DEERE & COMPANY RESULTS OF OPERATIONS Overview Organization
The Company's equipment operations generate revenues and cash primarily from the
sale of equipment to
Trends and Economic Conditions for Fiscal Year 2022
Industry sales of large agricultural machinery in the
Items of concern include global and regional political conditions, economic and trade policies, inflationary pressures, the ongoing pandemic, capital market disruptions, changes in demand and pricing for new and used equipment, and the other items discussed in the "Forward-Looking Statements" below. Significant fluctuations in foreign currency exchange rates, volatility in the price of many commodities, and supply chain disruptions could also impact the Company's results.
The Company's second quarter results reflect strong demand while enduring supply chain pressures continue to impact production levels and delivery schedules. The Company's employees, suppliers, and dealers are working to address these challenges. The demand for agricultural equipment is expected to benefit from positive fundamentals despite availability concerns and inflationary pressures affecting customers' input costs. The Company's smart industrial operating model and recently announced financial and sustainability goals (Leap Ambitions) are focused on helping customers manage higher costs and increasingly scarce inputs, while improving agricultural yields, through the use of the Company's integrated technologies.
Impact of Events in
The recent events in
33
2022 Compared with 2021
Three Months Ended Six Months Ended
Deere & Company May 1 May 2 % May 1 May 2 %
(In millions of dollars, except per
share amounts) 2022 2021 Change 2022 2021 Change
Net sales and revenues $ 13,370 $ 12,058 +11 $ 22,939 $ 21,170 +8
Net income attributable to Deere &
Company 2,098 1,790 +17 3,001 3,013
Diluted earnings per share 6.81 5.68 9.72 9.55
Results for the second quarter of 2022 and year-to-date periods of 2022 and 2021 were impacted by special items. See Note 20 for more information on special items impacting the presented periods. The discussion on net sales and operating profit is included in the Business Segment Results below.
Three Months Ended Six Months Ended
Deere & Company May 1 May 2 % May 1 May 2 %
(In millions of dollars) 2022 2021 Change 2022 2021 Change
Cost of sales to net sales 74.1% 72.1% 75.9% 72.1%
Other income $ 540 $ 251 +115 $ 779 $ 477 +63
Research and development expenses 453 377 +20 855 743 +15
Selling, administrative and general
expenses 932 838 +11 1,713 1,607 +7
Other operating expenses 328 335 -2 638 708 -10
Provision for income taxes 461 530 -13 710 838 -15
The cost of sales to net sales ratio increased in the second quarter and the
first six months of fiscal 2022 primarily due to higher production costs
partially offset by price realization. Other income increased in both periods
due to a non-cash gain on the remeasurement of the previously held equity
investment in the Deere-Hitachi joint venture. Research and development expenses
were higher for both periods due to continued focus on developing and
incorporating technology solutions. Selling, administrative, and general
expenses increased in the second quarter and the first six months primarily due
to a higher provision for credit losses, including higher reserves due to the
events in
34
Business Segment Results
Three Months Ended Six Months Ended
Production and Precision Agriculture May 1 May 2 % May 1 May 2 %
(In millions of dollars) 2022 2021 Change 2022 2021 Change
Net sales $ 5,117 $ 4,529 +13 $ 8,473 $ 7,599 +12
Operating profit 1,057 1,007 +5 1,353 1,651 -18
Operating margin 20.7% 22.2% 16.0% 21.7%
Price realization +11 +10
Currency translation -1
Production and precision agriculture sales increased for the quarter due to
price realization and higher shipment volumes. Operating profit rose primarily
due to price realization and higher shipment volumes / sales mix. These items
were partially offset by higher production costs, higher research and
development and selling, administrative, and general expenses, and impairments
related to events in
[[Image Removed: Graphic]]
Sales for the first six months increased mainly as a result of price realization
and higher shipment volumes. Operating profit for the first six months decreased
primarily resulting from higher production costs, higher research and
development and selling, administrative, and general expenses, the UAW contract
ratification bonus, and the impact of impairments related to events in
[[Image Removed: Graphic]]
35
Three Months Ended Six Months Ended
Small Agriculture and Turf May 1 May 2 % May 1 May 2 %
(In millions of dollars) 2022 2021 Change 2022 2021 Change
Net sales $ 3,570 $ 3,390 +5 $ 6,201 $ 5,904 +5
Operating profit 520 648 -20 891 1,117 -20
Operating margin 14.6% 19.1% 14.4% 18.9%
Price realization +8 +7
Currency translation -2 -2
Small agriculture and turf sales for the quarter increased due to price realization partially offset by the unfavorable impact of currency translation. Operating profit decreased primarily due to higher production costs, a less favorable sales mix, and higher selling, administrative, and general and research and development expenses. These items were partially offset by price realization.
[[Image Removed: Graphic]]
Sales for the first six months increased mainly as a result of price realization partially offset by the unfavorable impact of currency translation. Operating profit for the first six months decreased primarily resulting from higher production costs, a less favorable sales mix, and higher selling, administrative, and general and research and development expenses. Partially offsetting these factors was price realization.
[[Image Removed: Graphic]]
36
Three Months Ended Six Months Ended
Construction and Forestry May 1 May 2 % May 1 May 2 %
(In millions of dollars) 2022 2021 Change 2022 2021 Change
Net sales $ 3,347 $ 3,079 +9 $ 5,891 $ 5,546 +6
Operating profit 814 489 +66 1,085 756 +44
Operating margin 24.3% 15.9% 18.4% 13.6%
Price realization +10 +9
Currency translation -2 -2
Construction and forestry sales moved higher for the quarter primarily due to
price realization and higher shipment volumes, partially offset by the
unfavorable impact of currency translation. Operating profit increased due to a
non-cash gain on the remeasurement of the previously held equity investment in
the Deere-Hitachi joint venture and price realization. These items were
partially offset by higher production costs, impairments related to the events
in
[[Image Removed: Graphic]]
The segment's six-month sales also increased due to price realization partially offset by the unfavorable impact of currency translation. The first six-month's operating profit moved higher mainly due to price realization and a non-cash gain on the remeasurement of the previously held equity investment in the Deere-Hitachi joint venture, partially offset by higher production costs.
[[Image Removed: Graphic]]
37
Three Months Ended Six Months Ended
Financial Services May 1 May 2 % May 1 May 2 %
(In millions of dollars) 2022 2021 Change 2022 2021 Change
Revenue (including intercompany)
112 181 -38 270 369 -27
Net income 208 222 -6 439 427 +3
While the average balance of receivables and leases financed was 6 percent
higher in the second quarter and the first six months of 2022 compared with the
same periods last year, revenues decreased slightly due to lower financing
rates. Gains on operating lease dispositions also benefited revenue in both
periods. Interest expense decreased in the second quarter and first six months
of 2022 primarily as a result of non-designated derivative gains and lower
average borrowing rates. Net income decreased for the quarter mainly due to
higher reserves for credit losses related to the events in
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 estimates.
CAPITAL RESOURCES AND LIQUIDITY
The discussion of capital resources and liquidity has been organized to review separately, where appropriate, the Company's consolidated totals, equipment operations, and financial services operations.
Consolidated
Cash outflows from consolidated operating activities in the first six months of
2022 were
Positive cash flows from consolidated operating activities in the first six
months of 2021 were
The Company has access to most global markets at a reasonable cost and expects
to have sufficient sources of global funding and liquidity to meet its funding
needs in the short term and long term. Sources of liquidity for the Company
include cash and cash equivalents, marketable securities, funds from operations,
the issuance of commercial paper and term debt, the securitization of retail
notes (both public and private markets), and committed and uncommitted bank
lines of credit. The Company's commercial paper outstanding at
Lines of Credit. The Company also has access to bank lines of credit with
various banks throughout the world. Worldwide lines of credit totaled
38
purpose of computing unused credit lines, commercial paper, and short-term bank
borrowings, excluding secured borrowings and the current portion of long-term
borrowings, were primarily considered to constitute utilization. Included in the
total credit lines at
Debt Ratings. To access public debt capital markets, the Company relies on credit rating agencies to assign short-term and long-term credit ratings to the Company's securities as an indicator of credit quality for fixed income investors. A security rating is not a recommendation by the rating agency to buy, sell, or hold Company securities. A credit rating agency may change or withdraw Company ratings based on its assessment of the Company's current and future ability to meet interest and principal repayment obligations. Each agency's rating should be evaluated independently of any other rating. Lower credit ratings generally result in higher borrowing costs, including costs of derivative transactions, and reduced access to debt capital markets. The senior long-term and short-term debt ratings and outlook currently assigned to unsecured Company debt securities by the rating agencies engaged by the Company are as follows:
Senior
Long-Term Short-Term Outlook
Fitch Ratings A F1 Stable
Moody's Investors Service, Inc. A2 Prime-1 Stable Standard & Poor's
A A-1 Stable
Trade Accounts and Notes Receivable. Trade accounts and notes receivable
primarily arise from sales of goods to independent dealers. Trade receivables
increased
Equipment Operations
The Company's equipment businesses are capital intensive and are subject to seasonal variations in financing requirements for inventories and certain receivables from dealers. The equipment operations sell a significant portion of their trade receivables to financial services. Funds provided from operations are supplemented by external financing sources as needed.
Cash used for operating activities of the equipment operations, including
intercompany cash flows, in the first six months of 2022 was
Cash provided by operating activities of the equipment operations, including
intercompany cash flows, in the first six months of 2021 was
39
in borrowings of
Trade receivables held by the equipment operations increased
Inventories increased by
Total interest-bearing debt, excluding finance lease liabilities, of the
equipment operations was
Property and equipment cash expenditures for the equipment operations in the
first six months of 2022 were
Financial Services
The financial services operations rely on their ability to raise substantial
amounts of funds to finance their receivable and lease portfolios. Their primary
sources of funds for this purpose are a combination of commercial paper, term
debt, securitization of retail notes, equity capital, and borrowings from
During the first six months of 2022 and 2021, the cash provided by operating and
financing activities was used for investing activities. Cash, cash equivalents,
and restricted cash decreased
Receivables and leases held by the financial services operations consist of
retail notes originated in connection with financing of new and used equipment,
operating leases, trade receivables, revolving charge accounts, sales-type and
direct financing leases, and wholesale notes. Trade and financing receivables
and equipment on operating leases increased
Total external interest-bearing debt of the financial services operations was
In the first six months of 2022, the financial services operations issued
40
term notes. In
Subsequent Event
On
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. Except
as required by law, the Company undertakes no obligation to update or revise its
forward-looking statements. Further information concerning the Company and its
businesses, including factors that could materially affect the Company's
financial results, is included in the Company's other filings with the
Factors Affecting All Lines of Business
All of the Company's businesses and their results are affected by general
economic conditions in the global markets and industries in which the Company
operates; customer confidence in general economic conditions; government
spending and taxing; foreign currency exchange rates and their volatility,
especially fluctuations in the value of the
Significant changes in market liquidity conditions, changes in the Company's
credit ratings, and any failure to comply with financial covenants in credit
agreements could impact access to funding and funding costs, which could reduce
the Company's earnings and cash flows. Financial market conditions could also
negatively impact customer access to capital for purchases of the Company's
products and purchase decisions, financing and repayment practices, and the
number and size of customer delinquencies and defaults. A debt crisis in
Additional factors that could materially affect the Company's operations, access
to capital, expenses, and results include changes in, uncertainty surrounding,
and the impact of governmental trade, banking, monetary, and fiscal policies,
including financial regulatory reform and its effects on the consumer finance
industry, derivatives, funding costs, governmental programs, policies, and
tariffs for the benefit of certain industries or sectors; retaliatory actions to
such changes in trade, banking, monetary, and fiscal policies; actions by
central banks; actions by financial and securities regulators; actions by
environmental, health, and safety regulatory agencies, including those related
to engine emissions, carbon and other greenhouse gas emissions, and the effects
of climate change; changes to GPS radio frequency bands or their permitted uses;
changes in labor and immigration regulations; changes to accounting standards;
changes in tax rates, estimates, laws, and regulations and Company actions
related thereto; changes to and compliance with privacy, banking, and other
regulations; changes to and compliance with economic sanctions, or
countersanctions, and export controls laws and regulations; and compliance with
41
Other factors that could materially affect the Company's results and operations include security breaches, cybersecurity attacks, technology failures, and other disruptions to the information technology infrastructure of the Company and its suppliers and dealers; security breaches with respect to the Company's products; production, design, and technological innovations and difficulties, including capacity and supply constraints and prices; the loss of or challenges to intellectual property rights, whether through theft, infringement, counterfeiting, or otherwise; the availability and prices of strategically sourced materials, components, and whole goods; delays or disruptions in the Company's supply chain, including work stoppages or disputes by suppliers with their unionized labor; the failure of customers, dealers, suppliers, or the Company to comply with laws, regulations, and Company policy pertaining to employment, human rights, health, safety, the environment, sanctions, export controls, anti-corruption, privacy and data protection, and other ethical business practices; introduction of legislation that could affect the Company's business model and intellectual property, such as right to repair or right to modify; events that damage the Company's reputation or brand; significant investigations, claims, lawsuits, or other legal proceedings; start-up of new plants and products; the success of new product initiatives or business strategies; changes in customer product preferences and sales mix; gaps or limitations in rural broadband coverage, capacity, and speed needed to support technology solutions; oil and energy prices, supplies, and volatility; the availability and cost of freight; actions of competitors in the various industries in which the Company competes, particularly price discounting; dealer practices, especially as to levels of new and used field inventories; changes in demand and pricing for used equipment and resulting impacts on lease residual values; labor relations and contracts, including work stoppages and other disruptions; changes in the ability to attract, develop, engage, and retain qualified personnel; acquisitions and divestitures of businesses; greater-than-anticipated transaction costs; the integration of acquired businesses; the failure or delay in closing or realizing anticipated benefits of acquisitions, joint ventures, or divestitures; the inability to deliver precision technology and agricultural solutions to customers; and the failure to realize anticipated savings or benefits of cost reduction, productivity, or efficiency efforts.
COVID-19
Uncertainties related to the continued effects of the COVID-19 pandemic have adversely affected and may continue to affect the Company's business and outlook. These uncertainties include, among other things: the duration and impact of any resurgence in COVID-19; disruptions in the supply chain, including those caused by industry capacity constraints, material availability, and global logistics delays and constraints arising from, among other things, the transportation capacity of ocean shipping containers, and continued disruptions in the operations of one or more key suppliers, or the failure of any key suppliers; and an increasingly competitive labor market due to a sustained labor shortage or increased turnover caused by the COVID-19 pandemic. The sustainability of the economic recovery from the pandemic remains unclear and significant volatility could continue for a prolonged period.
Agricultural Equipment Operations
The Company's agricultural equipment operations are subject to a number of uncertainties, including certain factors that affect farmers' confidence and financial condition. These factors include demand for agricultural products; world grain stocks; soil conditions; harvest yields; prices for commodities and livestock; crop and livestock production expenses; availability of fertilizer; availability of transport for crops; trade restrictions and tariffs; global trade agreements; the level of farm product exports; the growth and sustainability of non-food uses for some crops (including ethanol and biodiesel production); real estate values; available acreage for farming; changes in government farm programs and policies; international reaction to such programs; changes in and effects of crop insurance programs; changes in environmental regulations and their impact on farming practices; animal diseases and their effects on poultry, beef, and pork consumption and prices on livestock feed demand; and crop pests and diseases.
Production and Precision Agriculture Operations
The production and precision agriculture operations rely in part on hardware and software, guidance, connectivity and digital solutions, and automation and machine intelligence. Many factors contribute to the Company's precision agriculture sales and results, including the impact to customers' profitability and/or sustainability outcomes; the rate of adoption and use by customers; availability of technological innovations; speed of research and development; effectiveness of partnerships with third parties; and the dealer channel's ability to support and service precision technology solutions.
Small Agriculture and Turf Equipment
Factors affecting the Company's small agriculture and turf equipment operations include customer profitability; labor supply; consumer borrowing patterns; consumer purchasing preferences; housing starts and supply; infrastructure investment; spending by municipalities and golf courses; and consumable input costs.
42
Construction and Forestry
Factors affecting the Company's construction and forestry equipment operations include consumer spending patterns; real estate and housing prices; the number of housing starts; interest rates; commodity prices such as oil and gas; the levels of public and non-residential construction; and investment in infrastructure. Prices for pulp, paper, lumber, and structural panels affect sales of forestry equipment.
John Deere Financial
The liquidity and ongoing profitability of
Supplemental Consolidating Information
The supplemental consolidating data presented on the subsequent pages is presented for informational purposes. The equipment operations represent the enterprise without financial services. The equipment operations include the Company's production and precision agriculture operations, small agriculture and turf operations, construction and forestry operations, and other corporate assets, liabilities, revenues, and expenses not reflected within financial services. Transactions between the equipment operations and financial services have been eliminated to arrive at the consolidated financial statements.
The equipment operations and financial services participate in different industries. The equipment operations primarily generate earnings and cash flows by manufacturing and selling equipment, service parts, and technology solutions to dealers and retail customers. Financial services primarily finances sales and leases by dealers of new and used equipment that is largely manufactured by the Company. Those earnings and cash flows generally are the difference between the finance income received from customer payments less interest expense, and depreciation on equipment subject to an operating lease. These two businesses are capitalized differently and have separate performance metrics. The supplemental consolidating data is also used by management due to these differences.
43
© Edgar Online, source
