Deere & Company (DE) Earnings

Management highlights

- Overall Quarterly Performance * Delivered 5% year-over-year net sales growth to $13.369 billion, with 5% growth in equipment operations net sales to $11.778 billion. * Net income attributable to Deere & Company was $1.773 billion ($6.55 per diluted share); equipment operations margin reached 16.9%, lifted 250 basis points by a one-time $272 million IEPA tariff refund. * All three core segments operate at different points in the cycle (large ag below trough, small ag and turf mid-cycle, construction and forestry above mid-cycle) while delivering double-digit operating margins, providing portfolio resilience. * Deere is 80% U.S.-manufactured for complete goods sold domestically, with 75% of components sourced from U.S. suppliers, and committed to $20 billion in U.S. manufacturing investment over 10 years; a $70 million expansion in Kernersville, NC recently began production of U.S.-designed excavators. - Market Dynamics * Large ag: Robust global commodity demand driven by growing biofuel use, with expectations of tighter future supply amid higher fertilizer costs. Customer sentiment remains muted due to grower margin pressure from elevated volatile input costs and high interest rates; Deere has low new inventory and improving used inventory, and is gaining share via new product and technology launches ahead of a cycle recovery. * Small ag and turf: Benefiting from a turf market recovery after years of decline and strong dairy/livestock sector cash flow, with steady demand fundamentals. * Construction and forestry: Robust demand supported by U.S. infrastructure spending, rental fleet replacement, and growing data center construction, offsetting softness in residential construction; global forestry markets face pressure from low lumber/log prices, while road building markets are growing strongly. - Inventory Management * North American large ag new high-horsepower tractor and combine inventories are down over 50% from mid-2024 peaks, with inventory-to-sales ratios at historical averages. * Used large ag inventories have improved meaningfully: combines and high-horsepower tractors are down mid-teens from cycle peaks, with model year 2022-2023 8R tractors down ~45% from 2024 peaks. * Inventories outside North America (Europe, South America) are in good shape after prior reductions, with Brazil planning to underproduce retail demand for combines this year. - Product and Technology Innovation * Ag innovation: Launched six redesigned high-horsepower 8R/8RX tractor models (up to 540 horsepower) that are autonomy-ready and integrated with precision tech; expanded furrow optimization, automated fertilizer placement, and See & Spray technology to cover additional crop types (wheat, barley, canola) and added See & Scout field data capabilities. * Global expansion: Held the largest product launch in Deere Brazil history, with over 20 new ag and construction products/tech solutions for the region. * Connected technology: Partnered with Starlink for satellite connectivity in low-cell areas; sold over 12,500 JDLink Boost Kits, with 25% quarterly growth; engaged acres on John Deere Operations Center grew 10% year-over-year, with monthly active digital users reaching nearly 440,000, and second-year Precision Essentials renewal rates exceeding 90%. - Capital Allocation * Returned $635 million to shareholders in Q2 via dividends and share repurchases, maintaining a disciplined capital allocation strategy.

Guidance

- Overall enterprise net income guidance for fiscal 2026 is maintained at $4.5 billion to $5 billion. - Effective tax rate guidance for fiscal 2026 is set at 24% to 26%; equipment operations operating cash flow guidance remains $4.5 billion to $5.5 billion. - Production and Precision Ag: Full-year net sales guidance is unchanged at a 5% to 10% year-over-year decline; full-year operating margin guidance remains 11% to 13%. - Small Ag and Turf: Full-year net sales guidance is maintained at ~15% year-over-year growth; full-year operating margin guidance remains 13.5% to 15%. - Construction and Forestry: Full-year net sales guidance was raised to ~20% year-over-year growth (up from prior lower guidance); full-year operating margin guidance was increased to 10% to 12%. - Worldwide Financial Services: Full-year net income guidance was raised to $860 million, driven by favorable fair value adjustments and improved credit loss provisions. - Full-year annual tariff expense net of the Q2 refund is projected at $900 million, representing a ~3% margin headwind, unchanged in total run rate from prior guidance after accounting for the one-time refund. - Second half 2026 revenue is expected to be higher than the first half, with Q4 revenue higher than Q3; margin comparisons are expected to be most favorable in Q4 due to easier comps for tariffs and material costs, and improved overhead absorption from higher large ag production volumes. - Industry outlook: U.S. and Canada large ag equipment sales projected to decline 15% to 20%; South America ag tractor/combine sales projected to decline 15% (down from prior guidance of a 5% decline); U.S. and Canada small ag and turf demand expected to be flat to up 5%; U.S. and Canada construction/compact construction equipment sales projected to be up ~5%; global road building markets projected to grow ~10% (up from prior guidance); global forestry markets projected to decline 5%; Asia ag industry sales projected to be flat year-over-year.

Segment performance

1. Production and Precision Ag (PPA): Net sales of $4.503 billion, down 14% year-over-year, contributing 33.7% of total Q2 equipment net sales. Operating profit was $706 million, with an operating margin of 15.7%. The decline was driven by lower shipment volumes and higher production costs, partially offset by positive price realization and favorable currency translation. 2. Small Ag and Turf (SAT): Net sales increased 16% year-over-year to $3.485 billion, contributing 29.6% of total Q2 equipment net sales. Operating profit was $719 million, with an operating margin of 20.6%. Growth came from higher shipment volumes, favorable price realization, and positive currency translation. 3. Construction and Forestry (CNF): Net sales increased 29% year-over-year to $3.79 billion, contributing 32.2% of total Q2 equipment net sales. Operating profit was $561 million, with an operating margin of 14.8%. Growth was driven by higher shipment volumes, favorable price realization, and positive currency translation, partially offset by higher production costs. 4. Worldwide Financial Services: Q2 net income attributable to Deere & Company was $190 million, up year-over-year due to favorable financing spreads and derivative valuation adjustments, partially offset by a lower average portfolio.

Risks & headwinds

- Large ag grower margins face ongoing headwinds from elevated and volatile input costs (including recently higher fertilizer and fuel prices), high interest rates, and geopolitical uncertainty, which dampen customer sentiment and capital spending plans. - The conflict in Iran has increased global energy and fertilizer prices, with disproportionate near-term impact on Brazilian growers who are exposed to spot input prices ahead of their fall planting season, alongside additional pressure from a strong Brazilian real that reduces grower export margins. - Ongoing dynamic trade policy and tariff changes create margin pressure, with an expected $900 million net tariff expense in fiscal 2026 that remains dilutive to margins even after the Q2 refund. - Recent global inflationary pressure on raw materials, components, and energy costs could offset expected margin improvement in the back half of fiscal 2026. - A slower-than-expected recovery in the large ag cycle depends on geopolitical developments, ag commodity fundamentals, and policy outcomes, with downside risk if grower margins remain depressed. Residential construction weakness continues to pressure global forestry product markets.

Analyst Q&A

• Q: CNF industry growth is projected at 5%, but Deere's sales growth is much higher. Is this from share gains and past underproduction? /

  A: Past underproduction in CNF last year created a natural lift as Deere aligns production with retail demand this year. In addition to broad industry growth from road building, Deere has gained share over the past 12 months, particularly after recent pricing adjustments, leading to the outperformance relative to overall industry growth projections.

• Q: How is Deere mitigating ongoing tariff costs, and how will price-cost dynamics change through the year? /

  A: Deere has kept net price realization aligned with general inflation (1.5% to 2% for 2026) and chosen not to add customer surcharges for dynamic, inconsistent tariff costs. Instead, Deere is mitigating exposure through cost actions including resourcing, reshoring, exemption submissions, and USMCA compliance to offset tariff impacts over time. In the back half of 2026, price-cost dynamics will improve as the company laps last year's back-half tariff and inflation expenses, and laps prior year incentive pricing, leading to more favorable margins.

• Q: What is the downside risk to the global large ag cycle outlook amid heightened geopolitical uncertainty? /

  A: After two years of downturn, large ag fleets are aging, creating strong underlying replacement demand, and used inventory levels have improved dramatically (late-model high-horsepower tractors are down 45% from 2024 peaks), creating a strong setup for recovery. Brazilian large ag demand has been downgraded due to acute input cost and currency headwinds, but U.S. farmers are better positioned after locking in lower input costs and seeing 20% commodity price gains since last August. Deere's baseline expectation remains for a large ag cycle recovery starting in 2027.

• Q: What is the adoption and performance outlook for Deere's precision ag technologies, specifically See & Spray and Precision Essentials? /

  A: See & Spray acreage coverage has grown from 1 million acres in year one to 5 million acres last year, and early 2026 growth is outpacing prior years, with 50% to 60% herbicide cost savings driving customer adoption. Take rates for 2027 See & Spray are already tracking above 2026 levels, with expansion to new crops and the Brazilian market. Overall Precision Essentials renewal rates are ~70%, but second-year cohort renewal rates exceed 90%, indicating high customer stickiness and growing adoption of connected precision solutions.