Fitch Revises Rtg Outlook On Deere, JDCC And Subs. To Neg

Business Wire, Sept 28, 2001

Business Editors

CHICAGO--(BUSINESS WIRE)--Sept. 28, 2001

Fitch has revised the Rating Outlook on Deere & Co. (Deere), John Deere Capital Corp. (JDCC), and related subsidiaries listed below to Negative from Stable. The Rating Outlook includes all rated long-term debt and commercial paper of these entities, as listed below. At July 31, 2001, Deere and its subsidiaries had approximately $12 billion of debt securities outstanding.

The change in Rating Outlook is based on a meaningful increase in debt levels resulting from acquisitions and excess inventories, which has coincided with continuing weak conditions in the company's agricultural markets and a steep decline in operating results at Deere's non-agricultural operations. Production cutbacks and costs associated with restructuring actions will result in weak operating income in the short term, which together with higher debt levels will delay improvement in the company's financial measures to levels consistent with the current rating category.

Deere has spent approximately $1 billion on acquisitions over the past several years, primarily to accelerate consolidated growth through expansion of its non-agricultural businesses. These acquisitions, the largest of which was the $600 million acquisition of forestry products-maker Timberjack, were made just prior to a downturn in these businesses. In particular, operating results in Deere's construction and forestry segment have suffered during the recent downturn. The decline in construction equipment was augmented by Deere's exposure to the rental equipment market, where the downturn and stressed financial condition of players in the industry has disproportionately impacted Deere's volumes in this segment. Deere has announced a number of restructuring actions in its construction and forestry, and consumer and commercial segments, and the sale of certain loss-producing assets in its Homelite operations. These steps are expected to improve the cash position of these operations through working capital adjustments and reposition the segments' cost structure for improved long-term profitability, although associated charges will produce a net loss for Deere's fiscal year-ending Oct. 31, 2001.

These events have also occurred in the midst of an extended period of weakness in the company's core agricultural operations. However, agricultural operations have remained profitable, and Deere's operating performance through this cycle has been significantly improved from the last cycle, despite a steeper decline in industry volumes. Deere emerged from its recent seasonal selling season with excess inventories estimated by Fitch at $200-$300 million. Significant cutbacks in production for the fourth fiscal quarter will address this issue, but will result in negative EBITDA for the period.

Manufacturing debt levels have risen from $1.7 billion at fiscal year-end Oct. 31, 1999, to approximately $3.5 billion at July 31, 2001. Fitch estimates that seasonal receivable runoff should amount to roughly $400-$500 million of debt during the fourth fiscal quarter, with inventory reductions resulting in further debt reduction. Weak operating income resulting from meaningful production cutbacks indicates that recovery in interest coverage and leverage figures is not likely to occur until later next calendar year.

Longer term, Deere continues to expand its already very strong share position across virtually all of its agricultural product lines in North America, supplemented by a continuing high level of new product introductions. Historically, each agricultural down cycle has extracted a heavy toll on Deere's competition and Deere has regularly emerged in a stronger competitive position. This cycle appears to be no different. Upon any eventual upturn in its end markets, Deere would be expected to capitalize on its very significant cash flow generation potential afforded it by its strong market share position. Deere also maintains a very healthy parts business that provides a secure, long- term revenue stream.

As always, variables such as global weather, international purchasing patterns, livestock disease, etc. make even short term results highly uncertain. Farmers' balance sheets remain very healthy, and land values have held up, differentiating this period from previous down cycles. Although the final product is certainly unknown, the current form of the new farm bill would provide longer-term visibility for price supports, potentially providing more long-term confidence to farmers on which to base investment decisions.

The ratings between Deere and JDCC and other finance subsidiaries have historically been linked due to their importance to the parent's operations. In 1998, the relationship between Deere and JDCC was formalized with the establishment of an operating agreement. This agreement requires Deere to maintain JDCC's tangible net worth in excess of $50 million, fixed charge coverage of 1.05 times (x), and a 51% ownership stake in JDCC at all times. In general, Fitch views Deere's finance operation as a solid business that adds diversity to the parent's revenue stream with a manageable amount of risk. Although still modest in terms of revenue, Deere's finance subsidiaries' contribution to Deere's total revenues has steadily increased and stood at 10% in fiscal 2000 up from 7% in fiscal 1997. Operating income from this segment is a meaningful contributor to consolidated results.