What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-02-23 compared with 2022-09-01 · 197 added, 264 removed, 195 unchanged (70% of the section changed)

1 unchanged sentence

RESULTS OF OPERATIONS

The Company generates net sales primarily from the sale of equipment to John Deere dealers and distributors.

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;

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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).

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 digital, 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.

In February 2023, the Company released its 2022 Sustainability Report, available at JohnDeere.com/sustainability.

This report identifies important progress on the Company’s Leap Ambitions in fiscal year 2022.

The information in our 2022 Sustainability Report is not incorporated by reference into, and does not form a part of, this Form 10-Q.

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 5 to 10 percent compared to 2022.

Industry sales of small agricultural and turf equipment in the U.S.

and Canada are expected to be down about 5 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 up 5 percent in 2023.

Asia industry sales are forecasted to be down moderately in 2023.

On an industry basis, North American construction equipment and compact construction equipment sales are both expected to be flat to up 5 percent in 2023.

Global forestry and global roadbuilding industry sales are each expected to be flat.

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 framework.

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, 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 through a majority of 2023.

Agricultural fundamentals are expected to remain solid into 2023, and retail demand will comprise most of 2023 sales.

The North American retail customer fleet age of combines and large tractors remains above average, and dealer inventories are historically low due to the manufacturing and supply chain constraints over the past few years.

The Company expects the replenishment of dealer stock inventory to occur in 2024.

Crop prices remain favorable to our customers in part due to low stock-to-use ratios for key grains.

The Company expects to sell more large agricultural equipment in 2023 than 2022 in North America, Europe, and South America.

Demand for small agricultural equipment remains stable, while turf and utility equipment product sales are expected to be lower due to the overall U.S.

economic conditions.

Construction equipment markets are forecasted to be steady.

Rental fleets replenishment, the energy industry, and U.S.

infrastructure spend are expected to offset moderation in residential

home construction.

Roadbuilding demand remains strongest in the U.S., largely offset by softening demand in Europe and parts of Asia.

Net income for the Company’s financial services operations is expected to be lower than fiscal year 2022 due to less-favorable financing spreads as a result of heightened interest rates, higher selling, administrative and general expenses, and lower gains on operating-lease dispositions, partially offset by higher average portfolio balances.

Additional Trends – The Company experienced supply chain disruptions and inflationary pressures in 2022.

These trends continued into 2023.

While these are two distinct issues and discussed separately below, their impact may be intertwined.

Supply chain disruptions impacted many aspects of the business, including parts availability, increased production costs, and higher inventory levels.

Past due deliveries from suppliers were at elevated levels during 2022.

Although past due deliveries remain elevated, the Company experienced improvement during the first quarter of 2023.

The reduction in supply chain disruptions contributed to higher levels of production.

The Company implemented the following mitigation efforts to minimize the impact of supply chain disruptions on its ability to meet customer demand:

• Worked with the supply base to obtain allocations and improve on-time deliveries of parts.

• Multi-sourced some parts and materials.

• Provided resources to suppliers to address constraints.

• Entered into long-term contracts for some critical components.

• Utilized alternative freight carriers to expedite delivery.

While supply chain disruptions are expected to persist into 2023, the Company is working diligently to secure the parts and components that customers need to deliver essential food and infrastructure more profitably and sustainably.

Although the Company experienced some improvement in this area during the first quarter of 2023, concerns remain and this issue could impact our ability to meet customer demand in the remainder of 2023.

Inflation has continued to be a pervasive feature in 2023, increasing the cost of purchased components, energy, salaries, and wages.

Higher costs due to general business inflation were offset by price realization, which mitigated the impact of inflation on the Company’s operating results.

The Company expects inflation to continue in 2023 resulting in higher costs.

If customers are unwilling to accept increases in cost of John Deere products, or the Company is otherwise unable to offset increases in production costs, inflation could have an adverse effect on the Company’s operations and financial condition.

Central bank policy interest rates increased in the first quarter of 2023 and are projected to continue to increase during 2023 but at a moderating pace compared to 2022.

Most retail receivables are fixed rate, while wholesale financing receivables are floating rate.

The Company has both fixed and floating 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 $53 million (after-tax) of less favorable financing spreads in the first quarter of 2023 compared to 2022.

The Company expects spread compression to persist during 2023.

Supply chain disruptions, inflationary pressures, 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.

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, post-pandemic effects, 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 digital, automation, autonomy, and alternative propulsion technologies.

As with most technology investments, marketplace adoption and monetization of these features holds an elevated level of uncertainty.

2023 Compared with 2022

Three Months Ended

Nine Months Ended

Deere & Company

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Diluted earnings per share

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.

Net income in the first quarter of 2022 was impacted by special items.

See Note 20 for additional details.

The discussion of net sales and operating profit is included in the Business Segment Results below.

An explanation of the cost of sales to net sales ratio and other significant statement of consolidated income changes follows:

Three Months Ended

Nine Months Ended

Deere & Company

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Provision for income taxes

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.

The cost of sales ratio decreased due to price realization, partially offset by higher production costs.

Inefficiencies due to the delayed ratification of the UAW labor agreement and contract-ratification bonus costs affected the prior period cost of sales ratio (see Note 20).

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.

The provision for income taxes was higher as a result of higher pretax income.

Business Segment Results

For the equipment operations, higher production costs were mostly due to elevated cost of purchased components, energy, salaries, and wages.

Three Months Ended

Nine Months Ended

Production and Precision Agriculture

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Currency translation

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.

Production and precision agriculture sales increased for the quarter as a result of higher shipment volumes (primarily in the U.S., Canada, and Latin America) and price realization in most end markets.

Operating profit improved primarily due to price realization and improved shipment volume / mix as a result of improved supply chain conditions.

These items were partially offset by higher production costs and increased selling, administrative and general expenses and research and development expenses.

The UAW contract-ratification bonus costs affected the prior period.

Three Months Ended

Nine Months Ended

Small Agriculture and Turf

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Currency translation

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.

Small agriculture and turf sales increased for the quarter due to price realization in most end markets and higher shipment volumes (primarily in the U.S., Canada, India, and Mexico), partially offset by the negative effects of foreign currency translation mostly due to a stronger U.S.

Operating profit improved primarily as a result of price realization and improved shipment volumes due to improved supply chain conditions.

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.

Three Months Ended

Nine Months Ended

Construction and Forestry

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Currency translation

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.

Construction and forestry sales moved higher for the quarter primarily due to higher shipment volumes (primarily in the U.S.

and Brazil) and price realization, partially offset by the negative effects of foreign currency translation from a stronger U.S.

Operating profit improved due to price realization and improved shipment volumes as a result of improved supply chain conditions, partially offset by higher production costs.

The UAW contract-ratification bonus costs affected the prior period.

Three Months Ended

Nine Months Ended

Financial Services

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Interest expense

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.

The average balance of receivables and leases financed was 15 percent higher in the first three months of 2023, compared with the same period last year.

Revenue also increased due to higher average financing rates.

Interest expense increased in the first quarter of 2023 as a result of higher average borrowing rates and higher average borrowings.

Net income for the quarter decreased mainly due to less favorable financing spreads as a result of heightened interest rates, higher selling, administrative and general expenses, and lower gains on operating lease dispositions, 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.

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, 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, Key Metrics and Balance Sheet Data

The Company has access to most global 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 subject to seasonal variations in financing requirements for inventories and certain receivables from dealers.

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.

However, the patterns of seasonality in inventory have been affected by increases in production rates and supply chain disruptions experienced during fiscal year 2022, which continue to impact inventory levels during 2023.

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:

Key metrics are provided in the following table, in millions of dollars:

Cash, cash equivalents, and marketable securities

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Ratio of interest-bearing debt to stockholder’s equity

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.

The reduction in unused credit lines in 2023 compared to both prior periods relates to an increase in commercial paper outstanding to support working capital requirements.

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.

Nine Months Ended

July 31, 2022

August 1, 2021

Net cash provided by operating activities

Net cash used for investing activities

Net cash provided by (used for) financing activities

Three Months Ended

(In millions of dollars)

January 29, 2023

January 30, 2022

Net cash used for operating activities

Net cash provided by investing activities

Net cash used for financing activities

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 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.

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.

Net decrease in cash, cash equivalents, and restricted cash

Cash outflows from consolidated operating activities in the first three months of 2023 were $1,246 million.

This resulted mainly from a working capital change, partially offset by net income adjusted for non-cash provisions.

Cash inflows from investing activities were $760 million in the first three months of this year.

The primary drivers were collections of receivables (excluding receivables related to sales) exceeding the cost of receivables acquired and a change in collateral on derivatives – net, partially offset by purchases of property and equipment.

Cash outflows from financing activities were $339 million in the first three months of 2023.

Cash, cash equivalents, and restricted cash decreased by $763 million during the first three months of this year.

Trade Accounts and Notes Receivable – Trade accounts and notes receivable arise from sales of goods to customers.

Trade receivables increased by $1,199 million during the first three months of 2023, mostly due to a seasonal increase.

These receivables increased $2,754 million, compared to a year ago, due to higher shipment volumes.

percentage of total worldwide trade receivables outstanding for periods exceeding 12 months was 1 percent at each of January 29, 2023, October 30, 2022, and January 30, 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 decreased by $720 million during the first quarter of 2023, primarily due to seasonal payments, and increased by $5,142 million in the past 12 months, due to strong retail sales.

Total acquisition volumes of financing receivables and equipment on operating leases were 31 percent higher in the first three months of 2023, compared with the same period last year, as volumes of wholesale notes, operating leases, retail notes, and revolving charge accounts were higher, while finance leases were lower compared to January 30, 2022.

Inventories – Inventories increased by $1,561 million during the first three months, primarily due to a seasonal increase.

Inventories increased $2,121 million, compared to a year ago, due to higher forecasted shipment volumes and supply chain disruptions, partially offset by the effect of foreign currency translation.

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 three months of 2023 were $315 million, compared with $193 million in the same period last year.

Capital expenditures in 2023 are estimated to be approximately $1,400 million.

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.

Accounts Payable and Accrued Expenses – Decreased by $1,714 million in the first three months of 2023, primarily due to a decrease in accrued expenses associated with dealer sales discounts, employee benefits, and derivative liabilities.

Accounts payable and accrued expenses increased $2,457 million compared to a year ago, due to an increase in accrued expenses associated with derivative liabilities, accrued taxes, and employee benefits, and an increase in accounts payable associated with trade payables.

Borrowings – Total external borrowings increased by $2,165 million in the first three months of 2023 and increased $6,754 million compared to a year ago, 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 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.

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 January 29, 2023, $786 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 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 the first three months of 2023, the financial services operations retired $849 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 $8,327 million at January 29, 2023, $1,581 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 January 29, 2023 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.

The Company expects to extend the terms of these credit facilities.

All of these requirements of 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 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.

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, 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:

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:

Fitch Ratings

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Standard & Poor’s

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

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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).

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;

Many factors could cause actual results to differ materially from these forward-looking statements.

Among these factors are risks related to:

● changes in U.S.

and international laws, regulations, and policies relating to trade, spending, taxing, banking, monetary, environmental (including climate change and engine emission), and farming policies;

● political, economic, and social instability of the geographies in which the Company operates;

● wars and other conflicts, including the current conflict between Russia and Ukraine, and natural disasters;

● adverse macroeconomic conditions, including unemployment, inflation, rising interest rates, changes in consumer practices due to slower economic growth or possible recession, and liquidity constraints;

● growth and sustainability of non-food uses for crops (including ethanol and biodiesel production);

● the Company’s ability to execute business strategies, including the Company’s Smart Industrial operating model, Leap Ambitions, and mergers and acquisitions;

● the ability to understand and meet its customers’ changing expectations and demand for John Deere products;

● accurately forecasting customer demand for products and services and adequately managing inventory;

● changes to governmental communications channels (radio frequency technology);

● 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;

● the Company’s ability to adapt in highly competitive markets;

● dealer practices and their ability to manage distribution of John Deere products and support and service precision technology solutions;

● changes in climate patterns and unfavorable weather events;

● higher interest rates and currency fluctuations which could adversely affect the U.S.

dollar, customer confidence, access to capital, and demand for our products;

● changes in the Company’s credit ratings, and failure to comply with financial covenants in credit agreements could impact access to funding;

● availability and price of raw materials, components, and whole goods;

● delays or disruptions in the Company’s supply chain;

● 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;

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.

● the ability to attract, develop, engage, and retain qualified personnel;

● security breaches, cybersecurity attacks, technology failures, and other disruptions to the information technology infrastructure of the Company and its products;

● loss of or challenges to intellectual property rights;

● compliance with evolving U.S.

and foreign laws, including economic sanctions, data privacy, and environmental laws and regulations;

● legislation introduced or enacted that could affect the Company’s business model and intellectual property, such as so-called right to repair or right to modify legislation;

● investigations, claims, lawsuits, or other legal proceedings;

● events that damage the Company’s reputation or brand;

● world grain stocks, available farm acres, soil conditions, harvest yields, prices for commodities and livestock, input costs (e.g., fertilizer), and availability of transport for crops;

● housing starts and supply, real estate and housing prices, levels of public and non-residential construction, and infrastructure investment.

“Risk Factors” of our Annual Report on Form 10-K).

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.

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.

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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.

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.

These two businesses are capitalized differently and have separate performance metrics.

The two businesses are capitalized differently and have separate performance metrics.

The supplemental consolidating data is also used by management due to these differences.

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STATEMENTS OF INCOME

For the Three Months Ended July 31, 2022 and August 1, 2021

(In millions of dollars) Unaudited

Net Sales and Revenues

Finance and interest income

Costs and Expenses

Cost of sales

Research and development expenses

Selling, administrative and general expenses

Interest expense

Interest compensation to Financial Services

Other operating expenses

Income before Income Taxes

Provision for income taxes

Income after Income Taxes

Equity in income (loss) of unconsolidated affiliates

Net income attributable to noncontrolling interests

Net Income Attributable to Deere & Company

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.

DEERE & COMPANY

SUPPLEMENTAL CONSOLIDATING DATA (Continued)

STATEMENTS OF INCOME

For the Nine Months Ended July 31, 2022 and August 1, 2021

For the Three Months Ended January 29, 2023 and January 30, 2022

(In millions of dollars) Unaudited

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Equity in income of unconsolidated affiliates

Net income attributable to noncontrolling interests

Net income (loss) attributable to noncontrolling interests

Net Income Attributable to Deere & Company

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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.

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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.

DEERE & COMPANY

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Commitments and contingencies (Note 16)

Redeemable noncontrolling interest (Note 19)

Redeemable noncontrolling interest

Stockholders’ Equity

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STATEMENTS OF CASH FLOWS

For the Nine Months Ended July 31, 2022 and August 1, 2021

For the Three Months Ended January 29, 2023 and January 30, 2022

(In millions of dollars) Unaudited

Cash Flows from Operating Activities

Adjustments to reconcile net income to net cash provided by operating activities:

Adjustments to reconcile net income to net cash provided by (used for) operating activities:

Provision (credit) for credit losses

Provision for depreciation and amortization

Impairment charges

Share-based compensation expense

Gain on remeasurement of previously held equity investment

Undistributed earnings of unconsolidated affiliates

Distributed earnings of Financial Services

Provision (credit) for deferred income taxes

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Retirement benefits

Net cash provided by operating activities

Net cash provided by (used for) operating activities

Cash Flows from Investing Activities

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Collateral on derivatives – net

Net cash used for investing activities

Net cash provided by (used for) investing activities

Cash Flows from Financing Activities

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Dividends paid

Net cash provided by (used for) financing activities

Net cash used for financing activities

Effect of Exchange Rate Changes on Cash, Cash Equivalents, and Restricted Cash

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14 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.

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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis