Deere (DE) Q2 2026 earnings review
A $272M Tariff Refund Made the Quarter Look Fine. It Wasn't.
Headline numbers tell a soothing story: revenue up 5% to $13.4B, net income down just 2% to $1.77B, EPS of $6.55. But the quarter included a one-time $272M IEEPA tariff refund from the February 2026 Supreme Court decision. Strip it out, and underlying net income was down roughly 13% YoY—closer to the prior trajectory than the headline suggests. Beneath the surface, Deere is running a tale of two companies: Construction & Forestry surged 29% with operating profit up 48%, Small Ag & Turf jumped 16% with margin expanding to 20.6%, while Production & Precision Ag collapsed—sales down 14%, operating profit down 39%. Management maintained FY26 net income guidance at $4.5-5.0B despite the H1 beat, implying a cautious H2 outlook.
🐂 Bull Case
C&F sales surged 29% YoY with operating profit up 48% and margin expanding to 14.8%. Management raised full-year guidance to up ~20% (from ~15% at Q1, ~10% at Q4 2025). Contractor backlogs extend into 2027, supported by infrastructure spending and data center demand.
From a 1.0% operating margin in Q4 2025 to 20.6% in Q2 2026—a remarkable swing. Sales up 16%, profit up 25%. Volume normalization after FY25 underproduction is delivering operating leverage.
The Supreme Court's IEEPA ruling delivered $272M in refunds this quarter and structurally reduces the $1.2B FY26 tariff drag management originally projected. Mitigation efforts have outperformed expectations.
🐻 Bear Case
Ex the $272M IEEPA recovery, operating profit fell ~15% and net income ~13% YoY. The 'good' Q2 print masks a deterioration in core performance—particularly in Large Ag, which remains Deere's most profitable business.
Management called FY26 the bottom of the large ag cycle, but PPA Q2 sales fell 14% YoY (vs +3% in Q1)—a sharp reversal. Operating margin compressed from 22% to 15.7%. The 'bottom' may not be where management thinks it is.
After beating their own internal plan in H1, management held the FY26 net income range at $4.5-5.0B. Implied H2 of ~$2.32B is roughly flat to slightly down vs H2 2025. Management sees something in H2 that warrants caution.
⚖️ Verdict: ⚪
Neutral. The diversification story is genuinely working—C&F and SAT are providing real offset to PPA weakness. But the headline beat is heavily flattered by a one-time tariff refund, and the PPA deceleration from Q1 to Q2 is concerning. Maintained guidance suggests management is not yet ready to call the inflection.
Key Themes
PPA Decelerated Sharply Despite 'Cycle Bottom' Narrative
Production & Precision Ag sales went from +3% in Q1 to -14% in Q2—a 17-point swing in the wrong direction. Operating profit dropped 39% and margin compressed from 22.0% to 15.7%. This contradicts the Q1 narrative that 2026 marks the trough. Management also raised the FY26 currency tailwind assumption to +3% (from +1.5%), implying the underlying volume trend is worse than the sales guidance suggests.
Construction & Forestry Is Now the Growth Engine
C&F has flipped from cycle laggard to standout performer. Sales +29%, operating profit +48%, margin expanded to 14.8%. The order book grew over 50% in Q1 and remains healthy. Demand drivers are diversified: infrastructure spending, data centers, rental refleeting. Management raised FY26 sales guidance to ~+20% (third consecutive raise, from ~10% at Q4 2025). The Tenna acquisition adds a digital fleet-management layer for contractors.
Small Ag & Turf Margin Snapped Back
After the Q4 2025 collapse to 1.0% operating margin (driven by tariffs and warranty costs), SAT recovered to 20.6% in Q2—the highest in the last six quarters. Sales up 16%, profit up 25%, on a combination of volume recovery after FY25 underproduction and positive price realization. Operating leverage is finally working: H1 segment margin of 16.2% is up from 14.7% in H1 2025 despite the difficult comparison base.
Supreme Court IEEPA Ruling Removes a Major Overhang
The February 20, 2026 Supreme Court decision invalidating IEEPA tariffs led to a $272M refund recovery in Q2 alone—more than Deere's original full-year FY2025 tariff impact estimate. With FY26 originally facing $1.2B in pre-tax tariff costs, this ruling structurally improves the cost outlook. Management's ability to maintain guidance while absorbing significant tariff costs throughout the year is now meaningfully easier.
Tenna Acquisition Builds Digital Fleet Layer in C&F
Closed in February 2026 for $439M (largely goodwill and intangibles), Tenna is a mixed-fleet equipment operations and asset tracking platform. Combined with the earlier Virtual Superintendent acquisition, it positions Deere as a brand-agnostic operating system for construction job sites—addressing the reality that no contractor operates a pure Deere fleet. This is the third layer of Ryan Campbell's stated three-layer C&F strategy: machines, tasks, job sites.
Inventory Building Despite 'Produce to Retail' Discipline
Total inventories rose to $8.19B at quarter-end, up from $7.41B at FY25 close (+11% YTD) and up 4% YoY from $7.87B. While some buildup is seasonal, the pace contradicts management's repeated framing about lean production and producing in line with retail demand. With PPA decelerating sharply, this inventory needs to clear in H2 or risks margin pressure from incentive deployment.
Large Ag Industry Outlook Unchanged at Down 15-20%
Despite the cycle-bottom rhetoric, the U.S./Canada Large Ag industry forecast remains down 15-20% for FY26—the same magnitude management has projected since Q4 2025. South America was also revised down to ~-15% (from flat at Q1). The international markets management once described as 'green shoots' are softening: Asia held flat, Europe held flat to up 5%. Outside of C&F, the demand picture is not improving.
Buyback Pace Slowing
Repurchases totaled $500M in H1 2026 vs $838M in H1 2025—a 40% reduction. Q2 standalone buybacks of ~$198M trailed Q1's $302M. After pausing repurchases in Q4 2025 'due to market uncertainty,' the resumption has been measured. With H1 free cash flow of just $591M (vs $1.7B in annual dividends), there is limited room for buyback acceleration without working capital improvement.
Financial Services Quietly Outperforming
Financial Services net income of $190M in Q2 was up 18% YoY, benefiting from favorable financing spreads and derivative valuation. FY26 guidance was raised to ~$860M (from $840M at Q1, $830M at Q4 2025)—the third consecutive raise. This segment provides earnings stability through the cycle and is increasingly material: FinSvcs operating profit of $251M in Q2 represented 11% of total operating profit.
Other KPIs
Down from 31.8% in Q2 2025—roughly 200 basis points of compression. The IEEPA tariff refund flowed through cost of sales, so the underlying margin pressure is worse than the reported number. Cost discipline remains intact ex-tariff, but the mix shift toward lower-margin C&F and SAT (and away from PPA) is structurally headwinding consolidated gross margin.
A dramatic improvement from just $13M in H1 2025, driven by smaller drags from accounts payable changes (-$333M vs -$898M) and retirement benefits (-$290M vs -$794M). H1 is seasonally weak for Deere; the full-year FY26 OCF guidance of $4.0-5.0B remains in place. Despite improvement, FCF is still well below the $1.7B annual dividend run-rate, leaving buybacks dependent on H2 cash generation.
Up 11% YTD from $7.41B at fiscal year-end and up 4% YoY. Goodwill increased $325M YTD largely from the Tenna acquisition. Total debt declined modestly to $63.8B from $63.9B at year-end. Total cash and marketable securities of $9.34B vs $9.69B at year-end.
Guidance
Decelerating. Midpoint of $4.75B implies a 5.5% decline from FY25's $5.03B. With H1 done at $2.43B, the implied H2 of ~$2.32B is roughly flat to down 1.4% vs H2 2025's $2.35B. Holding guidance after beating H1 internal plan is conservative—management is signaling caution for the back half despite improving CF and SAT trends.
Reversing. After Q1 PPA grew +3%, Q2 reversed to -14%. The currency assumption was raised to +3.0% (from +1.5% at Q1), with price at ~+1.0%—implying underlying volume is weaker than the headline guidance suggests. The industry outlook for U.S./Canada Large Ag remains unchanged at down 15-20%.
Accelerating. Third consecutive raise (from ~10% at Q4 2025, to ~15% at Q1 2026, now ~20%). Includes +2.0% currency and ~+2.5% price realization. Global Roadbuilding industry outlook also raised to up ~10% (from Flat at Q4 2025). The Tenna acquisition adds incremental revenue, though most of the raise reflects organic demand strength.
Accelerating. Includes +1.0% currency and ~+1.5% price realization. With H1 SAT sales already up 19%, the guidance implies some moderation in H2 as comps become harder. The 20.6% Q2 margin demonstrates significant upside if volume momentum holds.
Accelerating. Third consecutive raise. Up from $830M at Q4 2025 and $840M at Q1 2026. Benefits from favorable financing spreads and lower credit losses. Represents ~18% of FY26 net income guidance midpoint.
Key Questions
PPA Q2 Deceleration Explained
PPA sales went from +3% in Q1 to -14% in Q2. Was Q1 boosted by pull-forward demand or shipment timing? What gives confidence that 2026 still marks the cycle bottom when the trajectory is worsening, not improving?
IEEPA Refund Magnitude Going Forward
Beyond the $272M recognized in Q2, what is the expected magnitude of additional refunds in H2? How does the Supreme Court ruling change the $1.2B FY26 tariff exposure originally projected at Q4 2025?
Inventory Build Versus Production Discipline
Total inventories are up 11% YTD despite repeated statements about producing in line with retail demand. Which segment is driving the buildup, and does this signal weaker-than-expected retail sell-through?
Guidance Maintenance Logic
With H1 beating internal expectations and FinSvcs guidance raised, why was the headline net income range held? What H2 headwinds—beyond the tariff cushion fading—are weighing on the forecast?
Used Equipment Cycle Status
Late-model used high-horsepower tractor inventory was a key constraint at Q1. Has the destocking continued at the Q1 pace, or has the PPA Q2 weakness slowed dealer trade-in velocity?