DEERE & CO quarterly report, Q3 FY2021

Deere & Company — Q3 2021 Form 10-Q

Reporting period: Three and nine months ended August 1, 2021; comparable periods ended August 2, 2020. Each period was 13 weeks for the quarter and 39 weeks year to date. Dollar amounts are in millions unless stated otherwise. Deere manufactures agricultural, turf, construction and forestry equipment and provides customer and dealer financing.

Financial performance

Metric	Q3 2021	Q3 2020	Nine months 2021	Nine months 2020
Net sales and revenues	$11,527	$8,925	$32,697	$25,809
Equipment net sales	$10,413	$7,859	$29,461	$22,612
Net income attributable to Deere	$1,667	$811	$4,680	$1,993
Diluted EPS	$5.32	$2.57	$14.86	$6.30
Operating cash flow	Not provided separately	Not provided separately	$4,314	$4,057

Quarterly consolidated income before taxes increased to $2,150 from $1,270. Equipment operations operating profit was $1,952, up 70%; financial services operating profit was $291, up 20%.
Equipment cost of sales as a share of equipment net sales improved to 72.7% from 74.2% for the quarter and to 72.3% from 76.1% year to date. Higher price realization and prior-year impairments contributed to the improvement; higher production costs partly offset gains.
Quarterly segment operating margins were 21.3% for production and precision agriculture (18.4% prior year), 18.5% for small agriculture and turf (14.1%), and 15.4% for construction and forestry (9.4%).
Nine-month operating cash flow was $4,314; investing cash outflow was $3,102 and financing cash outflow was $851. Cash, cash equivalents and restricted cash increased $467 during the period to $7,639.

Balance sheet, debt and liquidity

At August 1, 2021, cash and cash equivalents were $7,519 and marketable securities $688. Combined, these totaled $8,207, compared with $7,707 at November 1, 2020 and $8,830 at August 2, 2020.
Total assets were $80,688; total liabilities $64,955; Deere stockholders’ equity $15,731. Inventories rose to $6,410 from $4,999 at November 1, 2020, primarily reflecting seasonality, stronger demand and currency translation.
Reported short-term borrowings were $10,404, short-term securitization borrowings $5,277 and long-term borrowings $32,280. These categories total approximately $47,961; this includes financing-related debt and securitization borrowings.
Equipment operations’ interest-bearing debt, excluding finance leases, was $10,305; its debt-to-total-capital ratio was 40%, versus 45% at fiscal year-end. Financial services’ external interest-bearing debt was $37,591; its debt-to-equity ratio including intercompany debt was 7.6 to 1.
Worldwide bank credit lines totaled $8,146, of which $6,131 was unused. Deere reported compliance with its credit-agreement requirements. Equipment operations’ estimated 2021 capital expenditures were approximately $900.

Changes versus prior year and management commentary

Quarterly revenues rose 29% and net income rose 106%; nine-month revenues rose 27% and net income rose 135%. Equipment sales and operating profit increased across all three equipment segments, reflecting higher shipment volumes and price realization.
Financial services’ nine-month revenue declined 2%, but operating profit increased 69%. Deere cited lower credit-loss provisions, improved operating-lease residual values, more favorable financing spreads and a larger average portfolio. Average receivables and leases financed rose 8% in the quarter and 4% year to date.
Management described worldwide equipment markets as strong and said the business was positioned for a strong year. It also said supply-chain pressures and shortages of critical parts and components were disrupting production and expected to persist through the rest of the year.
Management’s 2021 industry outlook called for U.S. and Canada large agricultural machinery sales up about 25%, small agriculture and turf up about 10%, construction up 15–20%, and compact construction up 20–25%; Europe agricultural machinery up 10–15%, South American tractors and combines up about 20%, and global forestry equipment sales up about 15%. These are industry forecasts, not company revenue or earnings guidance.
No quantified full-year Deere earnings or EPS forecast is stated in the supplied filing text. Financial services was expected to benefit versus the prior year from stronger lease residual values, lower credit-loss provisions, more favorable financing spreads and higher average portfolio balances.

Unusual items, risks and subsequent events

2021 special items included a $58 pretax benefit from a favorable Brazilian indirect-tax ruling and a $27 pretax gain on sale of a closed China factory, partly offset by $50 of long-lived asset impairments; the filing reports a net $35 pretax benefit for these items. In 2020, results included $138 of voluntary employee-separation costs and various impairments and closure-related charges.
COVID-related customer payment relief still outstanding at August 1 represented about 3% of financing receivables and operating-lease portfolios; remaining trade receivables granted relief were not material. Deere cited COVID uncertainty, supply availability and costs, logistics, commodity and currency volatility, demand for new and used equipment, financing conditions, and geopolitical and trade risks.
Deere acquired Bear Flag Robotics on August 5 for $250 cash, to advance autonomous tractor technology. On August 19 it agreed to end its Hitachi construction-equipment joint venture and acquire Hitachi’s shares in relevant manufacturing entities; initial consideration is $275, subject to adjustments, with closing expected in the first half of fiscal 2022 and required approvals.
On August 25, the board declared a quarterly dividend of $1.05 per share, an increase of $0.15 (about 17%) from the prior rate. A planned $700 voluntary contribution to the U.S. OPEB plan was deferred from fiscal 2021 to fiscal 2022.
Deere said unresolved legal actions were not expected to have a material financial effect. It disclosed a pending Argentine environmental fine of approximately $401,000, which the company is contesting.

Key facts for investors to verify

Whether supply-chain constraints, production interruptions and higher input costs persist, and how they affect deliveries, margins and order fulfillment.
Whether shipment growth and price realization continue to offset production-cost inflation, and whether the exceptional year-over-year profit comparison normalizes as prior-year special charges roll off.
Credit quality, delinquency trends, provisions and used-equipment residual values within Financial Services, including the performance of accounts granted COVID relief.
Funding costs, leverage, liquidity and covenant headroom, particularly given the financing portfolio’s reliance on external borrowings and securitizations.
Execution, regulatory approvals, costs and expected benefits of the Bear Flag acquisition and Hitachi joint-venture dissolution, as well as the timing of the deferred OPEB contribution.