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, 2004

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, 2004, 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 20 Pages
Index to Exhibits: Page 16

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, 2004 and 2003
(Unaudited)
(in millions)

2004

2003

Revenues

Finance income earned on retail notes

$

97.1

$

97.8

Lease revenues

69.7

90.9

Revolving charge account income

36.0

31.8

Finance income earned on wholesale receivables

51.3

52.0

Operating loan income

6.0

7.2

Securitization and servicing fee income

12.7

14.3

Net gain on receivables and leases sold

14.1

6.4

Interest income from short-term investments

5.7

3.2

Other income

6.6

6.0

     Total revenues

299.2

309.6

Expenses

Interest expense

81.7

86.7

Operating expenses:

Administrative and operating expenses

51.8

47.5

Provision for credit losses

7.6

12.9

Fees paid to John Deere

7.3

8.1

Depreciation of equipment on operating leases

44.8

58.5

     Total operating expenses

111.5

127.0

     Total expenses

193.2

213.7

Income of consolidated group before income taxes

106.0

95.9

Provision for income taxes

36.9

33.7

Income of consolidated group

69.1

62.2

Equity in income of unconsolidated affiliates

0.2

0.1

Net income

69.3

62.3

Cash dividends declared

( 65.0

)

Retained earnings at beginning of period

1,119.4

1,043.9

Retained earnings at end of period

$

1,123.7

$

1,106.2

John Deere Capital Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
(in millions)

January 31, 2004

October 31,
2003

January 31,
2003

Assets

Cash and cash equivalents

$

583.2

$

342.5

$

335.7

Receivables:

Retail notes

5,839.8

6,109.7

5,423.8

Revolving charge accounts

944.2

1,117.4

750.2

Operating loans

510.1

541.4

574.7

Wholesale receivables

3,042.8

2,904.6

3,268.3

Financing leases

408.0

427.3

450.6

Total receivables

10,744.9

11,100.4

10,467.6

Allowance for credit losses

(121.4

)

(123.8

)

(122.4

)

Total receivables - net

10,623.5

10,976.6

10,345.2

Notes receivable - unconsolidated affiliates

274.3

267.7

Notes receivable - John Deere

23.4

Other receivables

154.2

142.9

115.5

Equipment on operating leases - net

802.3

879.2

1,077.9

Investments in unconsolidated affiliates

3.4

3.0

2.5

Other assets

341.5

337.1

419.7

Total Assets

$

12,508.1

$

12,955.6

$

12,587.6

Liabilities and Stockholder's Equity

Short-term borrowings:

Commercial paper

$

1,237.7

$

1,691.8

$

1,387.1

Other notes payable

51.8

66.4

37.7

John Deere

369.5

166.0

Current maturities of long-term borrowings

1,111.7

1,592.2

1,779.1

Total short-term borrowings

2,770.7

3,516.4

3,203.9

Accounts payable and accrued liabilities:

Accrued interest on debt

92.0

65.1

91.0

Other payables

335.4

374.2

426.9

Total accounts payable and accrued liabilities

427.4

439.3

517.9

Deposits withheld from dealers and merchants

161.4

159.5

138.8

Long-term borrowings:

Senior debt

7,045.6

6,757.4

6,699.3

Subordinated debt

150.0

150.0

150.0

     Total long-term borrowings

7,195.6

6,907.4

6,849.3

     Total liabilities

10,555.1

11,022.6

10,709.9

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

1,123.7

1,119.4

1,106.2

Cumulative translation adjustment

22.8

13.5

1.5

Unrealized loss on derivatives

(17.7

)

(19.3

)

(47.1

)

Unrealized gain on investments

11.4

6.6

4.3

     Total accumulated other comprehensive income (loss)

16.5

.8

(41.3

)

     Total stockholder's equity

1,953.0

1,933.0

1,877.7

Total Liabilities and Stockholder's Equity

$

12,508.1

$

12,955.6

$

12,587.6

See Notes to Interim Financial Statements.

John Deere Capital Corporation and Subsidiaries
Condensed Statements of Consolidated Cash Flows
For the Three Months Ended January 31, 2004 and 2003
(Unaudited)
(in millions)

2004

2003

Cash Flows from Operating Activities:

   Net income

$

69.3

$

62.3

   Adjustments to reconcile net income to net cash

          provided by operating activities

53.3

37.1

          Net cash provided by operating activities

122.6

99.4

Cash Flows from Investing Activities:

   Cost of receivables acquired

(4,843.3

)

(3,911.2

)

   Collections of receivables

4,606.9

3,395.2

   Cost of operating leases acquired

(50.2

)

(41.4

)

   Proceeds from sales of equipment on operating leases

93.7

90.6

   Change in notes receivable - unconsolidated affiliates

274.3

(7.8

)

   Proceeds from sales of receivables

696.0

292.0

   Other

(3.9

)

8.1

           Net cash provided by (used for) investing activities

773.5

(174.5

)

Cash Flows from Financing Activities:

   Decrease in commercial paper

(488.6

)

(52.6

)

   Increase (decrease) in other notes payable

(17.0

)

2.9

   Increase (decrease) in payable with John Deere

203.4

(667.6

)

   Proceeds from issuance of long-term borrowings

231.5

1,825.0

   Principal payments on long-term borrowings

(527.5

)

(850.0

)

   Dividends paid

(65.0

)

          Net cash provided by (used for) financing activities

(663.2

)

257.7

Effect of exchange rate changes on cash

7.8

5.3

Net increase in cash and cash equivalents

240.7

187.9

Cash and cash equivalents at the beginning of period

342.5

147.8

Cash and cash equivalents at the end of period

$

583.2

$

335.7

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 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 2004 financial statement presentations.

(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 primarily 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 mer chants 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 offered through and acquired from farm input providers or through direct relationships with agricultural producers (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 2.27 to 1 for the first quarter of 2004, compared with 2.05 to 1 for the first quarter of 2003. "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 transactions with the stockholder, was as follows in millions of dollars:

Three Months Ended January 31,

2004

2003

Net Income

$

$

62.3

Other comprehensive income (loss), net of tax:

  Change in cumulative translation adjustment

9.3

3.7

  Unrealized gain on investments

4.8

2.7

  Unrealized gain (loss) on investments

1.6

(3.0

)

Total comprehensive income

$

85.0

$

65.7

(5)

     The Company has guaranteed certain recourse obligations on Receivables and Leases that it has sold. If the Receivables and Leases sold are not collected, the Company would be required to cover those losses up to the amount of its recourse obligation. At January 31, 2004, the maximum amount of exposure to losses under these agreements was $251 million, which is net of accrued losses of $19 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 and Leases. At January 31, 2004, the maximum remaining term of the Receivables and Leases guaranteed was approximately six years.

     The Company has also guaranteed $30 million of residual value related to property being used by the Company under an operating lease at January 31, 2004. 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 this agreement at January 31, 2004. The lease term expires in 2007.

(6)

     In December 2003, the Financial Accounting Standards Board (FASB) revised Interpretation (FIN) No. 46, Consolidation of Variable Interest Entities (as revised, the "Interpretation"), 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 investors with equity at risk lack certain essential characteristics of a controlling interest. Under the Interpretation, the Company must consolidate any variable interest entities (VIEs) in which the Company holds variable interests and is deemed the primary beneficiary. The effective date for adoption for new VIEs created after January 31, 2003 was immediate and had no effect. The effective date for VIEs that are also special purpose entities (SPEs) created prior to February 1, 2003 was the end of the first fiscal quarter of 2004 and had no effect on the Company's financial position or net income (see below). The effective date for VIEs that are not SPEs is the end of the second fiscal quarter of 2004 and is not expected to have an effect on the Company's financial position or net income.

     As disclosed in Note 4 to the Company's 2003 Annual Report filed on Form 10-K, the Company holds retained interests in certain SPEs related to the securitization and sale of retail notes. Under the Interpretation, most of the Company's retained interests are not deemed variable interests because they are interests in a VIE's specified assets with a fair value that is less than half the fair value of the VIE's total assets. The Company's remaining retained interests are with qualified special purpose entities (QSPEs) as defined by FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, which are exempt from consolidation. At January 31, 2004, the assets of these entities related to the Company's securitization and sale of retail notes totaled approximately $3,052 million and the maximum exposure to losses from recourse obligations related to theses entities was $249 million. The adoption of this standa rd did not require the consolidation of any of these entities.

(7)

     The Company recognized a pretax gain of $14.2 million on the retail notes securitized during the first three months of 2004. Key assumptions used to initially determine the fair value of the retained interests included a weighted-average remaining maturity of 20 months, average annual prepayment rate of 22 percent, expected annual credit losses of 0.31 percent, and a discount rate on retained interests and subordinate tranches of 13 percent.

(8)

     The Company participates in the Deere & Company salaried pension plan for employees in the U.S. and certain pension plans outside the U.S. These pension plans are defined benefit plans in which benefits are based primarily on years of service and employee compensation. Pension expense is actuarially determined based on the Company's employees included in the plan. The Company's pension expense amounted to $1.1  million in the first three months of 2004. The Company generally provides defined benefit health care and life insurance plans for retired employees in the U.S. through participation in Deere & Company's plans. Health care and life insurance benefits expense is actuarially determined based on the Company's employees included in the plans and amounted to $1.6 million during the first three months of 2004. Further disclosure for these plans is included in Deere & Company's Form 10-Q for the quarter ended January 31, 2004.

(9)

     In December 2003, John Deere acquired a majority interest in Nortrax, Inc., and it was consolidated with John Deere's financial statements. The Company's wholesale receivables from Nortrax, Inc., disclosed as "Notes Receivable - unconsolidated affiliates" on the financial statements, were settled in December 2003.

Item 2.

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

Results of Operations

            Net income was $69.3 million for the first quarter of 2004, compared with $62.3 million for the same period a year ago. The increase in quarterly net income was primarily due to higher gains from an increased volume of retail note sales, a lower provision for credit losses reflecting improved portfolio quality, and growth in the portfolio, partially offset by higher administrative costs..

            Revenues totaled $299.2 million for the first quarter of 2004, compared to $309.6 for the same period a year ago. The decrease was primarily due to lower lease revenues, partially offset by a higher net gain on Receivables and Leases sold. Finance income earned on retail notes totaled $97.1 million for the first three months of 2004, compared to $97.8 million for the same period in 2003. Lease revenues decreased $21.2 million, to $69.7 million in the first three months of 2004, from $90.9 million in the first three months of 2003 primarily due to a 26 percent decrease in the average amount of equipment on operating leases. Finance income earned on wholesale receivables totaled $51.3 million for the first three months of 2004, compared to $52.0 million in the first three months of 2003. Revenues earned on revolving charge accounts amounted to $36.0 million in the first three months of 2004, a 13 percent increase over revenues of $31.8 million during the same period last year. The increase was primarily due to growth of Farm Planä and John Deere Credit Revolving Plan receivables in the first three months of 2004 compared with the same period last year. Operating loan income decreased $1.2 million to $6.0 million in the first three months of 2004, from $7.2 million in the first three months of 2003. The decrease was primarily due to a 6 percent decrease in the average balance of operating loan accounts. Revenues earned from Deere & Company totaled $78.6 million for the first quarter of 2004, compared to $81.1 million for the same period last year.

            The net gain on Receivables and Leases sold, including adjustments to prior sales, totaled $14.1 million for the first quarter of 2004, compared to $6.4 million for the same period a year ago. The increase was primarily due to higher sales of agricultural retail notes of approximately $687 million total principal value during the first three months of 2004, compared to the sale of approximately $284 million total principal value during the first three months of 2003. Additional sales of Receivables and Leases are expected to be made in the future.

            Interest expense totaled $81.7 million for the first quarter of 2004, compared to $86.7 million for the same period in 2003. The decrease was due to lower average borrowing rates.

            Administrative and operating expenses were $51.8 million in the first quarter of 2004, compared with $47.5 million for the same period in 2003. The increase was primarily due to higher employment costs.

            During the first quarter of 2004, the provision for credit losses totaled $7.6 million, compared with $12.9 million in the same period last year. The decrease was primarily due to lower write-offs of John Deere construction equipment retail notes and revolving charge accounts. The annualized provision for credit losses, as a percentage of the total average balance of Receivables financed, was .27 percent for the first quarter of 2004, compared with .51 percent for the same period last year.

            Fees paid to John Deere for interest and support were $7.3 million in the first quarter of 2004, compared with $8.1 million for the same period in 2003. Depreciation of equipment on operating leases was $44.8 million in the first quarter of 2004, compared to $58.5 million for the same period in 2003. The decrease was primarily the result of the lower average amount of equipment on operating leases.

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

Three Months

Ended January 31,

2004

2003

$ Change

% Change

Retail notes:

  Agricultural equipment

$

806

$

730

$

76

10

%

  Construction and forestry equipment

243

160

83

52

  Commercial and consumer equipment

132

64

68

106

     Total

1,181

954

227

24

Revolving charge accounts

555

468

87

19

Operating loans

540

422

118

28

Wholesale receivables

2,535

2,041

494

24

Financing leases

33

26

7

27

Equipment on operating leases

50

42

8

19

     Total

$

4,894

$

3,953

$

941

24

%

            Retail note volumes increased during the first quarter of 2004, compared to last year, primarily due to increases in retail sales of John Deere agricultural, construction and forestry and commercial and consumer equipment. Revolving charge accounts and operating loan volumes increased in the first quarter of 2004, when compared to last year, primarily as a result of increased market coverage. Wholesale receivable volumes increased during the first quarter of 2004, when compared to last year, primarily due to increased shipments of Deere equipment as a result of increased retail sales activity.

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

January 31,

October 31,

January 31,

2004

2003

2003

Retail notes:

  Agricultural equipment

$

3,676

$

3,954

$

3,425

  Construction and forestry equipment

1,266

1,196

1,207

  Commercial and consumer equipment

851

909

720

  Recreational products

47

51

72

     Total

5,840

6,110

5,424

Revolving charge accounts

944

1,118

750

Operating loans

510

541

575

Wholesale receivables

3,043

2,905

3,268

Financing leases

408

427

451

Equipment on operating leases

802

879

1,078

     Total

$

11,547

$

11,980

$

11,546

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

January 31,

October 31,

January 31,

2004

2003

2003

Receivables and Leases administered:

   Owned by the Company

$

11,547

$

11,980

$

11,546

   Sold and serviced - with limited recourse*

2,810

2,559

2,261

   Sold and serviced - without recourse**

32

35

48

     Total Receivables and Leases administered

$

14,389

$

14,574

$

13,855

*

The Company's maximum exposure under all Receivable and Lease recourse provisions at January 31, 2004, October 31, 2003 and January 31, 2003 was $251 million, $221 million and $204 million, respectively. In addition, the Company has provided letters of credit for John Deere Credit Inc., the John Deere finance subsidiary in Canada, as part of two retail note sales. At January 31, 2004, October 31, 2003 and January 31, 2003, exposure under these agreements was approximately $11 million, $10 million and $7 million, respectively. The Company does not record the recourse obligations as liabilities as they are contingent liabilities that are not probable at this time. However, the probable loss on receivables that have been sold was accrued at the time of sale, and any subsequent necessary adjustments are made as part of ongoing reviews.

**

These receivables represent recreational product retail notes that the Company has sold but continues to administer for a fee.

            Total Receivable amounts 60 days or more past due in the table below represent the amount of all customer payments past due 60 days or more, by product, and as a percent of the respective receivables. They are as follows (in millions of dollars):

January 31,

October 31,

January 31,

2004

2003

2003

Dollars

Percent

Dollars

Percent

Dollars

Percent