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

DBRS has today confirmed the Issuer Rating and Senior Unsecured Debt of Deere & Company (Deere or the Company) and its subsidiaries at “A.” The Commercial Paper ratings are confirmed at R-1 (low). All trends are Stable. The confirmation reflects the Company’s superior business and financial profiles. Deere continues to maintain leading market positions in a broad range of agricultural and forestry product categories in many markets globally, as well as solid market shares in construction equipment in North America. Deere’s strong cash flow generation and reasonable debt levels have helped maintain credit metrics consistently at or above the “A” range.

Deere’s Equipment Operations segment sustained positive sales growth of 4.5% in fiscal year 2013 (ending October 31, 2013) relative to fiscal year 2012, although sales growth was mixed in its two primary segments. Sales in the agricultural and turf (A&T) segment rose 7.4% compared to fiscal year 2012, backed by relatively strong farm incomes in the United States, although the growth slowed relative to prior periods, noting the decreasing prices for agricultural commodities throughout the year. Sales in the construction and forestry (C&F) segment decreased 8% compared to fiscal 2012, reflecting mainly lower volumes and the challenging competitive landscape. Overall, sales in the United States and Canada rose approximately 5%, while sales outside of those regions expanded 3.8%, mainly reflecting weak sales in Europe. Throughout fiscal 2013, DBRS-calculated operating profit margin in Equipment Operations rose to an all-time high of 13.1%, reflective of Deere’s continued cost discipline as a part of a strategic drive to increase operating margins. The Company’s financial services arm continued a trend of very strong performance, with John Deere Financial increasing net income and the size of its portfolio, while continuing with near-zero credit write-offs.

Deere generated strong operating cash flow, in line with increased earnings and sales, and the Company’s financial profile remained stable in 2013. Credit metrics continued to fall in line with the “A” rating range, supported by elevated cash flows, solid earnings and stable debt levels. DBRS notes that, given improved operating performance in 2013, Deere’s dividend and share repurchase programs have increased, although this remains manageable under the current rating, given the Company’s substantial balance sheet flexibility.

Deere continues to benefit from its superior business profile, characterized by its leading position in the North American agriculture market. The Company has also made strides in achieving respectable shares in construction machinery, although the competitive landscape in that segment remains fierce. Outside of North America, Deere has recently begun production in several facilities in various emerging markets, aiming to establish the Company’s presence around the world. Deere is trying to build share in the emerging markets and this is expected to benefit the Company in the long term.

Results in 2014 will likely be affected by softer agricultural and regional conditions, pushing Equipment Operations sales growth into negative territory. Sales will likely decline in the single-digit range during the year, although increasing diversity of sales by geography, as well as some positive regional developments (i.e., the U.S. housing recovery), should help mitigate these declines. Sales in the A&T segment are expected to decrease in the low single-digit range in 2014, driven by a combination of softer farm incomes, as well as lower agricultural commodity prices. Sales in the C&F segment will likely stay flat or expand in the low single-digit range in 2014, noting that the U.S. housing recovery and increased construction spending are expected to lift sales.

Despite the milder outlook for 2014 relative to the previous year, DBRS expects sales and earnings levels to nonetheless be at relatively elevated levels, noting the strong growth seen over the last few years. Additionally, the Company’s financial profile has sufficient cushion to absorb low- to medium-sized sales and operating profit impacts. As such, DBRS expects that credit metrics will continue to be stable throughout 2014, also noting that the Company will repay approximately $700 million in maturing debt during the year.

DBRS expects the ratings to remain stable over the near to medium term, reflecting the credit metrics commensurate with the current rating. Additionally, the Company remains well-positioned to benefit from fundamentals supporting agricultural and construction product demand. DBRS expects that Deere will maintain its dominant position in agricultural machinery and defend its number two position in construction markets over the long term.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The John Deere Credit Inc. name was changed to John Deere Financial Inc. in 2012.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is Rating Companies in the Industrial Products Industry (June 2013), which can be found on our website under Methodologies.