Fitch Affs Rtgs Of Deere, John Deere Capital At 'A/F1'

Business Wire, July 25, 2003

Business Editors

CHICAGO--(BUSINESS WIRE)--July 25, 2003

Fitch Ratings affirms the senior unsecured long-term debt and commercial paper ratings of Deere & Co. (Deere) and its subsidiaries, including John Deere Capital Corp. (JDCC) at 'A' and 'F1'. Also, JDCC's subordinated debt and preferred stock ratings are affirmed at 'A-'. The Rating Outlook remains Negative and reflects Deere's current weak, albeit improving, financial ratios for the rating category. A full list of the ratings covered is provided below.

The ratings reflect Deere's superior market positions across its U.S. agricultural product lines, improved performance in businesses such as European agricultural products, recent improvements in both working capital and operating performance, Deere's high degree of liquidity, and the benefits to the company's credit profile provided by its ownership of JDCC. Rating concerns include the relative weakness in equipment orders from the U.S. agricultural market and the continued overall weak profitability in Deere's non-agricultural businesses, particularly in the company's construction and forestry business.

With its strong performance in the U.S. and with its gains in Europe over the last year, Deere has confirmed its role as the leading global manufacturer of agricultural equipment and has further enhanced its competitive position during the extended downturn in the agricultural market. New product introductions, technological advances, and a relatively stable dealer network have led to continued maintenance of a pre-eminent position in the U.S. agriculture market. Not only should this performance result in improved sales but should also translate into improved pricing. Restructuring actions, cost reductions, and increased focus on asset efficiency have led to operational improvements that, along with the company's operating leverage, provide substantial upside potential upon any improvement in the agricultural market. Performance in Europe, based upon a large number of new product offerings, has been particularly strong, and represents a key area of potential growth for the future.

Performance in the other equipment business lines has improved although it has not yet reached normal levels. Deere's construction equipment segment, although improving, continues to be weak. This is based principally upon weak economic conditions, severe price competition, and certain low return product lines. Segment performance has improved in first half 2003, as the division has generated an operating profit (before allocation of interest, currency gains, and certain other expenses) of $52 million versus a loss of $88 million in the year ago period. This is based principally upon a 22% increase in revenue (from $1.0 billion to $1.2 billion) and upon continued cost cutting. Commercial and Consumer Equipment improved from a profit $37 million in the first half of 2002 to a profit $132 million in the first half of 2003 (before allocation of interest, currency gains, and certain other expenses). This is based upon both effective cost cutting (to include the elimination of Homelite), but more importantly a strong new product introduction in the lawn tractor market. This new product offering, made in conjunction with the Home Depot, has been quite successful in improving both the visibility and profitability of this segment. Revenue has increased from $1.2 billion in first half 2002 to $1.5 billion in first half 2003.

Outside of the equipment operations Deere's performance remains strong with JDCC having evolved into both a source of consistent earnings and a counterbalance to Deere's otherwise cyclical businesses. Due to the close operating relationship governed by a formal operating agreement and importance to the parent, JDCC ratings are directly linked with the parent. Rating concerns for JDCC center on the cyclical nature of Deere's business and increased debt levels, heightened competition impacting lending margins, growth trends in the non-captive finance businesses, and international expansion diverting management's focus.

JDCC's credit metrics remain sound as profitability, asset quality, and financial leverage remain reasonable. JDCC's net income continues to rise and totaled $129.8 million for the six months ended April 30, 2003 up from $114.5 million in the comparable period in 2002. Operating results were driven by a 63% decline in provision for credit losses to $32.8 million offset by a decline in gain on sale revenue to $14.3 million for the six months ended April 30,2003 versus $71.6 million for the comparable period in 2002. Recent asset quality performance has returned to historical levels as annualized provisions to average receivables declined to 0.62% for the six months ended April 30, 2003 from 2.48% for the comparable period in 2002.

Liquidity remains strong at the equipment operations, with cash holdings of approximately $3.1 billion as of April 30, 2003, versus total debt of approximately $3.4 billion. The large cash portfolio has resulted from a strong overall focus on cash generation based upon working capital improvements, the sale of wholesale receivables to JDCC, a reduction in CAPEX resulting from the completion of significant investment in new products, and improved profitability. This is despite a substantial pension issue that which included a $475 million pension contribution. Although Deere's pension/OPEB issue remains material despite this contribution, Fitch's anticipates that Deere will contribute less in future years and that future funding levels will be approximately $300 million a year going forward. Fitch further anticipates that this will be met out of operating cash flow.