Company Overview
Deere & Company, founded in 1837, has been at the forefront of agricultural and construction equipment innovation for over 185 years. With a rich history rooted in the Midwest, this iconic American company has evolved from a small blacksmith shop to a global leader in precision agriculture, forestry, and construction equipment.
Under the leadership of CEO John May, Deere has been steadfast in its commitment to delivering cutting-edge technology that empowers its customers to enhance productivity, profitability, and sustainability. The company's three-pronged strategic approach - Production Systems, Technology Stack, and Lifecycle Solutions - has been instrumental in driving its success.
Company History
Deere's journey began with John Deere's invention of the first commercially successful steel plow in Grand Detour, Illinois. Over the next several decades, the company expanded its product line and grew its presence across the United States. In the early 20th century, Deere diversified into construction and forestry equipment markets, a strategic move that would later prove crucial in helping the company weather economic downturns in the agricultural sector.
The company faced significant challenges during the Great Depression when falling farm incomes led to a sharp decline in equipment sales. However, Deere's focus on cost-cutting measures and maintaining quality standards enabled it to survive this difficult period. After World War II, the company experienced rapid growth as demand for agricultural and construction equipment surged. Deere made strategic acquisitions to expand its product portfolio and geographic reach, solidifying its position in the industry.
In the 1970s, Deere established its financial services division to provide financing solutions for customers purchasing its equipment, further strengthening its relationship with its client base. The company has had to navigate numerous challenges over the past few decades, including volatile commodity prices, increasing global competition, and technological disruption. In the early 2000s, Deere faced a worker strike that disrupted production for several months, showcasing the company's resilience in overcoming labor disputes.
Business Segments
Deere operates through four main business segments: Production and Precision Agriculture (PPA), Small Agriculture and Turf (SAT), Construction and Forestry (CF), and Financial Services (FS).
The Production and Precision Agriculture (PPA) segment manufactures and distributes a full line of agriculture and turf equipment and related service parts, including large and mid-size tractors, combines, cotton pickers, sugar cane harvesters, soil preparation machinery, seeding and application equipment, hay and forage equipment, and landscape and commercial mowing equipment.
The Small Agriculture and Turf (SAT) segment produces and distributes a range of smaller agriculture and turf equipment, including utility tractors, compact construction equipment, riding lawn equipment, and landscaping equipment.
The Construction and Forestry (CF) segment manufactures and distributes a variety of equipment used in construction, earthmoving, material handling, and timber harvesting, including backhoe loaders, crawler dozers and loaders, four-wheel-drive loaders, excavators, motor graders, scrapers, and timber harvesters and forwarders.
The Financial Services (FS) segment finances sales and leases of new and used agricultural and turf equipment, as well as construction and forestry equipment. It also provides wholesale financing to dealers of the company's equipment.
Deere's Technology Stack is the backbone of its innovation, encompassing digital capabilities, automation, autonomy, and alternative power technologies. The company's investment in research and development has yielded groundbreaking solutions, such as the See & Spray Ultimate precision spraying system and the ExactEmerge high-speed planting technology, which have been enthusiastically adopted by customers.
Deere's Lifecycle Solutions integrate its aftermarket and support capabilities to provide comprehensive management of customer equipment, service, and technology needs throughout the product lifecycle. This holistic approach has solidified the company's reputation as a trusted partner, ensuring the long-term success of its customers.
Financials
Despite the challenges posed by the COVID-19 pandemic and subsequent supply chain disruptions, Deere has demonstrated resilience and agility. In fiscal year 2023, the company reported net sales and revenues of $60.25 billion and net income of $10.17 billion, showcasing its ability to navigate turbulent market conditions. The company also generated $8.59 billion in operating cash flow and $4.12 billion in free cash flow during this period.
However, in the most recent quarter (Q3 2024), Deere experienced a decline in financial performance. The company reported consolidated net sales and revenues of $13.15 billion, a 17% decrease from the same period in 2023. Net income attributable to Deere Company was $1.73 billion, a 42% decrease compared to the prior year quarter. Operating cash flow for the quarter was $3.195 billion, while free cash flow stood at $2.075 billion.
The decreases in both net sales and net income were primarily driven by lower sales volumes across the company's product segments. This was due to a challenging macro environment, including lower commodity prices, higher interest rates, and geopolitical uncertainty, which pressured customer demand.
Breaking down the performance by segment for Q3 2024:
Production and Precision Agriculture (PPA) net sales were $5.10 billion, down 25% from the same period in 2023, driven by lower shipment volumes primarily in the U.S., Europe, Brazil, and Asia. Operating profit for the PPA segment was $1.16 billion, a 35% decrease compared to the prior year period.
Small Agriculture and Turf (SAT) net sales were $3.05 billion, down 18% from the same period in 2023, primarily due to lower shipment volumes in Europe, the U.S., and Mexico. Operating profit for the SAT segment was $496 million, a 32% decrease compared to the prior year quarter.
Construction and Forestry (CF) net sales were $3.23 billion, a 13% decrease from the same period in 2023, driven by lower U.S. shipment volumes due to moderating demand and efforts to reduce field inventory. Operating profit for the CF segment was $448 million, a 37% decrease compared to the prior year quarter.
Financial Services (FS) revenues, including intercompany, were $1.67 billion, a 15% increase from the same period in 2023. FS net income was $153 million in the third quarter, a 29% decrease from the prior year period.
Looking ahead, Deere has maintained its fiscal year 2024 net income guidance of approximately $7 billion, underscoring the company's confidence in its strategy and the strength of its market position. The company's focus on proactive inventory management and disciplined cost control has been instrumental in weathering the current business cycle.
For the full fiscal year 2024, Deere expects the Production and Precision Ag segment to see net sales down between 20-25%, the Small Ag & Turf segment to see net sales down between 20-25%, and the Construction & Forestry segment to see net sales down between 10-15%. The Financial Services segment is projected to have net income of $720 million for fiscal year 2024.
Cash flow from Deere's equipment operations is now projected to be in the range of $6 billion to $6.5 billion for fiscal year 2024.
Liquidity
Deere maintains a strong liquidity position, which is crucial for navigating challenging market conditions. As of July 28, 2024, the company reported:
- Cash & Cash Equivalents: $7.0 billion - Available Credit Lines: $10.93 billion in total worldwide credit lines, with $4.92 billion unused - Debt/Equity Ratio: 2.87x - Current Ratio: 0.68 - Quick Ratio: 0.48
These figures indicate that Deere has sufficient liquidity to meet its operational and strategic needs, despite the current industry headwinds.
Sustainability Initiatives
Deere's commitment to sustainability is also a key aspect of its operations. The company's Leap Ambitions, launched in 2022, align with its customers' production systems, seeking to optimize their operations and deliver better outcomes with fewer resources.
Outlook
Despite the headwinds faced by the agricultural and construction sectors, Deere's innovative solutions, strong customer relationships, and disciplined execution have positioned the company for long-term success. As farmers and contractors continue to seek ways to enhance productivity and sustainability, Deere's role as a trusted partner and technology leader remains essential.
The agricultural equipment industry has experienced a cyclical downturn, with lower commodity prices and tighter farm incomes pressuring demand. However, the industry continues to see strong adoption of precision agriculture technologies that improve productivity and sustainability for customers.
The construction equipment industry has also moderated from recent peak levels, with housing starts and commercial construction slowing amid higher interest rates. Demand for infrastructure and industrial equipment remains relatively healthy.
Overall, the equipment markets that Deere serves are expected to see low-to-mid single digit CAGR over the long-term as technological innovation and sustainability needs drive replacement and expansion of the equipment fleet.
In summary, Deere & Company is navigating a challenging macro environment through disciplined inventory management and cost control, while continuing to invest in advanced technologies to drive long-term growth. The company maintains a strong liquidity position and leading market shares across its core agricultural and construction equipment businesses, positioning it well for future growth as market conditions improve.