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

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 trends remain Stable. Underpinning the ratings is the Company’s strong business profile as the leading global producer of agricultural equipment, with well-diversified revenues by product and geography. The ratings also reflect the Company’s strong financial profile, which has shown solid improvement year over year. In addition, the Company’s liquidity position is strong with approximately $3.6 billion in cash and cash equivalents and available credit lines of approximately $3.7 billion on a consolidated basis. Given strong underlying agriculture fundamentals and the Company’s conservative financial policies, we expect the Company’s financial profile and business profile to remain commensurate with the current rating in the near to medium term.

Deere’s overall financial profile improved over the past year with record sales and earnings keeping the profile favourable for the ratings. Growth in earnings and cash flows in the Agriculture and Turf division (A&T) were driven by strong demand primarily for agriculture equipment in both the Company’s core North American and international markets. Rising farm cash receipts, mainly from strong commodity food markets, led to increased net price realizations, higher equipment shipments and sharply higher agricultural equipment division profits. The A&T division generates the majority of the Company’s overall revenues and operating profit (i.e., over 75% at the end of 2011). The Company also had significant growth in earnings in its Construction and Forestry (C&F) division, with operating profits more than tripling year over year (albeit from weak 2010 levels).

The C&F division benefited from replacement demand to modernize very aged fleets and sales to independent rental companies. These strong results in both divisions were partially offset by increased raw material costs, higher selling, general and administrative (SG&A) costs as well as increased research and development expenses.

Due to higher earnings and despite significantly stronger capex and higher dividend spending, the Company generated over $1 billion in net free cash flows. Credit metrics remain strong for the current rating, notwithstanding the fact that Deere used free cash flows to repurchase shares.

Deere’s credit operations have also improved year over year, driven primarily by growth in the portfolio and a lower provision for credit losses. At the end of F2011, net write-offs were significantly below historical norms. Credit losses in agricultural equipment, which represents the significant majority of the managed portfolio, remained at very low levels given strong market conditions. Credit losses declined significantly in the C&F segment given stronger collections and recoveries.

Going forward into 2012, the Company is expected to continue to achieve record sales and earnings led by both the A&T and C&F divisions. Despite near-term uncertainty regarding global economic growth, favourable crop prices and supply and demand fundamentals are expected to continue to translate into high levels of farm receipts and support higher prices and stronger volumes for Deere agricultural equipment. Industry farm equipment sales are projected to increase in North America and Asia, while industry sales for this equipment in Europe and South America are expected to remain flat from F2011 levels. As the Company increases its geographic imprint, sales growth is expected to be generated from emerging markets in the coming year, improving geographic diversification. The C&F segment is also forecasted to see significant growth in F2012 as the construction industry shows signs of rebounding in the U.S. and Canada in addition to replacement demand for older equipment. DBRS notes that earnings will continue to be hampered by headwinds such as rising raw material costs, regulatory costs, research and development costs and SG&A costs.

Despite higher expected levels of operating cash flows in F2012, the Company is expected to increase its capex and dividend spending, resulting in similar levels of net free cash flows as those in F2011. The 2012 capital expenditures include spending on U.S. Tier 4 emission requirements, the construction of new manufacturing facilities and the development of new products that are expected to enhance future earnings. DBRS expects that the Company will use its net free cash flows and cash on hand to support further share repurchase activity, as opposed to any significant debt repayments (outside of upcoming maturities in F2012). DBRS expects the Company to be committed to maintaining conservative financial policies and, as such, expects the Company will be judicious in its share buyback activity to keep credit metrics at levels commensurate with the rating.

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 Companies in the Industrial Products Industry, which can be found on our website under Methodologies.