UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 29, 2023
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file no: 1-4121
(Exact name of registrant as specified in its charter)
Delaware | 36-2382580 |
One John Deere Place
Moline, Illinois 61265
(Address of principal executive offices)
Telephone Number: (309) 765-8000
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol | Name of each exchange on which registered | ||
Common stock, $1 par value | DE | New York Stock Exchange | ||
6.55% Debentures Due 2028 | DE28 | New York Stock Exchange |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☒ | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
Emerging growth company | ☐ | ||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
At January 29, 2023, 296,322,273 shares of common stock, $1 par value, of the registrant were outstanding.
PART I. FINANCIAL INFORMATION
See Condensed Notes to Interim Consolidated Financial Statements.
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See Condensed Notes to Interim Consolidated Financial Statements.
3
See Condensed Notes to Interim Consolidated Financial Statements.
4
See Condensed Notes to Interim Consolidated Financial Statements.
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See Condensed Notes to Interim Consolidated Financial Statements.
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Condensed Notes to Interim Consolidated Financial Statements (Unaudited)
(1) Organization and Consolidation
Deere & Company has been developing innovative solutions to help its customers become more profitable for more than 185 years. References to Deere & Company, John Deere, Deere, or the Company include its consolidated subsidiaries and consolidated variable interest entities (VIEs). The Company is managed through the following operating segments: production and precision agriculture (PPA), small agriculture and turf (SAT), construction and forestry (CF), and financial services (FS). References to “equipment operations” include production and precision agriculture, small agriculture and turf, and construction and forestry, while references to “agriculture and turf” include both production and precision agriculture and small agriculture and turf.
The Company uses a 52/53 week fiscal year with quarters ending on the last Sunday in the reporting period. The first quarter ends for fiscal year 2023 and 2022 were January 29, 2023 and January 30, 2022, respectively. Both periods contained 13 weeks. Unless otherwise stated, references to particular years, quarters, or months refer to the Company’s fiscal years generally ending in October and the associated periods in those fiscal years.
(2) Summary of Significant Accounting Policies and New Accounting Standards
Quarterly Financial Statements
The interim consolidated financial statements of Deere & Company have been prepared by the Company, without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the U.S. have been condensed or omitted as permitted by such rules and regulations. All normal recurring adjustments have been included. Management believes the disclosures are adequate to present fairly the financial position, results of operations, and cash flows at the dates and for the periods presented. It is suggested these interim consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto appearing in the Company’s latest Annual Report on Form 10-K. Results for interim periods are not necessarily indicative of those to be expected for the fiscal year.
Use of Estimates in Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts and related disclosures. Actual results could differ from those estimates.
New Accounting Standards
The Company closely monitors all Accounting Standard Updates (ASUs) issued by the Financial Accounting Standards Board and other authoritative guidance. ASUs adopted in 2023 did not have a material impact on the Company’s financial statements. ASUs to be adopted in future periods are being evaluated and at this point are not expected to have a material impact on the Company’s financial statements.
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(3) Revenue Recognition
The Company’s net sales and revenues by primary geographic market, major product line, and timing of revenue recognition in millions of dollars follow:
Three Months Ended January 30, 2022 | ||||||||||||||||
Production & Precision Ag | Small Ag & Turf | Construction & Forestry | Financial Services | Total | ||||||||||||
Primary geographic markets: |
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United States | $ | 1,608 | $ | 1,438 | $ | 1,260 | $ | 573 | $ | 4,879 | ||||||
Canada | 139 | 122 | 332 |
| 152 |
| 745 | |||||||||
Western Europe | 467 | 532 | 358 |
| 26 |
| 1,383 | |||||||||
Central Europe and CIS | 202 | 126 | 195 |
| 11 |
| 534 | |||||||||
Latin America | 776 | 104 | 228 |
| 68 |
| 1,176 | |||||||||
Asia, Africa, Oceania, and Middle East | 241 | 352 | 219 | 40 | 852 | |||||||||||
Total | $ | 3,433 | $ | 2,674 | $ | 2,592 | $ | 870 | $ | 9,569 | ||||||
Major product lines: |
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Production agriculture | $ | 3,283 |
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| $ | 3,283 | ||||||||||
Small agriculture | $ | 1,932 |
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| 1,932 | |||||||||
Turf | 627 |
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| 627 | ||||||||||
Construction |
| $ | 1,175 |
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| 1,175 | |||||||||
Compact construction |
| 321 |
| 321 | ||||||||||||
Roadbuilding |
| 692 |
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| 692 | ||||||||||
Forestry |
| 305 |
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| 305 | ||||||||||
Financial products | 12 | 11 | 5 | $ | 870 |
| 898 | |||||||||
Other | 138 | 104 | 94 |
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| 336 | |||||||||
Total | $ | 3,433 | $ | 2,674 | $ | 2,592 | $ | 870 | $ | 9,569 | ||||||
Revenue recognized: |
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At a point in time | $ | 3,396 | $ | 2,654 | $ | 2,570 | $ | 24 | $ | 8,644 | ||||||
Over time | 37 | 20 | 22 | 846 | 925 | |||||||||||
Total | $ | 3,433 | $ | 2,674 | $ | 2,592 | $ | 870 | $ | 9,569 | ||||||
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The Company invoices in advance of recognizing the sale of certain products and the revenue for certain services. These relate to extended warranty premiums, advance payments for future equipment sales, and subscription and service revenue related to precision guidance and telematic services. These advanced customer payments are presented as deferred revenue, a contract liability, in “Accounts payable and accrued expenses” in the consolidated balance sheets. The deferred revenue received, but not recognized in revenue, including extended warranty premiums also shown in Note 16, was $1,502 million, $1,423 million, and $1,348 million at January 29, 2023, October 30, 2022, and January 30, 2022, respectively. The contract liability is reduced as the revenue is recognized. During the three months ended January 29, 2023 and January 30, 2022, $215 million and $265 million, respectively, of revenue was recognized from deferred revenue that was recorded as a contract liability at the beginning of the respective fiscal year.
The amount of unsatisfied performance obligations for contracts with an original duration greater than one year is $1,282 million at January 29, 2023. The estimated revenue to be recognized by fiscal year in millions of dollars follows: remainder of - $278, - $332, - $260, - $168, - $100, - $61, and - $83. As permitted, the Company elected only to disclose remaining performance obligations with an original contract duration greater than one year. The contracts with an expected duration of one year or less are for sales of equipment, service parts, repair services, and certain telematics services.
(4) Other Comprehensive Income Items
The after-tax components of accumulated other comprehensive income (loss) in millions of dollars follow:
Following are amounts recorded in and reclassifications out of other comprehensive income (loss), and the income tax effects, in millions of dollars. Retirement benefits adjustment reclassifications for actuarial (gain) loss, prior service (credit) cost, and settlements are included in net periodic pension and other postretirement benefit costs (see Note 6).
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(5) Earnings Per Share
A reconciliation of basic and diluted net income per share attributable to Deere & Company follows in millions, except per share amounts:
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(6) Pension and Other Postretirement Benefits
The Company has several defined benefit pension plans and postretirement benefit (OPEB) plans, primarily health care and life insurance plans, covering its U.S. employees and employees in certain foreign countries. The components of net periodic pension and OPEB (benefit) cost consisted of the following in millions of dollars:
The reduction in the 2023 pension net (benefit) cost is due to increases in the expected long-term return rates on plan assets and increases in discount rates. The components of net periodic pension and OPEB (benefit) cost excluding the service cost component are included in the line item “Other operating expenses” in the statements of consolidated income.
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(7) Segment Reporting
Worldwide Net sales and revenues, operating profit, and identifiable assets by segment were as follows in millions of dollars.
Operating profit for production and precision ag, small ag and turf, and construction and forestry is income from continuing operations before reconciling items and income taxes. Operating profit of the financial services segment includes the effect of interest expense and foreign exchange gains and losses. Reconciling items to net income are primarily corporate expenses, certain external interest expenses, certain foreign exchange gains and losses, pension and OPEB benefit amounts excluding the service cost component, and net income attributable to noncontrolling interests.
(8) Financing Receivables
The Company monitors the credit quality of financing receivables based on delinquency status. Past due balances of financing receivables still accruing finance income represent the total balance held (principal plus accrued interest) with any payment amounts 30 days or more past the contractual payment due date. Non-performing financing receivables represent receivables for which the Company has ceased accruing finance income. The Company ceases accruing finance income when these receivables are generally 90 days delinquent. Generally, when receivables are 120 days delinquent the estimated uncollectible amount from the customer is written off to the allowance for credit losses. Finance income for non-performing receivables is recognized on a cash basis. Accrual of finance income is generally resumed when the receivable becomes contractually current and collections are reasonably assured.
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The credit quality analysis of retail notes, financing leases, and revolving charge accounts (collectively, retail customer receivables) by year of origination was as follows in millions of dollars:
October 30, 2022 | |||||||||||||||||||||||||
2022 | 2021 | 2020 | 2019 | 2018 | Prior Years | Revolving Charge Accounts | Total | ||||||||||||||||||
Retail customer receivables: |
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Agriculture and turf | |||||||||||||||||||||||||
Current | $ | 13,500 | $ | 7,984 | $ | 4,091 | $ | 1,875 | $ | 785 | $ | 200 | $ | 4,111 | $ | 32,546 | |||||||||
30-59 days past due | 46 | 63 | 36 | 17 | 7 | 3 | 19 | 191 | |||||||||||||||||
60-89 days past due | 14 | 25 | 13 | 6 | 2 | 1 | 5 | 66 | |||||||||||||||||
90+ days past due | 1 |
| 1 | ||||||||||||||||||||||
Non-performing | 27 | 60 | 44 | 28 | 18 | 19 | 8 | 204 | |||||||||||||||||
Construction and forestry | |||||||||||||||||||||||||
Current | 2,964 | 1,974 | 842 | 292 | 73 | 12 | 108 | 6,265 | |||||||||||||||||
30-59 days past due | 53 | 52 | 23 | 9 | 2 | 1 | 3 | 143 | |||||||||||||||||
60-89 days past due | 19 | 16 | 7 | 3 | 1 | 1 | 47 | ||||||||||||||||||
90+ days past due | 1 | 4 | 1 | 3 |
| 1 | 10 | ||||||||||||||||||
Non-performing | 25 | 61 | 34 | 19 | 7 | 3 | 149 | ||||||||||||||||||
Total retail customer receivables | $ | 16,650 | $ | 10,239 | $ | 5,091 | $ | 2,252 | $ | 895 | $ | 240 | $ | 4,255 | $ | 39,622 | |||||||||
January 30, 2022 | |||||||||||||||||||||||||
2022 | 2021 | 2020 | 2019 | 2018 | Prior Years | Revolving Charge Accounts | Total | ||||||||||||||||||
Retail customer receivables: |
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Agriculture and turf | |||||||||||||||||||||||||
Current | $ | 2,492 | $ | 11,580 | $ | 5,988 | $ | 3,038 | $ | 1,440 | $ | 761 | $ | 2,634 | $ | 27,933 | |||||||||
30-59 days past due | 5 | 82 | 52 | 30 | 15 | 6 | 25 | 215 | |||||||||||||||||
60-89 days past due | 1 | 23 | 18 | 10 | 5 | 3 | 5 | 65 | |||||||||||||||||
90+ days past due |
| 1 |
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| 1 | |||||||||||||||||
Non-performing | 1 | 33 | 58 | 52 | 31 | 36 | 6 | 217 | |||||||||||||||||
Construction and forestry | |||||||||||||||||||||||||
Current | 764 | 2,795 | 1,376 | 615 | 204 | 49 | 81 | 5,884 | |||||||||||||||||
30-59 days past due | 8 | 68 | 35 | 21 | 6 | 2 | 3 | 143 | |||||||||||||||||
60-89 days past due |
| 30 | 17 | 7 | 3 | 1 | 1 | 59 | |||||||||||||||||
90+ days past due |
| 2 | 3 | 3 | 1 | 8 |
| 17 | |||||||||||||||||
Non-performing |
| 33 | 48 | 37 | 14 | 7 | 1 | 140 | |||||||||||||||||
Total retail customer receivables | $ | 3,271 | $ | 14,647 | $ | 7,595 | $ | 3,813 | $ | 1,719 | $ | 873 | $ | 2,756 | $ | 34,674 | |||||||||
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The credit quality analysis of wholesale receivables by year of origination was as follows in millions of dollars:
October 30, 2022 | |||||||||||||||||||||||||
2022 | 2021 | 2020 | 2019 | 2018 | Prior Years | Revolving | Total | ||||||||||||||||||
Wholesale receivables: |
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Agriculture and turf | |||||||||||||||||||||||||
Current | $ | 387 | $ | 64 | $ | 27 | $ | 4 |
| $ | 2 | $ | 2,371 | $ | 2,855 | ||||||||||
30+ days past due |
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Non-performing |
| 1 | 1 | ||||||||||||||||||||||
Construction and forestry | |||||||||||||||||||||||||
Current | 7 | 29 | 2 | 1 |
| 1 | 377 | 417 | |||||||||||||||||
30+ days past due |
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Non-performing |
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Total wholesale receivables | $ | 394 | $ | 93 | $ | 29 | $ | 6 |
| $ | 3 | $ | 2,748 | $ | 3,273 | ||||||||||
January 30, 2022 | |||||||||||||||||||||||||
2022 | 2021 | 2020 | 2019 | 2018 | Prior Years | Revolving | Total | ||||||||||||||||||
Wholesale receivables: |
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Agriculture and turf | |||||||||||||||||||||||||
Current | $ | 101 | $ | 244 | $ | 56 | $ | 11 | $ | 7 | $ | 2 | $ | 1,426 | $ | 1,847 | |||||||||
30+ days past due |
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Non-performing |
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| 7 |
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| 7 | |||||||||||||||||
Construction and forestry | |||||||||||||||||||||||||
Current | 5 | 38 | 4 | 3 |
| 1 | 285 | 336 | |||||||||||||||||
30+ days past due |
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Non-performing |
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Total wholesale receivables | $ | 106 | $ | 282 | $ | 60 | $ | 21 | $ | 7 | $ | 4 | $ | 1,711 | $ | 2,191 | |||||||||
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An analysis of the allowance for credit losses and investment in financing receivables in millions of dollars during the periods follows:
In the first quarter of 2023, the Company determined that the financial services business in Russia met the held for sale criteria. The financing receivables in Russia were reclassified to “Other assets” and the associated allowance for credit losses was reversed (see Note 20). Excluding the portfolio in Russia, the allowance for credit losses decreased during the first quarter of 2023, as the financing receivables continue to benefit from strong fundamentals within the agricultural market.
(9) Securitization of Financing Receivables
As a part of its overall funding strategy, the Company periodically transfers certain financing receivables (retail notes) into VIEs that are special purpose entities (SPEs), or non-VIE banking operations, as part of its asset-backed securities programs (securitizations). The structure of these transactions is such that the transfer of the retail notes does not meet the accounting criteria for sales of receivables, and is, therefore, accounted for as a secured borrowing. SPEs utilized in securitizations of retail notes differ from other entities included in the Company’s consolidated statements because the assets they hold are legally isolated. Use of the assets held by the SPEs or the non-VIEs is restricted by terms of the documents governing the securitization transactions.
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The components of consolidated restricted assets, secured borrowings, and other liabilities related to secured borrowings in securitization transactions were as follows in millions of dollars:
(10) Inventories
A majority of inventory owned by Deere & Company and its U.S. equipment subsidiaries are valued at cost on the “last-in, first-out” (LIFO) basis. If all of the Company’s inventories had been valued on a “first-in, first-out” (FIFO) basis, estimated inventories by major classification in millions of dollars would have been as follows:
(11) Goodwill and Other Intangible Assets-Net
The changes in amounts of goodwill by operating segment were as follows in millions of dollars:
There were no accumulated goodwill impairment losses in the reported periods.
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The components of other intangible assets were as follows in millions of dollars:
In September 2017, the Company acquired Blue River Technology’s in-process research and development related to machine learning technology to optimize the use of farm inputs. Those research and development activities were completed, and the Company started amortizing the acquired technology in the second quarter of 2022.
The amortization of other intangible assets in the first quarter of 2023 and 2022 was $39 million and $28 million, respectively. The estimated amortization expense for the next five years is as follows in millions of dollars: remainder of 2023 – $132, 2024 – $167, 2025 – $139, 2026 – $119, 2027 – $118, and 2028 – $86.
(12) Short-Term Borrowings
Short-term borrowings were as follows in millions of dollars:
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(13) Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses were as follows in millions of dollars:
Amounts are presented net of eliminations, which primarily consist of dealer sales incentives with a right of set-off against trade receivables of $1,540 million at January 29, 2023, $1,280 million at October 30, 2022, and $983 million at January 30, 2022. Other eliminations were made for accrued taxes and other accrued expenses.
(14) Long-Term Borrowings
Long-term borrowings were as follows in millions of dollars:
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Medium-term notes serially due through 2032 are primarily offered by prospectus and issued at fixed and variable rates. These notes are presented in the table above with fair value adjustments related to interest rate swaps. All outstanding notes and debentures are senior unsecured borrowings and rank equally with each other.
(15) Leases - Lessor
The Company leases equipment manufactured or sold by the Company and a limited amount of non-John Deere equipment to retail customers through sales-type, direct financing, and operating leases. Sales-type and direct financing leases are reported in Financing receivables – net on the consolidated balance sheets, while operating leases are reported in Equipment on operating leases – net.
Lease revenues earned by the Company were as follows in millions of dollars:
Three Months Ended | |||||||
| January 29, 2023 |
| January 30, 2022 | ||||
Sales-type and direct finance lease revenues | $ | 41 | $ | 39 | |||
Operating lease revenues | 321 | 336 | |||||
Variable lease revenues | 6 | 7 | |||||
Total lease revenues | $ | 368 | $ | 382 | |||
(16) Commitments and Contingencies
The Company determines its total warranty liability by applying historical claims rate experience to the estimated amount of equipment that has been sold and is still under warranty based on dealer inventories and retail sales. The historical claims rate is determined by a review of five-year claims costs and current quality developments.
The premiums for extended warranties are recognized in Other income in the statements of consolidated income in proportion to the costs expected to be incurred over the contract period. The unamortized extended warranty premiums (deferred revenue) included in the following table totaled $901 million and $781 million at January 29, 2023 and January 30, 2022, respectively.
A reconciliation of the changes in the warranty liability and unearned premiums in millions of dollars follows:
At January 29, 2023, the Company had $235 million of guarantees issued to banks outside the U.S. and Canada related to third-party receivables for the retail financing of John Deere equipment. The Company may recover a portion of any required payments incurred under these agreements from repossession of the equipment collateralizing the receivables. At January 29, 2023, the accrued losses under these agreements were not material. The maximum remaining term of the receivables guaranteed at January 29, 2023 was about seven years.
At January 29, 2023, the Company had commitments of $467 million for the construction and acquisition of property and equipment. Also, at January 29, 2023, the Company had restricted assets of $269 million, classified as “Other assets.”
The Company also had other miscellaneous contingent liabilities and guarantees totaling approximately $90 million at January 29, 2023. The accrued liability for these contingencies was not material at January 29, 2023.
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The Company is subject to various unresolved legal actions which arise in the normal course of its business, the most prevalent of which relate to product liability (including asbestos-related liability), retail credit, employment, patent, trademark, and antitrust matters. The Company believes the reasonably possible range of losses for these unresolved legal actions would not have a material effect on its consolidated financial statements.
(17) Fair Value Measurements
The fair values of financial instruments that do not approximate the carrying values were as follows in millions of dollars. Long-term borrowings exclude finance lease liabilities.
Fair value measurements above were Level 3 for all financing receivables and Level 2 for all borrowings.
Fair values of the financing receivables that were issued long-term were based on the discounted values of their related cash flows at interest rates currently being offered by the Company for similar financing receivables. The fair values of the remaining financing receivables approximated the carrying amounts.
Fair values of long-term borrowings and short-term securitization borrowings were based on current market quotes for identical or similar borrowings and credit risk, or on the discounted values of their related cash flows at current market interest rates. Certain long-term borrowings have been swapped to current variable interest rates. The carrying values of these long-term borrowings included adjustments related to fair value hedges.
Assets and liabilities measured at fair value on a recurring basis in millions of dollars follow, excluding the Company’s cash equivalents, which were carried at cost that approximates fair value and consisted of money market funds and time deposits.
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The contractual maturities of debt securities at January 29, 2023 in millions of dollars are shown below. Actual maturities may differ from contractual maturities because some securities may be called or prepaid. Because of the potential for prepayment on mortgage-backed securities, they are not categorized by contractual maturity.
Fair value, nonrecurring Level 3 measurements from impairments, excluding financing receivables with specific allowances which were not significant, were as follows in millions of dollars.
Fair Value | Losses | |||||||||||||||
Three Months Ended | ||||||||||||||||
January 29 | October 30 | January 30 | January 29 | January 30 | ||||||||||||
| 2023 |
| 2022 |
| 2022 |
| 2023 | 2022 |
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Inventories | $ | 19 | ||||||||||||||
Property and equipment – net | 15 | |||||||||||||||
The following is a description of the valuation methodologies the Company uses to measure certain financial instruments on the balance sheet at fair value:
Marketable securities – The portfolio of investments is valued on a market approach (matrix pricing model) in which all significant inputs are observable or can be derived from or corroborated by observable market data such as interest rates, yield curves, volatilities, credit risk, and prepayment speeds. Funds are valued using closing prices in the active market in which the investment trades.
Derivatives – The Company’s derivative financial instruments consist of interest rate contracts (swaps), foreign currency exchange contracts (futures, forwards, and swaps), and cross-currency interest rate contracts (swaps). The portfolio is valued based on an income approach (discounted cash flow) using market observable inputs, including swap curves and both forward and spot exchange rates for currencies.
Financing receivables – Specific reserve impairments are based on the fair value of the collateral, which is measured using a market approach (appraisal values or realizable values).
Inventories – The impairment was based on net realizable value.
Property and equipment - net – The valuations were based on cost and market approaches. The inputs include replacement cost estimates adjusted for physical deterioration and economic obsolescence.
(18) Derivative Instruments
The Company’s policy is to execute derivative transactions to manage exposures arising in the normal course of business and not for the purpose of creating speculative positions or trading. The financial services operations manage the relationship of the types and amounts of their funding sources to their receivable and lease portfolio in an effort to diminish risk due to interest rate and foreign currency fluctuations, while responding to favorable financing opportunities. The Company also has foreign currency exposures at some of its foreign and domestic operations related to buying, selling, and financing in currencies other than the functional currencies. In addition, the Company has interest rate and foreign currency exposure at certain equipment operations units for sales incentive programs.
All derivatives are recorded at fair value on the balance sheets. Cash collateral received or paid is not offset against the derivative fair values on the balance sheet. The cash flows from the derivative contracts were recorded in operating activities in the statements of consolidated cash flows. Each derivative is designated as a cash flow hedge, a fair value hedge, or remains undesignated. All designated hedges are formally documented as to the relationship with the hedged item as well as the risk-management strategy. Both at
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inception and on an ongoing basis the hedging instrument is assessed as to its effectiveness. If and when a derivative is determined not to be highly effective as a hedge, the underlying hedged transaction is no longer likely to occur, the hedge designation is removed, or the derivative is terminated, hedge accounting is discontinued.
Cash Flow Hedges
Certain interest rate contracts (swaps) were designated as hedges of future cash flows from borrowings. The total notional amounts of the receive-variable/pay-fixed interest rate contracts at January 29, 2023, October 30, 2022, and January 30, 2022 were $1,950 million, $1,950 million, and $2,700 million, respectively. Fair value gains or losses on cash flow hedges were recorded in other comprehensive income (OCI) and are subsequently reclassified into interest expense in the same periods during which the hedged transactions impact earnings. These amounts offset the effects of interest rate changes on the related borrowings.
The amount of gain recorded in OCI at January 29, 2023 that is expected to be reclassified to interest expense in the next twelve months if interest rates remain unchanged is $38 million after-tax. No gains or losses were reclassified from OCI to earnings based on the probability that the original forecasted transaction would not occur.
Fair Value Hedges
Certain interest rate contracts (swaps) were designated as fair value hedges of borrowings. The total notional amounts of the receive-fixed/pay-variable interest rate contracts at January 29, 2023, October 30, 2022, and January 30, 2022 were $10,802 million, $10,112 million, and $8,307 million, respectively. The fair value gains or losses on these contracts were generally offset by fair value gains or losses on the hedged items (fixed-rate borrowings) with both items recorded in interest expense.
The amounts recorded in the consolidated balance sheet related to borrowings designated in fair value hedging relationships were as follows in millions of dollars. Fair value hedging adjustments are included in the carrying amount of the hedged item.
Derivatives not designated as hedging instruments
The Company has certain interest rate contracts (swaps), foreign currency exchange contracts (futures, forwards, and swaps), and cross-currency interest rate contracts (swaps), which were not formally designated as hedges. These derivatives were held as economic hedges for underlying interest rate or foreign currency exposures for certain borrowings, purchases or sales of inventory, and sales incentive programs. The total notional amounts of these interest rate swaps at January 29, 2023, October 30, 2022, and January 30, 2022 were $11,147 million, $10,568 million, and $10,210 million, the foreign exchange contracts were $9,304 million, $8,185 million, and $7,864 million, and the cross-currency interest rate contracts were $234 million, $260 million, and $303 million, respectively. The fair value gains or losses from derivatives not designated as hedging instruments were recorded in the statements of consolidated income, generally offsetting over time the exposure on the hedged item.
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Fair values of derivative instruments in the condensed consolidated balance sheets in millions of dollars follow:
The classification and gains (losses) including accrued interest expense related to derivative instruments on the statements of consolidated income consisted of the following in millions of dollars:
* Includes interest and foreign exchange gains (losses) from cross-currency interest rate contracts.
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Counterparty Risk and Collateral
Derivative instruments are subject to significant concentrations of credit risk to the banking sector. The Company manages individual counterparty exposure by setting limits that consider the credit rating of the counterparty, the credit default swap spread of the counterparty, and other financial commitments and exposures between the Company and the counterparty banks. All interest rate derivatives are transacted under International Swaps and Derivatives Association (ISDA) documentation. Some of these agreements include credit support provisions. Each master agreement permits the net settlement of amounts owed in the event of default or termination.
Certain of the Company’s derivative agreements contain credit support provisions that may require the Company to post collateral based on the size of the net liability positions and credit ratings. The aggregate fair value of all derivatives with credit-risk-related contingent features that were in a net liability position at January 29, 2023, October 30, 2022, and January 30, 2022 was $781 million, $1,113 million, and $213 million, respectively. In accordance with the limits established in these agreements, the Company posted $349 million, $701 million, and $18 million of cash collateral at January 29, 2023, October 30, 2022, and January 30, 2022, respectively. In addition, the Company paid $8 million of collateral that was outstanding at January 29, 2023, October 30, 2022, and January 30, 2022 to participate in an international futures market to hedge currency exposure, not included in the table below.
Derivatives are recorded without offsetting for netting arrangements or collateral. The impact on the derivative assets and liabilities related to netting arrangements and any collateral received or paid in millions of dollars follows:
(19) Stock Option and Restricted Stock Unit Awards
In December 2022, the Company granted stock options to employees for the purchase of 161 thousand shares of common stock at an exercise price of $438.44 per share and a binomial lattice model fair value of $136.46 per share at the grant date. At January 29, 2023, options for 2.0 million shares were outstanding with a weighted-average exercise price of $178.86 per share. The Company also granted 112 thousand of service-based restricted stock units and 41 thousand of performance/service-based restricted stock units to employees in the first three months of 2023. The weighted-average fair value of the service-based restricted stock units at the grant date was $434.02 per unit based on the market price of a share of underlying common stock. The fair value of the performance/service-based restricted stock units at the grant date was $424.93 per unit based on the market price of a share of underlying common stock excluding dividends. At January 29, 2023, the Company was authorized to grant awards for an additional 16.6 million shares under the equity incentive plans.
(20) Special Items
In the first quarter of 2022, Net sales from the Company’s Russian operations represented 2 percent of Deere’s consolidated Net sales. Sales in the region were impacted as the Company suspended shipments of machines and service parts to Russia beginning in February 2022. As of January 29, 2023 and October 30, 2022, the Company’s net exposure in Russia / Ukraine was approximately $229 million and $266 million, respectively.
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In January 2023, the Company reached an agreement to sell its financial services business in Russia (registered in Russia as a leasing company). The completion of the transaction is expected in the second quarter of 2023. The assets and liabilities were classified as “Other assets” and “Accounts payable and accrued expenses”, respectively, which include $100 million of . In the first quarter of 2023, the Company reversed the allowance for credit losses and recorded a valuation allowance on the assets held for sale in “Selling, administrative and general expenses.” The Company does not expect a significant gain or loss upon disposition.
On November 17, 2021, employees represented by the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America (UAW) approved a new collective bargaining agreement. The agreement, which has a term of six years, covers the wages, hours, benefits, and other terms and conditions of employment for the Company’s UAW-represented employees at 14 U.S. facilities. The labor agreement included a lump sum ratification bonus payment of $8,500 per eligible employee, totaling $90 million, and an immediate wage increase of 10 percent plus further wage increases over the term of the contract. The lump sum payment was expensed in the first quarter of 2022.
The following table summarizes the operating profit impact, in millions of dollars, of the special items recorded for the three months ended January 30, 2022:
Production & |
| Small Ag |
| Construction |
| Total | |||||||
UAW ratification bonus – Cost of sales | $ | 53 | $ | 9 | $ | 28 | $ | 90 | |||||
(21) Subsequent Events
In February 2023, the Company entered into two retail note securitization transactions. The first transaction resulted in $307 million of secured borrowings. The second transaction will result in $983 million of secured borrowings and is expected to settle in March 2023.
On February 22, 2023, the Company’s Board of Directors declared a quarterly dividend of $1.25 per share payable on May 8, 2023, to stockholders of record on March 31, 2023.
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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.
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
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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.
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2023 Compared with 2022
Three Months Ended | |||||||
Deere & Company | January 29 | January 30 | |||||
(In millions of dollars, except per share amounts) | 2023 | 2022 | |||||
Net sales and revenues | $ | 12,652 | $ | 9,569 | |||
Net income attributable to Deere & Company | 1,959 | 903 | |||||
Diluted earnings per share | 6.55 | 2.92 | |||||
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:
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.
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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 | |||||||||
Production and Precision Agriculture | January 29 | January 30 | |||||||
(In millions of dollars) |
| 2023 |
| 2022 |
| % Change | |||
Net sales | $ | 5,198 | $ | 3,356 | +55 | ||||
Operating profit | 1,208 | 296 | +308 | ||||||
Operating margin | 23.2% | 8.8% | |||||||
Price realization | +22 | ||||||||
Currency translation | -1 | ||||||||
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.
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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. dollar. 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.
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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. dollar. 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 | |||||||||
Financial Services | January 29 | January 30 | |||||||
(In millions of dollars) | 2023 | 2022 | % Change | ||||||
Revenue (including intercompany) | $ | 1,244 | $ | 916 | +36 | ||||
Interest expense | 442 | 158 | +180 | ||||||
Net income | 185 | 231 | -20 | ||||||
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 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.
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CAPITAL RESOURCES AND LIQUIDITY
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 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.
Key metrics are provided in the following table, in millions of dollars:
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.
Cash Flows
Three Months Ended | |||||||
(In millions of dollars) |
| January 29, 2023 |
| January 30, 2022 |
| ||
Net cash used for operating activities | $ | (1,246) | $ | (2,553) | |||
Net cash provided by investing activities | 760 | 648 | |||||
Net cash used for financing activities | (339) | (1,577) | |||||
Effect of exchange rate changes on cash, cash equivalents, and restricted cash | 62 | (74) | |||||
Net decrease in cash, cash equivalents, and restricted cash | $ | (763) | $ | (3,556) | |||
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. The
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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.
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 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 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. 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 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
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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 and involve factors that are subject to change, assumptions, risks, and uncertainties that could cause actual results to differ materially. Some of these risks and uncertainties could affect all lines of the Company’s operations generally while others could more heavily affect a particular line of business.
Forward-looking statements are based on currently available information and current assumptions, expectations, and projections about future events and should not be relied upon. Except as required by law, the Company expressly disclaims any obligation to update or revise its forward-looking statements. 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; |
| ● | 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; |
| ● | 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; and |
| ● | housing starts and supply, real estate and housing prices, levels of public and non-residential construction, and infrastructure investment. |
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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).
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.
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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.
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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.
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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.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See the Company’s most recently filed Annual Report on Form 10-K (Part II, Item 7A). There has been no material change in this information.
Item 4. CONTROLS AND PROCEDURES
The Company’s principal executive officer and its principal financial officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act)) were effective as of January 29, 2023, based on the evaluation of these controls and procedures required by Rule 13a-15(b) or 15d-15(b) of the Exchange Act. During the first quarter of 2023, there were no changes that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject to various unresolved legal actions which arise in the normal course of its business, the most prevalent of which relate to product liability (including asbestos-related liability), retail credit, employment, patent, trademark, and antitrust matters. The Company believes the reasonably possible range of losses for these unresolved legal actions would not have a material effect on its consolidated financial statements.
Item 1A. Risk Factors
See the Company’s most recently filed Annual Report on Form 10-K (Part I, Item 1A). There has been no material change in this information. The risks described in the Annual Report on Form 10-K, and the “Forward-Looking Statements” in this report, are not the only risks faced by the Company. Additional risks and uncertainties may also materially affect the Company’s business, financial condition, or operating results. One should not consider the risk factors to be a complete discussion of risks, uncertainties, and assumptions.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Company’s purchases of its common stock during the first quarter of 2023 were as follows:
| (1) | The Company has a share repurchase plan that was announced in December 2019 to purchase up to $8,000 million of shares of the Company’s common stock. The maximum number of shares that may yet be purchased under the December 2019 plan was 2.4 million shares based on the end of the first quarter 2023 closing share price of $418.18 per share. At the end of the first quarter of 2023, $995 million of common stock remains to be purchased under the December 2019 plan. In December 2022, the Board of Directors authorized the repurchase of up to $18,000 million of additional common stock. Based on the first quarter 2023 closing share price, the maximum number of shares that may be repurchased under the December 2022 plan was 43.0 million shares. |
| (2) | In the first quarter of 2023, 57 thousand shares were acquired from plan participants at a market price to pay payroll taxes on certain restricted stock awards. The shares were valued at a weighted-average market price of $434.88. |
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Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
Certain instruments relating to long-term borrowings constituting less than 10 percent of the registrant’s total assets are not filed as exhibits herewith pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K. The registrant will file copies of such instruments upon request of the Commission.
3.1 | ||
3.2 | ||
10.1 | John Deere ERISA Supplementary Pension Benefit Plan, as amended October 31, 2022 | |
31.1 | ||
31.2 | ||
32 | ||
101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |
* Incorporated by reference.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DEERE & COMPANY | ||||
Date: | February 23, 2023 | By: | /s/ Joshua A. Jepsen | |
Joshua A. Jepsen | ||||
(Principal Financial Officer and Principal Accounting Officer) | ||||
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