UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 31, 2003

Commission file no: 1-6458

JOHN DEERE CAPITAL CORPORATION

Delaware
(State of incorporation)

36-2386361
(IRS employer identification no.)

1 East First Street, Suite 600
Reno, Nevada 89501
(Address of principal executive offices)

Telephone Number: (775) 786-5527

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes

  x  

No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

Yes

No

  x  

     At January 31, 2003, 2,500 shares of common stock, without par value, of the registrant were outstanding, all of which were owned by John Deere Credit Company, a wholly-owned subsidiary of Deere & Company.

     The registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with certain reduced disclosures as permitted by those instructions.

Page 1 of 22 Pages
Index to Exhibits: Page 20

PART I.  FINANCIAL INFORMATION

Item 1.     Financial Statements.

John Deere Capital Corporation and Subsidiaries

Statements of Consolidated Income and Retained Earnings

For the Three Months Ended January 31, 2003 and 2002

(Unaudited)

(in millions)

2003

2002

Revenues

Finance income earned on retail notes

$

97.8

$

102.7

Lease revenues

90.9

110.1

Revolving charge account income

31.8

29.3

Finance income earned on wholesale receivables

52.0

50.6

Operating loan income

7.2

6.4

Securitization and servicing fee income

14.3

9.6

Net gain on receivables and leases sold

6.4

29.8

Interest income from short-term investments

3.2

2.8

Other income

6.0

7.6

     Total revenues

309.6

348.9

Expenses

Interest expense

86.7

97.6

Operating expenses:

Administrative and operating expenses

47.5

46.4

Provision for credit losses

12.9

20.3

Fees paid to John Deere

8.1

5.4

Depreciation of equipment on operating leases

58.5

67.2

     Total operating expenses

127.0

139.3

     Total expenses

213.7

236.9

Income of consolidated group before income taxes

95.9

112.0

Provision for income taxes

33.7

39.2

Income of consolidated group

62.2

72.8

Equity in income (loss) of unconsolidated affiliates

0.1

(0.9

)

Net income

62.3

71.9

Cash dividends declared

(140.0

)

Retained earnings at beginning of period

1,043.9

1,163.3

Retained earnings at end of period

$

1,106.2

$

1,095.2

See Notes to Interim Financial Statements.

John Deere Capital Corporation and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

(in millions)

January 31, 2003

October 31,
2002

January 31,
2002

Assets

Cash and cash equivalents

$

335.7

$

147.8

$

425.1

Receivables

Retail notes

5,423.8

5,311.7

4,323.2

Revolving charge accounts

750.2

896.0

678.7

Operating loans

574.7

561.2

472.8

Wholesale receivables

3,268.3

2,942.2

2,757.0

Financing leases

450.6

467.5

465.3

Total receivables

10,467.6

10,178.6

8,697.0

Allowance for credit losses

(122.4

)

(118.3

)

(101.1

)

Total receivables - net

10,345.2

10,060.3

8,595.9

Notes receivable - unconsolidated affiliates

267.7

259.9

297.2

Notes receivable - John Deere

23.4

320.2

Other receivables

115.5

96.9

140.5

Equipment on operating leases - net

1,077.9

1,180.0

1,382.3

Investment in unconsolidated affiliates

2.5

7.1

5.3

Other assets

419.7

350.4

206.4

Total Assets

$

12,587.6

$

12,102.4

$

11,372.9

Liabilities and Stockholder's Equity

Short-term borrowings:

Commercial paper

$

1,387.1

$

1,422.0

$

2,430.9

Other notes payable

37.7

37.5

27.6

John Deere

654.0

Current maturities of long-term borrowings

1,779.1

2,158.6

2,693.0

Total short-term borrowings

3,203.9

4,272.1

5,151.5

Accounts payable and accrued liabilities

Accrued interest on debt

91.0

52.3

54.2

Other payables

426.9

446.3

508.5

Total accounts payable and accrued liabilities

517.9

498.6

562.7

Deposits withheld from dealers and merchants

138.8

138.4

132.0

Long-term borrowings:

Senior debt

6,699.3

5,231.3

3,521.9

Subordinated debt

150.0

150.0

150.0

     Total long-term borrowings

6,849.3

5,381.3

3,671.9

     Total liabilities

10,709.9

10,290.4

9,518.1

Stockholder's equity:

Common stock, without par value (issued and outstanding - 2,500 shares    owned by John Deere Credit Company)

812.8

812.8

812.8

Retained earnings

1,106.2

1,043.9

1,095.2

Cumulative translation adjustment

1.5

(2.2

)

(8.2

)

Unrealized loss on derivatives

(47.1

)

(44.1

)

(46.6

)

Unrealized gain on investments

4.3

1.6

1.6

     Total accumulated other comprehensive income (loss)

(41.3

)

(44.7

)

(53.2

)

     Total stockholder's equity

1,877.7

1,812.0

1,854.8

Total Liabilities and Stockholder's Equity

$

12,587.6

$

12,102.4

$

11,372.9

See Notes to Interim Financial Statements.

John Deere Capital Corporation and Subsidiaries

Statements of Consolidated Cash Flows

For the Three Months Ended January 31, 2003 and 2002

(Unaudited)

(in millions)

2003

2002

Cash Flows from Operating Activities:

   Net income

$

62.3

$

71.9

     Adjustments to reconcile net income to net cash

          provided by operating activities:

        Provision for credit losses

12.9

20.3

        Provision for depreciation and amortization

59.9

68.6

      Provision for deferred income taxes

(0.4

)

1.3

        Undistributed earnings of unconsolidated affiliates

(0.1

)

0.9

        Other

(35.2

)

(116.5

)

          Net cash provided by operating activities

99.4

46.5

Cash Flows from Investing Activities:

   Cost of receivables acquired

(3,911.2

)

(3,158.5

)

   Collections of receivables

3,395.2

3,086.6

   Cost of operating leases acquired

(41.4

)

(67.9

)

   Proceeds from sales of equipment on operating leases

90.6

108.4

   Change in notes receivable - unconsolidated affiliates

(7.8

)

16.7

   Proceeds from sales of receivables

292.0

1,702.8

   Acquisition of businesses

(2.3

)

   Other

8.1

126.4

           Net cash provided by (used for) investing activities

(174.5

)

1,812.2

Cash Flows from Financing Activities:

   Change in commercial paper

(52.6

)

59.4

   Change in other notes payable

2.9

3.4

   Change in payable with John Deere

(667.6

)

(1,874.9

)

   Proceeds from issuance of long-term borrowings

1,825.0

691.3

   Principal payments on long-term borrowings

(850.0

)

(675.0

)

   Dividends paid

(140.0

)

          Net cash provided by (used for) financing activities

257.7

(1,935.8

)

Effect of exchange rate changes on cash

5.3

Net increase (decrease) in cash and cash equivalents

187.9

(77.1

)

Cash and cash equivalents at beginning of period

147.8

502.2

Cash and cash equivalents at end of period

$

335.7

$

425.1

See Notes to Interim Financial Statements.

John Deere Capital Corporation and Subsidiaries

Notes to Interim Financial Statements

(Unaudited)

(1)

          The consolidated financial statements of John Deere Capital Corporation (Capital Corporation) and its subsidiaries (collectively called the Company) have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted as permitted by such rules and regulations. All adjustments, consisting of normal recurring adjustments, have been included. Management believes that the disclosures are adequate to present fairly the financial position, results of operations and cash flows at the dates and for the periods presented. It is suggested that these interim financial statements be read in conjunction with the financial statements and the notes thereto inc luded in the Company's latest annual report on Form 10-K. Results for interim periods are not necessarily indicative of those to be expected for the year.

          The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and related disclosures. Actual results could differ from those estimates.

        Certain amounts for prior years have been reclassified to conform with 2003 financial statement presentation.

(2)

           The Company provides and administers financing for retail purchases of new equipment manufactured by Deere & Company's agricultural equipment, commercial and consumer equipment, and construction and forestry divisions and used equipment taken in trade for this equipment. The Company purchases retail installment sales and loan contracts (retail notes) from Deere & Company and its wholly-owned subsidiaries (collectively called John Deere). John Deere acquires these retail notes through John Deere retail dealers. The Company also purchases and finances a limited amount of non-Deere retail notes and continues to service a small portfolio of recreational products and other retail notes. In addition, the Company leases John Deere equipment and a limited amount of non-Deere equipment to retail customers (financing and operating leases). The Company also finances and services revolving charge accounts, in most c ases acquired from and offered through merchants in the agricultural, commercial and consumer, and construction and forestry markets (revolving charge accounts). Further, the Company finances and services operating loans, in most cases acquired from and offered through farm input providers, and provides insured international export financing generally involving John Deere products (operating loans). The Company also provides wholesale financing for inventories of John Deere engines and John Deere agricultural, commercial and consumer and construction and forestry equipment owned by dealers of those products (wholesale receivables). In addition, the Company purchases and administers a significant portion of the trade receivables originated by John Deere, which are included in wholesale receivables. Retail notes, revolving charge accounts, operating loans, financing leases and wholesale receivables are collectively called "Receivables." Receivables and operating leases are collectively called "Receivables and Leases."

(3)

          The Company's ratio of earnings before fixed charges to fixed charges was 2.05 to 1 for the first quarter of 2003 compared with 2.13 to 1 for the first quarter of 2002. "Earnings before fixed charges" consist of income before income taxes, the cumulative effect of changes in accounting and fixed charges. "Fixed charges" consist of interest on indebtedness, amortization of debt discount and expense, an estimated amount of rental expense under capitalized leases which is deemed to be representative of the interest factor and rental expense under operating leases.

(4)

      Comprehensive income, which includes all changes in the Company's equity during the period except for transactions with the stockholder, was as follows in millions of dollars:

Three Months Ended January 31,

2003

2002

Net Income

$

62.3

$

71.9

Other comprehensive income (loss), net of tax:

Other comprehensive income (loss), net of tax:

  Change in cumulative translation adjustment

3.7

(.3

)

  Unrealized holding gain and net gain on investments

2.7

1.6

  Net unrealized gain (loss) on derivatives

(3.0

)

15.0

Total other comprehensive income

$

65.7

$

88.2

(5)

          The Company has guarantees for certain recourse obligations on financing receivables that it has sold. If the receivables sold are not collected, the Company would be required to cover those losses up to the amount of its recourse obligation. At January 31, 2003, the Company's maximum amount of exposure to losses under these agreements was $204 million, which is net of accrued losses of $20 million related to these agreements. The Company may recover a portion of any required payments incurred under these agreements from the repossession of the equipment collateralizing the receivables. At January 31, 2003, the maximum remaining term of the receivables to which the recourse obligations relate was approximately six years.

          Additionally, at January 31, 2003, the Company had guaranteed $30 million of residual value related to property being used by the Company under an operating lease. The Company is obligated at the end of the lease term to pay to the lessor any reduction in market value of the leased property up to the guaranteed residual value. The Company recognizes the expense for this future estimated lease payment over the life of the operating lease and had accrued expenses of $3 million related to these agreements at January 31, 2003. The lease term expires in 2007.

(6)

          In the first quarter of 2003, the Company adopted FASB Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement No. 141 requires the purchase method of accounting for all business combinations and eliminates the pooling of interests method effective June 30, 2001. Statement No. 141 also specifies the types of acquired intangible assets to be included in goodwill and those to be reported separately from goodwill upon adoption of Statement No. 142. The Company does not have goodwill or goodwill amortization. This Statement did not have an effect on the Company's financial position or net income.

          In the first quarter of 2003, the Company also adopted the following accounting standards issued by the FASB. Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, requires the guarantor to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing a guarantee. The Interpretation also requires certain disclosures for guarantees, which are included in Note 5. Statement No. 143, Accounting for Asset Retirement Obligations, requires legal obligations associated with the retirement of long-lived assets to be recorded as increases in costs of the related assets. Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, retains the previous cash flow test for impairment and broadens the presentation of discontinued operations. Statement No. 146, Accounting for the Costs Associated with Exit or Disposal Activities, requires companies to recognize liabilities and costs associated with exit or disposal activities initiated after December 31, 2002 when they are incurred, rather than when management commits to a plan to exit an activity. The adoption of these standards did not have a material effect on the Company's financial position or net income.

          In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, which addresses the consolidation and related disclosures of these entities by business enterprises. These are entities in which either the equity investment at risk is not sufficient to absorb the probable losses without additional subordinated financial support from other parties, or the equity investors lack certain essential characteristics of control. As disclosed in Note 4 to the Company's 2002 Annual Report filed on Form 10-K, the Company holds retained interests in certain variable interest entities related to the securitization and sale of retail notes. Upon adoption of this Interpretation, the Company will not be required to consolidate any of these entities because it qualifies for the following exceptions. Under the Interpretation, most of the Company's retained interests are not deemed variable interests b ecause they are interests in a variable interest entity's specified assets with a fair value which is less than half the fair value of the entity's total assets. The Company's remaining retained interests are with qualified special purpose entities as defined by FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. At January 31, 2003, the assets of these entities related to the Company's securitizations and sales of retail notes totaled $2,456 million and the maximum exposure to losses from recourse obligations related to these entities was $203 million. This Interpretation is effective for variable interests created after January 31, 2003 and is effective for preexisting variable interests in the Company's fourth quarter of fiscal year 2003. The Company does not expect the adoption of this standard to have a material effect on the Company's financial position or net income.

(7)

          The Company recognized a pretax gain of $6.2 million on the retail notes securitized during the first three months of 2003. Key assumptions used to initially determine the fair value of the retained interests included a weighted-average maturity of 22 months, average annual prepayment rate of 20 percent, expected annual credit losses of 0.28 percent, and a discount rate on retained interests and subordinate tranches of 13 percent.

(8)

          In the fourth quarter of 2002, the Company began purchasing European wholesale receivables (trade receivables) from John Deere. These trade receivables arise from John Deere's sales of goods to dealers. Under the terms of the sales to dealers, interest is charged to dealers on outstanding balances, from the earlier of the date when goods are sold to retail customers by the dealer or the expiration of certain interest-free periods granted to the dealer at the time of the sale, until payment is received by the Company. The interest-free periods are determined based on the type of equipment sold and the time of year of the sale. John Deere compensates the Company for the carrying costs related to these interest-free periods.

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations.

Results of Operations

          Net income was $62.3 million for the first quarter of 2003, compared with $71.9 million for the same period a year ago. The decrease was primarily due to lower gains resulting from a reduced volume of retail-notes sold and higher administrative expenses related to growth in the portfolio. Partially offsetting these factors was a lower provision for credit losses. Last year's results were negatively affected by after-tax losses of $6 million in Argentina related to the peso devaluation.

          Revenues totaled $309.6 million for the first quarter of 2003, compared to $348.9 million for the same period a year ago. Revenues decreased primarily due to the reduction in the net gain on Receivables and Leases sold. Finance income earned on retail notes totaled $97.8 million for the first three months of 2003, compared to $102.7 million for the same period in 2002. This decrease was primarily due to declining interest rates earned on the average retail note portfolio balance. Lease revenues decreased $19.2 million, to $90.9 million in the first three months of 2003, from $110.1 million in the first three months of 2002 due to athe lower average amount of equipment on operating leases. Finance income earned on wholesale receivables increased $1.4 million, to $52.0 million for the first three months of 2003, from $50.6 million in the first three months of 2002. This increase was primarily due to a seven percent incr ease in the average balance of wholesale receivables. Revolving charge account income was $31.8 million for the first three months of 2003, compared to $29.3 million during the same period last year. This increase was primarily due to a three percent increase in the average balance of revolving charge accounts. Operating loan income increased $.8 million to $7.2 million in the first three months of 2003, from $6.4 million in the first three months of 2002. Revenues earned from Deere & Company totaled $81.1 million for the first quarter of 2003, respectively, compared to $80.9 million for the same period a year ago.

          The net gain on Receivables sold, including adjustments to prior sales, totaled $6.4 million for the first quarter of 2003, compared to $29.8 million for the same period a year ago. The decrease was primarily due to significantly lower sales of agricultural retail notes of approximately $284 million total principal value during the first three months of 2003, compared to the sale of agricultural and construction and forestry retail notes of approximately $1,750 million total principal value during the first three months of 2002. Additional sales of Receivables and Leases are expected to be made in the future.

          Interest expense totaled $86.7 million for the first quarter of 2003, compared to $97.6 million for the same period in 2002. This decrease was due to lower average borrowing rates, partially offset by higher average debt balances.

          Administrative and operating expenses were $47.5 million in the first quarter of 2003, compared with $46.4 million for the same period in 2002. This increase was primarily due to higher costs associated with administering a larger Receivable and Lease portfolio in the first quarter of 2003. Further, last year's results were negatively affected by the Argentina peso devaluation.

          Depreciation of equipment on operating leases was $58.5 million in the first quarter of 2003, compared to $67.2 million for the same period in 2002. The decrease was primarily the result of the lower average amount of equipment on operating leases, partially offset by lower residual values on newly originated operating leases. Interest and support fees paid to John Deere were $8.1 million in the first quarter of 2003, compared with $5.4 million for the same period in 2002. The increase was primarily due to the increased average borrowings from Deere & Company in the first quarter of 2003.

          During the first quarter of 2003, the provision for credit losses totaled $12.9 million, compared with $20.3 million in the same period last year. The decrease was primarily due to decreased provisions taken on John Deere equipment retail notes and decreased write-offs on John Deere construction equipment financing leases. The annualized provision for credit losses, as a percentage of the total average balance of Receivables financed, was .51 percent for the first quarter of 2003, compared with .87 percent for the same period last year.

Receivable and Lease acquisition volumes were as follows (in millions of dollars):

Three Months

Ended January 31,

2003

2002

$ Change

% Change

Retail notes:

  Agricultural equipment

$

730

$

883

$

(153

)

(17

)%

  Construction and forestry equipment

160

206

(46

)

(22

)

  Commercial and consumer equipment

64

62

2

3

     Total

954

1,151

(197

)

(17

)

Revolving charge accounts

468

404

64

16

Operating loans

422

262

160

61

Wholesale receivables

2,041

1,309

732

56

Financing leases

26

32

(6

)

(19

)

Equipment on operating leases

42

68

(26

)

(38

)

     Total

$

3,953

$

3,226

$

727

23

%

          Agricultural and construction and forestry volumes decreased in the first quarter when compared to the same period last year, primarily due to less aggressive finance programs offered in the first quarter of 2003. Revolving charge account volumes increased in the first quarter of 2003, when compared to last year, primarily as a result of incentive programs offered. Operating loan volumes increased in the first quarter, when compared to the same period last year, primarily due to improved market coverage. Wholesale receivable volumes increased when compared to last year, primarily as a result of the Company purchasing European wholesale receivables (trade receivables) from John Deere beginning in the fourth quarter of 2002, as described in Note 8 to the Interim Financial Statements.

          Total Receivables and Leases held were as follows (in millions of dollars):

January 31,

October 31,

January 31,

2003

2002

2002

Retail notes:

  Agricultural equipment

$

3,425

$

3,305

$

2,619

  Construction and forestry equipment

1,207

1,198

1,003

  Commercial and consumer equipment

720

730

599

  Recreational products

72

79

102

     Total

5,424

5,312

4,323

Revolving charge accounts

750

896

679

Operating loans

575

561

473

Wholesale receivables

3,268

2,942

2,757

Financing leases

451

468

465

Equipment on operating leases

1,078

1,180

1,382

     Total

$

11,546

$

11,359

$

10,079

          Receivables and Leases administered by the Company were as follows (in millions of dollars):

January 31,

October 31,

January 31,

2003

2002

2002

Receivables and Leases administered:

   Owned by the Company

$

11,546

$

11,359

$

10,079

   Sold and serviced - with limited recourse*

2,261

2,482

2,686

   Sold and serviced - without recourse**

48

51

66

     Total Receivables and Leases administered

$

13,855

$