Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview
Organization
The Company generates net sales primarily 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 are managed through the production and precision agriculture, small agriculture and turf, and construction and forestry operating segments. The Company’s financial services segment primarily provides credit services, which mainly finance sales and leases of equipment by John Deere dealers.
Trends and Economic Conditions for Fiscal Year 2022
Industry sales of large agricultural machinery in the U.S. and Canada are expected to be up about 15 percent. Industry sales of small agriculture and turf equipment in the U.S. and Canada are expected to be flat. Industry sales of agricultural machinery in Europe are forecast to be flat. In South America, industry sales of tractors and combines are projected to be up about 10 to 15 percent. Asia industry sales of agricultural machinery are forecast to be down moderately. Construction equipment industry sales in the U.S. and Canada are expected to increase about 10 percent, while compact construction equipment industry sales in the U.S. and Canada are anticipated to be flat to down 5 percent. Forestry global industry equipment sales are expected to be flat to down 5 percent. Global roadbuilding equipment industry sales are forecasted to be flat to up 5 percent. Net income for the Company’s financial services operations is expected to be slightly lower than fiscal year 2021 due to a higher provision for credit losses, less-favorable financing spreads, and higher selling, administrative, and general expenses. These factors are expected to be partially offset by income earned on a higher average portfolio.
Items of concern include global and regional political conditions, economic and trade policies, inflationary pressures, the ongoing pandemic, capital market disruptions, changes in demand and pricing for new and used equipment, and the other items discussed in the “Forward-Looking Statements” below. Significant fluctuations in foreign currency exchange rates, volatility in the prices of many commodities, and supply chain disruptions could also impact the Company’s results.
The Company’s third quarter results reflect increased factory output and shipments to customers while supply chain pressures endure. Also during the third quarter, the Company experienced higher costs and production inefficiencies from these supply chain pressures. The Company is confident favorable conditions will continue into fiscal year 2023 based on strong underlying fundamentals and customer responses to early-order programs. The Company’s factories and suppliers are also preparing for higher levels of customer demand in 2023. Additionally, the Company believes the smart industrial operating model and recently announced leap ambitions will create value for customers through the Company’s advanced technologies and solutions.
Impact of Events in Russia / Ukraine
The events in Russia / Ukraine have impacted the safety, welfare, and well-being of the Company’s employees in the region. The Company’s top priority is to support and maintain close communication with its affected teams, providing necessary resources when possible. The Company has suspended shipments of machines and service parts to Russia. These events are impacting business continuity, liquidity, and asset values for the Company’s operations in Russia / Ukraine (see Note 20).
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2022 Compared with 2021
Three Months Ended
Nine Months Ended
Deere & Company
July 31
August 1
%
July 31
August 1
%
(In millions of dollars, except per share amounts)
2022
2021
Change
2022
2021
Change
Net sales and revenues
$
14,102
$
11,527
+22
$
37,041
$
32,697
+13
Net income attributable to Deere & Company
1,884
1,667
+13
4,885
4,680
+4
Diluted earnings per share
6.16
5.32
15.88
14.86
Results for the third quarter and year-to-date periods of 2022 and 2021 were impacted by special items. More information on these special items is provided in Note 20. The discussion on Net sales and operating profit is included in the Business Segment Results below.
Three Months Ended
Nine Months Ended
Deere & Company
July 31
August 1
%
July 31
August 1
%
(In millions of dollars)
2022
2021
Change
2022
2021
Change
Cost of sales to net sales
73.2%
72.7%
74.9%
72.3%
Other income
$
256
$
289
-11
$
1,035
$
768
+35
Research and development expenses
481
394
+22
1,336
1,137
+18
Selling, administrative and general expenses
959
841
+14
2,672
2,448
+9
Other operating expenses
316
324
-2
954
1,033
-8
Provision for income taxes
654
491
+33
1,364
1,328
+3
The cost of sales to net sales ratio increased in the third quarter and the first nine months of fiscal 2022 primarily due to higher production costs partially offset by price realization. Other income decreased in the third quarter due to a prior period gain on sale of a closed factory in China. Other income increased in the first nine months due to a non-cash gain on the remeasurement of the previously held equity investment in the Deere-Hitachi joint venture. Research and development expenses were higher for both periods due to continued focus on developing and incorporating technology solutions. Selling, administrative, and general expenses increased in the third quarter and the first nine months primarily due to a higher provision for credit losses, including higher reserves due to the events in Russia / Ukraine, as well as a higher merit pay increase due to inflationary conditions. Other operating expenses decreased in the third quarter and the first nine months primarily due to lower depreciation of equipment on operating leases, while lower retirement benefit costs impacted the first nine months. The provision for income taxes increased in the third quarter due to higher pretax income and unfavorable discrete income-tax adjustments.
32
Business Segment Results
Three Months Ended
Nine Months Ended
Production and Precision Agriculture
July 31
August 1
%
July 31
August 1
%
(In millions of dollars)
2022
2021
Change
2022
2021
Change
Net sales
$
6,096
$
4,250
+43
$
14,568
$
11,848
+23
Operating profit
1,293
906
+43
2,646
2,557
+3
Operating margin
21.2%
21.3%
18.2%
21.6%
Price realization
+15
+12
Currency translation
-4
-2
Production and precision agriculture sales increased for the quarter due to higher shipment volumes and price realization, partially offset by the unfavorable impact of currency translation. Operating profit rose primarily due to price realization and higher shipment volumes / sales mix. These items were partially offset by higher production costs, higher selling, administrative, and general expenses, increased research and development expenses, and the unfavorable effects of foreign currency exchange.
Sales for the first nine months increased mainly as a result of higher shipment volumes and price realization. Operating profit for the first nine months increased primarily resulting from price realization, higher sales volume / mix, and the favorable effects of foreign currency exchange. Partially offsetting these factors were higher production costs, higher research and development and selling, administrative, and general expenses, the UAW contract ratification bonus, and the impact of impairments related to events in Russia / Ukraine. The prior year was also impacted by a favorable indirect tax ruling in Brazil.
33
Three Months Ended
Nine Months Ended
Small Agriculture and Turf
July 31
August 1
%
July 31
August 1
%
(In millions of dollars)
2022
2021
Change
2022
2021
Change
Net sales
$
3,635
$
3,147
+16
$
9,836
$
9,051
+9
Operating profit
552
583
-5
1,443
1,699
-15
Operating margin
15.2%
18.5%
14.7%
18.8%
Price realization
+10
+8
Currency translation
-5
-3
Small agriculture and turf sales for the quarter increased due to higher shipment volumes and price realization partially offset by the unfavorable impact of currency translation. Operating profit decreased primarily due to higher production costs, higher selling, administrative, and general expenses, increased research and development expenses, and the unfavorable effects of foreign currency exchange. These items were partially offset by price realization and higher sales volumes. Results for the prior period included a gain on the sale of a closed factory in China that had produced small agricultural equipment.
Sales for the first nine months increased mainly as a result of price realization and higher shipment volumes, partially offset by the unfavorable impact of currency translation. Operating profit for the first nine months decreased primarily resulting from higher production costs and higher selling, administrative, and general and research and development expenses. Partially offsetting these factors was price realization. Results for the prior period included a gain on the sale of a closed factory in China that had produced small agricultural equipment.
34
Three Months Ended
Nine Months Ended
Construction and Forestry
July 31
August 1
%
July 31
August 1
%
(In millions of dollars)
2022
2021
Change
2022
2021
Change
Net sales
$
3,269
$
3,016
+8
$
9,161
$
8,562
+7
Operating profit
514
463
+11
1,599
1,220
+31
Operating margin
15.7%
15.4%
17.5%
14.2%
Price realization
+10
+9
Currency translation
-4
-3
Construction and forestry sales moved higher for the quarter primarily due to price realization. Operating profit increased due to price realization, partially offset by higher production costs.
The segment’s nine-month sales also increased due to price realization partially offset by the unfavorable impact of currency translation. The first nine-month’s operating profit moved higher mainly due to price realization and a non-cash gain on the remeasurement of the previously held equity investment in the Deere-Hitachi joint venture, partially offset by higher production costs and unfavorable product mix.
35
Three Months Ended
Nine Months Ended
Financial Services
July 31
August 1
%
July 31
August 1
%
(In millions of dollars)
2022
2021
Change
2022
2021
Change
Revenue (including intercompany)
$
984
$
963
+2
$
2,851
$
2,851
Interest expense
223
169
+32
493
539
-9
Net income
209
227
-8
649
654
-1
While the average balance of receivables financed increased 9 percent in the third quarter and 8 percent in the first nine months of 2022 compared with the same periods last year, revenues increased 2 percent in the third quarter and were unchanged in the first nine months. Lower operating lease revenue partially offset the higher average receivable balances in both periods. Interest expense increased in the third quarter due to higher average borrowing rates and higher average borrowings. Interest expense decreased in the first nine months of 2022 primarily as a result of non-designated derivative gains, partially offset by higher average borrowings. Net income decreased for the quarter mainly due to unfavorable discrete income-tax adjustments, a higher provision for credit losses, and lower gains on operating lease residual values. These items were partially offset by income earned on a higher average portfolio. Results for the first nine months decreased slightly due to a higher provision for credit losses, partially offset by income earned on higher average portfolio balances.
Critical Accounting Estimates
See the Company’s critical accounting estimates discussed in Management’s Discussion and Analysis of the most recently filed Annual Report on Form 10-K. There have been no material changes to these estimates.
CAPITAL RESOURCES AND LIQUIDITY
Sources of Liquidity, including Key Metrics and Balance Sheet Data
The Company has access to most global markets at a reasonable cost and expects to have sufficient sources of global funding and liquidity to meet its funding needs in the short term and long term. 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 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 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. The key metrics are provided in the following table, in millions of dollars:
July 31
October 31
August 1
2022
2021
2021
Cash, cash equivalents, and marketable securities
$
5,078
$
8,745
$
8,207
Trade accounts and notes receivable – net
6,696
4,208
5,268
Ratio to prior 12 month’s net sales
15%
11%
14%
Inventories
9,121
6,781
6,410
Ratio to prior 12 month’s cost of sales
28%
23%
23%
Unused credit lines
1,957
5,770
6,131
Financial Services:
Ratio of interest-bearing debt to stockholder’s equity
8.2 to 1
7.8 to 1
7.6 to 1
Due to the uncertainties around the COVID-19 pandemic, the Company temporarily increased its cash, cash equivalents, and marketable securities target beginning in March 2020. The reduction in unused credit lines compared to both prior periods relates to an increase in commercial paper outstanding to fund growth in the receivable portfolio. The Company expects to generate excess operating cash flows in 2022, as evidenced by the common stock dividend increase declared on May 25, 2022, and $2,477 million of share repurchases during the first nine months of 2022. As the underlying fundamentals remain strong in the Company’s operating segments, the Company expects to generate long-term cash flows.
36
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
Nine Months Ended
July 31, 2022
August 1, 2021
Net cash provided by operating activities
$
418
$
4,314
Net cash used for investing activities
(4,430)
(3,102)
Net cash provided by (used for) financing activities
515
(851)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
(143)
106
Net increase (decrease) in cash, cash equivalents, and restricted cash
$
(3,640)
$
467
Cash inflows from operating activities in the first nine months of 2022 were $418 million. This resulted mainly from net income adjusted for non-cash provisions, partially offset by a working capital change and a $1,000 million voluntary contribution to a U.S. OPEB plan. Cash outflows from investing activities were $4,430 million in the first nine months of 2022. The primary drivers were growth in the retail customer receivable portfolio; purchases of property and equipment; acquisitions of businesses, net of cash acquired; and a change in collateral on derivatives – net. Cash inflows from financing activities were $515 million in the first nine months of 2022, as higher external borrowings of $3,970 million were mainly offset by repurchases of common stock and dividends paid. Cash, cash equivalents, and restricted cash decreased $3,640 million during the first nine months of this year as the Company lowered its targeted cash balance, as previously noted.
Cash and Marketable Securities Held by Foreign Subsidiaries . The total cash and cash equivalents and marketable securities held by foreign subsidiaries was $2,713 million, $5,817 million, and $5,690 million at July 31, 2022, October 31, 2021, and August 1, 2021, respectively. During the first nine months of 2022, the Company’s foreign subsidiaries returned $4,460 million of cash and cash equivalents to the U.S.
Trade Accounts and Notes Receivable. Trade accounts and notes receivable primarily arise from sales of goods to dealers. Trade receivables increased $2,488 million during the first nine months of 2022, primarily due to a seasonal increase and higher overall demand, partially offset by the effect of foreign currency translation. These receivables increased $1,428 million, compared to a year ago, primarily due to higher overall demand partially offset by the effect of foreign currency translation. The percentage of total worldwide trade receivables outstanding for periods exceeding 12 months was 1 percent at July 31, 2022, 1 percent at October 31, 2021, and 2 percent at August 1, 2021.
Financing Receivables and Equipment on Operating Leases . These receivables and leases primarily 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 $1,305 million during the first nine months of 2022 and increased $2,919 million in the past 12 months primarily due to higher equipment sales. Total acquisition volumes of financing receivables and equipment on operating leases were 2 percent higher in the first nine months of 2022, compared with the same period last year, as volumes of revolving charge accounts, retail notes, and operating leases were higher, while volumes of financing leases and wholesale notes were lower.
Inventories . Inventories increased by $2,340 million during the first nine months of 2022 and increased by $2,711 million compared to a year ago. The higher levels in both periods are due to increased overall demand and the impact of supply chain disruptions, partially offset by foreign currency translation.
Property and Equipment . Property and equipment cash expenditures in the first nine months of 2022 were $596 million, compared with $492 million in the same period last year. Capital expenditures in 2022 are estimated to be approximately $1,100 million.
Borrowings . Total external borrowings have changed generally corresponding with the level of the receivable and the lease portfolio, as well as the level of cash and cash equivalents.
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 2021 with an expiration in November 2022 and a reduction of the total capacity or “financing limit” from $2,000 million to $1,000 million. As a result of the reduced capacity, Capital Corporation repurchased $511 million of outstanding short-term securitization borrowings in November 2021, in addition to the normal payments collected on the retail notes. At July 31, 2022, $891 million of securitization borrowings was 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.
37
In the first nine months of 2022, the Company issued $2,669 million and retired $2,343 million of retail note securitization borrowings, which are presented in Increase in total short-term borrowings on the statements of consolidated cash flows. In April 2022, the Company issued $600 million of sustainability-linked medium-term notes with an initial interest rate of 3.35 percent, which are due in 2029. This transaction supports the Company’s commitment to environmental sustainability by linking financing to the achievement of its ambitious and comprehensive environmental, social, and governance (ESG) targets. Failure to meet the stated sustainability performance target will result in a 25-basis point increase to the interest rate payable on the 2029 notes from and including April 2026.
Lines of Credit . The Company also has access to bank lines of credit with various banks throughout the world. Worldwide lines of credit totaled $8,427 million at July 31, 2022, $1,957 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 primarily considered to constitute utilization. Included in the total credit lines at July 31, 2022 was a 364-day credit facility agreement of $3,000 million expiring in the second quarter of 2023. In addition, total credit lines included long-term credit facility agreements of $2,500 million expiring in the second quarter of 2026 and $2,500 million expiring in the second quarter of 2027. These credit agreements require Capital Corporation and other parts of the Company to maintain certain performance metrics and liquidity targets. All of these credit agreement requirements 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 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 Company 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, and reduced access to debt capital markets. The senior long-term and short-term debt ratings and outlook currently assigned to unsecured Company debt 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
Stable
Standard & Poor’s
A
A-1
Stable
Subsequent Events
On August 16, 2022, the U.S. federal government enacted the Inflation Reduction Act of 2022. The bill contains numerous tax provisions, including a 15 percent corporate minimum tax. The Company has not yet completed its analysis of the newly enacted tax legislation. At this point, however, this legislation is not expected to have a material impact on the Company’s financial statements.
On August 31, 2022, the Company’s Board of Directors declared a quarterly dividend of $1.13 per share payable November 8, 2022 to stockholders of record on September 30, 2022.
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 and involve factors that are subject to change, assumptions, risks, and uncertainties that could cause actual results to differ materially. 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. 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 the Company’s most recent Annual Report on Form 10-K and subsequent Quarterly Reports on Form 10-Q).
38
Factors Affecting All Lines of Business
All of the Company’s businesses and their results are affected by general global macroeconomic conditions, including but not limited to inflation, including rising costs for materials used in our production, slower growth or recession, higher interest rates and currency fluctuations which could adversely affect the U.S. dollar and customer confidence, and customer access to capital and overall demand for our products; delays or disruptions in the Company’s supply chain, including work stoppages or disputes by suppliers with their unionized labor; shipping delays; government spending and taxing; changes in weather and climate patterns; the political and social stability of the markets in which the Company operates; the effects of, or response to, wars and other conflicts, including the current military conflict between Russia and Ukraine; natural disasters; and the spread of major epidemics or pandemics (including the COVID-19 pandemic). The sustainability of economic recovery from COVID-19 remains unclear and significant volatility could continue for a prolonged period.
Significant changes in market liquidity conditions, changes in the Company’s credit ratings, and any failure to comply with financial covenants in credit agreements could impact our access to or terms of future funding, which could reduce the Company’s earnings and cash flows. A debt crisis in Europe, Latin America, or elsewhere could negatively impact currencies, global financial markets, funding sources and costs, asset and obligation values, customers, suppliers, and demand for equipment. The Company’s investment management activities could be impaired by changes in the equity, bond, and other financial markets, which would negatively affect earnings.
Additional factors that could materially affect the Company’s operations, financial condition, and results include changes in governmental trade, banking, monetary, and fiscal policies, including policies and tariffs for the benefit of certain industries or sectors; actions by environmental, health, and safety regulatory agencies, including those related to engine emissions, carbon and other greenhouse gas emissions, and the effects of climate change; changes to GPS radio frequency bands and their permitted uses; changes to accounting standards; changes to and compliance with economic sanctions and export controls laws and regulations (including those in place for Russia); and compliance with evolving U.S. and foreign laws when expanding to new markets and otherwise.
Other factors that could materially affect the Company’s results and operations include security breaches, cybersecurity attacks, technology failures, and other disruptions to the information technology infrastructure of the Company and its suppliers and dealers; security breaches with respect to the Company’s products; the loss of or challenges to intellectual property rights; the availability and prices of strategically sourced materials, components, and whole goods; introduction of legislation that could affect the Company’s business model and intellectual property, such as so-called right to repair or right to modify legislation; events that damage the Company’s reputation or brand; significant investigations, claims, lawsuits, or other legal proceedings; the success or failure of new product initiatives or business strategies; changes in product preferences, sales mix, and take rates of products and life cycle solutions; gaps or limitations in rural broadband coverage, capacity, and speed needed to support technology solutions; oil and energy prices, supplies, and volatility; the availability and cost of freight; actions of competitors in the various industries in which the Company competes, particularly price discounting; dealer practices, especially as to levels of new and used field inventories; changes in demand and pricing for used equipment and resulting impacts on lease residual values; the inability to deliver precision technology and agricultural solutions to customers; labor relations and contracts, including work stoppages and other disruptions; changes in the ability to attract, develop, engage, and retain qualified personnel; and the integration of acquired businesses.
Production & Precision Agriculture and Small Agriculture & Turf Operations
The Company’s agricultural equipment operations are subject to a number of uncertainties, including certain factors that affect farmers’ confidence and financial condition. These factors include demand for agricultural products; world grain stocks; soil conditions; harvest yields; prices for commodities and livestock; availability and cost of fertilizer; availability of transport for crops; the growth and sustainability of non-food uses for some crops (including ethanol and biodiesel production); real estate values; available acreage for farming; changes in government farm programs and policies; changes in and effects of crop insurance programs; changes in environmental regulations and their impact on farming practices; animal diseases and their effects on poultry, beef, and pork consumption and prices on livestock feed demand; and crop pests and diseases.
Production and Precision Agriculture Operations
The production and precision agriculture operations rely in part on hardware and software, guidance, connectivity and digital solutions, and automation and machine intelligence. Many factors contribute to the Company’s precision agriculture sales and results, including the impact to customers’ profitability and/or sustainability outcomes;
39
availability of technological innovations; speed of research and development; effectiveness of partnerships with third parties; and the dealer channel’s ability to support and service precision technology solutions.
Small Agriculture and Turf Equipment
Factors affecting the Company’s small agriculture and turf equipment operations include customer profitability; consumer purchasing preferences; housing starts and supply; infrastructure investment; spending by municipalities and golf courses; and consumable input costs.
Construction and Forestry
Factors affecting the Company’s construction and forestry equipment operations include real estate and housing prices; the number of housing starts; commodity prices such as oil and gas; the levels of public and non-residential construction; and investment in infrastructure. Prices for pulp, paper, lumber, and structural panels affect sales of forestry equipment.
John Deere Financial
The liquidity and ongoing profitability of John Deere Capital Corporation and the Company’s other financial services subsidiaries depend on timely access to capital to meet future cash flow requirements, and to fund operations, costs, and purchases of the Company’s products. If general economic conditions deteriorate or capital markets become more volatile, funding could be unavailable or insufficient. Additionally, customer confidence levels may result in declines in credit applications and increases in delinquencies and default rates, which could materially impact write-offs and provisions for credit losses.
Supplemental Consolidating Information
The supplemental consolidating data presented on the subsequent pages is presented for informational purposes. The equipment operations represent the enterprise without financial services. The equipment operations include 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 primarily 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. These two businesses are capitalized differently and have separate performance metrics. The supplemental consolidating data is also used by management due to these differences.
40
DEERE & COMPANY
SUPPLEMENTAL CONSOLIDATING DATA
STATEMENTS OF INCOME
For the Three Months Ended July 31, 2022 and August 1, 2021
(In millions of dollars) Unaudited
EQUIPMENT
FINANCIAL
OPERATIONS
SERVICES
ELIMINATIONS
CONSOLIDATED
2022
2021
2022
2021
2022
2021
2022
2021
Net Sales and Revenues
Net sales
$
13,000
$
10,413
$
13,000
$
10,413
Finance and interest income
60
33
$
905
$
867
$
(119)
$
(75)
846
825
1
Other income
228
263
79
96
(51)
(70)
256
289
2
Total
13,288
10,709
984
963
(170)
(145)
14,102
11,527
Costs and Expenses
Cost of sales
9,512
7,574
(1)
9,511
7,574
3
Research and development expenses
481
394
481
394
Selling, administrative and general expenses
805
702
156
141
(2)
(2)
959
841
3
Interest expense
109
92
223
169
(36)
(17)
296
244
4
Interest compensation to Financial Services
83
58
(83)
(58)
4
Other operating expenses
47
32
317
360
(48)
(68)
316
324
5
Total
11,037
8,852
696
670
(170)
(145)
11,563
9,377
Income before Income Taxes
2,251
1,857
288
293
2,539
2,150
Provision for income taxes
574
425
80
66
654
491
Income after Income Taxes
1,677
1,432
208
227
1,885
1,659
Equity in income (loss) of unconsolidated affiliates
(1)
8
1
8
Net Income
1,676
1,440
209
227
1,885
1,667
Less: Net income attributable to noncontrolling interests
1
1
Net Income Attributable to Deere & Company
$
1,675
$
1,440
$
209
$
227
$
1,884
$
1,667
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 intercompany service fees.
4 Elimination of equipment operations’ interest expense to financial services.
5 Elimination of financial services’ lease depreciation expense related to inventory transferred to equipment on operating leases.
41
DEERE & COMPANY
SUPPLEMENTAL CONSOLIDATING DATA (Continued)
STATEMENTS OF INCOME
For the Nine Months Ended July 31, 2022 and August 1, 2021
(In millions of dollars) Unaudited
EQUIPMENT
FINANCIAL
OPERATIONS
SERVICES
ELIMINATIONS
CONSOLIDATED
2022
2021
2022
2021
2022
2021
2022
2021
Net Sales and Revenues
Net sales
$
33,565
$
29,461
$
33,565
$
29,461
Finance and interest income
131
95
$
2,580
$
2,582
$
(270)
$
(209)
2,441
2,468
1
Other income
1,028
712
271
269
(264)
(213)
1,035
768
2
Total
34,724
30,268
2,851
2,851
(534)
(422)
37,041
32,697
Costs and Expenses
Cost of sales
25,126
21,309
(2)
(2)
25,124
21,307
3
Research and development expenses
1,336
1,137
1,336
1,137
Selling, administrative and general expenses
2,215
2,089
463
365
(6)
(6)
2,672
2,448
3
Interest expense
297
287
493
539
(77)
(43)
713
783
4
Interest compensation to Financial Services
189
166
(189)
(166)
4
Other operating expenses
186
140
1,028
1,098
(260)
(205)
954
1,033
5
Total
29,349
25,128
1,984
2,002
(534)
(422)
30,799
26,708
Income before Income Taxes
5,375
5,140
867
849
6,242
5,989
Provision for income taxes
1,142
1,130
222
198
1,364
1,328
Income after Income Taxes
4,233
4,010
645
651
4,878
4,661
Equity in income of unconsolidated affiliates
4
18
4
3
8
21
Net Income
4,237
4,028
649
654
4,886
4,682
Less: Net income attributable to noncontrolling interests
1
2
1
2
Net Income Attributable to Deere & Company
$
4,236
$
4,026
$
649
$
654
$
4,885
$
4,680
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 intercompany service fees.
4 Elimination of equipment operations’ interest expense to financial services.
5 Elimination of financial services’ lease depreciation expense related to inventory transferred to equipment on operating leases.
42
DEERE & COMPANY
SUPPLEMENTAL CONSOLIDATING DATA (Continued)
CONDENSED BALANCE SHEETS
(In millions of dollars) Unaudited
EQUIPMENT
FINANCIAL
OPERATIONS
SERVICES
ELIMINATIONS
CONSOLIDATED
Jul 31
Oct 31
Aug 1
Jul 31
Oct 31
Aug 1
Jul 31
Oct 31
Aug 1
Jul 31
Oct 31
Aug 1
2022
2021
2021
2022
2021
2021
2022
2021
2021
2022
2021
2021
Assets
Cash and cash equivalents
$
3,540
$
7,188
$
6,638
$
819
$
829
$
881
$
4,359
$
8,017
$
7,519
Marketable securities
2
3
3
717
725
685
719
728
688
Receivables from Financial Services
5,055
5,564
5,913
$
(5,055)
$
(5,564)
$
(5,913)
6
Trade accounts and notes receivable – net
1,342
1,155
1,127
6,738
3,895
5,319
(1,384)
(842)
(1,178)
6,696
4,208
5,268
7
Financing receivables – net
45
73
89
35,011
33,726
31,360
35,056
33,799
31,449
Financing receivables securitized – net
2
10
13
5,139
4,649
5,388
5,141
4,659
5,401
Other receivables
1,676
1,629
1,545
371
159
171
(48)
(23)
(14)
1,999
1,765
1,702
7
Equipment on operating leases – net
6,554
6,988
6,982
6,554
6,988
6,982
Inventories
9,121
6,781
6,410
9,121
6,781
6,410
Property and equipment – net
5,630
5,783
5,612
36
37
37
5,666
5,820
5,649
Goodwill
3,754
3,291
3,148
3,754
3,291
3,148
Other intangible assets – net
1,281
1,275
1,267
1,281
1,275
1,267
Retirement benefits
3,062
3,539
986
65
64
63
(2)
(2)
(59)
3,125
3,601
990
8
Deferred income taxes
1,248
1,215
1,959
48
53
59
(186)
(231)
(251)
1,110
1,037
1,767
9
Other assets
1,727
1,646
1,747
510
499
702
(1)
(1)
2,236
2,145
2,448
Total Assets
$
37,485
$
39,152
$
36,457
$
56,008
$
51,624
$
51,647
$
(6,676)
$
(6,662)
$
(7,416)
$
86,817
$
84,114
$
80,688
Liabilities and Stockholders’ Equity
Liabilities
Short-term borrowings
$
471
$
1,509
$
1,376
$
13,705
$
9,410
$
9,028
$
14,176
$
10,919
$
10,404
Short-term securitization borrowings
2
10
12
4,918
4,595
5,265
4,920
4,605
5,277
Payables to Equipment Operations
5,055
5,564
5,913
$
(5,055)
$
(5,564)
$
(5,913)
6
Accounts payable and accrued expenses
11,925
11,198
10,484
2,494
2,015
1,916
(1,433)
(865)
(1,193)
12,986
12,348
11,207
7
Deferred income taxes
436
438
371
311
369
395
(186)
(231)
(251)
561
576
515
9
Long-term borrowings
8,481
8,915
8,982
23,651
23,973
23,298
32,132
32,888
32,280
Retirement benefits and other liabilities
2,799
4,239
5,219
114
107
112
(2)
(2)
(59)
2,911
4,344
5,272
8
Total liabilities
24,114
26,309
26,444
50,248
46,033
45,927
(6,676)
(6,662)
(7,416)
67,686
65,680
64,955
Commitments and contingencies (Note 15)
Redeemable noncontrolling interest (Note 19)
95
95
Stockholders’ Equity
Total Deere & Company stockholders’ equity
19,033
18,431
15,731
5,760
5,591
5,720
(5,760)
(5,591)
(5,720)
19,033
18,431
15,731
10
Noncontrolling interests
3
3
2
3
3
2
Financial Services’ equity
(5,760)
(5,591)
(5,720)
5,760
5,591
5,720
10
Adjusted total stockholders’ equity
13,276
12,843
10,013
5,760
5,591
5,720
19,036
18,434
15,733
Total Liabilities and Stockholders’ Equity
$
37,485
$
39,152
$
36,457
$
56,008
$
51,624
$
51,647
$
(6,676)
$
(6,662)
$
(7,416)
$
86,817
$
84,114
$
80,688
6 Elimination of receivables / payables between equipment operations and financial services.
7 Primarily reclassification of sales incentive accruals on receivables sold to financial services.
8 Reclassification of net pension assets / liabilities.
9 Reclassification of deferred tax assets / liabilities in the same taxing jurisdictions.
10 Elimination of financial services’ equity.
43
DEERE & COMPANY
SUPPLEMENTAL CONSOLIDATING DATA (Continued)
STATEMENTS OF CASH FLOWS
For the Nine Months Ended July 31, 2022 and August 1, 2021
(In millions of dollars) Unaudited
EQUIPMENT
FINANCIAL
OPERATIONS
SERVICES
ELIMINATIONS
CONSOLIDATED
2022
2021
2022
2021
2022
2021
2022
2021
Cash Flows from Operating Activities
Net income
$
4,237
$
4,028
$
649
$
654
$
4,886
$
4,682
Adjustments to reconcile net income to net cash provided by operating activities:
Provision (credit) for credit losses
5
62
(22)
62
(17)
Provision for depreciation and amortization
806
803
790
866
$
(153)
$
(100)
1,443
1,569
11
Impairment charges
81
50
81
50
Share-based compensation expense
64
64
64
64
12
Gain on remeasurement of previously held equity investment
(326)
(326)
Undistributed earnings of unconsolidated affiliates
370
246
(3)
(2)
(368)
(240)
(1)
4
13
Provision (credit) for deferred income taxes
44
(218)
(50)
(53)
(6)
(271)
Changes in assets and liabilities:
Trade, notes, and financing receivables related to sales
(215)
(73)
(2,142)
(371)
(2,357)
(444)
14, 16, 17
Inventories
(2,415)
(1,367)
(111)
(450)
(2,526)
(1,817)
15
Accounts payable and accrued expenses
491
860
36
(20)
(542)
(98)
(15)
742
16
Accrued income taxes payable/receivable
52
43
30
(9)
82
34
Retirement benefits
(1,020)
8
6
5
(1,014)
13
Other
101
(200)
(105)
26
49
(121)
45
(295)
11, 12, 15
Net cash provided by operating activities
2,206
4,185
1,415
1,445
(3,203)
(1,316)
418
4,314
Cash Flows from Investing Activities
Collections of receivables (excluding receivables related to sales)
16,927
15,704
(1,153)
(1,224)
15,774
14,480
14
Proceeds from sales of equipment on operating leases
1,501
1,510
1,501
1,510
Cost of receivables acquired (excluding receivables related to sales)
(19,069)
(18,349)
491
1,188
(18,578)
(17,161)
14
Acquisitions of businesses, net of cash acquired
(488)
(19)
(488)
(19)
Purchases of property and equipment
(595)
(491)
(1)
(1)
(596)
(492)
Cost of equipment on operating leases acquired
(1,868)
(1,818)
151
608
(1,717)
(1,210)
15
Increase in trade and wholesale receivables
(3,318)
(481)
3,318
481
14
Collateral on derivatives – net
5
(4)
(198)
(185)
(193)
(189)
Other
(87)
(10)
(74)
(42)
28
31
(133)
(21)
13, 17
Net cash used for investing activities
(1,165)
(524)
(6,100)
(3,662)
2,835
1,084
(4,430)
(3,102)
Cash Flows from Financing Activities
Increase (decrease) in total short-term borrowings
58
(93)
4,209
1,022
4,267
929
Change in intercompany receivables/payables
70
(624)
(70)
624
Proceeds from long-term borrowings
137
6,144
5,877
6,281
5,877
Payments of long-term borrowings
(1,372)
(71)
(5,206)
(5,101)
(6,578)
(5,172)
Proceeds from issuance of common stock
55
136
55
136
Repurchases of common stock
(2,477)
(1,780)
(2,477)
(1,780)
Dividends paid
(971)
(761)
(368)
(240)
368
240
(971)
(761)
13
Other
(39)
(50)
(23)
(22)
(8)
(62)
(80)
13
Net cash provided by (used for) financing activities
(4,539)
(3,243)
4,686
2,160
368
232
515
(851)
Effect of Exchange Rate Changes on Cash, Cash Equivalents, and Restricted Cash
(148)
77
5
29
(143)
106
Net Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash
(3,646)
495
6
(28)
(3,640)
467
Cash, Cash Equivalents, and Restricted Cash at Beginning of Period
7,200
6,156
925
1,016
8,125
7,172
Cash, Cash Equivalents, and Restricted Cash at End of Period
$
3,554
$
6,651
$
931
$
988
$
4,485
$
7,639
Components of cash, cash equivalents, and restricted cash
Cash and cash equivalents
$
3,540
$
6,638
$
819
$
881
$
4,359
$
7,519
Restricted cash (Other assets)
14
13
112
107
126
120
Total cash, cash equivalents, and restricted cash
$
3,554
$
6,651
$
931
$
988
$
4,485
$
7,639
11 Elimination of depreciation on leases related to inventory transferred to equipment on operating leases.
12 Reclassification of share-based compensation expense.
13 Elimination of dividends from financial services to the equipment operations, which are included in the equipment operations’ operating activities, and capital investments in financial services from the equipment operations.
14 Primarily reclassification of receivables related to the sale of equipment.
15 Reclassification of direct lease agreements with retail customers.
16 Reclassification of sales incentive accruals on receivables sold to financial services.
17 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.
44
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.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.