Fitch Affs Rtgs Of Deere, John Deere Capital at 'A/ F1', Revises Outlook to Stable

Business Wire, Jan 29, 2004

Business Editors

CHICAGO--(BUSINESS WIRE)--Jan. 29, 2004

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 is revised to Stable from Negative, reflecting recent improving cash generation and industry conditions, and longer-term efficiency improvements in Deere's business model.

The ratings reflect Deere's strong market positions across its worldwide agricultural product lines, improved year-over-year performance in all major operating segments, continuing efforts to reduce costs and improve efficiency, Deere's continuing strong levels of liquidity, and the benefits to the company's credit profile provided by its ownership of JDCC. Rating concerns include uncertainty surrounding the magnitude, timing, and duration of the ongoing recovery and the ability of Deere to restore margins to previous levels especially when considering the ongoing costs associated with company provided pensions and health care.

With its strong fiscal 2003 operating performance (revenue up 9% for the Agricultural segment), Deere has confirmed its role as a leading global manufacturer of agricultural equipment. This stronger year comes after what had been a sustained multi-year downturn during which Deere managed to maintain/enhance its competitive position, through new product introductions (particularly in Europe), technological advances, and its strong dealer network. Margins have been positively impacted not only by cost reductions and improving pricing, but also an increased focus on asset efficiency.

This improved asset efficiency is beginning to lead to operational improvements that should continue to provide substantial upside as the equipment markets improve. Margins have been pressured by increasing post retirement costs, labor agreement ratification costs, and higher receivable financing costs. Going forward these negative cost headwinds should be somewhat mitigated by improved operating leverage, continuing cost reductions (including savings related to the new labor agreement) and a strong domestic farm environment. Health care inflation and its impact on operating profitability remain, however, a key concern.

Liquidity remains strong at the equipment operations, with cash holdings of approximately $4.3 billion as of October 31, 2003, versus total debt of approximately $3.3 billion (excluding the intra-company debt associated with the sales of receivables to JDCC). 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. These figures also follow a $432 million voluntary contribution to its pension funds and $313 million in OPEB contributions. Deere retains a large underfunded pension position that will continue to represent a large application of cash. Fitch anticipates that Deere will contribute less in future years and that funding levels will be approximately $300-400 million a year. Deere has more than sufficient cash and operating cashflow to address this issue for the foreseeable future.

Performance in the non-agricultural equipment business lines has improved dramatically although industry volumes are still in the rebounding stage. Deere's construction and forestry equipment segment, which generated substantial loses in 2001 and 2002 has improved dramatically, showing a $227 million (before allocation of interest, currency gains, and certain other expenses) year-over-year improvement in operating profit.

This was partially due to higher operating leverage based upon a 24% increase in sales, but also due to significant improvements in cost structure realized over the last several years as Deere has restructured the business. Going forward, the completion of the Nortrax acquisition in fiscal 2004 could offer Deere the opportunity to continue to improve the performance of this segment as it puts Deere in a position to further implement revenue and cost enhancing measures that it has applied effectively in other area.

The commercial and consumer equipment segment improved from an operating profit of $79 million in 2002 to a profit of $227 million in 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 reflects strong new product launches, especially in the Consumer Equipment segment with the launch of the Home Depot relationship. Revenue increased 19% from $2.7 billion in 2002 to $3.2 billion in 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, heightened competition impacting lending margins, growth trends in the non-captive finance businesses, and the potential for international expansion to divert management's focus.