Deere's agricultural downcycle turned in the third quarter — but not in the business that defines the company. Quarterly segment operating profit rose 18.4% to $1,856 million on revenue of $12,608 million, yet Production & Precision Agriculture, the row-crop tractor and combine business, saw profit fall 9.1%. Every dollar of the recovery came from Construction & Forestry and Small Agriculture & Turf. Over the first nine months, Small Ag & Turf operating profit ($1,538M) overtook big-ag PPA ($1,372M), having trailed it by 43% a year earlier — a reordering that matters more than the headline beat, because it tells you which cycle actually turned.
1. Consolidated Balance Sheet
1-1. Principal asset lines
Deere's fiscal Q3 ended August 2, 2026. The right comparison is the same quarter a year earlier (July 27, 2025), not the October fiscal year-end, because the equipment business is heavily seasonal.
| Item | Jul 27, 2025 ($M) | Aug 2, 2026 ($M) | Change % |
|---|---|---|---|
| Cash and cash equivalents | 8,580 | 8,928 | +4.1% |
| Trade accounts and notes receivable – net | 6,103 | 7,723 | +26.5% |
| Financing receivables – net | 43,930 | 42,860 | -2.4% |
| Financing receivables securitized – net | 7,948 | 6,316 | -20.5% |
| Inventories | 7,713 | 7,811 | +1.3% |
| Equipment on operating leases – net | 7,512 | 7,400 | -1.5% |
| Property and equipment – net | 7,713 | 8,006 | +3.8% |
| Goodwill | 4,209 | 4,466 | +6.1% |
| Total assets | 107,817 | 107,607 | -0.2% |
Total assets barely moved. The action is inside the receivables.
Trade receivables jumped 26.5% while revenue grew 4.9%. On its own that would be a warning. It is not, or not entirely. Total receivables across all three buckets — trade, financing, and securitized — actually shrank 1.9%, from $57,981M to $56,899M. What happened is a funding mix shift: less paper moved into the captive finance arm, more left sitting as trade credit on the equipment operations' books.
The shift still costs cash. Receivable days on equipment sales rose from about 54 days to about 64 days. The cash flow statement shows the bill: sales-related receivables consumed $1,252M over nine months, against $494M a year earlier.
Inventories were nearly flat at $7,811M. That is the more reassuring number — Deere grew equipment sales 8.6% over nine months without building stock.
One accounting note. Deere carries most inventory on LIFO (last-in, first-out — newest costs charged to expense first). The gap between FIFO and LIFO valuation fell from $2,864M to $2,592M year over year, and by $129M since the October year-end. A shrinking LIFO reserve lowers reported cost of sales. Roughly $129M of the nine-month cost line came from inventory accounting rather than operations — about 2.7% of segment operating profit. It also means the balance sheet understates inventory's replacement value by $2.6 billion.
1-2. Debt structure — total down, maturities pulled forward
| Borrowings | Jul 27, 2025 ($M) | Aug 2, 2026 ($M) | Change % |
|---|---|---|---|
| Short-term borrowings | 14,607 | 17,115 | +17.2% |
| — of which commercial paper | 5,322 | 6,777 | +27.3% |
| — of which long-term due within 1 year | 8,550 | 9,659 | +13.0% |
| Short-term securitization borrowings | 7,610 | 6,095 | -19.9% |
| Long-term borrowings | 44,429 | 40,626 | -8.6% |
| Total borrowings | 66,646 | 63,836 | -4.2% |
Deere cut total debt by $2.8 billion. Underneath, the maturity profile shortened: 36.4% of borrowings now come due within a year, up from 33.3%. Commercial paper reliance rose 27.3%.
For an industrial company that would be a real flag. For Deere it is less alarming — most of this debt funds short-duration equipment loans, so short funding is matched to short assets. Still, a shorter book reprices faster if rates move.
The marginal cost of money is visible. Deere Funding Canada issued 4.85% notes due 2031 on July 15, 2026. Legacy debt is cheaper: the euro notes due 2039 carry 1.65%. That gap now shows up as an asset. Long-term borrowings carry at $40,549M but are worth only $39,916M at fair value — $633M below book. At the October year-end they traded slightly above book. Rates rose during the year, and Deere's locked-in low coupons quietly gained $633M of economic value.
1-3. Capital structure
Total stockholders' equity rose 11.2% to $27,997M. The equity-to-assets ratio improved to 26.0% from 23.4%, and debt-to-equity fell to 2.28x from 2.65x.
The composition is unusual. Retained earnings stand at $62,169M against paid-in capital of $5,826M. Treasury stock sits at negative $37,029M — Deere has bought back more than six times its entire paid-in capital over the company's history. Book equity is thin relative to earnings power by design, not by weakness.
Accumulated other comprehensive loss narrowed slightly to $2,976M from $3,107M. But the direction reversed inside the year: the third quarter alone booked a $208M comprehensive loss, against a $298M gain a year earlier. Goodwill translation adjustments tell the same story — negative $8M over nine months this year versus positive $206M last year. The dollar strengthened, and that reverses a tailwind Deere enjoyed in FY2025.
2. Consolidated Income Statement
2-1. Core profit metrics
| Item | Q3 FY2025 ($M) | Q3 FY2026 ($M) | Change % |
|---|---|---|---|
| Net sales and revenues | 12,018 | 12,608 | +4.9% |
| Segment operating profit | 1,568 | 1,856 | +18.4% |
| Segment operating margin (%) | 12.94 | 14.57 | +1.63%p |
| Profit before income taxes | 1,610 | 1,906 | +18.4% |
| Income tax expense | 339 | 529 | +56.1% |
| Net income attributable to Deere | 1,289 | 1,379 | +7.0% |
| Diluted EPS ($) | 4.75 | 5.10 | +7.4% |
| Item | 9M FY2025 ($M) | 9M FY2026 ($M) | Change % |
|---|---|---|---|
| Net sales and revenues | 33,290 | 35,589 | +6.9% |
| Segment operating profit | 4,669 | 4,867 | +4.2% |
| Profit before income taxes | 4,843 | 5,045 | +4.2% |
| Income tax expense | 905 | 1,243 | +37.4% |
| Net income attributable to Deere | 3,962 | 3,808 | -3.9% |
| Diluted EPS ($) | 14.57 | 14.06 | -3.5% |
Pre-tax profit is derived from the filing's own segment reconciliation and ties exactly to reported net income. All figures are GAAP; Deere does not lean on adjusted measures in this filing.
The nine-month picture looks like deterioration. It is not. Pre-tax profit rose 4.2%. Net income fell 3.9% for one reason: tax. The effective tax rate went from 18.7% to 24.8% over nine months, and from 21.2% to 28.1% in the quarter. Deere attributes the swing to unfavorable discrete items this year and favorable ones last year — in plain terms, one-off tax settlements that flatter or punish a single period.
The dollar cost is $338M of extra nine-month tax on a pre-tax base that grew only $202M. Strip the rate change out and the earnings direction flips from negative to positive. That is the single most important adjustment in this filing, and it is not a permanent impairment of the business.
Operating leverage tells you exactly when the cycle turned. Operating leverage measures how much profit moves for each 1% of revenue change. In the third quarter, revenue rose 4.9% and segment operating profit rose 18.4% — leverage of 3.7x. Very healthy for a capital-goods maker.
Now split the year. First-half segment revenue grew 8.2% but operating profit fell 2.9%. Third-quarter revenue grew 5.1% and profit rose 18.4%. Margin went from 14.44% to 12.95% in the first half, then from 12.94% to 14.57% in the quarter. The inflection is real and it is recent — one quarter old.
2-2. Where the profit actually comes from
| Segment (Q3) | Revenue FY25 ($M) | Revenue FY26 ($M) | Op profit FY25 ($M) | Op profit FY26 ($M) | Margin FY25→FY26 |
|---|---|---|---|---|---|
| Production & Precision Ag | 4,379 | 4,105 | 580 | 527 | 13.2% → 12.8% |
| Small Ag & Turf | 3,082 | 3,445 | 485 | 622 | 15.7% → 18.1% |
| Construction & Forestry | 3,112 | 3,682 | 237 | 436 | 7.6% → 11.8% |
| Financial Services | 1,544 | 1,505 | 266 | 271 | 17.2% → 18.0% |
Over nine months the gaps are wider. PPA operating profit fell 33.6% and its margin collapsed 4.6 percentage points to 11.4%. Construction & Forestry profit rose 66.5%. Small Ag & Turf rose 30.1%.
Deere's most prestigious segment is now its lowest-margin equipment business. Small Ag & Turf — lawn mowers, compact tractors, dairy and livestock equipment — earns 18.1%, the best margin in the company. That is not how this company has historically worked.
Product-line revenue confirms it for the quarter: production agriculture down 6.3%, construction up 28.9%, compact construction up 16.5%, roadbuilding up 13.1%, turf up 15.1%.
One caveat on segment costs. Under US GAAP, research and development is expensed immediately and cannot be capitalized. Deere bundles R&D, engineering, and selling expenses into a single "other segment items" line, so it is not separable here. This also means Deere's margins are structurally understated versus IFRS-reporting peers that capitalize development spending — a direct comparison of operating margins across accounting regimes is not valid.
Part of the Construction & Forestry gain is bought, not earned. Goodwill in that segment rose $286M from acquisitions during the nine months, and the cash flow statement shows $455M spent on businesses versus $89M last year. The organic improvement is real but smaller than 66.5%.
3. Consolidated Cash Flow (Nine Months)
| Item | 9M FY2025 ($M) | 9M FY2026 ($M) | Change |
|---|---|---|---|
| Net cash from operating activities | 3,464 | 3,250 | -6.2% |
| Net cash used for investing activities | (801) | (825) | — |
| Net cash used for financing activities | (1,557) | (1,828) | — |
| Purchases of property and equipment | (852) | (716) | -16.0% |
| Ending cash, equivalents and restricted cash | 8,847 | 9,150 | +3.4% |
Free cash flow — operating cash flow minus capital spending — was $2,534M, down 3.0% from $2,612M. Deere also runs a leasing fleet, and that spending is real. Netting equipment-on-lease purchases ($1,933M) against lease-fleet sale proceeds ($1,479M) gives adjusted free cash flow of $2,080M, up 3.4% from $2,011M.
Quality of earnings — operating cash flow divided by net income — was 0.86, versus 0.88 a year earlier. Below 1.0 in both years. For most companies a persistent reading under 1.0 signals receivables piling up faster than collections. Here the reading is partly structural: Deere's captive finance flows run through investing activities, not operating, so the ratio understates true cash conversion. The genuine drag is the $1,252M of sales-related receivables already discussed.
Capital spending fell to 2.0% of revenue from 2.6%. Equipment-operations depreciation and amortization was $1,042M against capital additions of $677M — Deere is investing at about 65% of its depreciation rate. That is standard late-downturn behavior and it is fine for a year or two. It is not fine indefinitely, and the $580M of committed property spending suggests it will not persist.
Capital returns show clear discipline. Buybacks fell 38.6% in cash terms to $697M, while dividends rose 2.7% to $1,316M. Total returned was $2,013M against $2,418M last year. Measured against $2,080M of adjusted free cash flow, Deere paid out 97% of what it generated — versus 120% a year earlier, when it was funding buybacks out of the balance sheet.
The dividend itself did not grow. Declared dividends were $1,315M against $1,320M, with average share count down 0.4%. The per-share payout was essentially unchanged. Deere protected the dividend through the trough and cut buybacks instead.
4. What Else Matters
Dealer inventories are being cleared — the strongest cycle signal in the filing. Wholesale receivables, which finance dealer floor stock, fell 20.3% to $7,317M. Agriculture and turf wholesale receivables fell 22.8% to $5,880M. Deere has been deliberately building fewer machines than dealers sell, draining lots. That destocking is what crushed PPA margins. It is also what has to end before large-ag production can recover — and it is now two years in.
Credit stress is migrating, not disappearing. Non-performing retail customer receivables rose to $710M from $683M, taking the non-performing ratio to 1.69% from 1.59%. The allowance stands at $268M on $49,444M of financing receivables — 0.54% coverage, or 37.7% of non-performing balances. Coverage is thin by bank standards, but these loans are secured by repossessable equipment.
The direction matters more than the level. Deere states the allowance rose this year "due to higher expected losses on construction retail accounts," where last year the driver was agriculture. Credit is deteriorating in construction precisely as construction profits boom. Troubled-debt modifications reinforce this: $155M over nine months versus $115M, or 0.31% of the portfolio against 0.22%.
Warranty costs are rising faster than sales. New product warranty accruals hit $995M over nine months, up 26.6% from $786M, against equipment sales growth of 8.6%. As a share of equipment sales, warranty accrual rose to 3.23% from 2.77%. That is $209M of additional cost that is not obviously one-off. It deserves watching over the next two quarters.
The recovery is American. Third-quarter US revenue rose 13.4% to $6,814M. Latin America fell 13.8% to $1,258M, and PPA's Latin American revenue dropped 30.7% to $731M — Brazilian row-crop demand remains deeply depressed. Western Europe fell 7.8%. Asia, Africa, Oceania and the Middle East rose 13.1%. Deere's quarter rests on one geography.
Cycle position. Deere is a cyclical business and cannot be judged on a single year. Revenue peaked at $61,251M in FY2023 with net income of $10,166M. By FY2025 revenue was $45,684M and net income $5,027M — declines of 25.4% and 50.6% from peak. Nine-month FY2026 revenue is up 6.9%, the first year-over-year growth after two consecutive annual declines (-15.6% in FY2024, -11.7% in FY2025).
Set that against the longer record. Average revenue over FY2016–FY2025 was $42.4 billion; average net income was $4.74 billion. FY2025 — the trough — delivered $5.03 billion of net income, above the ten-year mean. The last comparable trough, FY2016, produced $1.52 billion. Deere's downcycle floor has risen roughly threefold in a decade. Whatever precision agriculture and pricing power have done to this business, they have raised the bottom.
Legal exposure is not a factor. Deere states that accrued losses on unresolved legal matters were not material and that the reasonably possible range of losses would not have a material effect. Off-balance-sheet guarantees total $145M for retail financing, $168M to the Banco John Deere joint venture, and roughly $115M of miscellaneous items against a $25M accrual. Immaterial against $107.6 billion of assets.
5. Key Takeaways and Outlook
What grew. Construction & Forestry and Small Agriculture & Turf carried the entire recovery. Nine-month operating profit rose 66.5% and 30.1% respectively, with CF margin expanding 2.7 percentage points and SAT margin 1.8. Financial Services quietly improved margin to 18.3% from 16.0%. The third quarter's 3.7x operating leverage confirms the inflection is genuine, and the first-half-to-third-quarter margin reversal dates it precisely.
What carries risk. Three items. First, Production & Precision Agriculture — the largest segment by revenue — saw nine-month profit fall 33.6% with no visible bottom, and its Latin American revenue is down 18.9%. Second, warranty accrual intensity rose from 2.77% to 3.23% of equipment sales, a cost trend that has not yet reversed. Third, credit deterioration has moved into construction retail accounts, which is where the current profit growth is concentrated. Add the tax rate: at 24.8% versus 18.7%, this year's earnings carry a $338M burden that flatters no one.
Capital allocation. The priority order is now explicit. Dividend held flat and fully funded. Buybacks cut 34% in declared terms to live within free cash flow. Capital spending reduced to 65% of depreciation. Acquisitions — $455M, five times last year's pace — directed entirely at Construction & Forestry, where returns are currently improving. Deere is redirecting capital toward the segments that work while it waits out large agriculture.
Cycle position: early recovery, uneven. Construction and small agriculture have turned. Large row-crop agriculture has not. Two years of dealer destocking have cut wholesale floor-plan financing by 20%, which sets up production recovery once field inventories normalize — but the filing gives no evidence that point has arrived. If the tax rate normalizes toward historical levels and PPA merely stops declining, the earnings arithmetic improves sharply without any volume recovery in big agriculture. If Brazilian demand stays where it is and warranty costs keep climbing, the quarter's 18.4% profit growth will prove hard to repeat.
Notes Quick Check
Accounting policy — Most inventory is LIFO; the FIFO-to-LIFO gap of $2,592M means reported inventory understates replacement value. Segment detail — Four segments, but revenue concentration is now geographic: the United States supplied $18,973M of $35,589M in nine-month revenue, up 7.6%, while Latin America fell 9.1%. Borrowings — $63,836M total, with 36.4% due within a year and commercial paper up 27.3%; recent issuance priced at 4.85%, and the long-term book trades $633M below carrying value. Contingencies — Not material; the largest single guarantee is $168M to the Banco John Deere joint venture, where maximum exposure to loss is $879M. Fiscal calendar — FY2025 contained 53 weeks with the extra week in the fourth quarter, so full-year FY2026 comparisons will face a one-week headwind that quarterly comparisons do not.
This analysis is based on filings submitted to the U.S. Securities and Exchange Commission and is provided for informational purposes only. It is not investment advice. Source: SEC Form 10-Q, filed August 27, 2026.