expected to materially affect consolidated financial statements.

Most important facts for investors to verify

• Whether price increases and shipment growth can offset production, labor, materials, and logistics costs—and whether segment margins recover from Q1 levels.
• How much of the negative operating cash flow is seasonal or driven by the $1.0 billion OPEB contribution, and whether inventory and working capital normalize.
• Whether the industry outlook translates into Deere shipment growth, given production constraints and the prior-year Wirtgen comparison.
• Financial services credit-loss provisions, delinquencies, lease residual values, funding costs, and access to securitization and debt markets.
• The cash and earnings effects of the Kreisel acquisition, the planned Hitachi transaction, and the UAW agreement’s pension costs.