DEERE & CO (DE) FY 2023 MD&A

MANAGEMENT’S DISCUSSION AND ANALYSIS

Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to promote understanding of our 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. All amounts are presented in millions of dollars, unless otherwise specified. For comparison of 2022 to 2021 results, refer to the “Management’s Discussion and Analysis” section of our 2022 Form 10-K.

Deere & Company is a global leader in the production of agricultural, turf, construction, and forestry equipment and solutions. John Deere Financial provides financing for John Deere equipment, parts, service, and other input costs customers need to run their operations. Our operations are managed through the production and precision agriculture (PPA), small agriculture and turf (SAT), construction and forestry (CF), and financial services operating segments. References to “equipment operations” include PPA, SAT, and CF, while references to “agriculture and turf” include both PPA and SAT.

Net Sales and Revenues by Segment in 2023

Smart Industrial Operating Model and Leap Ambitions

We announced the Smart Industrial Operating Model in 2020. This operating model is based on three focus areas:

Our Leap Ambitions were launched in 2022. These ambitions are designed to boost economic value and sustainability for our customers. The ambitions align across our customers’ production systems seeking to optimize their operations to deliver better outcomes with fewer resources.

Industry Sales Outlook for Fiscal 2024

Company Trends – Customers seek to improve profitability, productivity, and sustainability through technology. Integration of technology into equipment is a persistent market trend. Our Smart Industrial Operating Model and Leap Ambitions are intended to capitalize on this market trend. These technologies are incorporated into products within each of our operating segments. We expect this trend to persist for the foreseeable future. The investments in these technologies and in establishing a Solutions as a Service business model might increase our operating costs and may decrease operating margins during the transition period. Most notably in 2023, we introduced See & Spray™ Ultimate and a new model of See & Spray™ Premium. These technologies were introduced on a limited basis and did not represent a significant percentage of our sales in 2023.

Company Outlook for 2024

Agriculture and Turf Outlook for 2024

Market Conditions:

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Construction and Forestry Outlook for 2024

Market Conditions:

Financial Services Outlook for 2024

Additional Trends – We experienced supply chain disruptions and inflationary pressures in 2022. While these issues moderated in 2023, the effect on production schedules and central bank policy interest rates continued in 2023. These changes are discussed below.

Supply Chain Impact on Production Schedules. We experienced supply chain improvements compared to 2022, with a return to normal in 2023. The ease in supply chain disruptions contributed to higher levels of production compared to prior year. As a result, our production schedules in 2023 were more aligned with the customers’ seasonal use of our products, marking a return to historical seasonal production patterns and on-time product delivery. Additionally, supply chain improvements contributed to reductions in premium freight costs, moderation in material cost increases, and disciplined inventory management in 2023. In 2022, supply chain disruptions impacted many aspects of our business, including receiving past due deliveries from suppliers, parts availability, increased production costs, and higher inventory levels.

Interest Rates. Central bank policy interest rates increased in 2022 and 2023. Increased rates impacted us in several ways, primarily affecting the financing spreads for the financial services operations, and may impact future demand for our products.

Most retail customer receivables are fixed rate. Wholesale financing receivables generally are variable rate. Both types of

receivables are financed with fixed and floating rate borrowings. We manage our exposure to interest rate fluctuations by matching our receivables with our funding sources. We also enter into interest rate swap agreements to match our interest rate exposure.

Rising interest rates have historically impacted our borrowings sooner than the benefit is realized from receivable and lease portfolios. As a result, our financial services operations experienced $170 (after-tax) less favorable financing spreads in 2023 compared to 2022. If interest rates continue to rise, we expect to continue experiencing spread compression in 2024.

Demand for our products is negatively impacted by rising interest rates. We expect higher borrowing costs for our customers to primarily affect discretionary and residential product sales in 2024.

Rising interest rates are driven by factors outside of our control, and as a result, we cannot reasonably foresee when this condition will subside.

Agricultural Market Business Cycle. The agricultural market is affected by various factors including commodity prices, acreage planted, crop yields, and government policies. These factors affect farmers’ income and may result in lower demand for equipment. We may experience any of the following effects during unfavorable market conditions: lower net sales, higher sales discounts, higher receivable write-offs, or losses on equipment on operating leases. A potential benefit is that customers may invest in integrated technology solutions and precision agriculture to lower input costs and improve margins.

Other Items of Concern and Uncertainties – Other items that could impact our results are:

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Highlights

Net Sales and Revenues

Net Sales (Equipment Operations)

Net Income (Attributable to Deere & Company)

Diluted Earnings Per Share (EPS) ($ per share)

Other Significant Statement of Consolidated Income Changes –

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

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Each equipment operation segment experienced price realization during 2023, as orderbooks were full and most product lines were on allocation. These factors contributed to higher shipment volumes for large agriculture and construction equipment.

Production costs were unfavorable in 2023 due to higher material costs, profit-sharing incentive compensation, and manufacturing overhead costs, partially offset by lower freight costs and improved production efficiency. Material costs were higher in the first three quarters of 2023 but continued to moderate through the year. In the fourth quarter of 2023, material costs were lower than in the prior year.

Production and Precision Agriculture Operations

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Sales volumes increased 10 percent in the U.S. and Canada, 32 percent in Australia, and 9 percent in Western Europe, partially offset by the effect of suspension of shipments to Russia. Price realization was 17 percent in the U.S. and Canada and 12 percent outside the U.S. and Canada, driven by strong demand. Prior period results were impacted by special items (see Note 4).

Small Agriculture and Turf Operations

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Sales volumes decreased 8 percent in the U.S. and Canada but increased 18 percent in Mexico and 2 percent in Western Europe.

Price realization was 8 percent in the U.S. and Canada driven by inflation and 12 percent in Western Europe driven by strong demand.

Construction and Forestry Operations

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Sales volumes increased 18 percent in the U.S. and Canada but decreased 6 percent outside the U.S. and Canada driven by lower sales in Brazil and the suspension of shipments to Russia. Price realization was 12 percent in the U.S. and Canada driven by strong demand, and 7 percent outside the U.S. and Canada. Results in both periods were impacted by special items (see Note 4).

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Financial Services Operations

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Average wholesale receivables increased 72 percent and retail notes increased 13 percent driven by higher equipment sales. Revenue also increased due to higher average financing rates. Net income declined as a result of unfavorable financing spreads and a correction of the accounting treatment for financing incentives offered to John Deere dealers (see Note 4). In 2022, financial services increased the provision for credit losses in Russia and recorded an intercompany benefit from the equipment operations, which guarantees financial services’ investments in certain international markets, including Russia (see Note 4). The Russia-related impacts are displayed in the “Other” bar below.

Please refer to the “Management’s Discussion and Analysis” section of our 2022 Form 10-K.

We have access to global markets at a reasonable cost. Sources of liquidity include:

We closely monitor our cash requirements. Based on the available sources of liquidity, we expect to meet our funding needs in the short term (next 12 months) and long term (beyond 12 months). We

are forecasting lower operating cash flows in 2024 compared with 2023 as identified previously in Trends and Economic Conditions.

We operate in multiple industries, which have unique funding requirements. The equipment operations are capital intensive. Historically, these operations have been subject to seasonal variations in financing requirements for inventories and receivables from dealers. However, the patterns of seasonality have been affected by the supply chain disruptions experienced during fiscal year 2022.

The financial services operations rely on their ability to raise substantial amounts of funds to finance their receivable and lease portfolios.

Key Metrics and Balance Sheet Changes

Cash, Cash Equivalents and Marketable Securities

Trade Accounts and Notes Receivable – Net

Financing Receivables and Equipment on Operating Leases

Inventories

Property and Equipment

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Borrowings

Unused Credit Lines

Financial Services Ratio of Interest-Bearing Debt to Stockholder’s Equity

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Operating cash flows in 2023 were higher due to an increase in net income and lower inventory offset by higher receivables related to sales, while operating cash flows in 2022 were impacted by a $1 billion other postretirement benefit (OPEB) contribution.

Cash outflows from investing activities were $8.7 billion in 2023 due to growth in the financing receivable and lease portfolios, and purchases of property and equipment.

Cash inflows from financing activities were $2.8 billion in 2023, as higher borrowings were partially offset by repurchases of common stock and dividends paid.

Cash Returned to Shareholders

Cash returned to shareholders increased $3.7 billion in 2023.

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To access debt markets, we rely on credit rating agencies to assign short-term and long-term credit ratings to our debt. These ratings are an indicator of credit quality for fixed income investors. A debt rating is not a recommendation by the rating agency to buy, sell, or hold. A credit rating agency may change or withdraw company ratings based on its assessment of our current and future ability to meet interest and principal repayment obligations. Lower credit ratings or negative changes to ratings outlooks generally result in higher borrowing costs, including costs of derivative transactions, and reduced access to debt capital markets, and may adversely impact our liquidity.

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

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Our material cash requirements include the following:

Borrowings – As of October 29, 2023, we had $21.2 billion of payments due on borrowings and securitization borrowings in the next year, along with interest payments of $2.2 billion. The securitization borrowing payments are based on the expected liquidation of the retail notes. See Notes 12 and 19 for additional borrowing details. These payments will likely be replaced with new borrowings to finance the receivable and lease portfolio, which is expected to grow in 2024.

Purchase Obligations – As of October 29, 2023, our outstanding purchase obligations were $4.5 billion, with $4.1 billion payable within one year. These purchase obligations are noncancelable.

Other Cash Requirements – In addition to our contractual obligations, we have the following commitments:

Share repurchases will be considered as a means of deploying excess cash to shareholders, once the previously mentioned requirements are met.

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The timely preparation of financial statements requires management to make estimates and assumptions. Those estimates affect reported amounts in these financial statements. Changes in those estimates and assumptions could have a significant effect. The following estimates are the most critical to our financial statements:

These items require the most difficult, subjective, or complex judgments. Our accounting policies are described primarily in Note 2 of our consolidated financial statements.

Sales Incentives

We provide sales incentives to dealers. These incentives are offered in two forms:

The estimated cost of these programs is based on:

At the time a sale is recognized, we record an estimate of the sales incentive costs. The final cost is determined at the end of the volume bonus measurement period or at the time of the retail sale.

There are numerous programs available at any time, and new programs may be announced after we record the equipment sale to the dealer. Changes in the mix and types of sales incentive programs affect these estimates, which are reviewed quarterly. Actual cost differences from the original cost estimate are recognized in “Net sales.”

Sales Incentive Accruals

The accruals recorded against receivables relate to programs where we have the contractual right and the intent to offset against existing receivables. The increase in each of 2023 and 2022 primarily resulted from higher retail sales. Additional factors in

2023 were higher incentives for dealer market share and incentives provided to offset elevated interest rates.

A key assumption of the retail sales incentive accrual is the predictive value of the historical percent of retail sales incentive costs to retail sales. Over the last five fiscal years, this percent has varied by an average of .7 percent. Holding other assumptions constant, .7 percent change would have modified the sales incentive accrual by $105.

Product Warranties

A standard warranty is provided as an assurance that our equipment will function as intended. The standard warranty period varies by product and region.

At the time a sale is recognized, we record an estimate of future warranty costs, based on the following calculation:

The historical claims rate is determined by a review of five-year claims costs. The estimated population is based on dealer inventories and retail sales. These estimates are reviewed quarterly. Adjustments are also made for current quality developments.

Product Warranty Accruals

The increase in each of 2023 and 2022 related to higher sales volumes, partially offset by a decrease in the warranty rate.

Product warranty accrual estimates are affected by the historical percent of warranty claims costs as a percentage of gross sales. During this time, the percent has varied plus or minus .12 percent. Holding all other assumptions constant, if this estimated cost experience percent would have increased or decreased .12 percent, the warranty accrual at October 29, 2023 would have changed by approximately $81.

Postretirement Benefit Obligations

The pension and OPEB plan obligations (defined benefit) and expenses require the use of estimates. The main estimate is the present value of the projected future benefit payments. These future benefit payments extend several decades.

The estimates are based on existing retirement plan provisions. No assumption is made regarding any potential changes to benefit provisions beyond those to which we are presently committed (e.g., in existing labor contracts).

The key assumptions used by our actuaries to calculate the estimates include:

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Assumptions are set each year-end. These assumptions are not changed during the year unless there is a significant plan event. Actual results that differ from the assumptions affect future expenses and obligations.

The key pension and OPEB amounts follow:

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The reduction in the 2023 pension and OPEB net (benefit) cost was due to increased expected long-term return rates on plan assets and increased discount rates.

The effect of hypothetical changes to selected assumptions on our major U.S. retirement benefit plans would be as follows:

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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 for receivables with similar risk characteristics. Receivables that do not share risk characteristics are evaluated on an individual basis. Risk characteristics include:

We utilize the following loss forecast models to estimate expected credit losses:

The model output is adjusted for forecasted economic conditions, which may include the following economic indicators:

Management reviews each model’s output quarterly, and qualitative adjustments are incorporated as necessary.

Allowance for Credit Losses

The allowance decreased in 2023 due to the disposition of the receivable portfolio in Russia (see Note 11). Excluding the portfolio in Russia, the allowance increased slightly as higher portfolio balances and higher expected losses on turf and construction customer accounts. The allowance increased in 2022 due to higher reserves related to the economic uncertainty in Russia.

While we believe our allowance is sufficient to provide for losses over the life of our existing receivable portfolio, different assumptions would result in changes to the allowance for credit losses, specifically:

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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 $53 increase to the allowance for credit losses at October 29, 2023.

Operating Lease Residual Values

Equipment on operating leases is depreciated to the estimated residual value over the lease term. The residual values are based on several factors, including:

We review residual value estimates during the lease term. Depreciation is adjusted over the remaining lease term if residual estimates are revised. Impairments are recorded when events or circumstances necessitate.

At the end of the majority of leases, the equipment is disposed in the following sequence:

Operating Lease Residual Values

Hypothetically, if (a) future market values for this equipment were to decrease 10 percent from our present estimates and (b) all the equipment on operating leases were returned to us for remarketing at the end of the lease term, the total unfavorable impact after consideration of dealer residual value guarantees would be approximately $90. This amount would be recognized as higher depreciation expense over the remaining term of the operating leases, or potentially as an impairment.

Income Taxes

We are subject to federal, state, and foreign income taxes. These tax laws can be complex. Significant judgment and interpretation is required to implement them. Changes in tax laws could materially affect our consolidated financial statements. We record our tax positions in the following categories:

Deferred income taxes represent temporary differences between the tax and the financial reporting basis of assets and liabilities.

This will result in taxable or deductible amounts in the future. Loss carryforwards and tax credits are significant components of deferred tax asset balances. These assets are reviewed regularly for the following:

Valuation allowances are established when we determine that the deferred tax benefit may not be realized. The recoverability analysis requires significant judgment and relies on estimates. The valuation allowance as of October 29, 2023 was $1.6 billion. Changes in foreign income tax laws, income for certain jurisdictions, or our tax structure could impact the valuation allowance balance.

Some tax positions contain significant uncertainties. These positions may be challenged or disallowed by taxing authorities. If it is likely the position will be disallowed, no tax benefit is recorded. If it is likely the position will be sustained, a tax benefit is recognized. The ultimate resolution could take many years. This may result in a payment that is significantly different from the original estimate.

See Note 8 for further information on income taxes.

FORWARD-LOOKING STATEMENTS

Certain statements contained herein, including in the section entitled “Overview” relating to future events, expectations, and trends constitute “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995 and involve factors that are subject to change, assumptions, risks, and uncertainties that could cause actual results to differ materially. Some of these risks and uncertainties could affect all lines of our operations generally while others could more heavily affect a particular line of business.

Forward-looking statements are based on currently available information and current assumptions, expectations, and projections about future events and should not be relied upon. Except as required by law, we expressly disclaim any obligation to update or revise our forward-looking statements. Many factors, risks, and uncertainties could cause actual results to differ materially from these forward-looking statements. Among these factors are risks related to:

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Further information concerning our businesses, including factors that could materially affect our financial results, is included in our filings with the SEC (including, but not limited to, the factors discussed in Item 1A. “Risk Factors” of this Annual Report on Form 10-K). There also may be other factors that we cannot anticipate or that are not described herein because we do not currently perceive them to be material.

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SUPPLEMENTAL CONSOLIDATING DATA

The supplemental consolidating data presented on the subsequent pages is presented for informational purposes. The equipment operations represents the enterprise without financial services. The equipment operations includes 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. Transactions between the “equipment operations” and “financial services” have been eliminated to arrive at the consolidated financial statements.

The equipment operations and financial services participate in different industries. The equipment operations generate earnings and cash flows by manufacturing and selling equipment, service parts, and technology solutions to dealers and retail customers. Financial services finances sales and leases by dealers of new and used equipment that is largely manufactured by us. Those earnings and cash flows generally are the difference between the finance income received from customer payments less interest expense, and depreciation on equipment subject to an operating lease. The two businesses are capitalized differently and have separate performance metrics. The supplemental consolidating data is also used by management due to these differences.

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1 Elimination of intercompany interest income and expense.

2 Elimination of equipment operations’ margin from inventory transferred to equipment on operating leases (see Note 6).

3 Elimination of financial services’ income related to intercompany guarantees of investments in certain international markets and intercompany service revenues.

4 Elimination of intercompany service fees.

5 Elimination of financial services’ lease depreciation expense related to inventory transferred to equipment on operating leases.

6 Elimination of equipment operations’ expense related to intercompany guarantees of investments in certain international markets and intercompany service expenses.

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SUPPLEMENTAL CONSOLIDATING DATA (continued)

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7 Elimination of receivables / payables between equipment operations and financial services.

8 Primarily reclassification of sales incentive accruals on receivables sold to financial services.

9 Reclassification of net pension assets / liabilities.

10 Reclassification of deferred tax assets / liabilities in the same taxing jurisdictions.

11 Elimination of financial services’ equity.

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SUPPLEMENTAL CONSOLIDATING DATA (continued)

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12 Elimination of depreciation on leases related to inventory transferred to equipment on operating leases (see Note 6).

13 Reclassification of share-based compensation expense.

14 Elimination of dividends from financial services to the equipment operations, which are included in the equipment operations operating activities.

15 Primarily reclassification of receivables related to the sale of equipment.

16 Reclassification of direct lease agreements with retail customers.

17 Reclassification of sales incentive accruals on receivables sold to financial services.

18 Elimination and reclassification of the effects of financial services partial financing of the construction and forestry retail locations sales and subsequent collection of those amounts.

19 Elimination of investment from equipment operations to financial services.

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SELECTED FINANCIAL DATA

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