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

DBRS Limited (DBRS) has today confirmed the Issuer Rating of Deere & Company (Deere or the Company) at “A,” the Senior Unsecured Debt rating of Deere and its subsidiaries at “A” and the Commercial Paper rating of the same entities at R-1 (low). The trends remain Stable. The ratings are primarily supported by Deere’s stable, solid business profile, its position as a global leader in agricultural equipment, its dominant business and a meaningful market position in its other equipment businesses. Deere’s ability to generate solid cash flow from operations and to consistently stay free cash flow positive are also supporting factors. However, Deere’s financial profile has been on a weakening trend caused by a downturn in the capital goods equipment cycle, and it does not have much cushion to absorb further deterioration. Currently, the Commercial Paper rating is not at risk, but further decline in the key credit metrics, the adjusted debt-to-EBITDA ratio in particular, could put the “A” rating at risk. Nevertheless, the Stable trend reflects DBRS’s expectation that Deere’s financial profile will stabilize near current levels in F2017 (year ended October 31), despite the still challenging market conditions, and that its profile should strengthen modestly through F2019 as the markets recover. Recently announced Q1 F2017 results were in line with expectations. Furthermore, Deere’s increased optimism of its F2017 performance is encouraging.

As anticipated, Deere’s operating results at both its Agricultural and Turf and its Construction and Forestry businesses declined in F2016. Continued weak retail equipment shipment was the major contributing factor to lower sales and operating profit. Despite relatively flat gross debt levels, all key credit metrics weakened, and the adjusted debt-to-EBITDA ratio, at about 2.15 times (x) in F2016, was marginal for an “A” rating. An adjusted debt-to-EBITDA ratio weaker than the mid 2x range could put the current “A” rating at risk. (See DBRS rating report dated February 19, 2016).

DBRS expects market conditions to remain challenging in F2017 and to show gradual improvement in the latter part of calendar 2017. Nevertheless, Deere expects to outperform the industry and is forecasting a 4% increase in sales and a modest increase in net income (excluding non-recurring items such as the gain on sale of SiteOne and restructuring charges) in F2017, with higher cost savings from productivity initiatives being a key profit booster. With no meaningful debt maturity in F2017, DBRS expects all key credit metrics to remain little changed in F2017. Operating results are expected to show steady improvement supported by stronger market conditions and ongoing cost savings. Lower debt levels from repaying large maturing debt coupled with a modest increase in earnings should restore the key credit metrics to within the rating range in F2019 even if the market recovers slower than anticipated.

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.

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

The principal methodologies are Rating Companies in the Industrial Products Industry (February 2017), Global Methodology for Rating Finance Companies (October 2016), DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (February 2017) and DBRS Criteria: Guarantees and Other Forms of Support (February 2017), which can be found on dbrs.com under Methodologies.

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