John Deere financial services sees 479% income surge

Net income generated by John Deere’s financial services division jumped 479% year over year in its second quarter of fiscal 2024, driven partly by rising average portfolio balances.  

The spike in net income to $162 million from $28 million the year prior stemmed from “a correction of the accounting treatment for financing incentives offered to John Deere dealers.” This accounted for $173 million in pretax income recorded in the second quarter of fiscal 2023, the company said in its earnings report today.  

John Deere Manager of Investor Relations Holly Dunham told Equipment Finance News via email today that “the incentives were previously being expensed as used versus as earned by the dealers,” adding, “this one-time, non-repeating correction accounted for the earned portion of the incentives that had not previously been expensed.”  

The company said in its regulatory filing that the growth in financial services revenue was offset by higher provisions for credit losses and “less-favorable financing spreads,” but noted it still expects results to be higher than fiscal 2023 because of higher-than-average portfolio income.  

Net sales across small agriculture and turf, production and precision agriculture, and construction and forestry all declined on a yearly basis.  

Fiscal year net income for the financial services division is expected to total approximately $770 million, John Deere said in the report. 

BY THE NUMBERS:  

John Deere Financial Services reported: 

• Net income was $162 million in Q2, up 479% YoY from $28 million in Q2 2023;  

• Provision for credit losses in the first six months of fiscal 2024 totaled $131 million, up from negative $89 million in Q2 2023;  
• Net financing receivables were $45.28 billion, up 41.45% YoY;  
• Net equipment on operating leases totaled $6.96 billion, up roughly 6.54% YoY; and  
• Proceeds from sales of equipment on operating leases for the quarter were $1.01 billion, up about 1.8% YoY.  

Individual segments reported: 

• Small agriculture and turf net sales revenue in Q2 was $3.18 billion, down 23% YoY;  
• Production and precision agriculture net sales in Q2 were $6.58 billion, down 16% ; and 
• Construction and forestry net sales in Q2 totaled $3.84 billion, down 7% YoY. 

Farmer uncertainty affects bottom line 

A decline in farmer sentiment affected Deere’s selling power in the second quarter, Director of Investor Relations Josh Beal said.  

“Uncertainty has caused a decline in farmer sentiment and as a result we are seeing a softer retail environment today than we did just six months ago,” Beal said during the earnings call.  

Beal pointed to sinking global primary crop margins combined with rising feed prices and inventory levels as well as “persistently high interest rates” as factors that are negatively impacting farmers’ purchasing decisions.  

“Across all our major markets, we see continued softening in grower sentiment as the combined impacts of rising global stocks, lower commodity prices, high interest rates and weather volatility weigh on customer purchase decisions,” John Deere Manager of Investor Relations Josh Rohleder said during the earnings call.  

“Amidst this backdrop, and rising uncertainty, we’re seeing customers exercise greater discretion in their equipment purchases.” 

Decreasing production to aid dealers  

John Deere plans to produce less of certain equipment to help dealers cope with inventory increases.  

Cory Reed, president of John Deere’s Worldwide Agriculture & Turf division, said in the earnings call that the company has approached this year with a different strategy based in part on dealer feedback.  

“This is probably best exemplified by our decision to underproduce large tractor retail demand in North America in the back half of the year,” he said.  

Deere has also put a “strong focus” on a pool of money designed to help dealers manage large inventories, Reed said.  

“Dealers accumulate these funds based on new equipment sales and then use them to create competitive packages to help move used equipment,” he said. “Our dealers prudently built up these funds over the last several years, nearly tripling their total available balance, which is now providing valuable support in the current market environment.” 

Deere plans to decrease excess inventory in all its major markets, including North and South America and Europe, to stoke retail demand next year, Beal said.  

The sentiment John Deere hears from dealers remains positive and there is excitement around the company’s most recent technology products, including a rural connectivity satellite program in partnership with SpaceX’s Starlink and precision agriculture tech, Reed said in the earnings call. The company is increasingly investing in satellite communication. 

Shares of Deere & Co. [NASDAQ: DE] were trading at $394.43 per share at the close of trading Thursday, down 19.59% from market open. John Deere has a market cap of $110 billion.