Deere (DE) Q4 2025 earnings review
Volume Returns, but Margins Crumble: FY26 Guidance Points to Lower Earnings
Deere & Company delivered a surprise revenue reversal in Q4, growing top-line 11% YoY after three quarters of double-digit declines. However, this volume recovery did not translate to the bottom line. Net Income fell 14% as significant cost headwinds—specifically tariffs, warranty expenses, and litigation accruals—crushed margins, particularly in the Small Ag & Turf segment. While management calls FY26 the 'bottom of the large ag cycle,' the guidance implies a further earnings contraction to $4.0-$4.75 billion (vs. $5.03 billion in FY25), suggesting the pain is not yet over despite improved shipment volumes.
🐂 Bull Case
The era of destocking appears to be ending. Q4 sales rose across all segments (C&F +27%, PPA +10%, SAT +7%), and FY26 guidance projects ~10% growth for Small Ag and Construction, indicating production is realigning with retail demand.
Management explicitly stated they believe FY26 will mark the bottom of the large ag cycle. If accurate, the worst of the demand destruction is priced in, and the company is positioning for the upswing.
🐻 Bear Case
The Q4 margin profile was alarming. Small Ag & Turf operating profit collapsed 89% despite sales rising 7%. If volume growth cannot offset tariff and warranty costs, the earnings recovery will lag significantly behind the revenue recovery.
The company's profit engine, Production & Precision Ag, faces a grim FY26. Guidance predicts sales down another 5-10% and industry large ag volumes in North America falling 15-20%.
⚖️ Verdict: 🔴
Bearish. While the revenue inflection is a positive signal, the quality of earnings is poor. The collapse in margins (SAT at 1.0%) and the forecast for a further ~13% decline in Net Income for FY26 outweigh the volume recovery. The tariff headwinds appear to be biting harder than the narrative suggests.
Key Themes
Margin Shock in Small Ag & Turf (SAT)
A massive operational red flag appeared in the SAT segment. While sales grew 7% to $2.46B, Operating Profit plummeted 89% to just $25M (down from $234M). The operating margin collapsed to 1.0% from 10.1% a year ago. Management cited 'higher tariffs, warranty expenses, and production costs'. This indicates that current pricing power is insufficient to offset rising input and trade costs. Guidance shows a return to the 12.5% – 14.0% range for FY26.
Tariff Headwinds Intensifying
Tariffs are moving from a theoretical risk to a tangible P&L hit. The full-year FY25 pre-tax tariff impact reached nearly $600 million, and is projected to double to $1.2 billion in FY26. Based on Q2 commentary, the FY25 impact breakdown is approximately 40% to C&F (driven by Wirtgen production in Germany and excavator supply from Japan), 35% to Small Ag & Turf, and 25% to Production & Precision Ag. Management has signaled limited ability to pass through costs via pricing.
Construction & Forestry (C&F) Rebound
C&F was the star of the quarter on a relative basis. The segment saw sales growth of 27% YoY to $3.38B in Q4, a sharp reversal from declines earlier in the year. Unlike the Ag segments, operating profit also grew (+6%). Management expects this momentum to continue, guiding FY26 C&F sales up ~10%, driven by infrastructure needs and shipment normalization.
Large Ag Cycle Has Not Bottomed Yet
Despite management's claim that FY26 will be the bottom, the immediate outlook is painful. FY26 guidance for Production & Precision Ag (the company's profit engine) calls for sales to drop 5-10%, driven by a projected 15-20% decline in the U.S. & Canada Large Ag industry. High interest rates and subdued commodity prices continue to delay fleet replacement.
Aggressive Inventory Management Positions for Recovery
Deere's proactive destocking strategy has dramatically reduced field inventory levels. North American large ag tractor inventory is down 45% YoY, combines down 25%, and Brazilian large ag inventory down over 50% from 2023 peaks. North American small tractors are down nearly 40% YoY and earthmoving equipment down 25-30% YoY. This positions the company to produce in line with retail demand in FY26, creating a production tailwind for Small Ag & Turf and C&F.
Precision Ag Technology Adoption Continues Despite Downturn
Technology adoption remains a bright spot. JDLink Boost satellite connectivity has surpassed 8,000 global orders (up from 5,000 in Q3). The John Deere Operations Center has grown to over 500 million engaged acres. See & Spray technology covered 5 million acres in FY25 (up 5x from FY24), reducing herbicide use by nearly 50%. The 2024 cohort of See & Spray machines is running on 30% more acres this year, validating repeat usage and value.
Large Ag Cycle Expected to Bottom in FY26
CEO John May stated that 'we believe 2026 will mark the bottom of the large ag cycle.' The U.S./Canada large ag industry is forecasted down 15-20% in FY26, following a ~30% decline in FY25—implying roughly a 45-50% cumulative decline from peak. Customer caution persists due to trade uncertainty and interest rates, but global grain stocks-to-use (ex-China) at 20-year lows and improving international fundamentals provide a constructive backdrop for eventual recovery.
Elevated Used Equipment Inventory Weighing on Trade Cycle
While used inventory-to-sales ratios have stabilized just above the long-term average, the mix remains problematic. The population of late-model (1-2 year old) used equipment is approximately 2x normal levels, slowing the trade-in cycle and pressuring new equipment demand. Management is deploying 'pool funds' to support dealers in clearing used inventory, which contributed to negative price realization in prior quarters.
Pricing Power Constrained by Customer Fatigue
Management repeatedly emphasized taking a 'measured approach' to pricing given the significant increases customers have absorbed over the past 4-5 years. FY26 price realization guidance reflects this: Production & Precision Ag +1.5%, Small Ag & Turf +2.0%, but Construction & Forestry is negative at -1.0% (Q4 call, revised from +3% in release). The ability to fully offset tariff impacts through pricing appears limited, shifting the burden to cost control.
Litigation and Warranty Costs
Significant 'Special Items' impacted results. Specifically, a $95M pre-tax litigation accrual (antitrust lawsuit) and increased warranty expenses weighed on the quarter. While the litigation may be one-off, the warranty spike in SAT warrants monitoring for quality control issues as it was a key driver of the segment's margin collapse.
Other KPIs
Operating profit fell 8% YoY despite a 10% sales increase, indicating negative operating leverage. This was driven by higher production costs and tariffs that outweighed volume gains and price realization. The full-year operating margin of 15.4% came in below the original FY25 guidance of 17-18%, showing a gradual deterioration in outlook throughout the year.
Down from $7.6B in FY24 but remains healthy relative to Net Income ($5.0B), indicating solid working capital management despite inventory challenges. It enabled shareholder returns of over $2.8B (dividends + buybacks) while maintaining balance sheet strength. Cash and equivalents ended at $8.3B, up from $7.3B a year ago.
Up 28% from $696M in FY24. Q4 alone contributed $293M (+69% YoY), benefiting from favorable financing spreads and lower provision for credit losses. This segment provides important earnings stability through the equipment cycle and is guided for ~$830M in FY26.
Guidance
Decelerating. The midpoint ($4.375B) implies a ~13% decline from FY25's $5.03B. While better than the ~29% drop seen in FY25, it confirms the earnings recession will extend for another year.
Reversing. This segment grew 10% in 25Q4, so the guidance implies a return to contraction in the coming year. Price realization of +1.5% only partially offsets volume decline. Large Ag industry expected down 15-20%.
Accelerating. Improving from +7% in 25Q4. Management cites expected growth as production normalizes after deliberate underproduction in FY25. The margin is guided to expand significantly from the FY25 actual of 11.8% (and the Q4 shock of 1.0%), reflecting volume recovery and positive price (+2%).
Decelerating. Slowing from the +27% surge in 25Q4, but represents a healthy, stable growth outlook compared to the Ag weakness. Margin of 8-10% is guided flat to down from 9.0% in FY25, reflecting negative price realization and tariff impacts.
Declining. Down from $7.5B in FY25, reflecting lower earnings. Capital expenditures guided at ~$1.4B implies free cash flow of $2.6-$3.6B, sufficient for the ~$1.75B annual dividend but leaving less excess for buybacks.
Key Questions
Small Ag & Turf Margin Collapse
The Small Ag & Turf margin compressed to 1.0% this quarter despite sales growth. Can you quantify how much of this was from one-time warranty/litigation accruals versus structural tariff pressure? What gives you confidence in the rapid margin recovery to 12.5-14% guided for FY26?
Tariff Mitigation Strategy
With the forecasted pre-tax tariff impact doubling to $1.2 billion in FY26, and pricing power seemingly constrained, what specific sourcing or operational actions are planned to offset these costs, given that volume recovery alone was insufficient to protect margins in Q4?
Large Ag Bottom Confidence
You project FY26 as the bottom of the Large Ag cycle while also guiding for another 15-20% decline in North American industry sales. What specific leading indicators, beyond improving used inventory levels, give you confidence that 2026 is the floor and not just another step down?
PPA Negative Operating Leverage
In Production & Precision Ag, Q4 operating profit fell 8% even as sales rose 10%. With sales guided down in FY26, what steps are being taken to restore positive operating leverage in this critical segment, especially as tariffs rise?