01—Abstract
Summary
Summary of the 10-Q filed August 29, 2024. Cited figures are marked; the original filing is the authoritative source.
Deere & Company's third-quarter fiscal 2024 10-Q (quarter ended July 28, 2024) shows a clear downturn in equipment demand.
Net sales and revenues fell 17% in the quarter to $13.2 billiona and 11% year-to-date to $40.6 billion, driven by lower shipment volumes across production and precision agriculture, small agriculture and turf, and construction and forestry. Net income attributable to Deere fell 42% to $1.73 billion in the quarter (diluted EPS $6.29 vs. $10.20), and 25% to $5.86 billion year-to-date (diluted EPS $21.04 vs. $26.35). Management expects production volumes to keep declining through the rest of 2024 and forecasts lower equipment sales in all major agricultural markets and lower construction industry sales.
Margins compressed across the equipment segments, with production and precision agriculture operating margin at 22.8% in the quarter versus 26.2% a year ago. Higher interest expense (up 35% in the quarter) and a higher provision for credit losses in financial services weighed on earnings. The quarter also included $135 millionb of special items: roughly $120 million in employee-separation program costs and a $15 million loss tied to the planned sale of 50% of Banco John Deere S.A. in Brazil, which was reclassified as held for sale and is being transferred to a joint venture with Banco Bradesco.
Cash returned to shareholders was $4.4 billionc year-to-date, funded partly by higher external borrowings, with total borrowings rising and cash flow from operations down to $4.1 billion from $2.9 billion a year earlier on a consolidated basis. For investors, the central questions are the depth and duration of the agricultural and construction cycle, whether cost actions and pricing can protect margins, and whether financial services credit quality holds as delinquencies rise. The company maintains strong investment-grade ratings (A+/A1/A) and has substantial unused credit lines, but the earnings trajectory and rising leverage in the financial services arm are the key watch items.
02—Key points
Key Highlights
- Net sales and revenues fell 17% to $13.2 billion in Q3 and 11% to $40.6 billion year-to-date, driven by lower shipment volumes across all equipment segments.
- Net income attributable to Deere dropped 42% to $1.73 billion in Q3 (diluted EPS $6.29 vs. $10.20); year-to-date net income fell 25% to $5.86 billion (diluted EPS $21.04 vs. $26.35).
- Production and precision agriculture operating profit fell 35% in Q3, with operating margin down to 22.8% from 26.2%; construction and forestry operating profit fell 37%.
- Interest expense rose 35% in Q3 to $840 million, reflecting higher average borrowing rates and larger borrowings, while financial services faced a higher provision for credit losses and less favorable financing spreads.
- Special items totaled $135 million pretax in Q3, including about $120 million of employee-separation program costs (estimated total $150 million, with annual savings of roughly $230 million) and a $15 million net loss tied to the Banco John Deere S.A. held-for-sale reclassification.
- Management expects production volumes to decline further through the rest of 2024, with lower large and small agricultural equipment sales across all major markets and lower construction industry sales.
- Shareholder returns remained substantial, with $4.4 billion returned year-to-date (including $3.2 billion in buybacks and $1.2 billion in dividends), and a quarterly dividend of $1.47 per share was declared in August 2024.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-QQ3 FY2024filed August 29, 2024Financial Statements
Q3 FY2024 against Q3 FY2023
| Line item | Q3 FY2024Q3 FY2023 | Change |
|---|---|---|
| Revenue | $13.15B$15.80B | −16.8% |
| R&D Expenses | $567.00M$528.00M | +7.4% |
| SG&A Expenses | $1.28B$1.11B | +15.1% |
| Operating Expenses | $10.80B$12.20B | −11.5% |
| Interest Expense | $840.00M$623.00M | +34.8% |
| Net Income | $1.73B$2.98B | −41.8% |
| EPS (Basic) | $6.32$10.24 | −38.3% |
| EPS (Diluted) | $6.29$10.20 | −38.3% |
| Shares Outstanding (Basic) | 274.50M290.80M | −5.6% |
| Shares Outstanding (Diluted) | 275.60M292.10M | −5.6% |
05—Questions
Frequently Asked Questions
Why did Deere's earnings decline so sharply in the third quarter of 2024?
Lower shipment volumes across production and precision agriculture, small agriculture and turf, and construction and forestry drove the decline, reflecting weaker commodity prices, elevated interest rates, and reduced construction demand. Higher interest expense, a larger provision for credit losses in financial services, and about $135 million of special items also weighed on results. Net income fell 42% year over year in the quarter.
What is the status of the Banco John Deere S.A. transaction?
Deere reclassified its Brazilian financial services subsidiary, Banco John Deere S.A., as held for sale in Q3 2024, recording a $53 million valuation allowance partly offset by a $38 million allowance reversal, for a net $15 million loss. In August 2024 it agreed that Banco Bradesco S.A. will become a 50% owner, with the transaction expected to close in the second quarter of 2025 subject to regulatory approval. Deere will retain a 50% stake and account for it as an equity investment.
Is Deere's balance sheet and liquidity position still sound?
Liquidity remains strong, with $8.1 billion in cash and marketable securities and $4.9 billion of unused worldwide credit lines at July 28, 2024. Credit ratings are A+ (Fitch), A1 (Moody's), and A (S&P), all with stable outlooks. However, total borrowings rose by about $2.4 billion year-to-date, and the financial services debt-to-equity ratio increased to 8.5 to 1 from 8.4 to 1 at fiscal year-end, so leverage is a point to monitor.
What does the company expect for the rest of 2024?
Management expects production volumes to keep declining through the remainder of 2024 as agricultural and construction demand softens and inventory is managed through underproduction. Agricultural and turf sales are expected to be down from 2023 levels in all major markets, and construction equipment industry sales are forecast to decline. Financial services net income is expected to be up moderately, supported by a larger portfolio, but offset by a higher provision for credit losses and tighter financing spreads. The company also expects lower operating cash flow from equipment operations in 2024.
How is the credit quality of Deere's financing portfolio trending?
Credit quality is under some pressure. Excluding Brazil, the allowance for credit losses on retail notes and financing leases increased in Q3 and year-to-date, due to higher expected losses from elevated delinquencies and weaker market conditions. Management cited a decline in market conditions as the driver, with partial offset from a lower revolving charge account allowance. Write-offs for the nine months totaled $193 million, and modified loans were a small share of the portfolio at about 0.13%.
06—Continue