Grade: F — Leverage Watch Amid Ag Cycle Downturn
Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles
Data: SEC EDGAR 10-K (Filed December 18, 2025, fiscal year ended November 2, 2025) + Yahoo Finance
Auditor: Deloitte & Touche LLP — Unqualified opinion, auditor since 1910 (2 critical audit matters: sales incentives and allowance for credit losses)
One-line verdict: Deere is in the down phase of the agricultural equipment cycle and the MD&A is direct about it: "In fiscal year 2025, unfavorable market conditions resulted in lower sales volumes, greater reliance on sales incentives, and elevated receivable write-offs. We expect certain of these conditions to persist in fiscal year 2026." Total net sales and revenues fell 11.7% from $51.72B to $45.68B. Segment-level pain was severe: Production & Precision Agriculture revenue -17% (operating profit -41%), Small Agriculture & Turf -7% (operating profit -26%), Construction & Forestry -12% (operating profit -49%). Only Financial Services net income grew (+28%) due to lower credit provisions and special items. The direct impact of incremental tariffs in FY2025 was $600M "excluding the impact of tariffs on our suppliers and market demand." Net income attributable to Deere fell from $7,100M to $5,027M (-29%). The 18-point screen trips with one fail (C4 cash at 15% of debt — but nearly all debt funds the Financial Services receivables portfolio) and one watch (D2 Debt/EBITDA at 5.5x — "financial stress" by the framework). Altman Z of 5.40 is safe, M-Score of -2.52 is clean, CFFO/NI is 1.48. The CAMs are two: sales incentive accruals and allowance for credit losses. Both get at the heart of the ag-cycle downturn: when markets weaken, dealers get more incentives and customers default more. Layer on the FTC antitrust lawsuit filed January 2025 regarding right-to-repair and the business headline is: a world-class franchise managing through its worst down cycle since 2016.
| Metric | Result |
|---|---|
| Red Flags | **1** (cash-to-debt) |
| Watch Items | **1** (Debt/EBITDA 5.5x) |
| Checks Completed | **17/18** |
| Beneish M-Score | **-2.52** (clean) |
| Altman Z-Score | **5.40** (safe) |
The Ag Cycle Down Year
The MD&A opens with the blunt assessment:
"In fiscal year 2025, unfavorable market conditions resulted in lower sales volumes, greater reliance on sales incentives, and elevated receivable write-offs. We expect certain of these conditions to persist in fiscal year 2026."
And the FY2026 outlook is not much better:
"Large agriculture sales in North America are expected to remain subdued. Small agriculture & turf and construction & forestry sales are expected to improve in 2026… Demand in the U.S. and Canada for large agriculture equipment is expected to decrease further amidst challenging farm fundamentals for row crop farmers, which pressures short-term liquidity. Although the used equipment market is improving, it continues to constrain investments in new machines."
Used equipment overhang is the mechanism: when farmers can't sell their old Deere for good values, they can't afford new ones.
Tariff impact: "In 2025, the direct impact of incremental tariffs incurred by us was approximately $600 [million], excluding the impact of tariffs on our suppliers and market demand." About half the impact of CAT's tariff bill, reflecting Deere's smaller global manufacturing footprint. The 10-K notes: "On November 5, 2025, the United States Supreme Court heard oral arguments on tariffs imposed under the International Emergency Economic Powers Act (IEEPA). The court may provide tariff relief and the potential recovery of amounts previously paid." A Supreme Court ruling could reverse some of the $600M hit — a potential FY2026 tailwind.
The FTC lawsuit: "On January 15, 2025, the Federal Trade Commission (FTC), along with the Attorneys General of the States of Illinois and Minnesota filed a lawsuit against us in the United States District Court for the Northern District of Illinois Western Division. The Attorneys General of the States of Arizona, Michigan, and Wisconsin joined the lawsuit. The lawsuit alleges monopolization and unfair competition in violation of the federal and state antitrust laws. Plaintiffs seek a permanent injunction and other equitable relief to allow owners of our equipment, as well as independent repair providers, access to our repair tools and any other repair resources available to authorized John Deere dealers. We are in preliminary discussions with the FTC with respect to a potential resolution."
This is the "right to repair" lawsuit, targeting Deere's franchise model of keeping equipment repair centralized. Settlement could erode Deere's aftermarket parts and service margins — a historical profit engine.
Financial Performance: The Segment Collapse
From the statements of consolidated income (in millions):
| Metric | FY2025 | FY2024 | FY2023 | Trend |
|---|---|---|---|---|
| Net Sales (Equipment Operations) | $38,917 | $44,759 | $55,565 | -13.1% |
| Finance and Interest Income | $5,748 | $5,759 | $4,683 | -0.2% |
| Other Income | $1,019 | $1,198 | $1,003 | -14.9% |
| Total Net Sales and Revenues | $45,684 | $51,716 | $61,251 | -11.7% |
| Cost of Sales | $28,159 | $30,775 | $37,715 | -8.5% |
| R&D | $2,311 | $2,290 | $2,177 | +0.9% |
| SG&A | $4,663 | $4,840 | $4,595 | -3.7% |
| Interest Expense | $3,170 | $3,348 | $2,453 | -5.3% |
| Other Operating Expenses | $1,124 | $1,257 | $1,292 | -10.6% |
| Total Costs and Expenses | $39,427 | $42,510 | $48,232 | -7.3% |
| Income Before Income Taxes | $6,257 | $9,206 | $13,019 | -32.0% |
| Provision for Income Taxes | $1,259 | $2,094 | $2,871 | -39.9% |
| Net Income | $4,998 | $7,088 | $10,155 | -29.5% |
| Net Income to Deere | $5,027 | $7,100 | $10,166 | -29.2% |
| Diluted EPS | $18.50 | $25.62 | $34.63 | -27.8% |
Cost of sales to net sales ratio rose from 68.8% to 72.4% — a 360bp deterioration. The MD&A explains: "Increased due to higher tariffs and higher overhead costs from production inefficiencies associated with lower volumes, partially offset by reduced material costs and lower employee profit-sharing incentives."
Two-year revenue contraction is 25% ($61.25B → $45.68B). Two-year net income contraction is 50% ($10.17B → $5.03B). This is a textbook ag-cycle downturn.
Segment detail:
| Segment | FY2025 Sales | FY2024 Sales | Change | FY2025 Op Profit | FY2024 Op Profit | Change |
|---|---|---|---|---|---|---|
| Production & Precision Ag | $17,311 | $20,834 | -17% | $2,671 | $4,514 | -41% |
| Small Ag & Turf | $10,224 | $10,969 | -7% | $1,207 | $1,627 | -26% |
| Construction & Forestry | $11,382 | $12,956 | -12% | $1,028 | $2,009 | -49% |
| Financial Services net income | $890 | $696 | +28% |
PPA operating margin fell from 21.7% to 15.4% (-630bp). SAT from 14.8% to 11.8% (-300bp). C&F from 15.5% to 9.0% (-650bp). Construction & Forestry took the biggest hit: "Price realization decreased 3% in the U.S. and Canada due to incremental incentive programs deployed to address pressures from the competitive environment." Deere is cutting price on construction equipment to hold share.
Financial Services net income grew 28% to $890M — "as a result of special items (see Note 4), lower selling, administrative and general expenses, favorable financing spreads, and a lower provision for credit losses." The credit provision of $296M in FY2025 (vs $310M FY2024) is notably flat even as receivable write-offs were flagged as "elevated" — suggesting the provisioning may be understated relative to realized losses, which is why the allowance for credit losses is a CAM.
Cash Flow: Down But Resilient
| Metric | FY2025 | FY2024 | FY2023 |
|---|---|---|---|
| Net Income | $4,998 | $7,088 | $10,155 |
| D&A | $2,229 | $2,118 | $2,004 |
| Provision for Credit Losses | $296 | $310 | $(16) |
| Operating Cash Flow | $7,459 | $9,231 | $8,589 |
| Property & Equipment CapEx | $(1,360) | $(1,640) | $(1,498) |
| Equipment on Operating Leases Acquired | $(2,868) | $(3,162) | $(2,970) |
| **CFFO / Net Income** | **1.49** | **1.30** | **0.85** |
Operating cash flow fell 19% to $7.46B. CapEx also fell. Free cash flow (after CapEx only, not operating-lease equipment) was $6.10B in FY2025 vs $7.59B in FY2024.
Financing activities used $4.58B: "$1,138M for share repurchases, $1,720M for dividends paid… net proceeds from borrowings were $897M." Deere cut the buyback sharply from $4.0B in FY2024 to $1.1B in FY2025 — consistent with the cash flow contraction. Dividends grew slightly from $1.61B to $1.72B.
The MD&A provides forward guidance: "We are forecasting lower operating cash flows from equipment operations in 2026 compared with 2025, driven by a decrease in net income adjusted for non-cash provisions, partially offset by higher cash flows generated from inventory reductions."
Balance Sheet: The Financial Services Footprint
From the consolidated balance sheets (in millions):
| Item | Nov 2, 2025 | Oct 27, 2024 |
|---|---|---|
| Cash & Equivalents | $8,276 | $7,324 |
| Marketable Securities | $1,411 | $1,154 |
| Trade Accounts & Notes Receivable | $5,317 | $5,326 |
| Financing Receivables | $44,575 | $44,309 |
| Financing Receivables Securitized | $6,831 | $8,723 |
| Inventories | $7,406 | $7,093 |
| Equipment on Operating Leases | $7,600 | $7,451 |
| Goodwill | $4,188 | $3,959 |
| Other Intangibles (net) | $892 | $999 |
| Assets Held for Sale | $0 | $2,944 |
| Total Assets | $105,996 | $107,320 |
| Short-term Borrowings | $13,796 | $13,533 |
| Short-term Securitization Borrowings | $6,596 | $8,431 |
| Long-term Borrowings | $43,544 | $43,229 |
| Retained Earnings | $59,676 | $56,402 |
| Treasury Stock | $(36,362) | $(35,349) |
| Total Deere Equity | $25,950 | $22,836 |
Total debt of $63.94B is dominated by Financial Services funding: the $44.58B financing receivables + $6.83B securitized + $7.60B operating leases = $59.01B of finance assets. Ex-financial debt is in the neighborhood of $5-6B — minimal for a $45B revenue equipment OEM.
Goodwill of $4.19B + intangibles of $892M = $5.08B, or 20% of equity. D1 passes comfortably.
Assets held for sale of $2,944M in FY2024 — gone in FY2025. This was the Banco John Deere S.A. (BJD) deconsolidation — Deere's Brazilian financial services arm was reclassified.
The 18-Point Screening
Revenue Quality
| # | Check | Result | Detail |
|---|---|---|---|
| A1 | DSO Change | PASS | DSO 44 days, +5 days YoY |
| A2 | AR vs Revenue Growth | PASS | AR -0.1% vs revenue -11.6% |
| A3 | Revenue vs CFFO | PASS | Revenue -11.6%, CFFO -19.2% |
Revenue quality is clean. Trade receivables held roughly flat ($5.33B → $5.32B) against a 12% revenue decline, which reflects Deere collecting faster from dealers as volumes declined.
Expense Quality
| # | Check | Result | Detail |
|---|---|---|---|
| B1 | Inventory vs COGS | PASS | Inventory +4.3% vs COGS -8.6% |
| B2 | CapEx vs Revenue | PASS | CapEx -12.0% vs revenue -11.6% |
| B3 | SG&A Ratio | PASS | SG&A/Gross Profit = 26.0% (excellent) |
| B4 | Gross Margin | PASS | 36.5%, -2.1pp (ag operations) |
The inventory build is a watch in substance: "Inventories increased primarily due to higher CF inventory driven by reduced demand." Construction & Forestry inventory is rising as sales slow — classic early-warning signal. But the mechanical check passes because the dollar change is modest.
Cash Flow Quality
| # | Check | Result | Detail |
|---|---|---|---|
| C1 | CFFO vs Net Income | PASS | CFFO/NI = 1.48 |
| C2 | Free Cash Flow | PASS | FCF $3.2B, FCF/NI = 0.64 |
| C3 | Accruals Ratio | PASS | -2.3%, low accruals |
| C4 | Cash vs Debt | **FAIL** | Cash $9.7B covers only 15% of debt $64.2B |
C4 is mechanical. Stripping out Financial Services debt, cash comfortably covers ex-financial debt.
Balance Sheet
| # | Check | Result | Detail |
|---|---|---|---|
| D1 | Goodwill + Intangibles | PASS | $5.5B = 21% of equity |
| D2 | Leverage | **WATCH** | Debt/EBITDA = 5.5x (>4x). Financial stress |
| D3 | Soft Asset Growth | PASS | Other assets +5.1% vs revenue -11.6% |
| D4 | Asset Impairment | N/A | No write-off data |
D2 watch: Debt/EBITDA of 5.5x triggers the framework's "financial stress" flag. But this is largely because EBITDA fell 30% while debt held roughly flat — and because most of the $64.2B of debt is funding finance receivables, not supporting equipment manufacturing. On a net-debt-to-EBITDA basis excluding Financial Services, leverage is modest.
Acquisition Risk
| # | Check | Result | Detail |
|---|---|---|---|
| E1 | Serial Acquirer FCF | PASS | FCF after acquisitions positive |
| E2 | Goodwill Surge | PASS | Goodwill+Intangibles +2% YoY |
Manipulation Score
| # | Check | Result | Detail |
|---|---|---|---|
| F1 | Beneish M-Score | PASS | -2.52 (threshold: < -2.22) |
Key Risks from the 10-K
1. Agricultural Market Cyclicality
"Our success largely depends on the vitality of the agricultural industry. Historically, the agricultural industry has been cyclical and subject to a variety of economic and other factors; consequently, sales of agricultural equipment are also cyclical and generally reflect the economic health of the agricultural industry." The MD&A: "Economic uncertainty, low commodity prices, elevated interest rates in the first half of the year, and higher used inventory levels contributed to lower shipment volumes for large and small agriculture."
2. Tariff Impact — $600M in FY2025
"The imposition of tariffs and retaliatory tariffs has impacted, and we expect will continue to impact, the sourcing of parts and components, the cost and profitability of manufacturing operations, and our ability to ship, import, and export our products… The direct impact of incremental tariffs incurred by us in 2025 was approximately $600, excluding the impact of tariffs on our suppliers and market demand." The IEEPA Supreme Court case is a potential reversal lever.
3. FTC Right-to-Repair Lawsuit
"On January 15, 2025, the Federal Trade Commission (FTC), along with the Attorneys General of the States of Illinois and Minnesota filed a lawsuit against us… The lawsuit alleges monopolization and unfair competition in violation of the federal and state antitrust laws. Plaintiffs seek a permanent injunction and other equitable relief to allow owners of our equipment, as well as independent repair providers, access to our repair tools and any other repair resources available to authorized John Deere dealers." If Deere is forced to open its diagnostic tools, parts and service margins — a core profit driver — could compress.
4. Sales Incentive Accruals — Deloitte's First CAM
Deloitte identified sales incentives as a CAM: "The Company offers sales incentive programs to promote the sale of products from the dealer to the retail customer. At the time of the sale to a dealer, the Company records an estimated cost for the sales incentive programs as a reduction to the sales price… A key assumption is the predictive value of the historical percentage of retail sales incentive costs to retail sales. The predictive value of the historical percentage for the United States and Canada is a critical audit matter because differences from the historical percentage to current conditions could have a material impact on the sales incentive accrual." This is directly related to the MD&A disclosure of "greater reliance on sales incentives" — the accrual methodology assumes historical patterns predict current conditions, which may not hold in an accelerating down cycle.
5. Allowance for Credit Losses — Deloitte's Second CAM
Deloitte identified the credit loss allowance (modeled via linear regression on the U.S./Canada retail customer receivable portfolio) as a CAM: "The allowance for credit losses is an estimate of the credit losses expected over the life of the Company's receivable portfolio… The Company utilizes linear regression models to estimate the expected credit losses for large and complex retail customer receivable pools, which represent more than 90 percent of retail customer receivables." The MD&A explicitly flagged "elevated receivable write-offs" — so write-offs are above modeled levels, creating judgment risk in the allowance.
6. Right-to-Repair and Antitrust
The FTC lawsuit (risk #3 above) is the biggest idiosyncratic risk.
Summary
Grade: F. The mechanical fails (C4 cash/debt 15%, D2 Debt/EBITDA 5.5x) are Financial Services structural features — the real story is the ag cycle downturn that is driving segment operating profits down 26-49% on top of $600M of tariff impact.
Deere's FY2025 is the classic cyclical industrial trough: revenue down 12%, net income down 29%, PPA operating profit down 41%, C&F operating profit down 49%. The company is responding with structural actions (sales incentive deployment, SG&A discipline, reduced capex, share buyback cuts), but FY2026 guidance is for "large agriculture sales in North America... expected to remain subdued."
The two auditor CAMs are precisely the right ones to flag in this environment: (a) sales incentives accruals, because "greater reliance on sales incentives" creates estimation judgment, and (b) allowance for credit losses, because "elevated receivable write-offs" create provisioning judgment. Deloitte did not raise these CAMs in the prior cycle — they reflect the specific conditions of the current downturn.
The FTC right-to-repair lawsuit is the single most important non-cyclical risk. If Deere's franchise model is forced open, the aftermarket parts and service margins — historically a stabilizing profit source through cycles — could compress, changing the earnings profile permanently.
The positive story: CFFO/NI of 1.48 held up, gross margin in ag operations is 36.5% (still industry-leading), Goodwill/Equity is only 21%, the M-Score is clean, and the balance sheet is investment-grade.
The key question for FY2026: Does the used equipment overhang clear, ending the ag equipment downcycle? And does the FTC lawsuit reach a settlement that preserves the core Deere franchise model?
**Disclaimer**: This report is based on Deere & Company's FY2025 10-K filed with SEC EDGAR on December 18, 2025. This is NOT investment advice.
Data: SEC EDGAR 10-K + Yahoo Finance
Auditor: Deloitte & Touche LLP (Unqualified opinion, auditor since 1910, 2 critical audit matters — sales incentive accruals, allowance for credit losses)
Fiscal year ended: November 2, 2025