DEERE & CO

Previous wording

Company Trends – Customers seek to improve profitability, productivity, and sustainability through technology. Integration of technology into equipment is a persistent market trend. Our Smart Industrial Operating Model and Leap Ambitions are intended to capitalize on this market trend. These technologies are incorporated into products within each of our operating segments. We expect this trend to persist for the foreseeable future. The investments in these technologies and in establishing a Solutions as a Service business model might increase our operating costs and may decrease operating margins during the transition period. In the first quarter of 2024, we announced an agreement with SpaceX to expand machine connectivity for our customers in rural areas through satellite communication.

Current wording

Customers seek to improve profitability, productivity, and sustainability through technology. Integration of technology into equipment is a persistent market trend. Our Smart Industrial Operating Model and Leap Ambitions are intended to capitalize on this market trend. These technologies are incorporated into products within each of our operating segments. We expect this trend to persist for the foreseeable future. Our progress is demonstrated, in part, by the growing use of the John Deere Operations Center (our digital operations management system) engaging more agricultural acres globally. Engaged acres give us a foundational understanding of customer utilization of John Deere technology. The investments in these technologies and establishing a Solutions as a Service business model may increase our operating costs and decrease operating margins during the transition period.

Previous wording

Agricultural Market Business Cycle. The agricultural market is affected by various factors including commodity prices, acreage planted, crop yields, and government policies. These factors affect farmers’ income and may result in lower demand for equipment. We may experience any of the following effects during unfavorable market conditions: lower net sales, higher sales discounts, higher receivable write-offs, or losses on equipment on operating leases. A potential benefit is that customers may invest in integrated technology solutions and precision agriculture to lower input costs and improve margins.

Current wording

Agricultural Market Business Cycle. The agricultural market is affected by various factors including commodity prices, acreage planted, crop yields, and government policies. These factors affect farmers’ income and may result in lower demand for equipment. We may experience any of the following effects during unfavorable market conditions: lower net sales, higher sales discounts, higher receivable write-offs, and losses on equipment on operating leases. A potential benefit is that customers may invest in integrated technology solutions and precision agriculture to lower input costs and improve margins.

Previous wording

The market for our products is negatively impacted by higher interest rates. We expect higher borrowing costs for our customers to primarily affect discretionary and residential product sales in 2024.

Current wording

The market for our products is negatively impacted by higher interest rates. We expect higher borrowing costs for our customers to affect product sales in 2024.

Previous wording

Rising interest rates have historically impacted our borrowings sooner than the benefit is realized from receivable and lease portfolios. As a result, our financial services operations experienced $27 (after-tax) less favorable financing spreads in 2024 compared to 2023. We expect to continue experiencing spread compression in 2024, but at a moderating pace relative to spread compression experienced in 2023.

Current wording

Rising interest rates have historically impacted our borrowings sooner than the benefit is realized from receivable and lease portfolios. As a result, our financial services operations experienced $35 (after-tax) less favorable financing spreads in 2024 compared to 2023. We expect to continue experiencing spread compression in 2024, but at a moderating pace relative to spread compression experienced in 2023.

Previous wording

Net sales and revenues decreased for the quarter primarily due to lower sales volumes. Net income and diluted EPS decreased driven by lower sales. The discussion of net sales and operating profit is included in the Business Segment Results below.

Current wording

Net sales and revenues decreased for both the quarter and year-to-date periods primarily due to lower sales volumes. Net income and diluted EPS decreased driven by lower sales. The discussion of net sales and operating profit is included in the Business Segment Results below.

Previous wording

Production and precision agriculture sales decreased for the quarter as a result of lower shipment volumes (primarily in Brazil, the U.S., Canada, and Europe), driven by moderating agriculture fundamentals. This was partially offset by price realization in the U.S., Canada, and Europe due to inflation. Operating profit decreased primarily due to lower shipment volumes and increased selling, administrative and general expenses and research and development expenses, partially offset by price realization.

Current wording

Production and precision agriculture sales decreased for the quarter as a result of lower shipment volumes (primarily in Brazil, the U.S., and Europe), driven by softened demand. This was partially offset by price realization in the U.S. and Canada. Operating profit decreased primarily due to lower shipment volumes and higher production costs, partially offset by price realization.

Previous wording

Small agriculture and turf sales decreased for the quarter due to lower shipment volumes (primarily in the U.S., Canada, Europe, and Mexico) driven by moderating market demand. This was partially offset by price realization in the U.S., Canada, and Europe due to inflation. Operating profit decreased primarily as a result of lower shipment volumes and increased selling, administrative and general expenses and research and development expenses. These items were partially offset by price realization and lower production costs, driven by a decrease in material and freight costs.

Current wording

Sales for the first six months decreased as a result of lower shipment volumes (primarily in the U.S., Europe, and Mexico), partially offset by price realization. Operating profit for the first six months decreased primarily as a result of lower sales volumes, higher selling, administrative, and general expenses and research and development expenses, and higher warranty expenses. These items were partially offset by price realization, favorable mix, and lower production costs.

Previous wording

The average balance of receivables and leases financed was 19 percent higher in the first three months of 2024, compared with the same period last year. Revenue also increased due to higher average financing rates. Interest expense increased in the first quarter of 2024 as a result of higher average borrowing rates and higher average borrowings. Net income for the quarter increased mainly due to income earned on higher average portfolio balances, partially offset by less favorable financing spreads as a result of higher interest rates.

Current wording

The average balance of receivables and leases financed was 16 percent higher in the second quarter of 2024 and 18 percent higher in the first six months of 2024 compared with the same periods last year. Revenue also increased due to higher average financing rates in both periods. Interest expense increased compared to both prior periods as a result of higher average borrowings and higher average borrowing rates. Financial services net income in both periods increased due to income earned on higher average portfolio balances, partially offset by a higher provision for credit losses and less favorable financing spreads. The results of both periods were also affected by a correction of the accounting treatment for financing incentives offered to John Deere dealers. The cumulative effect of this correction, $173 pretax ($135 after-tax), was recorded in the second quarter of 2023.

Previous wording

In the first quarter, we invested $128 in U.S. dollar denominated bonds issued by the central bank of Argentina. The bonds are recorded in “Marketable securities,” classified as “International debt securities.” These bonds can be held until maturity or sold in a secondary market outside of Argentina to settle intercompany debt (see note 17).

Current wording

In the first half of 2024, we invested $177 in U.S. dollar denominated bonds issued by the central bank of Argentina. The bonds are recorded in “Marketable securities,” classified as “International debt securities.” These bonds can be held until maturity or sold in a secondary market outside of Argentina to settle intercompany debt (see Note 17).

Previous wording

The increase in unused credit lines at January 28, 2024 compared to October 29, 2023 relates to a decrease in commercial paper outstanding generally corresponding with the level of receivable and lease portfolios. We forecast lower operating cash flows in 2024 driven by a decrease in net income adjusted for non-cash provisions and an unfavorable change in working capital.

Current wording

The increase in unused credit lines in 2024 compared to both prior periods relates to a decrease in commercial paper outstanding.

Previous wording

Cash outflows from consolidated operating activities in the first three months of 2024 were $908. This resulted mainly from a working capital change, partially offset by net income adjusted for non-cash provisions. Cash inflows from investing activities were $1,217 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 $2,645 in the first three months of 2024. The increase in cash used for financing activities was due primarily to net payments of borrowings. Cash returned to shareholders was $1,714 in the first three months of 2024. Cash, cash equivalents, and restricted cash decreased $2,320 during the first three months of this year.

Current wording

Cash inflows from consolidated operating activities in the first six months of 2024 were $944. This resulted mainly from net income adjusted for non-cash provisions, partially offset by a working capital change. Included in the working capital change was a cash outflow of $1,300 from accounts payable and accrued expenses due to a higher profit sharing payout in the first quarter of 2024 based on strong fiscal year 2023 results, lower accrued expenses related to dealer sales discounts, and less trade payables consistent with our forecasted decrease in production. Cash outflows from investing activities were $1,670 in the first six months of this year. The primary drivers were purchases of property and equipment and growth in the retail customer receivable portfolio and equipment on operating leases. Cash outflows from financing activities were $1,162 in the first six months of 2024, as cash returned to shareholders was partially offset by higher external borrowings. Cash returned to shareholders was $3,218 in the first six months of 2024. Cash, cash equivalents, and restricted cash decreased $1,893 during the first six months of 2024.

Previous wording

Trade Accounts and Notes Receivable – Trade accounts and notes receivable arise from sales of goods to customers. Trade receivables increased by $56 during the first three months of 2024, mostly due to a seasonal increase. These receivables increased $186, compared to a year ago, due to higher dealer inventory levels. The percentage of total worldwide trade receivables outstanding for periods exceeding 12 months was 1 percent at each of January 28, 2024, October 29, 2023, and January 29, 2023.

Current wording

Trade Accounts and Notes Receivable. Trade accounts and notes receivable arise from sales of goods to customers. Trade receivables increased $1,141 during the first six months of 2024, primarily due to a seasonal increase. These receivables decreased $1,091, compared to a year ago, due to lower sales volumes. The percentage of total worldwide trade receivables outstanding for periods exceeding 12 months was 2 percent at April 28, 2024, 1 percent at October 29, 2023, and 1 percent at April 30, 2023.

Previous wording

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 $1,066 during the first quarter of 2024, primarily due to seasonal payments, and increased $8,386 in the past 12 months, due to strong retail sales. Total acquisition volumes of financing receivables and equipment on operating leases were 16 percent higher in the first three months of 2024, compared with the same period last year, as volumes of wholesale notes, retail notes, and financing leases were higher, while revolving charge accounts and operating leases were lower compared to the same period last year.

Current wording

Financing Receivables and Equipment on Operating Leases. Financing receivables and equipment on operating leases consist of retail notes originated in connection with financing of new and used equipment, operating leases, revolving charge accounts, sales-type and direct financing leases, and wholesale notes. Financing receivables and equipment on operating leases increased $1,580 during the first six months of 2024 and increased $8,368 in the past 12 months due to higher dealer inventory levels and elevated sales of new and used retail inventory. Total acquisition volumes of financing receivables and equipment on operating leases were 16 percent higher in the first six months of 2024, compared with the same period last year, as volumes of wholesale notes, retail notes, financing leases, and operating leases were higher, while revolving charge accounts were flat compared to April 30, 2023.

Previous wording

Inventories – Inventories increased by $777 during the first three months, primarily due to a seasonal increase. Inventories decreased $1,119, compared to a year ago, due to lower forecasted shipment volumes. A majority of these inventories are valued on the last-in, first-out (LIFO) method.

Current wording

Inventories. Inventories increased by $283 during the first six months of 2024, primarily due to a seasonal increase. Inventories decreased by $1,270 compared to a year ago due to lower forecasted shipment volumes. A majority of these inventories are valued on the last-in, first out (LIFO) method.

Previous wording

Property and Equipment – Property and equipment cash expenditures in the first three months of 2024 were $362, compared with $315 in the same period last year. Capital expenditures in 2024 are estimated to be approximately $1,900.

Current wording

Property and Equipment. Property and equipment cash expenditures in the first six months of 2024 were $719 compared with $584 in the same period last year. Capital expenditures in 2024 are estimated to be approximately $1,900.

Previous wording

Accounts Payable and Accrued Expenses – Accounts payable and accrued expenses decreased by $2,769 in the first three months of 2024, primarily due to a decrease in accrued expenses associated with employee benefits, dealer sales discounts, and derivative liabilities. Accounts payable and accrued expenses increased $253 compared to a year ago, due to an increase in accrued expenses associated with extended warranty premium, product warranties, and accrued interest, partially offset by a decrease in accounts payable associated with trade payables.

Current wording

Accounts Payable and Accrued Expenses. Accounts payable and accrued expenses decreased by $1,521 in the first six months of 2024, primarily due to a decrease in accrued expenses associated with dealer sales discounts and employee benefits, and decreased accounts payable associated with trade payables. Accounts payable and accrued expenses decreased $107 compared to a year ago due to a decrease in accounts payable associated with trade payables, partially offset by an increase in accrued expenses associated with derivative liabilities, extended warranty liabilities, and accrued interest.

Previous wording

Borrowings – Total external borrowings decreased by $245 in the first three months of 2024 and increased $9,102 compared to a year ago, generally corresponding with the level of the receivable and the lease portfolio, as well as other working capital requirements.

Current wording

Borrowings. Total external borrowings increased by $2,226 in the first six months of 2024 and increased $7,538 compared to a year ago, generally corresponding with the level of the receivable and lease portfolios, as well as other working capital requirements.

Previous wording

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 2023 with an expiration in November 2024 and with an increase in the total capacity or “financing limit” from $1,500 to $2,000. At January 28, 2024, $1,118 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.

Current wording

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 2023 with an expiration in November 2024 and with an increase in the total capacity or “financing limit” from $1,500 to $2,000. At April 28, 2024, $1,434 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.

Previous wording

In the first three months of 2024, the financial services operations retired $881 of retail note securitization borrowings, which are presented in “Net proceeds (payments) in total short-term borrowings (original maturities three months or less).”

Current wording

In the first six months of 2024, the financial services operations issued $1,880 and retired $1,900 of retail note securitization borrowings, which are presented in “Net proceeds in short-term borrowings (original maturities three months or less).”

Previous wording

Lines of Credit – We also have access to bank lines of credit with various banks throughout the world. Worldwide lines of credit totaled $10,310 at January 28, 2024, $1,577 of which were unused. For the purpose of computing unused credit lines, commercial paper, and short-term bank borrowings were considered to constitute utilization. Included in the total credit lines at January 28, 2024 was a 364-day credit facility agreement of $5,000, expiring in the second quarter of 2024. In addition, total credit lines included long-term credit facility agreements of $2,500, expiring in the second quarter of 2027, and $2,500, expiring in the second quarter of 2028. These credit agreements require Capital Corporation and other parts of our business to maintain certain performance metrics and liquidity targets. We expect to extend the terms of these credit facilities. All requirements in the credit agreements have been met during the periods included in the financial statements.

Current wording

Lines of Credit. We also have access to bank lines of credit with various banks throughout the world. Worldwide lines of credit totaled $10,934 at April 28, 2024, $2,787 of which were unused. For the purpose of computing unused credit lines, commercial paper and short-term bank borrowings were considered to constitute utilization. Included in the total credit lines at April 28, 2024 was a 364-day credit facility agreement of $5,000 expiring in the second quarter of 2025. In addition, total credit lines included long-term credit facility agreements of $2,750 expiring in the second quarter of 2028 and $2,750 expiring in the second quarter of 2029. These credit agreements require Capital Corporation and other parts of our business to maintain certain performance metrics and liquidity targets. All requirements in the credit agreements have been met during the periods included in the financial statements.

Previous wording

Equipment operations and financial services participate in different industries. 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 us. 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.

Current wording

Equipment operations and financial services participate in different industries. 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 equipment operations. 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.