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 from the sale of equipment to John Deere dealers and distributors. The Company manufactures and distributes a full line of agricultural equipment; a variety of commercial and consumer equipment; and a broad range of equipment for construction, roadbuilding, and forestry. These operations (collectively known as the “equipment operations”) are managed through the production and precision agriculture, small agriculture and turf, and construction and forestry operating segments. The Company’s financial services segment provides credit services, which finance sales and leases of equipment by John Deere dealers. In addition, the financial services segment provides wholesale financing to dealers of the foregoing equipment, finances retail revolving charge accounts, and offers extended equipment warranties.
Smart Industrial Operating Model and Leap Ambitions
The Company’s Smart Industrial operating model is focused on making significant investments, strengthening the Company’s capabilities in 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.
Trends and Economic Conditions
Industry Trends for Fiscal Year 2023 – Industry sales of large agricultural machinery in the U.S. and Canada for 2023 are forecasted to increase approximately 10 percent compared to 2022. Industry sales of small agricultural and turf equipment in the U.S. and Canada are expected to be down 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 in 2023. Asia industry sales are forecasted to be down moderately in 2023. On an industry basis, the U.S. and Canada 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; machine autonomy; and alternative propulsion technologies. This technology is incorporated into products within each of the Company’s operating segments.
Customers continue to adopt technology integrated in the John Deere portfolio of “smart” machines, systems, and solutions. The Company expects this trend to persist for the foreseeable future.
Demand for the Company’s equipment remains strong, as order books are full throughout 2023. Agricultural fundamentals are expected to remain solid through 2023, and retail demand will comprise most of 2023 sales. The North American retail customer fleet age of combines and large tractors is historically high, and dealer inventories are low due to the manufacturing and supply chain constraints over the past few years. The Company expects elevated demand to continue for the second half of the year as evidenced by retail customer orders that extend into 2024. Crop prices remain favorable to our customers in part due to a stock-to-use ratio below the 10-year average for key grains. The Company expects sales volume of large agricultural equipment to be greater in 2023 than 2022 in North America and Europe. Sales volume for small agriculture and turf equipment is expected to be lower than 2022 due to lower demand for consumer-oriented products, partially offset by stronger demand for mid-sized equipment. Construction equipment markets are forecasted to be steady. Strong U.S. infrastructure spending, industrial construction, and rental inventory restocking are expected to more than offset moderation in residential home and commercial real estate construction. Importantly, construction equipment dealer inventory remains below historical averages. 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
28
fiscal year 2022 due to less-favorable financing spreads, the correction of the accounting treatment for financing incentives offered to John Deere dealers, unfavorable derivative market valuation adjustments, a higher provision for credit losses, higher selling, administrative and general expenses, and lower gains on operating-lease dispositions. These factors are expected to be partially offset by income earned on higher average portfolio balances.
Additional Trends – Supply chain conditions have improved over 2022; however, the Company continues to experience disruptions above historical norms. Supply chain disruptions impacted many aspects of the business starting in 2022, including parts availability, increased production costs, and higher inventory levels. Past due deliveries from suppliers were at elevated levels during 2022. 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.
The Company has experienced supply chain improvements in the second quarter of 2023. The reduction in supply chain disruptions contributed to higher levels of production in the second quarter of 2023. However, remaining constraints in the supply base will limit higher levels of production in the second half of the year. As a result, the production schedules in 2023 will be more aligned with the customers’ seasonal use of the Company’s products, marking a return to historical seasonal production patterns.
Central bank policy interest rates increased in the first six months of 2023. Most retail receivables are fixed rate, while wholesale financing receivables are variable rate. The Company has both fixed and variable rate borrowings. The Company manages the risk of interest rate fluctuations by balancing the types and amounts of its funding sources to its financing receivable and equipment on operating lease portfolios. Accordingly, the Company enters into interest rate swap agreements to manage its interest rate exposure. Historically, rising interest rates impact the Company’s borrowings sooner than the benefit is realized from the financing receivable and equipment on operating lease portfolios. As a result, the Company’s financial services operations experienced $84 million (after-tax) of less favorable financing spreads in the first six months of 2023 compared to 2022. The Company expects spread compression to persist during 2023.
Recent banking sector events have resulted in increased liquidity considerations. The Company’s deposits are well diversified, and as a result, the Company was not materially exposed to banks that have entered receivership or encountered liquidity issues. These events have not changed the Company’s access to capital markets. The Company continues to monitor counterparty exposure through regular reviews of various risk metrics and adjusting exposure limits as needed.
Supply chain disruptions, rising interest rates, and recent banking sector events are driven by factors outside of the Company’s control, and as a result, the Company cannot reasonably foresee when these conditions will subside.
Other Items of Concern and Uncertainties – Other items of concern include global and regional political conditions, failure to raise the U.S. debt ceiling, 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, monetization, and regulation of these features holds an elevated level of uncertainty .
29
2023 Compared with 2022
Three Months Ended
Six Months Ended
Deere & Company
April 30
May 1
%
April 30
May 1
%
(In millions of dollars, except per share amounts)
2023
2022
Change
2023
2022
Change
Net sales and revenues
$
17,387
$
13,370
+30
$
30,038
$
22,939
+31
Net income attributable to Deere & Company
2,860
2,098
+36
4,819
3,001
+61
Diluted earnings per share
9.65
6.81
16.18
9.72
Net sales and revenues increased for both the quarter and year-to-date periods due to higher shipment volumes and price realization. See the Business Segment Results for additional details. Net income in each of the periods presented were impacted by special items. See Note 21 for additional details.
An explanation of the cost of sales to net sales ratio and other significant statement of consolidated income changes follows:
Three Months Ended
Six Months Ended
Deere & Company
April 30
May 1
%
April 30
May 1
%
(In millions of dollars)
2023
2022
Change
2023
2022
Change
Cost of sales to net sales
66.7%
74.1%
67.9%
75.9%
Other income
$
229
$
540
-58
$
484
$
779
-38
Research and development expenses
547
453
+21
1,043
855
+22
Selling, administrative and general expenses
1,330
932
+43
2,283
1,713
+33
Other operating expenses
363
328
+11
660
638
+3
Provision for income taxes
991
461
+115
1,528
710
+115
The cost of sales ratio improved in the second quarter and the first six months of fiscal 2023 due to price realization, partially offset by higher production costs. The six months ended May 1, 2022 were also impacted by inefficiencies due to the delayed ratification of the UAW labor agreement and contract-ratification bonus costs (see Note 21). Other income decreased compared to both prior periods due to a non-cash gain on the remeasurement of the previously held equity investment in the Deere-Hitachi joint venture recorded in 2022. Research and development expenses were higher due to continued focus on developing and incorporating technology solutions. Selling, administrative and general expenses increased mostly due to higher employee pay driven by inflationary conditions, profit-sharing incentives, commissions paid to dealers, as well as the cumulative correction of the accounting treatment for financing incentives offered to John Deere dealers. The provision for income taxes was higher as a result of higher pretax income as well as the prior period exclusion of the Deere-Hitachi joint-venture remeasurement gain from tax-effected income.
Business Segment Results
For the equipment operations, higher production costs were mostly due to elevated cost of purchased components, energy, salaries, and wages.
30
Three Months Ended
Six Months Ended
Production and Precision Agriculture
April 30
May 1
%
April 30
May 1
%
(In millions of dollars)
2023
2022
Change
2023
2022
Change
Net sales
$
7,822
$
5,117
+53
$
13,021
$
8,473
+54
Operating profit
2,170
1,057
+105
3,378
1,353
+150
Operating margin
27.7%
20.7%
25.9%
16.0%
Price realization
+20
+21
Currency translation impact on Net sales
-3
-2
Production and precision agriculture sales increased for the quarter as a result of higher shipment volumes (primarily in the U.S., Brazil, Europe, and Canada) and price realization in most end markets. Operating profit improved primarily due to price realization and improved sales volumes. These items were partially offset by increased selling, administrative and general expenses and research and development expenses, higher production costs, and the unfavorable effects of foreign currency exchange mostly due to a stronger U.S. dollar.
Sales for the first six months increased as a result of higher shipment volumes (primarily in the U.S., Canada, Brazil, and Europe) and price realization. Operating profit for the first six months increased primarily from price realization and higher sales volume. Partially offsetting these factors were higher production costs, higher selling, administrative, and general expenses and research and development expenses, and the unfavorable effects of foreign currency exchange mostly due to a stronger U.S. dollar.
31
Three Months Ended
Six Months Ended
Small Agriculture and Turf
April 30
May 1
%
April 30
May 1
%
(In millions of dollars)
2023
2022
Change
2023
2022
Change
Net sales
$
4,145
$
3,570
+16
$
7,146
$
6,201
+15
Operating profit
849
520
+63
1,296
891
+45
Operating margin
20.5%
14.6%
18.1%
14.4%
Price realization
+12
+12
Currency translation impact on Net sales
-2
-3
Small agriculture and turf sales increased for the quarter due to price realization in most end markets and higher shipment volumes (primarily in Europe, Mexico, and China), partially offset by the negative effects of foreign currency translation. Operating profit improved primarily as a result of price realization and improved sales volumes / mix. These items were partially offset by higher production costs, increased selling, administrative and general expenses and research and development expenses, and the unfavorable effects of foreign currency exchange mostly due to a stronger U.S. dollar.
Sales for the first six months increased mainly as a result of price realization and higher shipment volumes (primarily in Europe and Mexico), partially offset by the unfavorable impact of currency translation. Operating profit for the first six months improved primarily as a result of price realization and improved sales volumes / mix. These items were partially offset by higher production costs, higher selling, administrative, and general expenses and research and development expenses, and the unfavorable effects of foreign currency exchange mostly due to a stronger U.S. dollar.
32
Three Months Ended
Six Months Ended
Construction and Forestry
April 30
May 1
%
April 30
May 1
%
(In millions of dollars)
2023
2022
Change
2023
2022
Change
Net sales
$
4,112
$
3,347
+23
$
7,314
$
5,891
+24
Operating profit
838
814
+3
1,463
1,085
+35
Operating margin
20.4%
24.3%
20.0%
18.4%
Price realization
+13
+13
Currency translation impact on Net sales
-1
-2
Construction and forestry sales moved higher for the quarter primarily due to price realization and higher shipment volumes. Operating profit improved due to price realization and improved sales volumes / mix, partially offset by higher production costs, higher selling, administrative, and general expenses and research and development expenses. Prior period results benefited from the non-cash gain on the remeasurement of previously held equity investment in the Deere-Hitachi joint venture.
The segment’s six-month sales increased due to higher shipment volumes and price realization partially offset by the unfavorable impact of currency translation. The first six-month’s operating profit moved higher due to price realization and higher sales volumes, partially offset by higher production costs. Prior period results benefitted from the non-cash gain on the remeasurement of the previously held equity investment in the Deere-Hitachi joint venture.
33
Three Months Ended
Six Months Ended
Financial Services
April 30
May 1
%
April 30
May 1
%
(In millions of dollars)
2023
2022
Change
2023
2022
Change
Revenue (including intercompany)
$
1,297
$
951
+36
$
2,542
$
1,867
+36
Interest expense
540
112
+382
983
270
+264
Net income
28
208
-87
212
439
-52
The average balance of receivables and leases financed was 18 percent higher in the second quarter of 2023, and 17 percent higher in the first six months of 2023 compared with the same periods last year. Revenue also increased due to higher average financing rates in both periods. Interest expense increased compared to both prior periods as a result of higher average borrowing rates and higher average borrowings. Financial services net income for both periods decreased primarily due to less-favorable financing spreads and a higher provision for credit losses, partially offset by income earned on a higher average portfolio. Net income for the first six months of the year was also impacted by unfavorable derivative market valuation adjustments. Additionally impacting the results for both periods was a $135 million after-tax correction of the accounting treatment for financing incentives offered to John Deere dealers, which affected the timing of expense recognition and the presentation of incentive costs in the consolidated financial statements. The accounting correction is unrelated to current market conditions or the credit quality of the financial services portfolio, which remains strong. The allowance for credit losses, excluding the portfolio in Russia, was .40 percent of financing receivables as of April 30, 2023, compared with .42 percent as of May 1, 2022.
Critical Accounting Estimates
See the Company’s critical accounting estimates discussed in the Management’s Discussion and Analysis of the most recently filed Annual Report on Form 10-K. There have been no material changes to these policies.
CAPITAL RESOURCES AND LIQUIDITY
Sources of Liquidity, Key Metrics and Balance Sheet Data
The Company has access to most global capital markets at a reasonable cost. Sources of liquidity for the Company include cash and cash equivalents, marketable securities, funds from operations, the issuance of commercial paper and term debt, the securitization of retail notes (both public and private markets), and bank lines of credit. The Company closely monitors its liquidity sources against the cash requirements and expects to have sufficient sources of global funding and liquidity to meet its funding needs in the short term (next 12 months) and long term (beyond 12 months). The Company operates in multiple industries, which have different funding requirements. The production and precision agriculture, small agriculture and turf, and construction and forestry segments are capital intensive and are typically subject to seasonal variations in financing requirements for inventories and certain receivables from dealers. However, the patterns of seasonality in inventory have been affected by increases in production rates and supply chain disruptions experienced during fiscal year 2022. Supply chain conditions have begun trending towards more normalized levels in 2023, though disruptions remain above historical performance. The financial services operations rely on their ability to raise substantial amounts of funds to finance their receivable and lease portfolios.
Key metrics are provided in the following table, in millions of dollars:
April 30
October 30
May 1
2023
2022
2022
Cash, cash equivalents, and marketable securities
$
6,123
$
5,508
$
4,560
Trade accounts and notes receivable – net
9,971
6,410
6,258
Ratio to prior 12 month’s net sales
18%
13%
15%
Inventories
9,713
8,495
9,030
Ratio to prior 12 month’s cost of sales
25%
24%
29%
Unused credit lines
785
3,284
4,608
Financial Services:
Ratio of interest-bearing debt to stockholder’s equity
8.0 to 1
8.5 to 1
7.8 to 1
34
The reduction in unused credit lines in 2023 compared to both prior periods relates to an increase in commercial paper outstanding due to changes in receivables and funding mix. The Company forecasts higher operating cash flows in 2023 driven by an increase in net income adjusted for non-cash provisions and a favorable change in working capital.
There have been no material changes to the contractual and other cash requirements identified in the Company’s most recently issued Annual Report on Form 10-K.
Cash Flows (in millions of dollars)
Six Months Ended
April 30, 2023
May 1, 2022
Net cash used for operating activities
$
(147)
$
(1,762)
Net cash used for investing activities
(1,494)
(1,888)
Net cash provided by (used for) financing activities
2,017
(386)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
70
(110)
Net increase (decrease) in cash, cash equivalents, and restricted cash
$
446
$
(4,146)
Cash outflows from operating activities in the first six months of 2023 were $147 million. This resulted mainly from a working capital change, partially offset by net income adjusted for non-cash provisions. Cash outflows from investing activities were $1,494 million in the first six months of 2023. The primary drivers were growth in the retail customer receivable portfolio and purchases of property and equipment. Cash inflows from financing activities were $2,017 million in the first six months of 2023, as higher external borrowings of $5,293 million to support working capital requirements were offset by repurchases of common stock and dividends paid. Cash, cash equivalents, and restricted cash increased $446 million during the first six months of 2023.
Trade Accounts and Notes Receivable. Trade accounts and notes receivable arise from sales of goods to customers. Trade receivables increased $3,561 million during the first six months of 2023, primarily due to a seasonal increase and higher sales volumes, as well as the effect of foreign currency translation. These receivables increased $3,713 million, compared to a year ago, primarily due to higher sales volumes. The percentage of total worldwide trade receivables outstanding for periods exceeding 12 months was 1 percent at each of April 30, 2023, October 30, 2022, and May 1, 2022.
Financing Receivables and Equipment on Operating Leases . Financing receivables and equipment on operating leases consist of retail notes originated in connection with financing of new and used equipment, operating leases, revolving charge accounts, sales-type and direct financing leases, and wholesale notes. Financing receivables and equipment on operating leases increased $1,944 million during the first six months of 2023 and increased $6,514 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 six months of 2023, compared with the same period last year, as volumes of wholesale notes, retail notes, revolving charge accounts, operating leases, and finance leases were higher compared to May 1, 2022.
Inventories . Inventories increased by $1,218 million during the first six months of 2023 and increased by $683 million compared to a year ago. The increases were due to higher forecasted sales volumes and supply chain disruptions. The effect of foreign currency translation also increased inventories during the first six months of 2023. A majority of these inventories are valued on the last-in, first out (LIFO) method.
Property and Equipment . Property and equipment cash expenditures in the first six months of 2023 were $584 million, compared with $346 million in the same period last year. Capital expenditures in 2023 are estimated to be approximately $1,500 million.
Accounts Payable and Accrued Expenses . Accounts payable and accrued expenses decreased by $106 million in the first six months of 2023. Accounts payable and accrued expenses increased $2,037 million compared to a year ago due to an increase in accrued expenses associated with accrued taxes, employee benefits, product warranties, and dealer sales discounts.
Borrowings . Total external borrowings have changed generally corresponding with the level of the receivable and the lease portfolio, as well as other working capital requirements.
John Deere Capital Corporation (Capital Corporation), a U.S. financial services subsidiary, has a revolving warehouse facility to utilize bank conduit facilities to securitize retail notes (see Note 9). The facility was renewed in November 2022 with an expiration in November 2023 and increased the total capacity or “financing limit” from $1,000 million to $1,500 million. At April 30, 2023, $948 million of securitization borrowings was outstanding
35
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 six months of 2023, the financial services operations issued $1,289 million and retired $1,622 million of retail note securitization borrowings, which are presented in “Increase (decrease) in total short-term borrowings.”
Lines of Credit . The Company also has access to bank lines of credit with various banks throughout the world. Worldwide lines of credit totaled $10,309 million at April 30, 2023, $785 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 April 30, 2023 was a 364-day credit facility agreement of $5,000 million expiring in the second quarter of 2024. In addition, total credit lines included long-term credit facility agreements of $2,500 million expiring in the second quarter of 2027 and $2,500 million expiring in the second quarter of 2028. These credit agreements require Capital Corporation and other parts of the Company to maintain certain performance metrics and liquidity targets. All of the requirements in the credit agreements have been met during the periods included in the financial statements.
Debt Ratings . To access public debt capital markets, the Company relies on credit rating agencies to assign short-term and long-term credit ratings to the Company’s debt securities as an indicator of credit quality for fixed income investors. A security rating is not a recommendation by the rating agency to buy, sell, or hold Company securities. A credit rating agency may change or withdraw ratings based on its assessment of the Company’s current and future ability to meet interest and principal repayment obligations. Each agency’s rating should be evaluated independently of any other rating. Lower credit ratings generally result in higher borrowing costs, including costs of derivative transactions, and reduced access to debt capital markets. The senior long-term and short-term debt ratings and outlook currently assigned to unsecured Company securities by the rating agencies engaged by the Company are as follows:
Senior
Long-Term
Short-Term
Outlook
Fitch Ratings
A+
F1
Stable
Moody’s Investors Service, Inc.
A2
Prime-1
Positive
Standard & Poor’s
A
A-1
Stable
Forward-Looking Statements
Certain statements contained herein, including in the section entitled “Overview , ” relating to future events, expectations, and trends constitute “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Some of these risks and uncertainties could affect all lines of the Company’s operations generally while others could more heavily affect a particular line of business.
Forward- looking statements are based on currently available information and current assumptions, expectations, and projections about future events and should not be relied upon. Except as required by law, the Company expressly disclaims any obligation to update or revise its forward-looking statements. Many factors, risks, and uncertainties could cause actual results to differ materially from these forward-looking statements. Among these factors are risks related to:
● 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;
● adverse macroeconomic conditions, including unemployment, inflation, rising interest rates, changes in consumer practices due to slower economic growth or possible recession, and regional or global liquidity constraints;
● growth and sustainability of non-food uses for crops (including ethanol and biodiesel production);
● the 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 customers’ changing expectations and demand for John Deere products and solutions;
● 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;
● the Company’s ability to adapt in highly competitive markets;
36
● dealer practices and their ability to manage distribution of John Deere products and support and service precision technology solutions;
● changes in climate patterns, unfavorable weather events and natural disasters;
● higher interest rates and currency fluctuations which could adversely affect the U.S. dollar, customer confidence, access to capital, and demand for our products and solutions;
● stress in the banking sector may have adverse impacts on vendors or customers as well as on the Company’s ability to access cash deposits;
● uncertainty related to prolonged negotiations regarding the U.S. federal debt ceiling or the U.S. government’s failure to raise the debt ceiling;
● 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;
● 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, and availability of transport for crops; and
● housing starts and supply, real estate and housing prices, levels of public and non-residential construction, and infrastructure investment.
Further information concerning the Company and its businesses, including factors that could materially affect the Company’s financial results, is included in the Company’s other filings with the SEC (including, but not limited to, the factors discussed in Item 1A. “Risk Factors” of our Annual Report on Form 10-K and this Quarterly Report on Form 10-Q). There also may be other factors that we cannot anticipate or that are not described herein because we do not currently perceive them to be material.
Supplemental Consolidating Information
The supplemental consolidating data presented on the subsequent pages is presented for informational purposes. The equipment operations represents the enterprise without financial services. The equipment operations includes the Company’s production and precision agriculture operations, small agriculture and turf operations, construction and forestry operations, and other corporate assets, liabilities, revenues, and expenses not reflected within financial services. Transactions between the equipment operations and financial services have been eliminated to arrive at the consolidated financial statements.
The equipment operations and financial services participate in different industries. The equipment operations primarily generate earnings and cash flows by manufacturing and selling equipment, service parts, and technology solutions to dealers and retail customers. Financial services finances sales and leases by dealers of new and used equipment that is largely manufactured by the Company. Those earnings and cash flows generally are the difference between the finance income received from customer payments less interest expense, and depreciation on equipment subject to an operating lease. The two businesses are capitalized differently and have separate performance metrics. The supplemental consolidating data is also used by management due to these differences.
37
DEERE & COMPANY
SUPPLEMENTAL CONSOLIDATING DATA
STATEMENTS OF INCOME
For the Three Months Ended April 30, 2023 and May 1, 2022
(In millions of dollars) Unaudited
EQUIPMENT
FINANCIAL
OPERATIONS
SERVICES
ELIMINATIONS
CONSOLIDATED
2023
2022
2023
2022
2023
2022
2023
2022
Net Sales and Revenues
Net sales
$
16,079
$
12,034
$
16,079
$
12,034
Finance and interest income
121
36
$
1,206
$
847
$
(248)
$
(87)
1,079
796
1
Other income
185
584
91
104
(47)
(148)
229
540
2, 3
Total
16,385
12,654
1,297
951
(295)
(235)
17,387
13,370
Costs and Expenses
Cost of sales
10,737
8,919
(7)
(1)
10,730
8,918
4
Research and development expenses
547
453
547
453
Selling, administrative and general expenses
935
753
397
181
(2)
(2)
1,330
932
4
Interest expense
103
97
540
112
(74)
(22)
569
187
5
Interest compensation to Financial Services
174
62
(174)
(62)
5
Other operating expenses
85
99
316
377
(38)
(148)
363
328
6, 7
Total
12,581
10,383
1,253
670
(295)
(235)
13,539
10,818
Income before Income Taxes
3,804
2,271
44
281
3,848
2,552
Provision for income taxes
974
387
17
74
991
461
Income after Income Taxes
2,830
1,884
27
207
2,857
2,091
Equity in income of unconsolidated affiliates
1
5
1
1
2
6
Net Income
2,831
1,889
28
208
2,859
2,097
Less: Net loss attributable to noncontrolling interests
(1)
(1)
(1)
(1)
Net Income Attributable to Deere & Company
$
2,832
$
1,890
$
28
$
208
$
2,860
$
2,098
1 Elimination of financial services’ interest income earned from equipment operations.
2 Elimination of equipment operations’ margin from inventory transferred to equipment on operating leases.
3 Elimination of financial services’ income related to intercompany guarantees of investments in certain international markets and intercompany service revenue.
4 Elimination of intercompany service fees.
5 Elimination of equipment operations’ interest expense to financial services.
6 Elimination of financial services’ lease depreciation expense related to inventory transferred to equipment on operating leases.
7 Elimination of equipment operations’ expense related to intercompany guarantees of investments in certain international markets and intercompany service expenses.
38
DEERE & COMPANY
SUPPLEMENTAL CONSOLIDATING DATA (Continued)
STATEMENTS OF INCOME
For the Six Months Ended April 30, 2023 and May 1, 2022
(In millions of dollars) Unaudited
EQUIPMENT
FINANCIAL
OPERATIONS
SERVICES
ELIMINATIONS
CONSOLIDATED
2023
2022
2023
2022
2023
2022
2023
2022
Net Sales and Revenues
Net sales
$
27,481
$
20,565
$
27,481
$
20,565
Finance and interest income
234
70
$
2,274
$
1,675
$
(435)
$
(150)
2,073
1,595
1
Other income
417
801
268
192
(201)
(214)
484
779
2, 3
Total
28,132
21,436
2,542
1,867
(636)
(364)
30,038
22,939
Costs and Expenses
Cost of sales
18,675
15,614
(12)
(1)
18,663
15,613
4
Research and development expenses
1,043
855
1,043
855
Selling, administrative and general expenses
1,719
1,410
569
307
(5)
(4)
2,283
1,713
4
Interest expense
204
188
983
270
(138)
(41)
1,049
417
5
Interest compensation to Financial Services
297
106
(297)
(106)
5
Other operating expenses
137
138
707
712
(184)
(212)
660
638
6, 7
Total
22,075
18,311
2,259
1,289
(636)
(364)
23,698
19,236
Income before Income Taxes
6,057
3,125
283
578
6,340
3,703
Provision for income taxes
1,455
568
73
142
1,528
710
Income after Income Taxes
4,602
2,557
210
436
4,812
2,993
Equity in income of unconsolidated affiliates
1
5
2
3
3
8
Net Income
4,603
2,562
212
439
4,815
3,001
Less: Net loss attributable to noncontrolling interests
(4)
(4)
Net Income Attributable to Deere & Company
$
4,607
$
2,562
$
212
$
439
$
4,819
$
3,001
1 Elimination of financial services’ interest income earned from equipment operations.
2 Elimination of equipment operations’ margin from inventory transferred to equipment on operating leases.
3 Elimination of financial services’ income related to intercompany guarantees of investments in certain international markets and intercompany service revenue.
4 Elimination of intercompany service fees.
5 Elimination of equipment operations’ interest expense to financial services.
6 Elimination of financial services’ lease depreciation expense related to inventory transferred to equipment on operating leases.
7 Elimination of equipment operations’ expense related to intercompany guarantees of investments in certain international markets and intercompany service expenses.
39
DEERE & COMPANY
SUPPLEMENTAL CONSOLIDATING DATA (Continued)
CONDENSED BALANCE SHEETS
(In millions of dollars) Unaudited
EQUIPMENT
FINANCIAL
OPERATIONS
SERVICES
ELIMINATIONS
CONSOLIDATED
Apr 30
Oct 30
May 1
Apr 30
Oct 30
May 1
Apr 30
Oct 30
May 1
Apr 30
Oct 30
May 1
2023
2022
2022
2023
2022
2022
2023
2022
2022
2023
2022
2022
Assets
Cash and cash equivalents
$
3,587
$
3,767
$
3,167
$
1,680
$
1,007
$
711
$
5,267
$
4,774
$
3,878
Marketable securities
14
61
2
842
673
680
856
734
682
Receivables from Financial Services
5,899
6,569
5,669
$
(5,899)
$
(6,569)
$
(5,669)
8
Trade accounts and notes receivable – net
1,562
1,273
1,358
10,422
6,434
6,079
(2,013)
(1,297)
(1,179)
9,971
6,410
6,258
9
Financing receivables – net
54
47
49
38,900
36,587
34,036
38,954
36,634
34,085
Financing receivables securitized – net
1
6
5,658
5,936
4,067
5,659
5,936
4,073
Other receivables
2,201
1,670
1,944
481
832
405
(89)
(10)
(43)
2,593
2,492
2,306
9
Equipment on operating leases – net
6,524
6,623
6,465
6,524
6,623
6,465
Inventories
9,713
8,495
9,030
9,713
8,495
9,030
Property and equipment – net
6,254
6,021
5,678
34
35
37
6,288
6,056
5,715
Goodwill
3,963
3,687
3,812
3,963
3,687
3,812
Other intangible assets – net
1,222
1,218
1,352
1,222
1,218
1,352
Retirement benefits
3,450
3,666
2,996
69
66
65
(2)
(2)
3,519
3,730
3,059
10
Deferred income taxes
1,355
940
1,247
59
45
49
(106)
(161)
(192)
1,308
824
1,104
11
Other assets
1,961
1,794
1,767
564
626
516
(15)
(3)
(3)
2,510
2,417
2,280
9
Total Assets
$
41,236
$
39,208
$
38,077
$
65,233
$
58,864
$
53,110
$
(8,122)
$
(8,042)
$
(7,088)
$
98,347
$
90,030
$
84,099
Liabilities and Stockholders’ Equity
Liabilities
Short-term borrowings
$
1,755
$
1,040
$
1,554
$
15,354
$
11,552
$
10,859
$
17,109
$
12,592
$
12,413
Short-term securitization borrowings
5
5,379
5,711
4,001
5,379
5,711
4,006
Payables to Equipment Operations
5,899
6,569
5,669
$
(5,899)
$
(6,569)
$
(5,669)
8
Accounts payable and accrued expenses
13,759
12,962
11,370
3,074
3,170
2,534
(2,117)
(1,310)
(1,225)
14,716
14,822
12,679
9
Deferred income taxes
402
380
454
215
276
322
(106)
(161)
(192)
511
495
584
11
Long-term borrowings
7,310
7,917
8,556
28,301
25,679
23,891
35,611
33,596
32,447
Retirement benefits and other liabilities
2,410
2,351
2,855
110
108
111
(2)
(2)
2,520
2,457
2,964
10
Total liabilities
25,636
24,650
24,794
58,332
53,065
47,387
(8,122)
(8,042)
(7,088)
75,846
69,673
65,093
Commitments and contingencies (Note 16)
Redeemable noncontrolling interest
102
92
99
102
92
99
Stockholders’ Equity
Total Deere & Company stockholders’ equity
22,395
20,262
18,904
6,901
5,799
5,723
(6,901)
(5,799)
(5,723)
22,395
20,262
18,904
12
Noncontrolling interests
4
3
3
4
3
3
Financial Services’ equity
(6,901)
(5,799)
(5,723)
6,901
5,799
5,723
12
Adjusted total stockholders’ equity
15,498
14,466
13,184
6,901
5,799
5,723
22,399
20,265
18,907
Total Liabilities and Stockholders’ Equity
$
41,236
$
39,208
$
38,077
$
65,233
$
58,864
$
53,110
$
(8,122)
$
(8,042)
$
(7,088)
$
98,347
$
90,030
$
84,099
8 Elimination of receivables / payables between equipment operations and financial services.
9 Primarily reclassification of sales incentive accruals on receivables sold to financial services.
10 Reclassification of net pension assets / liabilities.
11 Reclassification of deferred tax assets / liabilities in the same taxing jurisdictions.
12 Elimination of financial services’ equity.
40
DEERE & COMPANY
SUPPLEMENTAL CONSOLIDATING DATA (Continued)
STATEMENTS OF CASH FLOWS
For the Six Months Ended April 30, 2023 and May 1, 2022
(In millions of dollars) Unaudited
EQUIPMENT
FINANCIAL
OPERATIONS
SERVICES
ELIMINATIONS
CONSOLIDATED
2023
2022
2023
2022
2023
2022
2023
2022
Cash Flows from Operating Activities
Net income
$
4,603
$
2,562
$
212
$
439
$
4,815
$
3,001
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Provision (credit) for credit losses
4
1
(93)
44
(89)
45
Provision for depreciation and amortization
565
518
500
530
$
(70)
$
(115)
995
933
13
Impairments and other adjustments
77
173
173
77
Share-based compensation expense
54
44
54
44
14
Gain on remeasurement of previously held equity investment
(326)
(326)
Distributed earnings of Financial Services
12
232
(12)
(232)
15
Provision (credit) for deferred income taxes
(304)
75
(73)
(38)
(377)
37
Changes in assets and liabilities:
Receivables related to sales
(255)
(215)
(4,152)
(1,320)
(4,407)
(1,535)
16, 18, 19
Inventories
(910)
(2,201)
(72)
(64)
(982)
(2,265)
17
Accounts payable and accrued expenses
161
(99)
243
(7)
(717)
(337)
(313)
(443)
18
Accrued income taxes payable/receivable
(97)
(144)
1
5
(96)
(139)
Retirement benefits
(67)
(1,024)
(1)
4
(68)
(1,020)
Other
54
(102)
103
(117)
(9)
48
148
(171)
13, 14, 17
Net cash provided by (used for) operating activities
3,766
(646)
1,065
860
(4,978)
(1,976)
(147)
(1,762)
Cash Flows from Investing Activities
Collections of receivables (excluding receivables related to sales)
13,169
12,004
(576)
(814)
12,593
11,190
16
Proceeds from sales of equipment on operating leases
993
1,035
993
1,035
Proceeds from sales of businesses and unconsolidated affiliates, net of cash sold
36
36
Cost of receivables acquired (excluding receivables related to sales)
(13,584)
(12,260)
133
289
(13,451)
(11,971)
16
Acquisitions of businesses, net of cash acquired
(41)
(473)
(41)
(473)
Purchases of property and equipment
(583)
(345)
(1)
(1)
(584)
(346)
Cost of equipment on operating leases acquired
(1,327)
(1,090)
98
86
(1,229)
(1,004)
17
Increase in investment in Financial Services
(799)
799
20
Increase in trade and wholesale receivables
(5,310)
(2,159)
5,310
2,159
16
Collateral on derivatives – net
6
367
(254)
367
(248)
Other
(37)
(46)
(142)
(49)
1
24
(178)
(71)
19
Net cash used for investing activities
(1,460)
(858)
(5,799)
(2,774)
5,765
1,744
(1,494)
(1,888)
Cash Flows from Financing Activities
Increase (decrease) in total short-term borrowings
(225)
128
4,217
684
3,992
812
Change in intercompany receivables/payables
932
(424)
(932)
424
Proceeds from long-term borrowings
41
55
4,827
4,243
4,868
4,298
Payments of long-term borrowings
(47)
(308)
(3,520)
(3,317)
(3,567)
(3,625)
Proceeds from issuance of common stock
30
50
30
50
Repurchases of common stock
(2,546)
(1,226)
(2,546)
(1,226)
Capital investment from Equipment Operations
799
(799)
20
Dividends paid
(697)
(649)
(12)
(232)
12
232
(697)
(649)
15
Other
(35)
(27)
(28)
(19)
(63)
(46)
Net cash provided by (used for) financing activities
(2,547)
(2,401)
5,351
1,783
(787)
232
2,017
(386)
Effect of Exchange Rate Changes on Cash, Cash Equivalents, and Restricted Cash
62
(113)
8
3
70
(110)
Net Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash
(179)
(4,018)
625
(128)
446
(4,146)
Cash, Cash Equivalents, and Restricted Cash at Beginning of Period
3,781
7,200
1,160
925
4,941
8,125
Cash, Cash Equivalents, and Restricted Cash at End of Period
$
3,602
$
3,182
$
1,785
$
797
$
5,387
$
3,979
Components of Cash, Cash Equivalents, and Restricted Cash
Cash and cash equivalents
$
3,587
$
3,167
$
1,680
$
711
$
5,267
$
3,878
Restricted cash (Other assets)
15
15
105
86
120
101
Total Cash, Cash Equivalents, and Restricted Cash
$
3,602
$
3,182
$
1,785
$
797
$
5,387
$
3,979
13 Elimination of depreciation on leases related to inventory transferred to equipment on operating leases.
14 Reclassification of share-based compensation expense.
15 Elimination of dividends from financial services to the equipment operations, which are included in the equipment operations’ operating activities.
16 Primarily reclassification of receivables related to the sale of equipment.
17 Reclassification of direct lease agreements with retail customers.
18 Reclassification of sales incentive accruals on receivables sold to financial services.
19 Elimination and reclassification of the effects of financial services partial financing of the construction and forestry retail locations sales and subsequent collection of those amounts.
20 Elimination of investment from equipment operations to financial services
41
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.