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 July 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 July 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 18

PART I.  FINANCIAL INFORMATION

Item 1.     Financial Statements.

John Deere Capital Corporation and Subsidiaries

Statements of Consolidated Income and Retained Earnings

(Unaudited)

(in millions)

Three Months Ended
July 31,

Nine Months Ended
July 31,

2003

2002

2003

2002

Revenues

Finance income earned on retail notes

$

105.8

$

98.9

$

306.0

$

302.6

Lease revenues

79.2

100.6

256.1

312.6

Revolving charge account income

40.6

35.9

106.8

97.6

Finance income earned on wholesale receivables

64.3

56.9

180.4

161.8

Operating loan income

7.9

6.0

23.6

18.8

Securitization and servicing fee income

11.5

11.7

36.9

35.0

Net gain on receivables and leases sold

23.8

4.7

38.1

76.3

Interest income from short-term investments

4.8

2.6

11.1

8.0

Other income

5.1

5.3

20.1

14.9

     Total revenues

343.0

322.6

979.1

1,027.6

Expenses

Interest expense

93.4

92.9

274.7

278.9

Operating expenses:

   Administrative and operating expenses

50.3

48.7

146.0

155.2

   Provision for credit losses

22.7

18.9

55.5

108.3

   Fees paid to John Deere

6.6

4.6

21.0

15.3

   Depreciation of equipment on operating leases

47.3

64.1

160.1

192.1

     Total operating expenses

126.9

136.3

382.6

470.9

     Total expenses

220.3

229.2

657.3

749.8

Income of consolidated group before income taxes

122.7

93.4

321.8

277.8

Provision for income taxes

43.0

33.6

112.4

101.5

Income of consolidated group

79.7

59.8

209.4

176.3

Equity in income (loss) of unconsolidated affiliates

0.1

(.9

)

0.2

(2.9

)

Net income

79.8

58.9

209.6

173.4

Cash dividends declared

(40.0

)

(140.0

)

(90.0

)

(340.0

)

Retained earnings at beginning of period

1,123.7

1,077.8

1,043.9

1,163.3

Retained earnings at end of period

$

1,163.5

$

996.7

$

1,163.5

$

996.7

See Notes to Interim Financial Statements

John Deere Capital Corporation and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

(in millions)

July 31, 2003

October 31,
2002

July 31,
2002

Assets

Cash and cash equivalents

$

344.5

$

147.8

$

354.0

Receivables

Retail notes

5,497.8

5,311.7

4,734.4

Revolving charge accounts

1,116.5

896.0

863.9

Operating loans

619.3

561.2

553.5

Wholesale receivables

3,523.9

2,942.2

3,068.0

Financing leases

430.9

467.5

456.3

Total receivables

11,188.4

10,178.6

9,676.1

Allowance for credit losses

(126.5

)

(118.3

)

(162.1

)

Total receivables - net

11,061.9

10,060.3

9,514.0

Notes receivable - unconsolidated affiliates

300.3

259.9

271.1

Other receivables

141.8

96.9

101.3

Equipment on operating leases - net

908.8

1,180.0

1,232.9

Investment in unconsolidated affiliates

2.9

7.1

9.2

Other assets

377.1

350.4

378.9

Total Assets

$

13,137.3

$

12,102.4

$

11,861.4

Liabilities and Stockholder's Equity

Short-term borrowings:

Commercial paper

$

1,995.0

$

1,422.0

$

1,622.8

Other notes payable

15.0

37.5

35.3

John Deere

117.3

654.0

979.1

Current maturities of long-term borrowings

1,402.3

2,158.6

2,243.9

Total short-term borrowings

3,529.6

4,272.1

4,881.1

Accounts payable and accrued liabilities

Accrued interest on debt

89.4

52.3

86.6

Other payables

425.8

446.3

265.2

Total accounts payable and accrued liabilities

515.2

498.6

351.8

Deposits withheld from dealers and merchants

150.2

138.4

134.0

Long-term borrowings:

Senior debt

6,841.8

5,231.3

4,583.8

Subordinated debt

150.0

150.0

150.0

     Total long-term borrowings

6,991.8

5,381.3

4,733.8

     Total liabilities

11,186.8

10,290.4

10,100.7

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

1,163.5

1,043.9

996.7

Cumulative translation adjustment

8.9

(2.2

)

(4.9

)

Unrealized loss on derivatives

(35.6

)

(44.1

)

(45.9

)

Unrealized gain on investments

0.9

1.6

2.0

     Total accumulated other comprehensive income (loss)

(25.8

)

(44.7

)

(48.8

)

     Total stockholder's equity

1,950.5

1,812.0

1,760.7

Total Liabilities and Stockholder's Equity

$

13,137.3

$

12,102.4

$

11,861.4

See Notes to Interim Financial Statements.

John Deere Capital Corporation and Subsidiaries

Condensed Statements of Consolidated Cash Flows

For the Nine Months Ended July 31, 2003 and 2002

(Unaudited)

(in millions)

2003

2002

Cash Flows from Operating Activities:

   Net income

$

209.6

$

173.4

   Adjustments to reconcile net income to net cash

          provided by operating activities

166.6

159.0

          Net cash provided by operating activities

376.2

332.4

Cash Flows from Investing Activities:

   Cost of receivables acquired

(15,311.8

)

(12,293.1

)

   Collections of receivables

12,882.9

10,212.9

   Cost of operating leases acquired

(190.6

)

(260.1

)

   Proceeds from sales of equipment on operating leases

320.4

332.5

   Change in notes receivable - unconsolidated affiliates

(40.4

)

45.8

   Proceeds from sales of receivables

1,542.9

2,789.1

   Acquisition of businesses

(8.1

)

   Other

20.3

(100.9

)

           Net cash provided by (used for) investing activities

(776.3

)

718.1

Cash Flows from Financing Activities:

   Change in commercial paper

529.6

(769.1

)

   Change in other notes payable

(20.7

)

13.3

   Change in payable with John Deere

(564.5

)

(556.0

)

   Proceeds from issuance of long-term borrowings

2,620.1

2,565.8

   Principal payments on long-term borrowings

(1,887.7

)

(2,111.9

)

   Dividends paid

(90.0

)

(340.0

)

         Net cash provided by (used for) financing activities

586.8

(1,197.9

)

Effect of exchange rate changes on cash

10.0

(.8

)

Net increase (decrease) in cash and cash equivalents

196.7

(148.2

)

Cash and cash equivalents at beginning of period

147.8

502.2

Cash and cash equivalents at end of period

$

344.5

$

354.0

See Notes 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 included 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 cases 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 to fixed charges was 2.29 to 1 for the third quarter of 2003 compared with 1.99 to 1 for the third quarter of 2002. The ratio of earnings to fixed charges was 2.15 to 1 for the first nine months of 2003 and 1.98 to 1 for the first nine months of 2002. "Earnings" 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 that 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
July 31,

Nine Months Ended
July 31,

2003

2002

2003

2002

Net Income

$

79.8

$

58.9

$

209.6

$

173.4

Other comprehensive income (loss), net of tax:

  Change in cumulative translation adjustment

6.0

3.4

11.1

3.0

  Unrealized gain (loss) on derivatives

7.7

(9.9

)

8.5

15.7

  Unrealized gain (loss) on investments

(6.7

)

.1

(.7

)

2.0

Total comprehensive income

$

86.8

$

52.5

$

228.5

$

194.1

(5)

     The Company has guaranteed certain recourse obligations on financing receivables and leases 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 July 31, 2003, the Company's maximum amount of exposure to losses under these agreements was $218 million, which is net of accrued losses of $22 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 July 31, 2003, the maximum remaining term of the receivables to which the recourse obligations relate was approximately six years.

     Additionally, at July 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 $4 million related to these agreements at July 31, 2003. The lease term expires in 2007.

(6)

     In the first quarter of 2003, the Company adopted Financial Accounting Standards Board (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 because they are interests in a variable intere st entity's specified assets with a fair value that 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 July 31, 2003, the assets of these entities related to the Company's securitizations and sales of retail notes totaled approximately $2,865 million and the maximum exposure to losses from recourse obligations related to these entities was $218 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.

     In April 2003, the FASB issued Statement No. 149, Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities. This standard is primarily effective for transactions occurring after June 30, 2003. In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. The Statement affects the accounting for certain obligations that a reporting entity can or must settle by issuing its own equity shares. It is effective for financial instruments entered into or modified after May 31, 2003 and is effective for the Company's previously existing financial instruments in the fourth quarter of 2003. The Company does not expect the adoption of these standards to have a material effect on the Company's financial position or net income.

(7)

     The Company recognized a pretax gain of $38.5 million on the retail notes securitized during the first nine months of 2003. Key assumptions used to initially determine the fair value of the retained interests included a weighted-average remaining maturity of 21 months, average annual prepayment rate of 19 percent, expected annual credit losses of 0.41 percent, and a discount rate on retained interests and subordinate tranches of 13 percent.

(8)

     The Company purchases certain 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. In the fourth quarter of 2002, the Company began purchasing European trade receivables from John Deere.

Item 2.

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

Results of Operations

          Net income was $79.8 million for the third quarter and $209.6 million for the first nine months of 2003, compared with $58.9 million and $173.4 million, respectively, last year. The increase in quarterly net income was primarily due to higher gains resulting from an increased volume of retail note sales and growth in the portfolio. The year-to-date increase was primarily due to lower loan losses, growth in the portfolio and the absence of losses from Argentina related to the peso devaluation last year, partially offset by lower gains on the sales of retail notes and narrower financing spreads.

          Revenues totaled $343.0 million for the third quarter and $979.1 million for the first nine months of 2003, compared to $322.6 million and $1,027.6 million, respectively, last year. The year-to-date decrease was primarily due to lower lease revenues and the reduction in the net gain on Receivables and Leases sold. Finance income earned on retail notes totaled $306.0 million for the first nine months of 2003, compared to $302.6 million for the same period in 2002. This increase was primarily due to higher average retail note portfolio balances. Lease revenues decreased $56.5 million, to $256.1 million in the first nine months of 2003, from $312.6 million in the first nine months of 2002 primarily due to a lower average amount of equipment on operating leases. Finance income earned on wholesale receivables increased $18.6 million, to $180.4 million for the first nine months of 2003, from $161.8 million in the first nine months of 2002. This increase was primarily due to a 15 percent increase in the average balance of wholesale receivables, resulting mainly from 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. Revolving charge account income was $106.8 million for the first nine months of 2003, compared to $97.6 million during the same period last year. This increase was primarily due to a 13 percent increase in the average balance of revolving charge accounts. Operating loan income increased $4.8 million to $23.6 million in the first nine months of 2003, from $18.8 million in the first nine months of 2002. The increase was primarily due to a 23 percent increase in the average balance of operating loan accounts. Revenues earned from Deere & Company totaled $91.4 million for the third quarter and $271.3 million for the first nine months of 2003, compared to $92.3 and $300.0 million, respectively, for the same periods last year.

          The net gain on Receivables and Leases sold, including adjustments to prior sales, totaled $23.8 million and $38.1 million for the third quarter and first nine months of 2003, respectively, compared to $4.7 million and $76.3 million for the same periods a year ago. The year-to-date decrease was primarily due to significantly lower sales of agricultural and construction and forestry retail notes of approximately $1,517 million total principal value during the first nine months of 2003, compared to the sale of approximately $2,764 million total principal value during the first nine months of 2002. Additional sales of Receivables and Leases are expected to be made in the future.

          Other income totaled $5.1 million for the third quarter of 2003, and $20.1 million for the first nine months of 2003, compared to $5.3 million and $14.9 million for the same periods in 2002. The year-to-date increase was primarily due to increased gains on the sale of matured lease equipment inventories.

          Interest expense totaled $93.4 million for the third quarter of 2003, and $274.7 million for the first nine months of 2003, compared to $92.9 million and $278.9 million for the same periods in 2002. The year-to-date decrease was due to lower average borrowing rates, partially offset by higher average debt balances.

          Administrative and operating expenses were $50.3 million in the third quarter of 2003, and $146.0 million for the first nine months of 2003, compared with $48.7 million and $155.2 million for the same periods in 2002. The year-to-date decrease was primarily due to the absence this year of the $23 million loss related to the Argentine peso devaluation during the first nine months of 2002, partially offset by higher costs associated with administering a larger Receivable and Lease portfolio during the first nine months of 2003.

          During the third quarter and first nine months of 2003, the provision for credit losses totaled $22.7 million and $55.5 million, respectively, compared with $18.9 million and $108.3 million, in the same periods last year. The year-to-date decrease was primarily due to a $45 million loan-loss provision taken during the first nine months of 2002 related to two international trade finance customers, Allied Deals Inc. and one of its affiliates (collectively called "Allied Deals"). For additional information, see Note 3 to the Company's most recently filed annual report on Form 10-K. The annualized provision for credit losses, as a percentage of the total average balance of Receivables financed, was .81 percent for the third quarter of 2003 and .67 percent for the first nine months of 2003, compared with .80 percent and 1.54 percent for the same periods last year. The year-to-date decrease was primarily due to the default of Allied Deals in 2002.

          Fees paid to John Deere for interest and support were $6.6 million in the third quarter of 2003 and $21.0 million for the first nine months of 2003, compared with $4.6 million and $15.3 million for the same periods in 2002. Depreciation of equipment on operating leases was $47.3 million in the third quarter of 2003 and $160.1 million for the first nine months of 2003, compared to $64.1 million and $192.1 million for the same periods 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.

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

Three Months

Ended July 31,

2003

2002

$ Change

% Change

Retail notes:

  Agricultural equipment

$

810

$

662

$

148

22

%

  Construction and forestry equipment

253

176

77

44

  Commercial and consumer equipment

200

117

83

71

     Total

1,263

955

308

32

Revolving charge accounts

901

691

210

30

Operating loans

351

257

94

37

Wholesale receivables

3,313

2,835

478

17

Financing leases

44

51

(7

)

(14

)

Equipment on operating leases

72

86

(14

)

(16

)

     Total

$

5,944

$

4,875

$

1,069

22

%

Nine Months

Ended July 31,

2003

2002

$ Change

% Change

Retail notes:

  Agricultural equipment

$

2,417

$

2,398

$

19

1

%

  Construction and forestry equipment

606

663

(57

)

(9

)

  Commercial and consumer equipment

381

316

65

21

     Total

3,404

3,377

27

1

Revolving charge accounts

2,057

1,637

420

26

Operating loans

1,096

788

308

39

Wholesale receivables

8,649

6,364

2,285

36

Financing leases

105

127

(22

)

(17

)

Equipment on operating leases

191

260

(69

)

(27

)

     Total

$

15,502

$

12,553

$

2,949

23

%

          Agricultural retail note volumes increased during the third quarter of 2003, compared to last year, primarily due to increased farmer cash flow and more favorable crop conditions in the United States, and an increase in international receivables. Agricultural retail note volumes increased during the first nine months of 2003, compared to last year, primarily due to an increase in international receivables. Construction and forestry retail note volumes increased during the third quarter of 2003, compared to last year, primarily due to a large increase in dealer retail sales. Construction and forestry retail note volumes decreased during the first nine months of 2003, compared to last year, due to reduced non-Deere commercial equipment volumes.

Commercial and consumer retail note volumes increased during the third quarter and first nine months of 2003, when compared to last year, primarily due to the success of recently introduced Deere equipment products and increased market share. Revolving charge account volumes increased in the third quarter and first nine months of 2003, when compared to last year, primarily as a result of incentive programs offered and increased market coverage. Operating loan volumes increased in the third quarter and first nine months of 2003, when compared to last year, primarily due to additional sales personnel increasing market coverage. Wholesale receivable volumes increased during the third quarter and first nine months of 2003, 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. Financing and operating lease volu mes decreased during the third quarter and first nine months of 2003, when compared to last year, due to more attractive financing options available for retail note products.

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