UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 30, 2023
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file no: 1-4121
DEERE & COMPANY
(Exact name of registrant as specified in its charter)
Delaware(State of incorporation)
36-2382580(IRS employer identification no.)
One John Deere Place
Moline, Illinois 61265
(Address of principal executive offices)
Telephone Number: (309) 765-8000
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol
Name of each exchange on which registered
Common stock, $1 par value
DE
New York Stock Exchange
6.55% Debentures Due 2028
DE28
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
At July 30, 2023, 288,000,577 shares of common stock, $1 par value, of the registrant were outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STATEMENTS OF CONSOLIDATED INCOME
For the Three and Nine Months Ended July 30, 2023 and July 31, 2022
(In millions of dollars and shares except per share amounts) Unaudited
Three Months Ended
Nine Months Ended
2023
2022
Net Sales and Revenues
Net sales
$
14,284
13,000
41,765
33,565
Finance and interest income
1,253
846
3,326
2,441
Other income
264
256
748
1,035
Total
15,801
14,102
45,839
37,041
Costs and Expenses
Cost of sales
9,624
9,511
28,288
25,124
Research and development expenses
528
481
1,571
1,336
Selling, administrative and general expenses
1,110
959
3,392
2,672
Interest expense
623
296
1,671
713
Other operating expenses
310
316
971
954
12,195
11,563
35,893
30,799
Income of Consolidated Group before Income Taxes
3,606
2,539
9,946
6,242
Provision for income taxes
636
654
2,164
1,364
Income of Consolidated Group
2,970
1,885
7,782
4,878
Equity in income of unconsolidated affiliates
2
5
8
Net Income
2,972
7,787
4,886
Less: Net income (loss) attributable to noncontrolling interests
(6)
1
(10)
Net Income Attributable to Deere & Company
2,978
1,884
7,797
4,885
Per Share Data
Basic
10.24
6.20
26.48
15.97
Diluted
10.20
6.16
26.35
15.88
Dividends declared
1.25
1.13
3.70
3.23
Dividends paid
1.05
3.58
3.15
Average Shares Outstanding
290.8
304.1
294.4
305.8
292.1
305.7
295.9
307.7
See Condensed Notes to Interim Consolidated Financial Statements.
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(In millions of dollars) Unaudited
Other Comprehensive Income (Loss), Net of Income Taxes
Retirement benefits adjustment
(9)
79
(267)
(137)
Cumulative translation adjustment
144
(269)
925
(784)
Unrealized gain (loss) on derivatives
(1)
(26)
41
Unrealized gain (loss) on debt securities
(13)
6
13
(57)
127
(185)
645
(937)
Comprehensive Income of Consolidated Group
3,099
1,700
8,432
3,949
Less: Comprehensive income (loss) attributable to noncontrolling interests
(5)
(3)
(8)
Comprehensive Income Attributable to Deere & Company
3,104
1,703
8,430
3,957
3
CONDENSED CONSOLIDATED BALANCE SHEETS
July 30
October 30
July 31
Assets
Cash and cash equivalents
6,576
4,774
4,359
Marketable securities
841
734
719
Trade accounts and notes receivable – net
9,297
6,410
6,696
Financing receivables – net
41,302
36,634
35,056
Financing receivables securitized – net
7,001
5,936
5,141
Other receivables
3,118
2,492
1,999
Equipment on operating leases – net
6,709
6,623
6,554
Inventories
9,350
8,495
9,121
Property and equipment – net
6,418
6,056
5,666
Goodwill
3,994
3,687
3,754
Other intangible assets – net
1,199
1,218
1,281
Retirement benefits
3,573
3,730
3,125
Deferred income taxes
1,360
824
Other assets
2,659
2,417
2,236
Total Assets
103,397
90,030
86,817
Liabilities and Stockholders’ Equity
Liabilities
Short-term borrowings
17,143
12,592
14,176
Short-term securitization borrowings
6,608
5,711
4,920
Accounts payable and accrued expenses
15,340
14,822
12,986
506
495
561
Long-term borrowings
38,112
33,596
32,132
Retirement benefits and other liabilities
2,536
2,457
2,911
Total liabilities
80,245
69,673
67,686
Commitments and contingencies (Note 16)
Redeemable noncontrolling interest
101
92
95
Stockholders’ Equity
Common stock, $1 par value (issued shares at July 30, 2023 – 536,431,204)
5,272
5,165
5,139
Common stock in treasury
(28,760)
(24,094)
(22,976)
Retained earnings
48,947
42,247
40,346
Accumulated other comprehensive income (loss)
(2,411)
(3,056)
(3,476)
Total Deere & Company stockholders’ equity
23,048
20,262
19,033
Noncontrolling interests
Total stockholders’ equity
23,051
20,265
19,036
Total Liabilities and Stockholders’ Equity
4
STATEMENTS OF CONSOLIDATED CASH FLOWS
For the Nine Months Ended July 30, 2023 and July 31, 2022
Cash Flows from Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Provision (credit) for credit losses
(64)
62
Provision for depreciation and amortization
1,527
1,443
Impairments and other adjustments
173
81
Share-based compensation expense
112
64
Gain on remeasurement of previously held equity investment
(326)
Credit for deferred income taxes
(429)
Changes in assets and liabilities:
Receivables related to sales
(5,059)
(2,357)
(663)
(2,526)
47
(15)
Accrued income taxes payable/receivable
(595)
82
(116)
(1,014)
Other
176
44
Net cash provided by operating activities
2,896
418
Cash Flows from Investing Activities
Collections of receivables (excluding receivables related to sales)
17,592
15,774
Proceeds from sales of equipment on operating leases
1,445
1,501
Cost of receivables acquired (excluding receivables related to sales)
(20,714)
(18,578)
Acquisitions of businesses, net of cash acquired
(82)
(488)
Purchases of property and equipment
(887)
(596)
Cost of equipment on operating leases acquired
(1,968)
(1,717)
Collateral on derivatives - net
240
(193)
(189)
(133)
Net cash used for investing activities
(4,563)
(4,430)
Cash Flows from Financing Activities
Increase in total short-term borrowings
5,040
4,267
Proceeds from long-term borrowings
9,972
6,281
Payments of long-term borrowings
(5,862)
(6,578)
Repurchases of common stock
(4,663)
(2,477)
(1,065)
(971)
(43)
(7)
Net cash provided by financing activities
3,379
515
Effect of Exchange Rate Changes on Cash, Cash Equivalents, and Restricted Cash
125
(143)
Net Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash
1,837
(3,640)
Cash, Cash Equivalents, and Restricted Cash at Beginning of Period
4,941
8,125
Cash, Cash Equivalents, and Restricted Cash at End of Period
6,778
4,485
Components of Cash, Cash Equivalents, and Restricted Cash
Restricted cash (Other assets)
202
126
Total Cash, Cash Equivalents, and Restricted Cash
STATEMENTS OF CHANGES IN CONSOLIDATED STOCKHOLDERS’ EQUITY
Total Stockholders’ Equity
Deere & Company Stockholders
Accumulated
Redeemable
Stockholders’
Common
Treasury
Retained
Comprehensive
Noncontrolling
Equity
Stock
Earnings
Income (Loss)
Interests
Interest
Three Months Ended July 31, 2022
Balance May 1, 2022
18,907
5,117
(21,727)
38,805
(3,291)
99
Other comprehensive loss
(4)
(1,251)
Treasury shares reissued
(343)
Share based awards and other
22
Balance July 31, 2022
Nine Months Ended July 31, 2022
Balance October 31, 2021
18,434
5,054
(20,533)
36,449
(2,539)
Acquisitions
105
Net income (loss)
4,887
34
(990)
(988)
(2)
85
Three Months Ended July 30, 2023
Balance April 30, 2023
22,399
5,227
(26,630)
46,336
(2,538)
102
Other comprehensive income
(2,139)
9
(364)
(362)
45
Balance July 30, 2023
Nine Months Ended July 30, 2023
Balance October 30, 2022
7,799
(12)
12
(4,696)
30
(1,091)
(1,088)
107
Condensed Notes to Interim Consolidated Financial Statements (Unaudited)
(1) Organization and Consolidation
Deere & Company has been developing innovative solutions to help its customers become more profitable for more than 185 years. References to Deere & Company, John Deere, Deere, or the Company include its consolidated subsidiaries and consolidated variable interest entities (VIEs). The Company is managed through the following operating segments: production and precision agriculture (PPA), small agriculture and turf (SAT), construction and forestry (CF), and financial services (FS). References to “equipment operations” include production and precision agriculture, small agriculture and turf, and construction and forestry, while references to “agriculture and turf” include both production and precision agriculture and small agriculture and turf.
The Company uses a 52/53 week fiscal year with quarters ending on the last Sunday in the reporting period. The third quarter ends for fiscal year 2023 and 2022 were July 30, 2023 and July 31, 2022, respectively. Both third quarters contained 13 weeks, while both year-to-date periods contained 39 weeks. Unless otherwise stated, references to particular years, quarters, or months refer to the Company’s fiscal years generally ending in October and the associated periods in those fiscal years.
(2) Summary of Significant Accounting Policies and New Accounting Standards
Quarterly Financial Statements
The interim consolidated financial statements of Deere & Company have been prepared by the Company, without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the U.S. have been condensed or omitted as permitted by such rules and regulations. All normal recurring adjustments have been included. Management believes the disclosures are adequate to present fairly the financial position, results of operations, and cash flows at the dates and for the periods presented. It is suggested these interim consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto appearing in the Company’s latest Annual Report on Form 10-K. Results for interim periods are not necessarily indicative of those to be expected for the fiscal year.
Use of Estimates in Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts and related disclosures. Actual results could differ from those estimates.
New Accounting Standards
The Company closely monitors all Accounting Standard Updates (ASUs) issued by the Financial Accounting Standards Board and other authoritative guidance. ASUs adopted in 2023 did not have a material impact on the Company’s financial statements. ASUs to be adopted in future periods are being evaluated and at this point are not expected to have a material impact on the Company’s financial statements.
7
(3) Revenue Recognition
The Company’s net sales and revenues by primary geographic market, major product line, and timing of revenue recognition in millions of dollars follow:
Production & Precision Ag
Small Ag & Turf
Construction & Forestry
Financial Services
Primary geographic markets:
United States
3,394
2,098
2,346
860
8,698
Canada
397
179
288
165
1,029
Western Europe
833
802
421
35
2,091
Central Europe and CIS
302
98
491
Latin America
1,326
220
371
117
2,034
Asia, Africa, Oceania, and Middle East
720
422
271
1,458
6,972
3,806
3,795
1,228
Major product lines:
Production agriculture
6,721
Small agriculture
2,688
Turf
964
Construction
1,745
Compact construction
614
Roadbuilding
987
Forestry
334
Financial products
89
28
15
162
100
388
Revenue recognized:
At a point in time
6,857
3,769
3,767
14,423
Over time
115
37
1,198
1,378
10,079
6,005
6,807
2,339
25,230
1,303
514
865
468
3,150
2,092
2,254
1,278
5,719
897
420
263
26
1,606
4,106
577
1,098
318
6,099
1,709
1,291
906
129
4,035
20,186
11,061
11,217
3,375
19,565
7,835
2,782
1,750
2,939
1,119
149
66
40
3,630
472
378
329
1,179
19,965
10,970
11,142
80
42,157
221
91
75
3,295
3,682
2,904
2,177
1,789
602
7,472
451
185
1,073
646
380
25
1,696
348
109
111
14
582
1,327
155
459
77
2,018
510
419
36
1,261
6,185
3,691
3,323
903
6,019
2,705
842
1,506
460
910
17
941
403
6,154
3,672
3,303
27
13,156
31
19
20
876
946
6,946
5,718
5,157
1,744
899
975
450
2,792
1,648
1,836
1,202
76
4,762
386
452
1,828
3,229
393
1,020
218
4,860
1,118
1,170
113
3,234
14,794
9,971
9,639
2,637
14,333
7,305
2,286
4,198
1,208
2,619
39
2,728
345
651
1,418
14,694
9,919
9,580
34,270
52
59
2,560
2,771
The Company invoices in advance of recognizing the sale of certain products and the revenue for certain services. These relate to extended warranty premiums, advance payments for future equipment sales, and subscription and service revenue related to precision guidance and telematic services. These advanced customer payments are presented as deferred revenue, a contract liability, in “Accounts payable and accrued expenses” in the consolidated balance sheets. The deferred revenue received, but not recognized in revenue, including extended warranty premiums also shown in Note 16, was $1,753 million, $1,423 million, and $1,424 million at July 30, 2023, October 30, 2022, and July 31, 2022, respectively. The contract liability is reduced as the revenue is recognized. During the three months ended July 30, 2023 and July 31, 2022, $96 million and $93 million, respectively, of revenue was recognized from deferred revenue that was recorded as a contract liability at the beginning of the respective fiscal year. During the nine months ended July 30, 2023 and July 31, 2022, $440 million and $488 million, respectively, of revenue was recognized from deferred revenue that was recorded as a contract liability at the beginning of the respective fiscal year.
The amount of unsatisfied performance obligations for contracts with an original duration greater than one year was $1,437 million at July 30, 2023. The estimated revenue to be recognized by fiscal year follows in millions of dollars: remainder of 2023 - $139, 2024 - $403, 2025 - $337, 2026 - $228, 2027 - $136, 2028 - $86 and later years - $108. As permitted, the Company elected only to disclose remaining performance obligations with an original contract duration greater than one year. The contracts with an expected duration of one year or less are for sales of equipment, service parts, repair services, and certain telematics services.
(4) Other Comprehensive Income Items
The after-tax components of accumulated other comprehensive income (loss) in millions of dollars follow:
(656)
(389)
(1,171)
(1,669)
(2,594)
(2,262)
21
(81)
(94)
(42)
Total accumulated other comprehensive income (loss)
Following are amounts recorded in and reclassifications out of other comprehensive income (loss), and the income tax effects, in millions of dollars. Retirement benefits adjustment reclassifications for actuarial (gain) loss, prior service (credit) cost, and settlements are included in net periodic pension and other postretirement benefit costs (see Note 6).
Before
Tax
After
(Expense)
Amount
Credit
143
Unrealized gain (loss) on derivatives:
Unrealized hedging gain (loss)
24
Reclassification of realized (gain) loss to:
Interest rate contracts – Interest expense
(18)
(14)
Net unrealized gain (loss) on derivatives
Unrealized gain (loss) on debt securities:
Unrealized holding gain (loss)
(16)
Net unrealized gain (loss) on debt securities
Retirement benefits adjustment:
Net actuarial gain (loss)
Reclassification of amortized amounts:
Actuarial (gain) loss – Other operating expenses
(20)
Prior service (credit) cost – Other operating expenses
Net unrealized gain (loss) on retirement benefits adjustment
Total other comprehensive income (loss)
121
10
914
11
(52)
(41)
(33)
(351)
83
(268)
(61)
(46)
Settlements – Other operating expenses
(348)
550
Reclassification of realized (gain) loss – Other income
Settlements/curtailment – Other operating expenses
(157)
(28)
(774)
(11)
(74)
16
(58)
(73)
Net actuarial gain (loss) and prior service credit (cost)
(338)
(257)
94
(24)
70
(178)
(973)
(5) Earnings Per Share
A reconciliation of basic and diluted net income per share attributable to Deere & Company follows in millions (except per share amounts):
Net income attributable to Deere & Company
Average shares outstanding
Basic per share
Effect of dilutive share-based compensation
1.3
1.6
1.5
1.9
Total potential shares outstanding
Diluted per share
Shares excluded from EPS calculation, as antidilutive
.2
.1
(6) Pension and Other Postretirement Employee Benefits
The Company has several defined benefit pension plans and other postretirement employee benefit (OPEB) plans, primarily health care and life insurance plans, covering its U.S. employees and employees in certain foreign countries. The components of net periodic pension and OPEB (benefit) cost consisted of the following in millions of dollars:
Pension
Service cost
86
186
265
Interest cost
133
400
242
Expected return on plan assets
(223)
(182)
(655)
(544)
Amortization of actuarial (gain) loss
Amortization of prior service cost
Settlements/curtailment
Net (benefit) cost
(23)
65
(19)
139
OPEB
132
74
(29)
(87)
(83)
Amortization of actuarial gain
(45)
Amortization of prior service credit
Net cost
18
The reduction in the 2023 pension net cost is due to increases in the expected long-term return rates on plan assets and increases in discount rates. The components of net periodic pension and OPEB (benefit) cost excluding the service cost component are included in the line item “Other operating expenses” in the statements of consolidated income.
During the second quarter of 2023, the Canada pension plan paid a premium to an insurance company to irrevocably transfer the benefit obligations and administration for the majority of its retired participants. The transaction did not impact the benefits to be received by the retired participants. In connection with the transaction, the Company recognized a one-time, non-cash, pre-tax pension settlement charge of $36 million in the second quarter of 2023 related to the accelerated recognition of actuarial losses included within “Accumulated other comprehensive income (loss)” in the statements of changes in consolidated stockholders’ equity.
(7) Segment Reporting
Worldwide net sales and revenues, operating profit, and identifiable assets by segment were as follows in millions of dollars:
%
Change
Net sales and revenues:
Production & precision ag net sales
6,806
6,096
+12
19,826
14,568
+36
Small ag & turf net sales
3,739
3,635
+3
10,886
9,836
+11
Construction & forestry net sales
3,269
+14
11,053
9,161
+21
Financial services revenues
+28
Other revenues
289
199
+45
699
839
-17
Total net sales and revenues
+24
Operating profit:
Production & precision ag
1,782
1,293
+38
5,160
2,646
+95
Small ag & turf
732
552
+33
2,028
+41
Construction & forestry
716
+39
2,179
1,599
Financial services
286
287
565
864
-35
Total operating profit
3,516
9,932
6,552
+52
Reconciling items
(108)
29
(303)
Income taxes
(636)
(654)
-3
(2,164)
(1,364)
+59
+58
+60
Intersegment sales and revenues:
+80
+40
+25
217
+168
612
214
+186
Operating profit for production and precision ag, small ag and turf, and construction and forestry is income from continuing operations before reconciling items and income taxes. Operating profit for financial services includes the effect of interest expense and foreign exchange gains and losses. Reconciling items to net income are primarily corporate expenses, certain interest income and expenses, certain foreign exchange gains and losses, pension and OPEB benefit amounts excluding the service cost component, equity in income of unconsolidated affiliates, and net income attributable to noncontrolling interests.
Identifiable assets were as follows in millions of dollars:
9,523
8,414
8,728
4,482
4,451
4,361
7,415
6,754
6,824
68,850
58,864
56,008
Corporate
13,127
11,547
10,896
Total assets
(8) Financing Receivables
The Company monitors the credit quality of financing receivables based on delinquency status. Past due balances of financing receivables still accruing finance income represent the total balance held (principal plus accrued interest) with any payment amounts 30 days or more past the contractual payment due date. Non-performing financing receivables represent receivables for which the Company has ceased accruing finance income. The Company ceases accruing finance income when these receivables are generally 90 days delinquent. Generally, when receivables are 120 days delinquent the estimated uncollectible amount from the customer is written off to the allowance for credit losses. Finance income for non-performing receivables is recognized on a cash basis. Accrual of finance income is generally resumed when the receivable becomes contractually current and collection is reasonably assured.
The credit quality analysis of retail notes, financing leases, and revolving charge accounts (collectively, retail customer receivables) by year of origination was as follows in millions of dollars:
July 30, 2023
2021
2020
2019
Prior
Years
Revolving Charge Accounts
Retail customer receivables:
Agriculture and turf
Current
10,554
9,701
5,792
2,779
1,080
402
4,388
34,696
30-59 days past due
53
261
60-89 days past due
90+ days past due
Non-performing
71
Construction and forestry
2,167
2,200
1,284
449
124
114
6,377
46
38
147
23
63
61
207
12,889
12,251
7,333
3,348
1,264
4,544
42,110
October 30, 2022
2018
PriorYears
13,500
7,984
4,091
1,875
785
200
4,111
32,546
191
60
204
2,964
1,974
292
73
108
6,265
16,650
10,239
5,091
2,252
895
4,255
39,622
July 31, 2022
9,169
4,713
2,234
935
3,962
30,552
201
48
2,336
2,249
1,004
382
106
6,199
54
49
164
11,643
11,716
5,908
2,725
1,085
438
4,099
37,614
The credit quality analysis of wholesale receivables by year of origination was as follows in millions of dollars:
Revolving
Wholesale receivables:
4,940
5,565
30+ days past due
752
803
469
145
51
5,692
6,369
387
2,371
2,855
377
417
394
93
2,748
3,273
2,022
2,452
32
283
331
300
131
2,305
2,785
An analysis of the allowance for credit losses and investment in financing receivables in millions of dollars during the periods follows:
Retail Notes
& Financing
Charge
Wholesale
Leases
Accounts
Receivables
Allowance:
Beginning of period balance
157
180
Provision
Write-offs
Recoveries
Translation adjustments
End of period balance
154
299
325
Provision transferred to held for sale
(142)
Provision (credit) subtotal
(67)
(60)
(36)
(96)
(17)
Financing receivables:
37,566
48,479
168
190
Provision (credit)
(22)
181
138
166
(47)
(69)
33,515
40,399
In the first quarter of 2023, the Company determined that the financial services business in Russia met the held for sale criteria. The financing receivables in Russia were reclassified to “Other assets” and the associated allowance for credit losses was reversed in the first quarter of 2023. These operations were sold in the second quarter of 2023 (see Note 20).
The allowance for credit losses decreased slightly in the third quarter of 2023 as strong fundamentals within the agriculture market continued to benefit the portfolio. Excluding the portfolio in Russia, the allowance for the first nine months of 2023 increased slightly as higher portfolio balances and higher expected losses on turf and construction customer accounts offset the favorable benefits in the agricultural customer accounts. The Company continues to monitor the economy as part of the allowance setting process, including potential impacts of inflation and interest rates, among other factors, and qualitative adjustments to the allowance are incorporated as necessary.
(9) Securitization of Financing Receivables
As a part of its overall funding strategy, the Company periodically transfers certain financing receivables (retail notes) into VIEs that are special purpose entities (SPEs), or non-VIE banking operations, as part of its asset-backed securities programs (securitizations). The structure of these transactions is such that the transfer of the retail notes does not meet the accounting criteria for sales of receivables, and is, therefore, accounted for as a secured borrowing. SPEs utilized in securitizations of retail notes differ from other entities included in the Company’s consolidated statements because the assets they hold are legally isolated. Use of the assets held by the SPEs or the non-VIEs is restricted by terms of the documents governing the securitization transactions.
The components of consolidated restricted assets, secured borrowings, and other liabilities related to secured borrowings in securitization transactions were as follows in millions of dollars:
Financing receivables securitized (retail notes)
7,019
5,952
5,156
Allowance for credit losses
Other assets (primarily restricted cash)
153
136
Total restricted securitized assets
7,154
6,091
5,277
Accrued interest on borrowings
Total liabilities related to restricted securitized assets
5,717
4,924
(10) Inventories
A majority of inventory owned by Deere & Company and its U.S. equipment subsidiaries are valued at cost on the “last-in, first-out” (LIFO) basis. If all of the Company’s inventories had been valued on a “first-in, first-out” (FIFO) basis, estimated inventories by major classification in millions of dollars would have been as follows:
Raw materials and supplies
4,492
4,442
4,508
Work-in-process
1,307
1,190
1,621
Finished goods and parts
6,164
5,363
5,434
Total FIFO value
11,963
10,995
Less adjustment to LIFO value
2,613
2,500
2,442
(11) Goodwill and Other Intangible Assets
The changes in amounts of goodwill by operating segments were as follows in millions of dollars:
Production &
Small Ag
Precision Ag
& Turf
& Forestry
Goodwill at October 31, 2021
542
2,484
3,291
69
597
798
(301)
(335)
Goodwill at July 31, 2022
323
2,780
Goodwill at October 30, 2022
2,723
196
227
Goodwill at July 30, 2023
710
365
2,919
There were no accumulated goodwill impairment losses in the reported periods.
The components of other intangible assets were as follows in millions of dollars:
Amortized intangible assets:
Customer lists and relationships
524
493
507
Technology, patents, trademarks, and other
1,415
1,301
1,320
Total at cost
1,939
1,794
1,827
Less accumulated amortization:
539
410
384
Total accumulated amortization
740
576
546
The amortization of other intangible assets in the third quarter and the first nine months of 2023 was $42 million and $126 million, and for the third quarter and the first nine months of 2022 was $42 million and $104 million, respectively. The estimated amortization expense for the next five years is as follows in millions of dollars: remainder of 2023 – $57, 2024 – $179, 2025 – $147, 2026 – $122, 2027 – $120, and 2028 – $88.
(12) Short-Term Borrowings
Short-term borrowings were as follows in millions of dollars:
Commercial paper
9,003
4,703
6,035
Notes payable to banks
352
427
Finance lease obligations due within one year
Long-term borrowings due within one year
7,765
7,466
7,693
(13) Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses were as follows in millions of dollars:
Accounts payable:
Trade payables
3,308
3,894
3,577
Payables to unconsolidated affiliates
Dividends payable
343
347
Operating lease liabilities
308
251
Deposits withheld from dealers and merchants
158
163
Accrued expenses:
Dealer sales discounts
902
1,044
586
Product warranties
1,619
1,427
1,398
Employee benefits
1,808
1,528
1,280
Accrued taxes
1,595
1,255
1,171
Unearned operating lease revenue
428
399
Unearned revenue (contractual liability)
754
557
Extended warranty premium
999
866
Accrued interest
260
Derivative liabilities
948
1,231
667
1,569
1,300
1,325
Total accounts payable and accrued expenses
Amounts are presented net of eliminations, which primarily consist of dealer sales incentives with a right of set-off against trade receivables of $2,240 million at July 30, 2023, $1,280 million at October 30, 2022, and $1,370 million at July 31, 2022. Other eliminations were made for accrued taxes and other accrued expenses.
(14) Long-Term Borrowings
Long-term borrowings were as follows in millions of dollars:
Underwritten term debt
U.S. dollar notes and debentures:
2.75% notes due 2025
700
6.55% debentures due 2028
5.375% notes due 2029
500
3.10% notes due 2030
8.10% debentures due 2030
250
7.125% notes due 2031
3.90% notes due 2042
1,250
2.875% notes due 2049
3.75% notes due 2050
850
Euro notes:
.5% notes due 2023 (€500 principal)
1.375% notes due 2024 (€800 principal)
797
816
1.85% notes due 2028 (€600 principal)
659
598
2.20% notes due 2032 (€600 principal)
1.65% notes due 2039 (€650 principal)
648
663
Serial issuances
Medium-term notes: (principal as of: July 30, 2023 - $30,348, October 30, 2022 - $25,629, July 31, 2022 - $22,983)
29,355
24,604
22,593
Other notes and finance lease obligations
1,605
1,223
1,191
Less debt issuance costs and debt discounts
(129)
(122)
(115)
Medium-term notes serially due through 2032 are primarily offered by prospectus and issued at fixed and variable rates. These notes are presented in the table above with fair value adjustments related to interest rate swaps. All outstanding notes and debentures are senior unsecured borrowings and rank equally with each other.
(15) Leases - Lessor
The Company leases equipment manufactured or sold by the Company and a limited amount of non-John Deere equipment to retail customers through sales-type, direct financing, and operating leases. Sales-type and direct financing leases are reported in Financing receivables – net on the consolidated balance sheets, while operating leases are reported in Equipment on operating leases – net.
Lease revenues earned by the Company were as follows in millions of dollars:
Sales-type and direct finance lease revenues
120
Operating lease revenues
332
326
974
991
Variable lease revenues
Total lease revenues
373
1,105
1,124
(16) Commitments and Contingencies
The Company determines its total warranty liability by applying historical claims rate experience to the estimated amount of equipment that has been sold and is still under warranty based on dealer inventories and retail sales. The historical claims rate is determined by a review of five-year claims costs and current quality developments.
The premiums for extended warranties are recognized in other income in the statements of consolidated income in proportion to the costs expected to be incurred over the contract period. The unamortized extended warranty premiums (deferred revenue) included in the following table totaled $999 million and $839 million at July 30, 2023 and July 31, 2022, respectively.
A reconciliation of the changes in the warranty liability and unearned premiums was as follows in millions of dollars:
2,511
2,095
2,293
2,086
Payments
(314)
(240)
(851)
(657)
Amortization of premiums received
(75)
(70)
(221)
(200)
Accruals for warranties
363
358
1,010
762
Premiums received
123
103
338
277
Foreign exchange
(32)
2,618
At July 30, 2023, the Company had $201 million of guarantees issued to banks outside the U.S. and Canada related to third-party receivables for the retail financing of John Deere equipment. The Company may recover a portion of any required payments incurred under these agreements from repossession of the equipment collateralizing the receivables. At July 30, 2023, the accrued losses under these agreements were not material.
At July 30, 2023, the Company had commitments of $649 million for the construction and acquisition of property and equipment. Also, at July 30, 2023, the Company had restricted assets of $270 million, classified as Other assets.
The Company also had other miscellaneous contingent liabilities and guarantees totaling approximately $115 million at July 30, 2023. The accrued liability for these contingencies was not material at July 30, 2023.
The Company is subject to various unresolved legal actions which arise in the normal course of its business, the most prevalent of which relate to product liability (including asbestos-related liability), retail credit, employment, patent, trademark, and antitrust matters. The Company believes the reasonably possible range of losses for these unresolved legal actions would not have a material effect on its consolidated financial statements.
(17) Fair Value Measurements
The fair values of financial instruments that do not approximate the carrying values were as follows in millions of dollars. Long-term borrowings exclude finance lease liabilities.
CarryingValue
FairValue
40,675
35,526
34,158
6,818
5,698
4,990
6,538
5,577
4,862
7,568
7,322
7,608
38,064
37,121
33,566
31,852
32,101
31,741
Fair value measurements above were Level 3 for all financing receivables and Level 2 for all borrowings.
Fair values of the financing receivables that were issued long-term were based on the discounted values of their related cash flows at interest rates currently being offered by the Company for similar financing receivables. The fair values of the remaining financing receivables approximated the carrying amounts.
Fair values of long-term borrowings and short-term securitization borrowings were based on current market quotes for identical or similar borrowings and credit risk, or on the discounted values of their related cash flows at current market interest rates. Certain long-term borrowings have been swapped to current variable interest rates. The carrying values of these long-term borrowings included adjustments related to fair value hedges.
Assets and liabilities measured at fair value on a recurring basis in millions of dollars follow. The Company’s cash equivalents, which consisted of money market funds and time deposits, are excluded as these assets were carried at cost that approximates fair value.
Level 1:
International equity securities
U.S. equity fund
U.S. fixed income fund
U.S. government debt securities
Total Level 1 marketable securities
252
135
140
Level 2:
134
Municipal debt securities
Corporate debt securities
213
International debt securities
Mortgage-backed securities
161
Total Level 2 marketable securities
589
599
579
Other assets - Derivatives
324
280
Accounts payable and accrued expenses - Derivatives
Level 3:
Accounts payable and accrued expenses - Deferred consideration
236
The contractual maturities of debt securities at July 30, 2023 in millions of dollars are shown below. Actual maturities may differ from contractual maturities because some securities may be called or prepaid. Unrealized losses were not recognized in income due to the ability and intent to hold to maturity. Because of the potential for prepayment on mortgage-backed securities, they are not categorized by contractual maturity.
Amortized
Fair
Cost
Value
Due in one year or less
Due after one through five years
130
Due after five through 10 years
193
170
Due after 10 years
211
174
194
Debt securities
753
652
Fair value, nonrecurring Level 3 measurements from impairments, excluding financing receivables with specific allowances which were not significant, were as follows in millions of dollars. Inventories and property and equipment – net fair values for October 30, 2022 represent the fair value assessment at July 31, 2022.
Fair Value
Losses
The following is a description of the valuation methodologies the Company uses to measure certain financial instruments on the balance sheet at fair value:
Marketable securities – The portfolio of investments is valued on a market approach (matrix pricing model) in which all significant inputs are observable or can be derived from or corroborated by observable market data such as interest rates, yield curves, volatilities, credit risk, and prepayment speeds. Funds are valued using closing prices in the active market in which the investment trades.
Derivatives – The Company’s derivative financial instruments consist of interest rate contracts (swaps), foreign currency exchange contracts (futures, forwards, and swaps), and cross-currency interest rate contracts (swaps). The portfolio is valued based on an income approach (discounted cash flow) using market observable inputs, including swap curves and both forward and spot exchange rates for currencies.
Financing receivables – Specific reserve impairments are based on the fair value of the collateral, which is measured using a market approach (appraisal values or realizable values).
Inventories – The impairment was based on net realizable value.
Property and equipment - net – The valuations were based on cost and market approaches. The inputs include replacement cost estimates adjusted for physical deterioration and economic obsolescence.
Other intangible assets - net – The Company considered external valuations based on the Company’s probability weighted cash flow analysis.
(18) Derivative Instruments
The fair value of the Company’s derivative instruments and the associated notional amounts were as follows in millions of dollars. Assets are recorded in “Other assets” on the consolidated balance sheets, while liabilities are recorded in “Accounts payable and accrued expenses.”
Notional
Cash flow hedges:
Interest rate contracts
1,500
1,950
87
2,350
Fair value hedges:
12,160
729
10,112
8,303
433
Not designated as hedging instruments:
13,233
10,568
212
9,880
Foreign exchange contracts
8,630
8,185
118
7,457
Cross-currency interest rate contracts
276
The amounts recorded in the consolidated balance sheet related to borrowings designated in fair value hedging relationships were as follows in millions of dollars. Fair value hedging adjustments are included in the carrying amount of the hedged item.
Active Hedging Relationships
Discontinued Hedging Relationships
Carrying Amount
Cumulative Fair Value
Carrying Amount of
of Hedged Item
Hedging Amount
Formerly Hedged Item
2,324
11,379
(728)
6,319
(265)
2,515
9,060
(1,006)
5,520
2,605
(430)
5,728
The classification and gains (losses) including accrued interest expense related to derivative instruments on the statements of consolidated income consisted of the following in millions of dollars:
Fair Value Hedges:
Interest rate contracts - Interest expense
(375)
(146)
(507)
Cash Flow Hedges:
Recognized in OCI
Interest rate contracts - OCI (pretax)
Reclassified from OCI
Not Designated as Hedges:
Interest rate contracts - Net sales
Interest rate contracts - Interest expense *
Foreign exchange contracts - Net sales
Foreign exchange contracts - Cost of sales
(78)
(109)
Foreign exchange contracts - Other operating expenses *
Total not designated
(163)
(68)
(124)
* Includes interest and foreign exchange gains (losses) from cross-currency interest rate contracts.
Certain of the Company’s derivative agreements contain credit support provisions that may require the Company to post collateral based on the size of the net liability positions and credit ratings. The aggregate fair value of all derivatives with credit-risk-related contingent features that were in a net liability position at July 30, 2023, October 30, 2022, and July 31, 2022, was $865 million, $1,113 million, and $518 million, respectively. In accordance with the limits established in these agreements, the Company posted $435 million, $701 million, and $238 million of cash collateral at July 30, 2023, October 30, 2022, and July 31, 2022, respectively.
Derivatives are recorded without offsetting for netting arrangements or collateral. The impact on the derivative assets and liabilities related to netting arrangements and any collateral received or paid in millions of dollars follows:
Gross Amounts
Netting
Recognized
Arrangements
Collateral
Net Amount
(160)
(435)
353
(179)
(54)
(701)
351
(125)
(40)
(238)
304
(19) Stock Option and Restricted Stock Unit Awards
In December 2022, the Company granted stock options to employees for the purchase of 161 thousand shares of common stock at an exercise price of $438.44 per share and a binomial lattice model fair value of $136.46 per share at the grant date. At July 30, 2023, options for 1.8 million shares were outstanding with a weighted-average exercise price of $187.53 per share. The Company also granted 125 thousand of service-based restricted stock units and 41 thousand of performance/service-based restricted stock units to employees in the first nine months of 2023. The weighted-average fair value of the service-based restricted stock units at the grant date was $428.49 per unit based on the market price of a share of underlying common stock. The fair value of the performance/service-based restricted stock units at the grant date was $424.93 per unit based on the market price of a share of underlying common stock excluding dividends. At July 30, 2023, the Company was authorized to grant awards for an additional 16.6 million shares under the equity incentive plans.
(20) Disposition
On March 7, 2023, the Company sold its financial services business in Russia (registered in Russia as a leasing company) to Insight Investment Group. The total proceeds, net of restricted cash sold, were $36 million. The operations were included in the Company’s financial services operating segment through the date of sale. At the disposal date, the total assets were $31 million, consisting primarily of financing receivables, the total liabilities were $5 million, and the cumulative translation loss was $10 million. The Company did not incur additional gains or losses upon disposition. At January 29, 2023, the assets and liabilities were classified as “Other assets” and “Accounts payable and accrued expenses”, respectively, which included $100 million of restricted cash. In the first quarter of 2023, the Company reversed the allowance for credit losses and recorded a valuation allowance on the assets held for sale in “Selling, administrative and general expenses.”
(21) Special Items
Brazil Tax Ruling
In the third quarter of 2023, the Brazil Superior Court of Justice published a favorable tax ruling regarding taxability of local incentives, which allowed the Company to record a $243 million reduction in the provision for income taxes and $47 million of interest income.
Financial Services Financing Incentives Correction
In the second quarter of 2023, the Company corrected the accounting treatment for financing incentives offered to John Deere dealers, which impacted the timing of expense recognition and the presentation of incentive costs in the consolidated financial statements. The cumulative effect of this correction, $173 million pretax ($135 million after-tax), was recorded in the second quarter of 2023. Prior period results for Deere & Company were not restated, as the adjustment is considered immaterial to the Company’s financial statements.
Impact of Events in Russia / Ukraine
In the second quarter of 2022, the Company suspended shipments of machines and service parts to Russia. The suspension of shipments to Russia reduced actual and forecasted revenue for the region, which made it probable future cash flows will not cover the carrying value of certain assets. The accounting consequences in 2022 were impairments of most long-lived assets, an increase in reserves of certain financial assets, and an accrual for various contractual uncertainties. In addition, the Company initiated a voluntary separation program for employees in Russia in the third quarter of 2022.
Gain on Previously Held Equity Investment
In the second quarter of 2022, the Company acquired full ownership of three former Deere-Hitachi joint venture factories and began new license and supply agreements with Hitachi Construction Machinery Co., Ltd. The fair value of the previous equity investment resulted in a non-cash gain of $326 million (pretax and after-tax).
UAW Collective Bargaining Agreement
In the first quarter of 2022, employees represented by the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America (UAW) approved a new collective bargaining agreement. The labor agreement included a lump sum ratification bonus payment of $8,500 per eligible employee, totaling $90 million, and an immediate wage increase of 10 percent plus further wage increases over the term of the contract. The lump sum payment was expensed in the first quarter of 2022.
The following table summarizes the operating profit impact, in millions of dollars, of the special items recorded for the three months and nine months ended July 30, 2023 and July 31, 2022:
Three Months
Nine Months
PPA
SAT
CF
FS
2023 Expense:
Financing incentive – SA&G expense
2022 Expense (benefit):
Gain on remeasurement of equity investment – Other income
Total Russia/Ukraine events expense (benefit)
33
UAW ratification bonus – Cost of sales
90
Total 2022 expense (benefit)
(250)
Period over period change
(98)
282
(22) Subsequent Event
On August 30, 2023, the Company’s Board of Directors declared a quarterly dividend of $1.35 per share payable on November 8, 2023, to stockholders of record on September 29, 2023.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview
Organization
The Company generates net sales from the sale of equipment to John Deere dealers and distributors. The Company manufactures and distributes a full line of agricultural equipment; a variety of commercial and consumer equipment; and a broad range of equipment for construction, roadbuilding, and forestry. These operations (collectively known as the “equipment operations”) are managed through the production and precision agriculture, small agriculture and turf, and construction and forestry operating segments. The Company’s financial services segment provides credit services, which finance sales and leases of equipment by John Deere dealers. In addition, the financial services segment provides wholesale financing to dealers of the foregoing equipment, finances retail revolving charge accounts, and offers extended equipment warranties.
Smart Industrial Operating Model and Leap Ambitions
The Company’s Smart Industrial operating model is focused on making significant investments, strengthening the Company’s capabilities in digitalization, automation, autonomy, and alternative propulsion technologies. These technologies are intended to increase worksite efficiency, improve yields, lower input costs, and ease labor constraints. The Company’s Leap Ambitions are goals designed to boost economic value and sustainability for the Company’s customers. The Company anticipates opportunities in this area, as the Company and its customers have a vested interest in sustainable practices.
Trends and Economic Conditions
Industry Trends for Fiscal Year 2023 – Industry sales of large agricultural machinery in the U.S. and Canada for 2023 are forecasted to increase approximately 10 percent compared to 2022. Industry sales of small agricultural and turf equipment in the U.S. and Canada are expected to be down 5 to 10 percent in 2023. Industry sales of agricultural machinery in Europe are forecasted to be flat to up 5 percent, while South American industry sales of tractors and combines are expected to be flat to down 5 percent in 2023. Asia industry sales of agricultural machinery are forecasted to be down moderately in 2023 as volumes in India remain subdued. On an industry basis, U.S. and Canada construction, U.S. and Canada compact construction, and global roadbuilding equipment sales are expected to be flat to up 5 percent in 2023. Global forestry industry sales are expected to be flat to down 5 percent.
Company Trends – Customers’ demand for integration of technology into equipment is a market trend underlying the Company’s Smart Industrial operating model and Leap Ambitions. Customers have sought to improve profitability, productivity, and sustainability through technology. The Company’s approach to technology involves hardware and software; guidance, connectivity and digital solutions; automation and machine intelligence; machine autonomy; and alternative propulsion technologies. This technology is incorporated into products within each of the Company’s operating segments.
Customers continue to adopt technology integrated in the John Deere portfolio of “smart” machines, systems, and solutions. The Company expects this trend to persist for the foreseeable future.
Demand for the Company’s equipment remains strong, as order books are full throughout 2023. Agricultural fundamentals are expected to remain solid through 2023 with farm net income in the U.S. and Canada expected to be near historical highs. Crop prices remain favorable to our customers in part due to weather conditions putting downward pressure on yields. The Company expects sales volume of large agricultural equipment to be greater in 2023 than 2022 in North America. Sales volume for small agriculture and turf equipment is expected to be lower compared to 2022 due to less demand for consumer-oriented products, partially offset by stronger demand for mid-sized equipment. Construction equipment markets are forecasted to be steady. Strong U.S. infrastructure spending, industrial construction, rental inventory restocking, and housing stabilization are expected to more than offset moderation in office and commercial real estate construction. Roadbuilding demand remains strongest in the U.S. and emerging markets in South America and India, largely offsetting flat fundamentals in Europe. Net income for the Company’s financial services operations is expected to be lower than fiscal year 2022 due to less-favorable financing spreads, a correction of the accounting treatment for financing incentives offered to John Deere dealers recorded in the second quarter of 2023, a higher provision for credit losses, higher selling, administrative and
general expenses, and lower gains on operating lease dispositions. These factors are expected to be partially offset by income earned on a higher average portfolio.
Additional Trends – The Company has experienced supply chain improvements over 2022 beginning in the second quarter of 2023. The reduction in supply chain disruptions contributed to higher levels of production compared to 2022. As a result, the production schedules in 2023 are more aligned with the customers’ seasonal use of the Company’s products, marking a return to historical seasonal production patterns. Additionally, supply chain improvements have contributed to meaningful reductions in production costs including premium freight and material costs. Supply chain disruptions impacted many aspects of the business in 2022, including receiving past due deliveries from suppliers, parts availability, increased production costs, and higher inventory levels.
Central bank policy interest rates increased in the first nine months of 2023. Most retail receivables are fixed rate, while wholesale financing receivables are variable rate. The Company has both fixed and variable rate borrowings. The Company manages the risk of interest rate fluctuations by balancing the types and amounts of its funding sources to its financing receivable and equipment on operating lease portfolios. Accordingly, the Company enters into interest rate swap agreements to manage its interest rate exposure. Historically, rising interest rates impact the Company’s borrowings sooner than the benefit is realized from the financing receivable and equipment on operating lease portfolios. As a result, the Company’s financial services operations experienced $133 million (after-tax) of less favorable financing spreads in the first nine months of 2023 compared to 2022. The Company expects spread compression to persist for the remainder of 2023.
Remaining supply chain disruptions and rising interest rates are driven by factors outside of the Company’s control, and as a result, the Company cannot reasonably foresee when these conditions will subside.
Other Items of Concern and Uncertainties – Other items of concern include global and regional political conditions, economic and trade policies, imposition of new or retaliatory tariffs against certain countries or covering certain products, capital market disruptions, changes in demand and pricing for new and used equipment, significant fluctuations in foreign currency exchange rates, and volatility in the prices of many commodities. These items could impact the Company’s results. The Company is making investments in technology and in strengthening its capabilities in digitalization, automation, autonomy, and alternative propulsion technologies. As with most technology investments, marketplace adoption, monetization, and regulation of these features holds an elevated level of uncertainty.
2023 Compared with 2022
Deere & Company
(In millions of dollars, except per share amounts)
Net sales and revenues
Diluted earnings per share
Net sales and revenues increased for both the quarter and year-to-date periods primarily due to price realization. See the Business Segment Results for additional details. Net income in each of the periods presented were impacted by special items. See Note 21 for additional details on special items.
An explanation of the cost of sales to net sales ratio and other significant statement of consolidated income changes follows:
(In millions of dollars)
Cost of sales to net sales
67.4%
73.2%
67.7%
74.9%
-28
+10
+18
+16
+27
-2
+2
The cost of sales ratio improved in the third quarter and the first nine months of fiscal 2023 due to price realization, partially offset by higher production costs. Other income decreased year-to-date due to a non-cash gain on the remeasurement of the previously held equity investment in the Deere-Hitachi joint venture recorded in 2022. Research and development expenses were higher due to continued focus on developing and incorporating technology solutions. Selling, administrative and general expenses increased mostly due to higher employee pay driven by inflationary conditions and profit-sharing incentives. Additionally, the nine-month period was impacted by a cumulative correction of the accounting treatment for financing incentives offered to John Deere dealers and higher commissions paid to dealers. The provision for income taxes was lower in the third quarter of 2023 due to a favorable income tax ruling in Brazil, partially offset by the effect of higher pretax income. The provision for income taxes was higher in the first nine months as a result of higher pretax income and the prior period’s exclusion of the Deere-Hitachi joint-venture remeasurement gain from tax-effected income, which were partially offset by the favorable income tax ruling in Brazil.
Business Segment Results
For the equipment operations, higher production costs were mostly due to elevated cost of purchased components, energy, salaries, and wages.
Production and Precision Agriculture
Operating profit
Operating margin
26.2%
21.2%
26.0%
18.2%
Price realization
+17
Currency translation impact on Net sales
+1
-1
Production and precision agriculture sales increased for the quarter as a result of price realization in most end markets. Operating profit rose due to price realization and improved shipment volumes / sales mix. These items were partially offset by higher production costs, increased selling, administrative and general expenses and research and development expenses, and the unfavorable effects of foreign currency exchange.
Sales for the first nine months increased as a result of higher shipment volumes (primarily in the U.S., Canada, Europe, and Brazil) and price realization. Operating profit for the first nine months increased primarily from price realization and higher sales volume. Partially offsetting these factors were higher production costs, higher selling, administrative, and general expenses and research and development expenses, and the unfavorable effects of foreign currency exchange mostly due to a stronger U.S. dollar.
Small Agriculture and Turf
19.6%
15.2%
18.6%
14.7%
+9
Small agriculture and turf sales increased for the quarter due to price realization in most end markets, partially offset by lower shipment volumes (primarily in the U.S.). Operating profit improved due to price realization, partially offset by higher production costs, lower shipment volumes, and increased selling, administrative and general expenses and research and development expenses.
Sales for the first nine months increased mainly as a result of price realization and higher shipment volumes (primarily in Europe and Mexico), partially offset by the unfavorable impact of currency translation. Operating profit for the first nine months improved primarily as a result of price realization and improved sales volumes / mix. These items were partially offset by higher production costs, higher selling, administrative, and general expenses and research and development expenses, and the unfavorable effects of foreign currency exchange mostly due to a stronger U.S. dollar.
Construction and Forestry
19.1%
15.7%
19.7%
17.5%
Construction and forestry sales moved higher for the quarter primarily due to price realization and higher shipment volumes (primarily in the U.S.). Operating profit rose primarily due to price realization and improved sales volumes. These items were partially offset by increased selling, administrative, and general expenses and research and development expenses, higher production costs, and the unfavorable impact of foreign currency exchange.
The segment’s nine-month sales increased due to price realization and higher shipment volumes (primarily in the U.S.) partially offset by the unfavorable impact of currency translation. The first nine-month’s operating profit moved higher due to price realization and higher sales volumes, partially offset by higher production costs. Prior period results benefitted from the non-cash gain on the remeasurement of the previously held equity investment in the Deere-Hitachi joint venture.
Revenue (including intercompany)
984
+47
3,987
2,851
622
223
+179
1,604
+225
216
209
429
649
-34
The average balance of receivables and leases financed was 22 percent higher in the third quarter of 2023, and 18 percent higher in the first nine months of 2023 compared with the same periods last year. Revenue also increased due to higher average financing rates in both periods. Interest expense increased compared to both prior periods as a result of higher average borrowing rates and higher average borrowings. Financial services net income in the third quarter of 2023 increased as a result of income earned on a higher average portfolio, partially offset by less-favorable financing spreads. Net income for the first nine months of 2023 decreased primarily due to a cumulative correction of the accounting treatment for financing incentives offered to John Deere dealers recorded in the second quarter, less-favorable financing spreads, and a higher provision for credit losses. These items were partially offset by income earned on a higher average portfolio. The accounting correction is unrelated to current market conditions or the credit quality of the financial services portfolio, which remains strong. The allowance for credit losses, excluding the portfolio in Russia, was .36 percent of financing receivables as of July 30, 2023, compared with .40 percent as of July 31, 2022.
Critical Accounting Estimates
See the Company’s critical accounting estimates discussed in the Management’s Discussion and Analysis of the most recently filed Annual Report on Form 10-K. There have been no material changes to these policies.
CAPITAL RESOURCES AND LIQUIDITY
Sources of Liquidity, Key Metrics and Balance Sheet Data
The Company has access to most global capital markets at a reasonable cost. Sources of liquidity for the Company include cash and cash equivalents, marketable securities, funds from operations, the issuance of commercial paper and term debt, the securitization of retail notes (both public and private markets), and bank lines of credit. The Company closely monitors its liquidity sources against the cash requirements and expects to have sufficient sources of global funding and liquidity to meet its funding needs in the short term (next 12 months) and long term (beyond 12 months). The Company operates in multiple industries, which have different funding requirements. The production and precision agriculture, small agriculture and turf, and construction and forestry segments are capital intensive and are typically subject to seasonal variations in financing requirements for inventories and certain receivables from dealers. The financial services operations rely on their ability to raise substantial amounts of funds to finance their receivable and lease portfolios.
Key metrics are provided in the following table, in millions of dollars:
Cash, cash equivalents, and marketable securities
7,417
5,508
5,078
Ratio to prior 12 month’s net sales
17%
13%
15%
Ratio to prior 12 month’s cost of sales
24%
28%
Unused credit lines
950
3,284
1,957
Financial Services:
Ratio of interest-bearing debt to stockholder’s equity
8.1 to 1
8.5 to 1
8.2 to 1
The reduction in unused credit lines in 2023 compared to both prior periods relates to an increase in commercial paper outstanding due to growth in financing receivables and funding mix. The Company forecasts higher operating cash flows in 2023 driven by an increase in net income adjusted for non-cash provisions and a favorable change in working capital.
There have been no material changes to the contractual and other cash requirements identified in the Company’s most recently issued Annual Report on Form 10-K.
Cash Flows (in millions of dollars)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
Net increase (decrease) in cash, cash equivalents, and restricted cash
Cash inflows from operating activities in the first nine months of 2023 were $2,896 million. This resulted mainly from net income adjusted for non-cash provisions, partially offset by a working capital change and change in accrued income taxes payable. Cash outflows from investing activities were $4,563 million in the first nine months of 2023. The primary drivers were growth in the retail customer receivable portfolio and purchases of property and equipment. Cash inflows from financing activities were $3,379 million in the first nine months of 2023, as higher external borrowings to support working capital requirements and financing receivable growth were offset by repurchases of common stock and dividends paid. Cash, cash equivalents, and restricted cash increased $1,837 million during the first nine months of 2023.
Trade Accounts and Notes Receivable. Trade accounts and notes receivable arise from sales of goods to customers. Trade receivables increased $2,887 million during the first nine months of 2023, primarily due to a seasonal increase and higher sales volumes, as well as the effect of foreign currency translation. These receivables increased $2,601 million, compared to a year ago, primarily due to higher sales volumes. The percentage of total worldwide trade receivables outstanding for periods exceeding 12 months was 1 percent at each of July 30, 2023, October 30, 2022, and July 31, 2022.
Financing Receivables and Equipment on Operating Leases. Financing receivables and equipment on operating leases consist of retail notes originated in connection with financing of new and used equipment, operating leases, revolving charge accounts, sales-type and direct financing leases, and wholesale notes. Financing receivables and equipment on operating leases increased $5,819 million during the first nine months of 2023 and increased $8,261 million in the past 12 months due to strong retail sales. Total acquisition volumes of financing receivables and equipment on operating leases were 32 percent higher in the first nine months of 2023, compared with the same period last year, as volumes of wholesale notes, retail notes, revolving charge accounts, operating leases, and finance leases were higher compared to July 31, 2022.
Inventories. Inventories increased by $855 million during the first nine months of 2023 and increased by $229 million compared to a year ago. The increases were due to higher forecasted sales volumes. The effect of foreign currency translation also increased inventories during the first nine months of 2023. A majority of these inventories are valued on the last-in, first out (LIFO) method.
Property and Equipment. Property and equipment cash expenditures in the first nine months of 2023 were $887 million, compared with $596 million in the same period last year. Capital expenditures in 2023 are estimated to be approximately $1,650 million.
Accounts Payable and Accrued Expenses. Accounts payable and accrued expenses increased by $518 million in the first nine months of 2023. Accounts payable and accrued expenses increased $2,354 million compared to a year ago due to an increase in accrued expenses associated with employee benefits, accrued taxes, dealer sales discounts, and derivative liabilities.
Borrowings. Total external borrowings have changed generally corresponding with the level of the receivable and the lease portfolio, as well as other working capital requirements.
John Deere Capital Corporation (Capital Corporation), a U.S. financial services subsidiary, has a revolving warehouse facility to utilize bank conduit facilities to securitize retail notes (see Note 9). The facility was renewed in November 2022 with an expiration in November 2023 and increased the total capacity or “financing limit” from $1,000 million to $1,500 million. At July 30, 2023, $1,415 million of securitization borrowings were outstanding under the facility. At the end of the contractual revolving period, unless the banks and Capital Corporation agree to renew, Capital Corporation would liquidate the secured borrowings over time as payments on the retail notes are collected.
In the first nine months of 2023, the financial services operations issued $3,207 million and retired $2,309 million of retail note securitization borrowings, which are presented in “Increase (decrease) in total short-term borrowings.”
Lines of Credit. The Company also has access to bank lines of credit with various banks throughout the world. Worldwide lines of credit totaled $10,352 million at July 30, 2023, $950 million of which were unused. For the purpose of computing unused credit lines, commercial paper, and short-term bank borrowings, excluding secured borrowings and the current portion of long-term borrowings, were considered to constitute utilization. Included in the total credit lines at July 30, 2023 was a 364-day credit facility agreement of $5,000 million expiring in the second quarter of 2024. In addition, total credit lines included long-term credit facility agreements of $2,500 million expiring in the second quarter of 2027 and $2,500 million expiring in the second quarter of 2028. These credit agreements require Capital Corporation and other parts of the Company to maintain certain performance metrics and liquidity targets. All requirements in the credit agreements have been met during the periods included in the financial statements.
Debt Ratings. To access public debt capital markets, the Company relies on credit rating agencies to assign short-term and long-term credit ratings to the Company’s debt securities as an indicator of credit quality for fixed income investors. A security rating is not a recommendation by the rating agency to buy, sell, or hold Company securities. A credit rating agency may change or withdraw ratings based on its assessment of the Company’s current and future ability to meet interest and principal repayment obligations. Each agency’s rating should be evaluated independently of any other rating. Lower credit ratings generally result in higher borrowing costs, including costs of derivative transactions, reduced access to debt capital markets, and may adversely impact the Company’s liquidity. The senior long-term and short-term debt ratings and outlook currently assigned to unsecured Company securities by the rating agencies engaged by the Company are as follows:
Senior
Long-Term
Short-Term
Outlook
Fitch Ratings
A+
F1
Stable
Moody’s Investors Service, Inc.
A2
Prime-1
Positive
Standard & Poor’s
A
A-1
Forward-Looking Statements
Certain statements contained herein, including in the section entitled “Overview,” relating to future events, expectations, and trends constitute “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Some of these risks and uncertainties could affect all lines of the Company’s operations generally while others could more heavily affect a particular line of business.
Forward-looking statements are based on currently available information and current assumptions, expectations, and projections about future events and should not be relied upon. Except as required by law, the Company expressly disclaims any obligation to update or revise its forward-looking statements. Many factors, risks, and uncertainties could cause actual results to differ materially from these forward-looking statements. Among these factors are risks related to:
Further information concerning the Company and its businesses, including factors that could materially affect the Company’s financial results, is included in the Company’s other filings with the SEC (including, but not limited to, the factors discussed in Item 1A. “Risk Factors” of our Annual Report on Form 10-K and this Quarterly Report on Form 10-Q). There also may be other factors that we cannot anticipate or that are not described herein because we do not currently perceive them to be material.
Supplemental Consolidating Information
The supplemental consolidating data presented on the subsequent pages is presented for informational purposes. The equipment operations represents the enterprise without financial services. The equipment operations includes the Company’s production and precision agriculture operations, small agriculture and turf operations, construction and forestry operations, and other corporate assets, liabilities, revenues, and expenses not reflected within financial services. Transactions between the equipment operations and financial services have been eliminated to arrive at the consolidated financial statements.
The equipment operations and financial services participate in different industries. The equipment operations primarily generate earnings and cash flows by manufacturing and selling equipment, service parts, and technology solutions to dealers and retail customers. Financial services finances sales and leases by dealers of new and used equipment that is largely manufactured by the Company. Those earnings and cash flows generally are the difference between the finance income received from customer payments less interest expense, and depreciation on equipment subject to an operating lease. The two businesses are capitalized differently and have separate performance metrics. The supplemental consolidating data is also used by management due to these differences.
SUPPLEMENTAL CONSOLIDATING DATA
STATEMENTS OF INCOME
For the Three Months Ended July 30, 2023 and July 31, 2022
EQUIPMENT
FINANCIAL
OPERATIONS
SERVICES
ELIMINATIONS
CONSOLIDATED
210
1,335
905
(292)
(119)
1
222
228
110
(51)
2, 3
14,716
13,288
(360)
(170)
9,630
9,512
4
913
805
156
(93)
5
Interest compensation to Financial Services
(199)
336
317
(48)
6, 7
11,398
11,037
1,157
696
Income before Income Taxes
3,318
2,251
564
574
72
Income after Income Taxes
2,754
1,677
208
Equity in income (loss) of unconsolidated affiliates
2,756
1,676
2,762
1,675
1 Elimination of financial services’ interest income earned from equipment operations.
2 Elimination of equipment operations’ margin from inventory transferred to equipment on operating leases.
3 Elimination of financial services’ income related to intercompany guarantees of investments in certain international markets and intercompany service revenue.
4 Elimination of intercompany service fees.
5 Elimination of equipment operations’ interest expense to financial services.
6 Elimination of financial services’ lease depreciation expense related to inventory transferred to equipment on operating leases.
7 Elimination of equipment operations’ expense related to intercompany guarantees of investments in certain international markets and intercompany service expenses.
SUPPLEMENTAL CONSOLIDATING DATA (Continued)
444
3,609
2,580
(727)
(270)
639
1,028
(264)
42,848
34,724
(996)
(534)
28,306
25,126
2,630
2,215
769
463
298
297
(231)
(77)
496
189
(496)
172
1,043
(244)
(260)
33,473
29,349
3,416
1,984
9,375
5,375
571
867
2,020
1,142
7,355
4,233
7,358
4,237
7,368
4,236
CONDENSED BALANCE SHEETS
Jul 30
Oct 30
Jul 31
4,858
3,540
1,718
1,007
819
838
673
717
Receivables from Financial Services
5,312
6,569
5,055
(5,312)
(6,569)
(5,055)
8
1,589
1,273
1,342
9,991
6,434
6,738
(2,283)
(1,297)
(1,384)
9
41,242
36,587
35,011
2,599
1,670
832
(80)
6,385
6,021
5,630
3,503
3,666
3,062
10
1,393
940
1,248
(161)
(186)
11
2,083
1,727
583
626
42,328
39,208
37,485
(7,781)
(8,042)
(6,676)
1,773
1,040
471
15,370
11,552
13,705
4,918
Payables to Equipment Operations
14,403
12,962
11,925
3,307
3,170
2,494
(2,370)
(1,310)
(1,433)
436
184
311
7,299
7,917
8,481
30,813
25,679
23,651
2,423
2,351
2,799
26,318
24,650
24,114
61,708
53,065
50,248
7,142
5,799
5,760
(7,142)
(5,799)
(5,760)
12
Financial Services’ equity
Adjusted total stockholders’ equity
15,909
14,466
13,276
8 Elimination of receivables / payables between equipment operations and financial services.
9 Primarily reclassification of sales incentive accruals on receivables sold to financial services.
10 Reclassification of net pension assets / liabilities.
11 Reclassification of deferred tax assets / liabilities in the same taxing jurisdictions.
12 Elimination of financial services’ equity.
STATEMENTS OF CASH FLOWS
872
806
757
790
(102)
(153)
13
14
Distributed earnings of Financial Services
368
(31)
(368)
15
Provision (credit) for deferred income taxes
(322)
(107)
(50)
(293)
(215)
(4,766)
(2,142)
16, 18, 19
(2,415)
(111)
17
730
303
(986)
(542)
18
(619)
(1,020)
247
(56)
13, 14, 17
2,206
1,496
(5,958)
(3,203)
18,440
16,927
(848)
(1,153)
16
(21,043)
(19,069)
(885)
(2,143)
(1,868)
175
151
Increase in investment in Financial Services
(811)
811
20
Increase in trade and wholesale receivables
(6,270)
(3,318)
6,270
Collateral on derivatives – net
(198)
(79)
19
(1,857)
(1,165)
(9,444)
(6,100)
2,835
Increase (decrease) in total short-term borrowings
(152)
58
5,192
4,209
Change in intercompany receivables/payables
1,476
(1,476)
137
9,912
6,144
(1,372)
(5,746)
(5,206)
Capital investment from Equipment Operations
Net cash provided by (used for) financing activities
(4,456)
(4,539)
8,615
4,686
(780)
(148)
1,153
(3,646)
684
3,781
7,200
1,160
4,934
3,554
1,844
931
13 Elimination of depreciation on leases related to inventory transferred to equipment on operating leases.
14 Reclassification of share-based compensation expense.
15 Elimination of dividends from financial services to the equipment operations, which are included in the equipment operations’ operating activities.
16 Primarily reclassification of receivables related to the sale of equipment.
17 Reclassification of direct lease agreements with retail customers.
18 Reclassification of sales incentive accruals on receivables sold to financial services.
19 Elimination and reclassification of the effects of financial services partial financing of the construction and forestry retail locations sales and subsequent collection of those amounts.
20 Elimination of investment from equipment operations to financial services.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See the Company’s most recently filed Annual Report on Form 10-K (Part II, Item 7A). There has been no material change in this information.
Item 4. CONTROLS AND PROCEDURES
The Company’s principal executive officer and its principal financial officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act)) were effective as of July 30, 2023, based on the evaluation of these controls and procedures required by Rule 13a-15(b) or 15d-15(b) of the Exchange Act. During the third quarter of 2023, there were no changes that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 1A. Risk Factors
See the Company’s most recently filed Annual Report on Form 10-K (Part I, Item 1A). There has been no material change in this information. The risks described in the Annual Report on Form 10-K, and the “Forward-Looking Statements” in this report, are not the only risks faced by the Company. Additional risks and uncertainties may also materially affect the Company’s business, financial condition, or operating results. One should not consider the risk factors to be a complete discussion of risks, uncertainties, and assumptions.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The Company’s purchases of its common stock during the third quarter of 2023 were as follows:
Total Number of
Shares Purchased as
Maximum Number of
Part of Publicly
Shares that May Yet Be
Shares
Announced Plans or
Purchased under the
Purchased
Average Price
Programs (1)
Plans or Programs (1)
Period
(thousands)
Per Share
(millions)
May 1 to May 28
1,581
375.70
40.0
May 29 to Jun 25
1,525
385.90
38.6
Jun 26 to Jul 30
2,285
418.54
36.4
5,391
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
42
Item 5. Other Information
Amendment to Bylaws
On August 30, 2023, the Board of Directors of the Company adopted amendments to the Company’s bylaws (as amended, the “Amended Bylaws”), effective as of such date. The amendments set forth in the Amended Bylaws, among other things, (1) revise the procedures and disclosure requirements for the nomination of directors and the submission of proposals for consideration at annual meetings of the stockholders of the Company, including, among other things, adding a requirement that a stockholder seeking to nominate director(s) at an annual meeting deliver to the Company reasonable evidence that it has complied with the requirements of Rule 14a-19 of the Exchange Act within eight business days of the meeting; (2) revise the majority voting provision to clarify when an election of directors will be deemed contested; (3) allow for the establishment of rules, regulations, or procedures of a meeting of the Company’s stockholders by the Board of Directors and/or the presiding person of a meeting and clarify the power of the chair of a stockholder meeting to adjourn any meeting of stockholders; (4) adopt gender-neutral terms when referring to particular positions, offices, or title holders; and (5) make certain administrative, modernizing, clarifying, and conforming changes, including making updates to reflect recent amendments to the General Corporation Law of the State of Delaware.
The foregoing description of the Amended Bylaws is qualified in its entirety by reference to the Bylaws, as amended, a copy of which is filed as Exhibit 3.2 hereto and is incorporated herein by reference.
Amended & Restated Change in Control Severance Program
On August 29, 2023, the Compensation Committee of the Board of Directors (the “Committee”) of the Company adopted amendments to the Company’s Amended and Restated Change in Control Severance Program (the “Program”). The amendments to the Program, among other things, reduced the multiplier applicable to cash severance payments in the event of a change in control and a qualifying termination for the Chief Executive Officer of the Company from 3.0x to 2.99x base salary. The multiplier for the Tier 1 and Tier 2 Participants, as those terms are defined in the Program, were unchanged and remain at 2.0x and 1.5x, respectively. The amendments to the Program result from the Committee’s periodic review of the Company’s executive compensation program, which includes consideration of shareholder feedback.
The foregoing description of the amendments to the Program is qualified in its entirety by reference to the Amended & Restated Change in Control Severance Program, a copy of which is filed as Exhibit 10.1 hereto and is incorporated herein by reference.
Director and Executive Officer Trading Arrangements
On June 2, 2023, Ryan D. Campbell, President, Worldwide Construction & Forestry and Power Systems adopted a trading plan intended to satisfy the affirmative defense of Rule 10b5-1(c). The plan covers the exercise of 6,073 employee stock options and the related sale of such shares. The plan expires on May 31, 2024.
43
Item 6. Exhibits
Certain instruments relating to long-term borrowings constituting less than 10 percent of the registrant’s total assets are not filed as exhibits herewith pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K. The registrant will furnish copies of such instruments to the Commission upon request of the Commission.
3.1
Certificate of Incorporation (Exhibit 3.1 to Form 10-Q of registrant for the quarter ended July 28, 2019, Securities and Exchange Commission File Number 1-4121*)
3.2
Bylaws, as amended August 30, 2023
10.1
Amended & Restated Change in Control Severance Program of Deere & Company, effective August 29, 2023
31.1
Rule 13a-14(a)/15d-14(a) Certification
31.2
Section 1350 Certifications (furnished herewith)
101.INS
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
* Incorporated by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date:
August 31, 2023
By:
/s/ Joshua A. Jepsen
Joshua A. JepsenSenior Vice President and Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)