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 subsidiaries 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 revenues and relatively stable Credit operations. In addition, DBRS notes that the Company was able to maintain abundant liquidity despite the economic downturn, with Deere continuing to enjoy ample access to debt and capital markets throughout the global financial crisis.

While DBRS acknowledges that the Company’s recent financial results are materially weaker vis-à-vis recent historically high levels, it also observes that Deere implemented several efficiency initiatives and nonetheless remained solidly profitable in fiscal 2009 (F2009, ending October 31, 2009) amid very challenging industry conditions that triggered the largest single year sales decline in company history. The recently formed Agriculture & Turf (A&T) division (that combines the former Agricultural Equipment and Commercial and Consumer Equipment segments) in particular was resilient to the downturn as operating margins remained healthy at 8%, similar to margins achieved in fiscal years 2005 and 2006. The Construction and Forestry (C&F) segment proved more vulnerable to the challenging environment as revenues in F2009 dropped by 45% year-over-year, although firm pricing and rigorous cost-cutting activities helped constrain incurred losses to modest levels. (DBRS notes that the C&F segment over the past five years only represented approximately 22% of Equipment operations revenues and is readily outweighed by the A&T division.) Additionally, while earnings of Deere’s Credit operations also softened in line with the financial crisis, profitability and portfolio credit quality remained well above the financial services industry average, with this segment also developing incremental funding sources to mitigate the negative impact of credit market disruptions.

Going forward into fiscal 2010 (F2010), Deere is expected to continue generate solid profitability, although earnings will remain below the historically high levels prior to the economic downturn. In the A&T segment, margins are projected to be roughly equivalent to prior year levels as the ongoing uncertainty regarding the timing of an economic recovery will likely somewhat constrain North American farmers’ spending patterns; however, farm receipts and commodity prices remain at healthy levels and should support reasonable volumes. In international markets, Western Europe is projected to moderately decline, with Eastern Europe likely remaining under pressure. In contrast, growth is expected in South America, bolstered by government supported financing and incentive programs promoting small tractor sales. In the C&F sector, while a modest rebound from very poor levels is forecast in forestry, construction activity is expected to remain weak, particularly with respect to non-residential spending, with Deere therefore expecting margins for this segment to persist at slightly negative levels. Profitability of the Company’s Credit operations should moderately increase in F2010 in line with expected lower credit losses and wider financing spreads.

While Deere’s credit metrics have weakened recently in line with the downturn, DBRS notes that the Company’s financial profile remains very solid, with the higher balance sheet leverage (as calculated by DBRS) primarily a function of the Company’s liquidity objectives in response to the recent financial crisis. DBRS also observes that Deere has historically maintained a conservative financial policy, as exemplified by the Company’s suspension of share repurchase activities as well as its $400 million capital injection to bolster the equity position of its Credit operations (both occurring in the second half of fiscal 2008). Going forward, coverage measures should also revert to historical levels as industry conditions improve.

DBRS expects the ratings to be constant over the near- to medium-term, with Deere remaining very well positioned to benefit from significant long-term agricultural tailwinds (i.e., rising global population and wealth, which will trigger higher food demand).

Notes:
All figures are in U.S. dollars unless otherwise noted.

John Deere Capital Corporation’s Guaranteed Medium-Term Notes are guaranteed by the Federal Deposit Insurance Corporation.

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

This is a Corporate rating.