DBRS Confirms Deere & Company and Subsidiaries at “A”, Stable Trend

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 stable Credit operations.

The Company’s performance significantly improved in fiscal 2010 (F2010, ending October 31, 2010), with Deere generating its second-highest-ever levels of sales and profitability after weak F2009 results that were primarily attributable to the global economic crisis. (DBRS notes, however, that Deere was solidly profitable in F2009 despite very challenging market conditions.) The much-improved results this past fiscal year were largely due to stronger performance of the Agriculture & Turf (A&T) division, which on average has represented more than 70% of consolidated revenues and operating profit over the past five fiscal years. Operating profit of the A&T segment almost doubled year-over-year to $2.8 billion on higher volumes and positive mix, primarily attributable to favourable conditions in the U.S. farm sector, while other regions such as Europe remained weak. This segment’s operating margin of 14% ranks very favourably relative to historical norms.

In the Company’s Construction and Forestry (C&F) segment, while F2010 revenues increased by 41% year-over-year, DBRS notes that this increase is relative to extremely weak F2009 levels, with C&F volumes remaining substantially below historical norms. However, the segment managed to generate a modest operating profit in F2010 (after incurring losses the previous year), although higher raw-material costs and compensation expenses partially offset the higher shipment and production volumes.

Deere’s Credit operations generated substantially higher profitability in F2010, with higher interest spreads and much-reduced provisions for credit losses being the two primary positive factors. As of the end of F2010, net write-offs of the segment’s credit portfolio reverted to historical norms, as losses in agricultural equipment (which represents the significant majority of the portfolio) remained at low levels, while losses in construction and forestry dropped sharply from very high levels, but remain above historical norms. DBRS notes that the segment recently sold its wind-energy business to focus more closely on its core financial services operations.

Deere’s financial profile has been significantly restored thanks to its strong F2010 results. Substantial free cash flow enabled Deere to pay down in excess of $1.3 billion in debt in F2010. DBRS notes that the Company’s previous level of indebtedness (high relative to historical norms) was assumed partly in order to bolster its liquidity position during the global financial crisis. While Deere has maintained significant dividend payouts and resumed share repurchases last year, DBRS expects the Company to adhere to its historically conservative financial policy and remain judicious with such activities in the future.

Going forward into F2011, Deere is expected to continue generating solid profitability given moderately higher A&T revenues, and C&F sales are projected to grow significantly from still-weak levels. Operating profit, while forecast to moderately increase, will likely be somewhat constrained by higher raw-material costs, negative mix impacts (given significantly positive mix effects in F2010 that are unlikely to be repeated), as well as expenses associated with the development of Interim Tier 4 technologies. In the longer term, the Company hopes to increase its presence in emerging markets, which are expected to represent the majority of global economic growth going forward.

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).

Note:
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.