# DEERE & CO (DE) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from DEERE & CO's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/315189/000155837021016864/de-20211031x10k.htm
Accession: 0001558370-21-016864
Filing date: 2021-12-16
Report date: 2021-10-31
Extracted from a later financial-section MD&A body after the formal Item 7 span was a short reference.
Confidence: high

Company profile: /company/DE/
All MD&A years: /company/DE/mda/
Next year: /company/DE/mda/fy2022/ (FY 2022)

MANAGEMENT’S DISCUSSION AND ANALYSIS

The following Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to promote understanding of the financial condition and results of operations. The MD&A is provided as a supplement to, and should be read in conjunction with, the consolidated financial statements and the accompanying Notes to Consolidated Financial Statements (Part II, Item 8 of this Form 10-K).

RESULTS OF OPERATIONS FOR THE YEARS ENDED

OCTOBER 31, 2021, NOVEMBER 1, 2020, AND NOVEMBER 3, 2019

OVERVIEW

Organization

The company’s equipment operations generate revenues and cash primarily from the sale of equipment to John Deere dealers and distributors. The equipment operations manufacture and distribute a full line of agricultural equipment; a variety of commercial and consumer equipment; and a broad range of equipment for construction, roadbuilding, and forestry. The company’s financial services primarily provide credit services, which mainly finance sales and leases of equipment by John Deere dealers and trade receivables purchased from the equipment operations. In addition, financial services offers extended equipment warranties. The information in the following discussion is presented in a format that includes information grouped as consolidated, equipment operations, and financial services. 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. The company also views its operations as consisting of two geographic areas: the U.S. and Canada, and outside the U.S. and Canada. The company’s operating segments consist of production and precision agriculture, small agriculture and turf, construction and forestry, and financial services.

Trends and Economic Conditions

The company’s production and precision agriculture equipment and small agriculture and turf equipment sales both increased 27 percent in 2021. Industry sales of large agricultural machinery in the U.S. and Canada for 2022 are forecasted to increase approximately 15 percent compared to 2021. Industry sales of small agricultural and turf equipment in the U.S. and Canada are expected to be flat in 2022. Industry sales of agricultural machinery in Europe are estimated to be about 5 percent higher. South American industry sales of tractors and combines are expected to be roughly 5 percent higher in 2022. Asia industry sales are forecasted to be nearly the same in 2022 as in 2021. The company’s construction and forestry sales increased 27 percent in 2021. On an industry basis, North American construction equipment and compact construction equipment sales are both expected to be 5 to 10 percent higher in 2022. Global forestry industry sales are projected to increase 10 to 15 percent. The company’s financial services operations for the full year 2022 are expected to experience slightly lower results due to a higher provision for credit losses,

lower gains on operating lease residual values, and higher selling, general and administrative expenses. These factors are expected to be partially offset by income earned on a higher average portfolio.

Items of concern that could affect the company’s results of operations and liquidity and capital resources include uncertainty of the effectiveness of governmental and private sector actions to address COVID, supply of critical parts and components, trade agreements, the uncertainty of the results of monetary and fiscal policies, the impact of elevated levels of sovereign and state debt, capital market disruptions, changes in demand and pricing for new and used equipment, geopolitical events, and the other items discussed in the “Safe Harbor Statement” below. Significant fluctuations in foreign currency exchange rates and volatility in the price of many commodities could also impact the company’s results. The future financial effects of COVID continue to be unknown due to many factors. As a result of these uncertainties, predicting the company’s forecasted financial performance is subject to many assumptions.

The UAW, the union representing the majority of the company’s production and maintenance employees in the U.S., initiated a strike on October 14, 2021. This resulted in a work stoppage affecting employees at 14 U.S. facilities. The work stoppage continued through the approval of a new six-year collective bargaining agreement on November 17, 2021. The company’s operations during the remainder of the fourth quarter were adversely affected by the work stoppage, which reduced production and shipments.

The company’s 2021 full-year performance reflects strong end-market demand and the ability of the company’s dedicated employees, dealers, and suppliers throughout the world, who have helped safely maintain operations, manage supply chain challenges, and continue to serve customers throughout the COVID pandemic. Demand for farm and construction equipment is expected to continue to benefit from positive fundamentals, including favorable crop prices, economic growth, and increased investment in infrastructure. While supply-chain pressures are expected to persist into at least the early part of fiscal year 2022, the company is working closely with key suppliers to secure the parts and components that customers need in order to deliver essential food and infrastructure more profitably and sustainably.

COVID Effects, Actions, and Recent Developments

During 2020 and to a lesser extent in 2021, the effects of COVID and the related actions of governments and other authorities to contain COVID have affected and continue to affect the company’s operations, results, cash flows, and forecasts.

The U.S. government and many other governments in countries where the company operates have designated the company an essential critical infrastructure business. This designation allows the company to operate in support of its customers to the extent possible.

The company’s first priority in addressing the effects of COVID continues to be the health, safety, and overall welfare of its

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employees. The company effectively activated previously established business continuity plans and proactively implemented health and safety measures at its operations around the world.

The company broadened its supply base to minimize the impact of potential supply chain disruptions on its ability to meet customer demand. The company has experienced shortages of critical parts and components, which caused challenges and production disruptions. The company continues to monitor the situation and work closely with suppliers.

The company continued to work closely with customers in 2021 in connection with short-term payment relief on obligations owed to the company. Financing receivables and operating leases granted relief since the beginning of the pandemic that remained outstanding at October 31, 2021 represented about 3 percent and about 2 percent of the respective portfolio balances. The trade receivables granted relief that remained outstanding at October 31, 2021 were not material. Additional information is presented in Notes 13 and 25.

2021 COMPARED WITH 2020

CONSOLIDATED RESULTS

​

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

​

Net income in 2020 was negatively affected by impairment charges and employee-separation costs of $458 million after-tax (see Notes 4 and 5). In addition, net income in 2020 was less favorably affected by discrete adjustments to the provision for income taxes.

​

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

​

The discussion on net sales and operating profit is included in the Business Segment and Geographic Area Results below.

A discussion of the cost of sales to net sales ratio and other significant statement of consolidated income changes follows:

​

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[[/GREPCENT_TABLE]]

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The cost of sales to net sales ratio decreased compared to 2020 mainly due to price realization and the impact of impairments and employee-separation expenses recorded in 2020 (see Note 5). Finance and interest income reduced slightly in 2021 due to lower average interest rates, largely offset by a higher average credit portfolio. Other income increased primarily due to operating lease disposition gains. Research and development expenses were lower in 2021 largely due to employee-separation expenses incurred in 2020 (see Note 5) and organizational efficiencies. Selling, administrative and general expenses decreased mostly due to employee-separation expenses recorded in 2020 (see Note 5) and a lower provision for credit losses, partially offset by higher incentive compensation. Interest expense decreased in 2021 due to lower average borrowing rates. Other operating expenses were lower compared to 2020 largely due to lower retirement benefit costs, reduced depreciation of equipment on operating leases, and the impact of operating lease impairments recorded in 2020 (see Note 5).

The company has several funded and unfunded defined benefit pension plans and other postretirement benefit (OPEB) plans, primarily health care and life insurance plans. The company’s costs for these plans in 2021 were $197 million, compared with $341 million in 2020. The long-term expected return on plan assets, which is reflected in these costs, was an expected gain of 5.9 percent in 2021 and 6.4 percent in 2020, or $876 million and $869 million, respectively. The actual return was a gain of $3,616 million in 2021 and $1,177 million in 2020. In 2022, the expected return is approximately 5.0 percent. The company’s costs under these plans in 2022, including the pension expense related to the UAW contract ratification and the expected gain on the voluntary OPEB contribution (see Note 29), are expected to be consistent with 2021. See the discussion in “Critical Accounting Estimates” for more information about pension and OPEB benefit obligations.

BUSINESS SEGMENT AND GEOGRAPHIC AREA RESULTS

The following discussion relates to operating results by reportable segment and geographic area. Operating profit is income before corporate expenses, certain external interest expense, certain foreign exchange gains or losses, and income taxes. However, the financial services segment operating profit includes the effect of interest expense and foreign currency exchange gains or losses.

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In fiscal year 2021, the company implemented a new operating model and reporting structure. With this change, the company’s agriculture and turf operations were divided into two new segments: production and precision agriculture and small agriculture and turf.

The production and precision agriculture segment defines, develops, and delivers global equipment and technology solutions to unlock customer value for production-scale growers of large grains, small grains, cotton, and sugar. Main products include large and certain mid-size tractors, combines, cotton pickers, sugarcane harvesters and loaders, and soil preparation, seeding, application and crop care equipment.

The small agriculture and turf segment defines, develops, and delivers global equipment and technology solutions to unlock customer value for dairy and livestock producers, high-value crop producers, and turf and utility customers. The segment’s primary products include certain mid-size and small tractors, as well as hay and forage equipment, riding and commercial lawn equipment, golf course equipment, and utility vehicles.

There were no reporting changes for the construction and forestry and financial services segments. As a result, the company has four reportable segments.

Worldwide Production and Precision Agriculture Operations

​

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[[/GREPCENT_TABLE]]

​

Segment sales increased due to higher shipment volumes and price realization. Operating profit benefitted from price realization, higher shipment volumes / sales mix, and a favorable indirect tax ruling in Brazil. These items were partially offset by higher production costs. The prior year was also impacted by employee-separation program expenses (see Note 5).

Worldwide Small Agriculture and Turf Operations

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["(In millions of dollars)","\u200b","2021","\u200b","2020","\u200b","% Change","\u200b"],["Net sales","\u200b","$","11,860","\u200b","$","9,363","\u200b","+27","\u200b"],["Operating profit","\u200b","\u200b","2,045","\u200b","\u200b","1,000","\u200b","+105","\u200b"],["Operating margin","\u200b","\u200b","17.2%","\u200b","\u200b","10.7%","\u200b","\u200b","\u200b"]]
[[/GREPCENT_TABLE]]

​

Segment sales and operating profit were both higher in 2021 due to higher shipment volumes / sales mix and price realization. The operating profit improvement was partially offset by higher production costs. Results for the current year were positively impacted by a gain on the sale of a factory in China, while results for the prior year were affected by impairments, closure costs, and employee-separation expenses (see Note 5).

Worldwide Construction and Forestry Operations

​

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[[/GREPCENT_TABLE]]

​

Segment sales increased in 2021 primarily due to higher shipment volumes and price realization. Operating profit increased mainly due to positive shipment volumes / sales mix and price realization, partially offset by higher production costs. The prior year was also impacted by employee-separation program expenses and impairments in certain fixed assets and unconsolidated affiliates (see Note 5).

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Worldwide Financial Services Operations

​

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

​

While the average balance of receivables and leases financed was 5 percent higher in 2021, revenue decreased due to lower average interest rates. Interest expense decreased in 2021 as a result of lower average borrowing rates. Net income in 2021 increased mainly due to an improvement on operating lease residual values, a lower provision for credit losses, more favorable financing spreads, and income earned on a higher average portfolio.

Deere & Company in U.S. and Canada

​

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

​

Net sales and revenues increased in 2021 due mostly to higher shipment volumes / sales mix and price realization. The growth in operating profit was due primarily to increased shipment volumes / sales mix and price realization, partially offset by higher production costs. Results in 2020 were negatively impacted by impairment charges and employee-separation expenses.

Deere & Company outside U.S. and Canada

​

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

​

The net sales and revenue increase in 2021 compared to 2020 was primarily the result of higher shipment volumes / sales mix, price realization, and the favorable effects of currency translation. Operating profit improvement was largely due to higher shipment volumes / sales mix and price realization, partially offset by increased production costs. Results in 2020 were negatively impacted by impairment charges and employee-separation costs.

2020 COMPARED WITH 2019

CONSOLIDATED RESULTS

​

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[[/GREPCENT_TABLE]]

​

Net income in 2020 was negatively affected by impairment charges and employee-separation costs of $458 million after-tax (see Notes 4 and 5). In 2019, the similar charges were $82 million. In addition, the provision for income taxes was adversely affected by non-deductible impairments and charges in 2020 and less favorably affected by discrete adjustments in 2020 than in 2019.

​

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[[/GREPCENT_TABLE]]

​

The discussion of net sales and operating profit is included in the following Business Segment and Geographic Area Results. The equipment operations’ provision for income taxes and net income were adversely affected by non-deductible impairments and charges in 2020 and were less favorably affected by discrete adjustments to the provision for income taxes in 2020 than in 2019.

A discussion of the cost of sales to net sales ratio and other significant statement of consolidated income changes follows:

​

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[[/GREPCENT_TABLE]]

​

The cost of sales to net sales ratio decreased compared to 2019 mainly due to price realization, improved production costs, and lower warranty expenses, partially offset by impairments, employee-separation expenses (see Note 5), and the unfavorable

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effects of foreign currency exchange. Finance and interest income decreased slightly in 2020 due to lower average interest rates, largely offset by a higher average credit portfolio. Other income declined primarily due to lower service income compared to 2019. Research and development expenses decreased compared to 2019 as a result of targeted project reductions related to COVID spending adjustments. Selling, administrative and general expenses decreased largely due to spending reductions and the favorable effects of currency translation, mostly offset by employee-separation expenses (see Note 5) and an increase in the provision for credit losses. Interest expense decreased in 2020 due to lower average borrowing rates, partially offset by higher average borrowings. Other operating expenses increased compared to 2019 largely due to increased depreciation of equipment on operating leases, employee-separation expenses (see Note 5), and a loss on sale of a business (see Note 4). These items were mostly offset by lower impairments and reduced losses on operating lease residual values and reduced service related expenses.

The company has several funded and unfunded defined benefit pension plans and OPEB plans, primarily health care and life insurance plans. The company’s costs for these plans in 2020 were $341 million, compared with $235 million in 2019. The returns on plan assets were gains of $1,177 million in 2020 and $2,163 million in 2019. Total company contributions to the plans were $951 million in 2020 and $518 million in 2019, which included voluntary contributions and direct benefit payments. The voluntary contributions to plan assets were $700 million in 2020 to a U.S. OPEB plan, and $306 million in 2019, which included $300 million to the same U.S. OPEB plan.

BUSINESS SEGMENT AND GEOGRAPHIC AREA RESULTS

Worldwide Production and Precision Agriculture Operations

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["(In millions of dollars)","\u200b","2020","\u200b","2019","\u200b","% Change","\u200b"],["Net sales","\u200b","$","12,962","\u200b","$","13,364","\u200b","-3","\u200b"],["Operating profit","\u200b","\u200b","1,969","\u200b","\u200b","1,729","\u200b","+14","\u200b"],["Operating margin","\u200b","\u200b","15.2%","\u200b","\u200b","12.9%","\u200b","\u200b","\u200b"]]
[[/GREPCENT_TABLE]]

​

Segment sales decreased due to lower shipment volumes and the unfavorable effects of currency translation, partially offset by price realization. Operating profit increased largely due to price realization, lower research and development expense, reduced selling, administrative and general expenses, and lower warranty expenses. These items were partially offset by lower shipment volumes / mix, the unfavorable effects of currency exchange, and employee-separation expenses.

Worldwide Small Agriculture and Turf Operations

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[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

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Segment sales decreased due to lower shipment volumes, partially offset by price realization. Operating profit improved due to price realization, favorable production costs, lower selling,

administrative and general expenses, reduced research and development expense, and lower warranty expense, partially offset by lower shipment volumes / mix, employee-separation expenses and impairments.

Worldwide Construction and Forestry Operations

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[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["(In millions of dollars)","\u200b","2020","\u200b","2019","\u200b","% Change","\u200b"],["Net sales","\u200b","$","8,947","\u200b","$","11,220","\u200b","-20","\u200b"],["Operating profit","\u200b","\u200b","590","\u200b","\u200b","1,215","\u200b","-51","\u200b"],["Operating margin","\u200b","\u200b","6.6%","\u200b","\u200b","10.8%","\u200b","\u200b","\u200b"]]
[[/GREPCENT_TABLE]]

​

Segment sales decreased in 2020 primarily due to lower shipment volumes and the unfavorable effect of currency translation, partially offset by price realization. Operating profit declined mainly due to lower shipment volumes / mix, employee-separation expenses, impairments, and the unfavorable effects of currency exchange. The reduction in operating profit was partially offset by price realization, lower research and development expenses, reduced selling, administrative and general expenses, and improved production costs.

Worldwide Financial Services Operations

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[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["(In millions of dollars)","\u200b","2020","\u200b","2019","\u200b","% Change","\u200b"],["Revenue (including intercompany)","\u200b","$","3,867","\u200b","$","3,969","\u200b","-3","\u200b"],["Interest expense","\u200b","\u200b","942","\u200b","\u200b","1,234","\u200b","-24","\u200b"],["Net income","\u200b","\u200b","566","\u200b","\u200b","539","\u200b","+5","\u200b"]]
[[/GREPCENT_TABLE]]

​

While the average balance of receivables and leases financed was 2 percent higher in 2020, revenue decreased due to lower average interest rates. Interest expense decreased in 2020 as a result of lower average borrowing rates, partially offset by higher average borrowings. Net income in 2020 increased mainly due to lower impairments and reduced losses on operating lease residual values and income earned on a higher average portfolio, partially offset by a higher provision for credit losses, employee-separation expenses, and unfavorable financing spreads.

Deere & Company in U.S. and Canada

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["(In millions of dollars)","\u200b","2020","\u200b","2019","\u200b","% Change","\u200b"],["Net sales and revenues","\u200b","$","21,386","\u200b","$","23,746","\u200b","-10","\u200b"],["Operating profit","\u200b","\u200b","2,775","\u200b","\u200b","2,841","\u200b","-2","\u200b"],["Operating margin","\u200b","\u200b","13.0%","\u200b","\u200b","12.0%","\u200b","\u200b","\u200b"]]
[[/GREPCENT_TABLE]]

​

Net sales and revenues decreased in 2020 due primarily to lower shipment volumes, partially offset by price realization. The reduction in operating profit was due primarily to lower shipment volumes / mix and employee-separation expenses, partially offset by price realization, lower research and development costs, reduced selling, general and administrative expenses, improved production costs, and lower warranty expenses.

Deere & Company outside U.S. and Canada

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["(In millions of dollars)","\u200b","2020","\u200b","2019","\u200b","% Change","\u200b"],["Net sales and revenues","\u200b","$","14,154","\u200b","$","15,512","\u200b","-9","\u200b"],["Operating profit","\u200b","\u200b","1,530","\u200b","\u200b","1,574","\u200b","-3","\u200b"],["Operating margin","\u200b","\u200b","10.8%","\u200b","\u200b","10.1%","\u200b","\u200b","\u200b"]]
[[/GREPCENT_TABLE]]

​

The net sales and revenues decrease in 2020 compared to 2019 was primarily the result of lower shipment volumes and the

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unfavorable effects of currency translation, partially offset by price realization. Operating profit declined primarily due to lower shipment volumes / mix, impairments, employee-separation expenses, and the unfavorable effects of currency exchange, largely offset by price realization, reduced selling, general and administrative expenses, lower research and development costs, improved production costs, and lower warranty expenses.

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

Positive cash flows from consolidated operating activities in 2021 were $7,726 million. This resulted primarily from net income adjusted for non-cash provisions, an increase in accounts payable and accrued expenses, and a decrease in receivables related to sales, which were partially offset by an increase in inventories. Cash outflows from investing activities were $5,750 million in 2021, due mainly to the cost of receivables (excluding receivables related to sales) and cost of equipment on operating leases acquired exceeding the collections of receivables and the proceeds from sales of equipment on operating leases by $4,332 million, purchases of property and equipment of $848 million, a change in collateral on derivatives – net of $281 million, and acquisition of businesses, net of cash acquired, of $244 million (see Note 4). Cash outflows from financing activities were $1,078 million in 2021, due primarily to repurchases of common stock of $2,538 million and dividends paid of $1,040 million, partially offset by an increase in borrowings of $2,450 million and proceeds from the issuance of common stock (resulting from the exercise of stock options) of $148 million. Cash, cash equivalents, and restricted cash increased $953 million during 2021.

Over the last three years, operating activities have provided an aggregate of $18,621 million in cash. Cash inflows were also provided by increases in borrowings of $5,621 million. The aggregate amount of these cash inflows was used mainly to acquire receivables (excluding receivables related to sales) and equipment on operating leases that exceeded collections of receivables and the proceeds from sales of equipment on operating leases by $9,817 million, repurchase common stock of $4,541 million, pay dividends of $2,939 million, and purchase property and equipment of $2,788 million. Cash, cash equivalents, and restricted cash increased $4,110 million over the three-year period.

The company has access to most global capital markets at reasonable costs 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 October 31, 2021 and November 1, 2020 was $2,230 million and $1,238 million, respectively, while the

total cash and cash equivalents and marketable securities position was $8,745 million and $7,707 million, respectively. The amount of the total cash and cash equivalents and marketable securities held by foreign subsidiaries was $5,817 million at October 31, 2021 and $5,010 million at November 1, 2020. During November 2021, the company’s foreign subsidiaries returned $3,500 million of cash and cash equivalents to the U.S.

Lines of Credit. The company also has access to bank lines of credit with various banks throughout the world. Worldwide lines of credit totaled $8,336 million at October 31, 2021, $5,770 million of which were unused. For the purpose of computing the 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 October 31, 2021 was a 364-day credit facility agreement of $3,000 million, expiring in fiscal April 2022. In addition, total credit lines included long-term credit facility agreements of $2,500 million, expiring in fiscal April 2025, and $2,500 million, expiring in fiscal March 2026. The agreements are mutually extendable and the annual facility fees are not significant. These credit agreements require John Deere Capital Corporation (Capital Corporation) to maintain its consolidated ratio of earnings to fixed charges at not less than 1.05 to 1 for each fiscal quarter and the ratio of senior debt, excluding securitization indebtedness, to capital base (total subordinated debt and stockholder’s equity excluding accumulated other comprehensive income (loss)) at not more than 11 to 1 at the end of any fiscal quarter. The credit agreements also require the equipment operations to maintain a ratio of total debt to total capital (total debt and stockholders’ equity excluding accumulated other comprehensive income (loss)) of 65 percent or less at the end of each fiscal quarter. Under this provision, the company’s excess equity capacity and retained earnings balance free of restriction at October 31, 2021 was $15,388 million. Alternatively under this provision, the equipment operations had the capacity to incur additional debt of $28,579 million at October 31, 2021. All of these credit agreement requirements have been met during the periods included in the consolidated 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 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.

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The senior long-term and short-term debt ratings and outlook currently assigned to unsecured company securities by the rating agencies engaged by the company are as follows:

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","","Senior","","\u200b"],["\u200b","\u200b","Long-Term","\u200b","Short-Term","\u200b","Outlook"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Fitch Ratings","\u200b","A","\u200b","F1","\u200b","Stable"],["Moody\u2019s Investors Service, Inc.","","A2","","Prime-1","","Stable"],["Standard & Poor\u2019s","","A","","A-1","","Stable"]]
[[/GREPCENT_TABLE]]

​

Trade Accounts and Notes Receivable. Trade accounts and notes receivable primarily arise from sales of goods to independent dealers. Trade receivables increased by $37 million in 2021. The ratio of trade accounts and notes receivable at October 31, 2021 and November 1, 2020 to fiscal year net sales was 11 and 13 percent, respectively. Total worldwide production and precision agriculture receivables decreased $193 million, worldwide small agriculture and turf receivables increased $199 million, and construction and forestry receivables increased $31 million. The collection period for trade receivables averages less than 12 months. The percentage of trade receivables outstanding for a period exceeding 12 months was 1 percent at October 31, 2021 and 3 percent at November 1, 2020.

Deere & Company Stockholders’ Equity. Deere & Company stockholders’ equity was $18,431 million at October 31, 2021, compared with $12,937 million at November 1, 2020. The increase of $5,494 million resulted from net income attributable to Deere & Company of $5,963 million, a change in the retirement benefits adjustment of $2,884 million, an increase in common stock of $159 million, and a change in the cumulative translation adjustment of $118 million, which was partially offset by an increase in treasury stock of $2,468 million and dividends declared of $1,125 million.

Contractual Obligations and Cash Requirements. The company’s material cash requirements include the following contractual and other obligations:

Borrowings – As of October 31, 2021, the equipment operations had $1,497 million of payments due on borrowings and securitization borrowings in the next year, along with interest payments of $329 million. As of the same date, the financial services operations had $11,959 million of payments due on borrowings and securitization borrowings in the next year, along with interest payments of $574 million. The securitization borrowing payments are based on the expected liquidation of the retail notes, as well as the repurchases due to the reduced facility capacity (see Note 29). The financial services borrowings will likely be replaced with new borrowings to finance their receivable and lease portfolios.

Purchase Obligations – As of October 31, 2021, the company’s outstanding purchase obligations were $4,314 million, with $4,190 million payable within one year. These purchase obligations are noncancelable.

Other Cash Requirements – In addition to its contractual obligations, the company’s quarterly cash dividend is $1.05 per share, subject to change at the discretion of the company’s Board of Directors. Total company pension and OPEB contributions in 2022 are expected to be approximately $1,250 million. Fiscal year

2022 contributions include a voluntary U.S. OPEB plan contribution of $1,000 million made on November 30, 2021 (see Note 29). Also anticipated in 2022 is the dissolution of the joint venture agreement between the company and Hitachi. In connection with the termination, the company will purchase all of Hitachi’s shares in the relevant joint venture manufacturing entities and receive certain intellectual property rights. The initial cash consideration consists of $275 million for the shares and an intellectual property license (see Notes 1, 4, and 11). The company will consider share repurchases as a means of deploying excess cash to shareholders once the previously mentioned requirements are met.

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. To the extent necessary, funds provided from operations are supplemented by external financing sources.

Cash provided by operating activities of the equipment operations during 2021, including intercompany cash flows, was $5,900 million due largely to net income adjusted for non-cash provisions and an increase in accounts payable and accrued expenses, partially offset by an increase in inventories and an increase in trade, notes, and financing receivables related to sales.

Over the last three years, these operating activities, including intercompany cash flows, have provided an aggregate of $13,860 million in cash.

Trade receivables held by the equipment operations increased by $142 million during 2021. The equipment operations sell a significant portion of their trade receivables to financial services (see previous consolidated discussion).

Inventories increased by $1,782 million in 2021 due primarily to increased production schedules. A majority of these inventories are valued on the last-in, first-out (LIFO) method. The ratios of inventories on a first-in, first-out (FIFO) basis (see Note 15), which approximates current cost, to fiscal year cost of sales were 31 percent and 28 percent at October 31, 2021 and November 1, 2020, respectively.

Total interest-bearing debt, excluding finance lease liabilities, of the equipment operations was $10,373 million at the end of 2021, compared with $10,382 million at the end of 2020 and $6,446 million at the end of 2019. The ratio of total debt to total capital (total interest-bearing debt and Deere & Company stockholders’ equity) at the end of 2021, 2020, and 2019 was 36 percent, 45 percent, and 36 percent, respectively.

In 2020, the equipment operations issued three tranches of notes in the U.S. with aggregate principal totaling $2,250 million that are due from 2025 to 2050. The equipment operations also issued Euro notes with aggregate principal totaling €2,000 million (approximately $2,170 million based on the exchange rate at the issue date) that are due from 2024 to 2032 (see Note 20). In 2020, the equipment operations issued commercial paper in the U.S. with aggregate

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principal totaling $466 million, of which $448 million had an original term greater than 90 days. This commercial paper was repaid in 2020 and is presented in “Increase (decrease) in total short-term borrowings” in the statement of consolidated cash flows.

Property and equipment cash expenditures for the equipment operations in 2021 were $845 million, compared with $816 million in 2020. Capital expenditures in 2022 are estimated to be $1,175 million.

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 Deere & Company.

The cash provided by operating and financing activities was used primarily to increase receivables and leases. Cash flows from the financial services’ operating activities, including intercompany cash flows, were $1,965 million in 2021. Cash used for investing activities totaled $4,308 million in 2021 due primarily to the cost of receivables (excluding trade and wholesale) and cost of equipment on operating leases acquired exceeding collections of these receivables and the proceeds from sales of equipment on operating leases by $5,311 million, a change in collateral on derivatives – net of $274 million, and purchases of marketable securities exceeding proceeds from maturities and sales by $89 million. Partially offsetting the use of cash was a decrease in trade receivables and wholesale notes of $1,364 million. Cash provided by financing activities totaled $2,238 million in 2021, resulting primarily from an increase in external borrowings of $2,468 million, an increase in borrowings from Deere & Company of $354 million, partially offset by dividends paid to Deere & Company of $555 million. Cash, cash equivalents, and restricted cash decreased $91 million.

Over the last three years, the operating activities, including intercompany cash flows, have provided $6,359 million in cash. In addition, an increase in total borrowings of $5,476 million, a decrease in trade and wholesale receivables of $2,428 million, and a change in collateral on derivatives – net of $59 million provided cash inflows. These amounts have been used mainly to fund receivables (excluding trade and wholesale) and equipment on operating lease acquisitions, which exceeded collections and the proceeds from sales of equipment on operating leases, by $12,454 million, pay dividends to Deere & Company of $1,368 million, and purchase $182 million of marketable securities in excess of maturities and sales. Cash, cash equivalents, and restricted cash increased $112 million over the three-year period.

Trade and financing receivables and equipment on operating leases increased by $3,401 million in 2021, compared with 2020. Total acquisition volumes of receivables (excluding trade and wholesale) and cost of equipment on operating leases increased 16 percent in 2021, compared with 2020. The volume of finance leases, retail notes, and revolving charge accounts increased 33 percent, 26 percent, and 1 percent, respectively. The volume of operating leases decreased 2 percent. During 2021, the wholesale notes and

trade receivables portfolios decreased 26 percent and 7 percent, respectively.

Total external interest-bearing debt of the financial services operations was $37,978 million at the end of 2021, compared with $35,556 million at the end of 2020 and $38,888 million at the end of 2019. Total external borrowings have changed generally corresponding with the level of the receivable and lease portfolio, the level of cash and cash equivalents, the change in payables owed to Deere & Company, and the change in investment from Deere & Company. The financial services operations’ ratio of total interest-bearing debt to total stockholder’s equity was 7.8 to 1 at the end of 2021, 7.8 to 1 at the end of 2020, and 8.0 to 1 at the end of 2019.

The Capital Corporation has a revolving credit agreement to utilize bank conduit facilities to securitize retail notes (see Note 14). At October 31, 2021, the revolving credit agreement had a total capacity, or “financing limit,” of up to $2,000 million of secured financings at any time. At October 31, 2021, $1,572 million of short-term securitization borrowings were outstanding under the agreement. 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. The agreement was renewed in November 2021 with an expiration in November 2022 and a capacity of $1,000 million. As a result of the reduced capacity, $511 million of outstanding short-term securitization borrowings were repurchased by the company in November 2021, in addition to the normal monthly collection of payments on the retail notes.

During 2021, the financial services operations issued $2,801 million and retired $2,861 million of retail note securitization borrowings, which are presented in “Increase (decrease) in total short-term borrowings” on the statement of consolidated cash flows. The financial services operations also issued $8,711 million and retired $6,996 million of long-term borrowings in 2021, which were primarily medium-term notes.

CRITICAL ACCOUNTING ESTIMATES

The preparation of the company’s consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect reported amounts of assets, liabilities, revenues, and expenses. Changes in these estimates and assumptions could have a significant effect on the financial statements. The accounting policies below are those management believes are the most critical to the preparation of the company’s financial statements and require the most difficult, subjective, or complex judgments. The company’s other accounting policies are described in the Notes to the Consolidated Financial Statements.

Sales Incentives

In certain markets, the company provides sales incentives to dealers. At the time a sale to a dealer is recognized, the company records an estimate of the future sales incentive costs as a reduction to the sales price. These incentives may be based on a

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dealer’s purchase volume, or on retail sales incentive programs for allowances and financing programs that will be due when the dealer sells the equipment to a retail customer. The estimated cost of these programs is based on historical data, announced and expected incentive programs, field inventory levels, and forecasted sales volumes. The final cost of these programs is determined at the end of the measurement period for volume-based incentives or when the dealer sells the equipment to the retail customer. This is due to numerous programs available at any particular time and new programs that may be announced after the company records the equipment sale. Changes in the mix and types of programs affect these estimates, which are reviewed quarterly.

The sales incentive accruals at October 31, 2021, November 1, 2020, and November 3, 2019 were $1,680 million, $1,718 million, and $2,033 million, respectively. The total accruals recorded were $880 million, $1,109 million, and $1,443 million in trade accounts and notes receivable – net, and $800 million, $609 million, and $590 million in accounts payable and accrued expenses at October 31, 2021, November 1, 2020, and November 3, 2019, respectively. The decrease in 2021 primarily resulted from higher retail demand and the decrease in 2020 primarily related to lower sales volume.

The estimation of the retail sales incentive accrual is impacted by many assumptions. One of the key assumptions is the predictive value of the historical percent of retail sales incentive costs to retail sales from dealers. Over the last five fiscal years, this percent has varied by an average of approximately plus or minus .5 percent, compared to the average retail sales incentive costs to retail sales percent during that period. Holding other assumptions constant, if this estimated retail incentive cost experience percent were to increase or decrease .5 percent, the sales incentive accrual at October 31, 2021 would increase or decrease by approximately $31 million.

Product Warranties

For most equipment and parts sales, the company provides a standard warranty to provide assurance that the equipment will function as intended for a specified period of time. At the time a sale is recognized, the company records the estimated future warranty costs. The company generally 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 primarily determined by a review of five-year claims costs and consideration of current quality developments. Variances in claims experience and the type of warranty programs affect these estimates, which are reviewed quarterly.

The product warranty accruals, excluding extended warranty unamortized premiums, at October 31, 2021, November 1, 2020, and November 3, 2019 were $1,312 million, $1,105 million, and $1,218 million, respectively. The increase in 2021 primarily related to higher sales volume while the decrease in 2020 mainly related to lower sales volume.

Estimates used to determine the product warranty accruals are significantly affected by the historical percent of warranty claims

costs to sales. Over the last five fiscal years, this percent has varied by an average of approximately plus or minus .08 percent, compared to the average warranty costs to sales percent during that period. Holding other assumptions constant, if this estimated cost experience percent were to increase or decrease .08 percent, the warranty accrual at October 31, 2021 would increase or decrease by approximately $35 million.

Postretirement Benefit Obligations

Pension and OPEB, primarily health care and life insurance plans, obligations are based on various assumptions used by the company’s actuaries in calculating these amounts. These assumptions include discount rates, health care cost trend rates, expected return on plan assets, compensation increases, retirement rates, mortality rates, and other factors. Actual results that differ from the assumptions and changes in assumptions affect future expenses and obligations.

The pension assets, net of pension liabilities, recognized on the balance sheet at October 31, 2021 were $2,665 million. The pension liabilities, net of pension assets, recognized on the balance sheet at November 1, 2020 and November 3, 2019 were $447 million and $226 million, respectively. The increase in the pension net assets in 2021 was primarily due to returns on plan assets. The increase in the pension net liabilities in 2020 was primarily due to decreases in discount rates and interest on the liabilities, largely offset by the return on plan assets.

The OPEB liabilities, net of OPEB assets, at October 31, 2021, November 1, 2020, and November 3, 2019 were $3,175 million, $3,892 million, and $4,686 million, respectively. The decrease in OPEB net liabilities in 2021 was due primarily to returns on plan assets and favorable changes to medical assumptions. The decrease in OPEB net liabilities in 2020 was due primarily to contributions to a U.S. OPEB plan.

The effect of hypothetical changes to selected assumptions on the company’s major U.S. retirement benefit plans would be as follows in millions of dollars:

​

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[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["*","Projected benefit obligation (PBO) for pension plans and accumulated postretirement benefit obligation (APBO) for OPEB plans."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["**","Pretax impact on service cost, interest cost, and amortization of gains or losses."]]
[[/GREPCENT_TABLE]]

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Goodwill

Goodwill is not amortized and is tested for impairment annually and when events or circumstances change such that it is more

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likely than not that the fair value of a reporting unit is reduced below its carrying amount. The end of the fiscal third quarter is the annual measurement date. To test for goodwill impairment, the carrying value of each reporting unit is compared with its fair value. If the carrying value of the goodwill is considered impaired, a loss is measured as the excess of the reporting unit’s carrying value over the fair value, with a limit of the goodwill allocated to that reporting unit.

An estimate of the fair value of the reporting unit is determined through a combination of comparable market values for similar businesses and discounted cash flows. These estimates can change significantly based on such factors as the reporting unit’s financial performance, economic conditions, interest rates, growth rates, pricing, changes in business strategies, and competition.

The company has not identified a reporting unit for which the goodwill was impaired in 2021, 2020, or 2019. For all reporting units, a 10 percent decrease in the estimated fair value would have had no effect on the carrying value of goodwill at the annual measurement date in 2021.

Allowance for Credit Losses

The allowance for credit losses is an estimate of the credit losses expected over the life of the receivable portfolio. The allowance is measured on a collective basis when similar risk characteristics exist. Risk characteristics considered by the company include finance product category, market, geography, credit risk, and remaining duration. Receivables that do not share risk characteristics with other receivables in the portfolio are evaluated on an individual basis. Non-performing receivables are included in the estimate of expected credit losses.

The company utilizes loss forecast models, which are selected based on the size and credit risk of the underlying pool of receivables, to estimate expected credit losses. Transition matrix models are used for large and complex retail customer receivable pools, while weighted average remaining maturity models are used for smaller and less complex retail customer receivable pools. Expected credit losses on wholesale receivables are based on historical loss rates, with consideration of current economic conditions and dealer financial risk. The modeled expected credit losses are adjusted based on reasonable and supportable forecasts, which may include economic indicators such as commodity prices, industry equipment sales, unemployment rates, and housing starts. Management reviews each model’s output quarterly, and qualitative adjustments are incorporated as necessary.

In 2021, the company adopted ASU No. 2016-13, which revised the measurement of credit losses from an incurred loss to an expected loss methodology. Upon adoption the company’s allowance for credit losses increased with an offset to retained earnings (see Note 3). The allowance for credit losses at November 1, 2020 and November 3, 2019 were not restated under the expected loss methodology. The total allowance for credit losses at October 31, 2021, November 1, 2020, and November 3, 2019 was $207 million, $223 million, and $222 million, respectively. The allowance decreased in 2021 compared to 2020 due to lower expected losses

in the construction and forestry market, continued improvement in the agriculture and turf market, and better than expected performance of accounts granted payment relief due to the economic effects of COVID. As previously mentioned, the allowance decrease was partially offset by the adoption of ASU No. 2016-13. The allowance was about the same in 2020 compared to 2019 with an increase in the financing receivable allowance largely offset by a decrease in the allowance for trade accounts and notes receivable (see Note 13).

The assumptions used in evaluating the company’s exposure to credit losses involve estimates and significant judgment. While the company believes its allowance is sufficient to provide for losses over the life of its existing receivable portfolio, different assumptions or changes in economic conditions would result in changes to the allowance for credit losses. Historically, changes in economic conditions have had limited impact on credit losses within the company’s wholesale receivable portfolio. Within the retail customer receivables portfolio, credit loss estimates are dependent on a number of factors, including historical portfolio performance, current delinquency levels, and estimated recoveries on defaulted accounts. The company’s transition matrix models, which are utilized to estimate credit losses for more than 90 percent of retail customer receivables, use historical portfolio performance and current delinquency levels to forecast future defaults. Estimated recovery rates are applied to the estimated default balance to calculate the expected credit losses. Holding all other factors constant, a 10 percent increase in the transition matrix models’ forecasted defaults and a simultaneous 10 percent decrease in recovery rates would have resulted in a $34 million increase to the allowance for credit losses at October 31, 2021.

Operating Lease Residual Values

The carrying value of equipment on operating leases is affected by the estimated fair values of the equipment at the end of the lease (residual values). Upon termination of the lease, the equipment is either purchased by the lessee or sold to a third party, in which case the company may record a gain or a loss for the difference between the estimated residual value and the sale price. The estimated residual values are based on several factors, including lease term, expected hours of usage, historical wholesale sales prices, return experience, intended equipment use, market dynamics and trends, and dealer residual value guarantees. The company reviews residual value estimates during the lease term and tests the carrying value of its operating leases for impairment when events or circumstances necessitate. Changes in residual value assumptions would affect the amount of depreciation expense and the amount of investment in equipment on operating leases. Depreciation is adjusted prospectively on a straight-line basis over the remaining lease term if residual estimates are revised.

The total operating lease residual values at October 31, 2021, November 1, 2020, and November 3, 2019 were $5,025 million, $5,254 million, and $5,259 million, respectively. The decreases in 2021 and 2020 primarily related to a lower average operating lease portfolio.

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Estimates used in determining end of lease market values for equipment on operating leases significantly impact the amount and timing of depreciation expense. Hypothetically, if future market values for this equipment were to decrease 10 percent from the company’s present estimates and all the equipment on operating leases were returned to the company for remarketing at the end of the lease term, the total effect would be to increase the company’s annual depreciation for equipment on operating leases by approximately $80 million, after consideration of dealer residual value guarantees.

Income Taxes

The company’s income tax provision, deferred income tax assets and liabilities, and liabilities for uncertain tax benefits represent the company’s best estimate of current and future income taxes to be paid. The annual tax rate is based on income tax laws, statutory tax rates, taxable income levels, and tax planning opportunities available in various jurisdictions where the company operates. These tax laws are complex, and require significant judgment to determine the consolidated provision for income taxes. Changes in tax laws, regulations, statutory tax rates, and estimates of the company’s future taxable income levels could result in actual realization of deferred taxes being materially different from amounts provided for in the consolidated financial statements.

Deferred income taxes represent temporary differences between the tax and the financial reporting basis of assets and liabilities, which will result in taxable or deductible amounts in the future. Deferred tax assets also include loss carryforwards and tax credits. These assets are regularly assessed for the likelihood of recoverability from estimated future taxable income, reversal of deferred tax liabilities, and tax planning strategies. To the extent the company determines that it is more likely than not a deferred income tax asset will not be realized, a valuation allowance is established. The recoverability analysis of the deferred income tax assets and the related valuation allowances requires significant judgment and relies on estimates.

Uncertain tax positions are determined based on whether it is more likely than not the tax positions will be sustained based on the technical merits of the position. For those positions that meet the more likely than not criteria, an estimate of the largest amount of tax benefit that is greater than 50 percent likely to be realized upon ultimate settlement with the related tax authority is recognized. The ultimate resolution of the tax position could take many years and result in a payment that is significantly different from the original estimate.

A provision for foreign withholding taxes has not been recorded on undistributed profits of the company’s non-U.S. subsidiaries that are determined to be indefinitely reinvested outside the U.S. If management intentions change in the future, there may be a significant impact on the provision for income taxes in the period the change occurs. For further information on income taxes, see Note 9 to the consolidated financial statements.