DBRS Confirms Deere & Company at “A”, R-1 (low)

DBRS has today confirmed the long- and short-term ratings for Deere & Company (Deere or the Company) and its related entities at “A” and R-1 (low), respectively. The ratings primarily reflect Deere’s strong business risk profile as the leading global producer of agricultural equipment, with well-diversified revenue and relatively stable credit operations. In addition, the Company’s very strong liquidity position, conservative balance sheet and access to capital markets has reduced the financial risk associated with the current deterioration in macroeconomic fundamentals and global credit market turmoil.

Deere is expected to maintain a solid financial profile despite facing several headwinds that will result in weaker earnings and cash flow over the near term. The Company’s core credit metrics have been very strong in recent years, following top-of-the-cycle agricultural equipment market conditions. While coverage, leverage and profitability ratios weakened over the 12 months to January 31, 2009, and will be pressured further in F2009, DBRS expects them to remain acceptable for the rating. In addition, Deere’s liquidity position is substantial, with over $5 billion in cash on a consolidated basis.

The continuing decline in operating results from Deere’s more economically-sensitive Construction & Forestry and Commercial & Consumer Equipment divisions (roughly one-third of total equipment sales) is a key challenge facing the Company. Demand will remain under pressure mainly related to the well-documented deterioration in the U.S. housing market and the U.S. economic recession, and is unlikely to materially improve before 2010. In addition, relative strength in the U.S. dollar and continuing high input costs are also expected to have a negative impact on operating results, and are likely to offset planned price increases. Furthermore, restricted consumer credit will contribute to materially lower agricultural equipment sales and earnings outside of North America (e.g., Brazil, CIS, eastern Europe) – regions that have been an important source of growth in recent years.

Despite the aforementioned challenges, Deere’s agricultural equipment business in North America is expected to remain strong through F2009. Farm cash receipts should remain at levels that will support favourable large tractor and combine deliveries (despite sharply lower commodity food prices from peak 2008 levels), and help mitigate declining sales in Deere’s international agricultural equipment markets. In addition, various efficiency initiatives implemented by the Company, including increased manufacturing flexibility, should help reduce the impact of the global economic downturn on overall earnings. Furthermore, infrastructure spending related to the U.S. stimulus package should be positive for equipment sales in 2010. That said, a prolonged economic downturn and further deterioration in farm commodity prices/farm cash receipts remain key risks to Deere’s earnings and cash flow.

The Company has maintained modest debt levels (at the equipment operations) and a large cash position over the past several years, and this strategy has positioned it to effectively manage the risks associated with the current downturn in macroeconomic and credit market conditions. While debt increased at January 31, 2009, versus end-F2008, coverage ratios remained solid. Free cash flow generation is expected to continue over the near term and DBRS does not expect Deere to resume its share repurchase program. As such, the Company’s leverage and liquidity position is likely to improve.

With respect to Deere’s Financial Services operations, earnings are expected to decline, mainly due to lower financing spreads and increased credit losses. However, the credit quality of Deere’s receivables is expected to remain strong, chiefly on account of its agricultural equipment portfolio, which should limit significant downside. In addition, the Company has sufficient liquidity to meet near-term term debt maturities following recent large debt issuances; access to commercial paper is not viewed as an issue.

Notes:
All currency amounts in U.S. dollars

The applicable methodology is “Rating the Industrial Products Industry”, which can be found on our website under Methodologies.

This is a Corporate rating.