Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-K
-----------------------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 2001
Commission file number 1-6458
JOHN DEERE CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-2386361
(State of incorporation) (IRS employer identification number)
1 East First Street, Suite 600
Reno, Nevada 89501 (775) 786-5527
(Address of principal executive offices) (Zip Code) (Telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
6% Debentures Due 2009 New York Stock Exchange
8-5/8% Subordinated Debentures Due 2019 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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 __
---
At January 1, 2002, 2,500 shares of common stock, without par value, of the
registrant were outstanding, all of which were owned by John Deere Credit
Company.
The registrant meets the conditions set forth in General Instruction I(1)(a) and
(b) of Form 10-K and is therefore filing this Form with certain reduced
disclosures as permitted by Instruction I(2).
================================================================================
PART I
------
Item 1. Business.
- ------- ---------
The Company
- -----------
John Deere Capital Corporation (Capital Corporation) and its
subsidiaries are collectively called the Company. John Deere Credit Company, a
wholly-owned finance holding subsidiary of Deere & Company, is the parent of the
Company. The Company conducts business in Argentina, Australia, France (through
a joint venture), Germany, Luxembourg, Mexico, New Zealand, the United Kingdom
and the United States.
The Company provides and administers financing for retail purchases of
new and used equipment manufactured by Deere & Company's agricultural equipment,
commercial and consumer equipment, and construction and forestry divisions. 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 certain agricultural,
commercial and consumer, and construction and forestry retail notes unrelated to
John Deere. In addition, the Company leases equipment to retail customers
(financing and operating leases). The Company also finances and services
revolving charge accounts and operating loans acquired from and offered through
merchants or farm input providers in the agricultural, construction and
forestry, and commercial and consumer markets as well as insured international
export financing products (revolving charge accounts and operating loans). The
Company also finances John Deere engines, and John Deere agricultural, John
Deere commercial and consumer, and John Deere construction and forestry
equipment owned by dealers of those products (wholesale receivables). In
addition, the Company purchases certain wholesale receivables (trade
receivables) from John Deere and administers those receivables. Retail notes,
revolving charge accounts, operating loans, financing leases and wholesale and
trade receivables are collectively called "Receivables". Receivables and
operating leases are collectively called "Receivables and Leases".
The Capital Corporation was incorporated under the laws of Delaware and
commenced operations in 1958. At January 1, 2002, the Company had 1,413
full-time and part-time employees.
Business of John Deere
- ----------------------
John Deere's operations are categorized into four major business
segments:
The agricultural equipment segment manufactures and distributes a full
line of farm equipment - including tractors; combines, cotton and
sugarcane harvesters; tillage, seeding and soil preparation machinery;
sprayers; hay and forage equipment; materials handling equipment; and
integrated agricultural management systems technology.
The commercial and consumer equipment segment manufactures and
distributes equipment for commercial and residential uses - including
small tractors for lawn, garden, commercial and utility purposes;
riding and walk-behind mowers; golf course equipment; snowblowers;
utility vehicles; landscape and irrigation equipment; and other outdoor
power products.
The construction and forestry segment manufactures and distributes a
broad range of machines used in construction, earthmoving, material
handling and timber harvesting - including backhoe loaders; crawler
dozers and loaders; four-wheel-drive loaders; excavators; motor
graders; articulated dump trucks; forklifts; landscape loaders;
skid-steer loaders; and log skidders, feller bunchers, loaders,
forwarders, harvesters and related attachments.
The products and services produced by the segments above and by the
special technologies operations, commonly referred to as the Equipment
Operations, are marketed primarily through independent retail dealer
networks and major retail outlets.
1
The credit operations segment includes the operations of the Company
(described herein), John Deere Credit Company, John Deere Credit Inc.
(Canada), Banco John Deere, S.A. (Brazil) and John Deere Credit Oy
(Finland), and primarily finances sales and leases by John Deere
dealers of new and used agricultural, commercial and consumer, and
construction and forestry equipment. In addition, it provides wholesale
financing to dealers of the foregoing equipment, provides operating
loans and finances retail revolving charge accounts.
John Deere had a net loss of $64 million, or $0.27 per share diluted
($0.27 per share basic), for 2001. Affecting this year's results were charges of
$217 million, or $0.91 per share, related to the early-retirement programs, the
decision to exit the hand-held consumer products business and the restructuring
of certain construction and forestry manufacturing and marketing operations.
Excluding these special items, income for the year was $153 million, or $0.64
per share diluted compared with net income of $486 million, or $2.06 per share
diluted ($2.07 per share basic), last year. In addition, results for the year
were negatively affected by weakness in John Deere's major markets and by deep
production cutbacks, particularly during the fourth quarter, aimed at achieving
more efficient asset levels. John Deere's net sales and revenues increased 1
percent to $13,293 million in 2001, compared with $13,137 million in 2000. Net
sales of the equipment operations decreased 1 percent in 2001 to $11,077 million
from $11,169 million last year. Sales decreased primarily due to lower shipments
of commercial and consumer equipment and construction and forestry equipment, as
well as the impact of a stronger U.S. dollar. Partially offsetting these factors
were higher sales of agricultural equipment and the inclusion of recent
acquisitions. Compared with last year, overseas net sales increased by 2 percent
for this year, primarily due to higher agricultural equipment sales and the
full-year inclusion of Timberjack, acquired in April 2000. Partially offsetting
these factors was the impact of a stronger U.S. dollar and lower sales of
commercial and consumer and construction and forestry equipment (excluding
Timberjack).
Outlook for John Deere
- ----------------------
In these economically uncertain times, John Deere is reinforcing its
efforts to maintain lean asset levels and to make a substantial improvement in
its cost structure. At the same time, John Deere is continuing to move ahead
aggressively with the introduction of advanced new products and technologies,
helping to set the stage for a strong recovery in John Deere's results when key
markets resume their growth.
Based on the market conditions outlined below, net sales are currently
forecast to be down 3 to 7 percent for the first quarter of 2002, compared to
the same period in 2001. Operating profit (income before interest expense,
foreign exchange gains and losses, income taxes and corporate expenses) in the
Equipment Operations will be under significant pressure due in part to reduced
production levels and is expected to range from a negative 7 percent to negative
9 percent of sales. For the full year, equipment sales are expected to be flat
to up slightly from 2001 levels with operating profit margins projected to be
from a positive 1 percent to negative 1 percent of sales. The projected annual
operating margin includes an anticipated two-percentage-point reduction
associated with the carrying costs of the equipment trade receivables sold to
the credit operations. Consolidated results for Deere & Company, however, will
not be affected by such sales.
Agricultural Equipment. Despite a continuation of relatively low grain
prices, retail sales of farm machinery experienced growth in 2001, particularly
in the area of smaller equipment. Farm income was helped by strength in the
livestock and dairy sectors and by a continuation of substantial government
payments. Farm fundamentals are not expected to change significantly in 2002,
although the global supply and demand situation for key commodities should keep
prices in check and prevent an improvement in United States grain exports. In
this environment, John Deere expects overall industry retail sales of farm
equipment in the United States and Canada to be flat to down approximately 5
percent in 2002.
In Europe, the farm outlook is slightly better due to somewhat
stronger livestock and dairy markets as well as generally higher crop prices
than in the United States and Canada. At the same time, the concerns over foot
and mouth disease that affected European farm machinery sales in 2001 have
largely abated. As a result, industry retail sales in Europe are expected to be
flat to up slightly for 2002. John Deere is targeting improved sales in Europe
this year due in large part to a record number of new products being introduced
to the
2
region's agricultural markets. In Latin America, farm machinery sales are
expected to be slightly higher next year due mainly to improvement in Mexico and
further growth in Brazil.
Last year, John Deere factories produced large tractors and combines at
high rates in the first quarter. However, in the interest of operating with
lower asset levels, John Deere is making substantial production cutbacks of
these products in the first quarter of fiscal 2002. In all, production tonnage
at John Deere's agricultural equipment factories in the U.S./Canada is expected
to be down about 20 percent in relation to the first quarter of last year.
Commercial and Consumer Equipment. Excluding the impact of acquisitions
and divestitures, shipments of John Deere commercial and consumer equipment are
projected to be down 5 to 10 percent in 2002. The expected decline will result
from low levels of consumer confidence and a weakening economy, coupled with
further steps to reduce asset levels. Segment results are expected to benefit
from a number of new and innovative products that are coming to market during
the year as well as from growth in new businesses.
Construction and Forestry. With economic weakness expected to spread,
residential and non-residential construction activity is projected to be
significantly lower in 2002. At the same time, purchases by independent rental
companies are expected to experience further severe weakness leaving them as
much as 90 percent below their year-2000 highs. Global sales of forestry
products are forecast to continue running lower than year earlier levels in
response to soft economic conditions. In light of these circumstances, John
Deere believes that industry retail sales of construction and forestry equipment
for 2002 will be 10 to 15 percent lower than the prior year and that pricing
will remain under pressure. Production tonnage at John Deere's construction and
forestry equipment factories is expected to be about 36 percent lower than prior
year levels in the first quarter. Despite continued weakness in core markets,
John Deere's construction and forestry operations are expected to benefit from
aggressive restructuring actions and new products.
Credit Operations. Credit is expected to benefit from continued growth
in the receivable portfolio and additional retail sales. The net income for 2002
will benefit by about $80 million from servicing fees associated with last
year's transfer and the ongoing purchase of trade receivables from the Equipment
Operations.
Relationships of the Company with John Deere
- --------------------------------------------
The results of operations of the Company are affected by its
relationships with John Deere, including among other items, the terms on which
the Company acquires Receivables and Leases and borrows funds from John Deere,
the reimbursement for interest waiver and low-rate finance programs from John
Deere and the payment to John Deere for various expenses applicable to the
Company's operations. In addition, the Company and John Deere have joint access
to all of the Company's lines of credit.
The Company's acquisition volume of Receivables and Leases is largely
dependent upon the level of retail sales and leases of John Deere products. The
level of John Deere retail sales and leases is responsive to a variety of
economic, financial, climatic, legislative and other factors that influence
demand for its products. All of the Company's businesses are affected by changes
in interest rates, demand for credit and competition.
The Company bears all of the credit risk (net of recovery from
withholdings from certain John Deere dealers, and Farm Plan(TM) and PowerPlan(R)
merchants) associated with its holding of Receivables and Leases, and performs
all servicing and collection functions. John Deere is reimbursed for staff and
other administrative services at estimated cost, and for credit lines provided
to the Company based on utilization of those lines.
The terms and the basis on which the Company acquires retail notes and
certain wholesale receivables from John Deere are governed by agreements with
John Deere, terminable by either John Deere or the Company on 30 days notice. As
provided in these agreements, the Company agrees to the terms and conditions for
purchasing the notes from John Deere. Under these agreements, John Deere is not
obligated to sell notes to the Company, and the Company is obligated to purchase
notes from John Deere only if the notes comply with the terms and conditions set
by the Company.
3
The basis on which John Deere acquires retail notes and wholesale
receivables from the dealers is governed by agreements with the John Deere
dealers, terminable at will by either the dealers or John Deere. In acquiring
these notes from dealers, the terms and conditions, as set forth in agreements
with the dealers, conform with the terms and conditions adopted by the Company
in determining the acceptability of retail and certain wholesale notes to be
purchased from John Deere. The dealers are not obligated to sell these notes to
John Deere and John Deere is not obligated to accept these notes from the
dealers. In practice, retail and wholesale notes are acquired from dealers only
if the terms of these notes and the creditworthiness of the customers are
acceptable to the Company for purchase of these notes from John Deere. The
Company acts on behalf of both itself and John Deere in determining the
acceptability of the notes and in acquiring acceptable notes from dealers.
The basis on which the Company enters into leases with retail customers
through John Deere dealers is governed by agreements between dealers and the
Company. Leases are accepted based on the terms and conditions, the lessees'
creditworthiness, the anticipated residual values of the equipment and the
intended uses of the equipment.
Deere & Company has an agreement with the Company to make income
maintenance payments to the Company such that its consolidated ratio of earnings
before fixed charges to fixed charges is not less than 1.05 to 1 for any fiscal
quarter. For 2001 and 2000, the Company's ratios were 1.53 to 1 and 1.48 to 1,
respectively, and never less than 1.48 to 1 and 1.46 to 1 for any fiscal quarter
of 2001 and 2000, respectively. Deere & Company also has committed to continue
to own at least 51 percent of the voting shares of capital stock of the Company
and to maintain the Company's consolidated tangible net worth at not less than
$50 million. These arrangements are not intended to make Deere & Company
responsible for the payment of any indebtedness, obligation or liability of the
Company.
In October 2001, the Company purchased $2.2 billion of wholesale
receivables (trade receivables) from John Deere. In the future, it is expected
that a significant portion of newly originated wholesale receivables will be
purchased from John Deere on an ongoing basis. 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. Dealers cannot cancel
purchases after goods are shipped and are responsible for payment even if the
equipment is not sold to retail customers. The interest-free periods are
determined based on the type of equipment sold and the time of year of the sale.
These periods range from one to 12 months for agricultural tractors, from one to
five months for construction and forestry equipment, and from two to 24 months
for most other equipment. Interest-free periods may not be extended. Interest
charged may not be forgiven and interest rates are set based on market factors.
John Deere will compensate the Company for the carrying costs related to these
interest-free periods.
Description of Receivables and Leases
- -------------------------------------
Receivables and Leases arise mainly from retail sales and leases of
John Deere products and used equipment accepted in trade for them, and from
retail sales of equipment of unrelated manufacturers. Receivables and Leases
also include revolving charge account receivables, operating loans and wholesale
receivables. The majority of these Receivables and Leases are derived from
retail sales and leases of agricultural equipment, commercial and consumer
equipment, and construction and forestry equipment sold by John Deere dealers.
Through Deere Credit, Inc., the Company holds retail notes, leases and
revolving charge receivables related to mining, transportation and other
commercial equipment.
On December 24, 2000, a federal charter was issued to FPC Financial,
f.s.b. (Thrift), a wholly-owned subsidiary of the Company, by the Office of
Thrift Supervision. The Thrift is headquartered in Madison, Wisconsin and offers
revolving charge products such as John Deere Credit Revolving Plan, Farm
Plan(TM), and PowerPlan(R) on a nationwide basis, and provides retail financing
for manufactured housing. John Deere Credit Revolving Plan is used primarily by
retail customers of John Deere dealers to finance purchases of commercial and
4
consumer equipment. Through its Farm Plan(TM) product, the Thrift finances
revolving charge accounts offered by approximately 5,000 participating
agri-businesses to their retail customers for the purchase of goods and
services. Farm Plan(TM) account holders consist mainly of farmers purchasing
equipment parts and service at implement dealerships. Farm Plan(TM) is also used
by customers patronizing other agri-businesses, including farm supply, feed and
seed, parts supply, bulk fuel, building supply merchants and veterinarians. The
PowerPlan(R) revolving charge account is used by construction and forestry
customers to finance the purchase of parts and service work performed at John
Deere construction dealers.
The Company also offers insured international export financing products
to select customers. See Note 2 to the Consolidated Financial Statements under
"Operating Loans."
The Company also works with several leading farm input providers to offer
crop input production loans (operating loans) for materials such as seeds and
fertilizer. These loans are secured by the crops being grown. Additionally, the
Company provides production loans directly to farmers for their total operating
needs. These loans are secured by crops and equipment.
The Company finances wholesale inventories of John Deere engines, and
John Deere agricultural, commercial and consumer, and construction and forestry
equipment. A large portion of the wholesale financing provided by the Company is
with dealers from whom it also purchases agricultural, commercial and consumer
and construction and forestry retail notes. See Note 2 to the Consolidated
Financial Statements under "Wholesale Receivables."
The Company requires that theft and physical damage insurance be carried
on all goods leased or securing retail notes. In most cases, the customers may,
at their expense, have the Company or the seller of the goods purchase this
insurance or obtain it from other sources. Theft and physical damage insurance
is also required on goods securing wholesale notes and can be purchased through
the Company or from other sources. Insurance is not required for goods purchased
pursuant to revolving charge accounts.
Receivables and Leases are eligible for acceptance if they conform to
prescribed finance and lease plan terms. Guidelines relating to down payments
and contract terms on retail notes and leases are described in Note 2 to the
Consolidated Financial Statements.
In some circumstances, Receivables and Leases may be accepted and
acquired even though they do not conform in all respects to the established
guidelines. The Company determines whether retail notes, wholesale receivables
and leases should be accepted and how they should be serviced. These
determinations are made according to the finance plans and retail terms,
although some exceptions are made. Officers of the Company are responsible for
reviewing the performance of the Company in accepting and collecting retail
notes, wholesale receivables, revolving charge accounts, leases and operating
loans. The Company normally makes all its own routine collections, settlements
and repossessions on Receivables and Leases.
Retail notes and wholesale receivables provide for retention by John
Deere or the Company of security interests in the goods financed under laws such
as the Uniform Commercial Code, certain federal statutes and state motor vehicle
laws. Security interest filings are also made for leases. However, filings for
operating leases are made for informational purposes only.
Finance Rates on Retail Notes
- -----------------------------
As of October 31, 2001 and 2000, approximately 48 percent and 46 percent
of the retail notes held by the Company bore a variable finance rate,
respectively. With the exception of agricultural retail notes, a majority of
retail notes are fixed rate notes. A portion of the finance income earned by the
Company arises from reimbursements from John Deere in connection with financing
the retail sales of John Deere equipment on which finance charges are waived or
reduced by John Deere for a period from the date of sale to a specified
subsequent date. See Note 2 to the Consolidated Financial Statements for
additional information.
5
Average Original Term and Average Actual Life of Retail Notes and Leases
- ------------------------------------------------------------------------
Due to prepayments (often from trade-ins and refinancing), the average
actual life of retail notes and leases is considerably shorter than the average
original term. The following table shows the average original term for retail
notes and leases acquired and the average actual life for retail notes and
leases liquidated (in months):
Average Original Term Average Actual Life
---------------------------- --------------------------
2001 2000 2001 2000
---------------------------- --------------------------
Retail notes 72 64 28 27
- ------------------------------------------------------------------------------------------------------------
New equipment:
Agricultural equipment 57 56 28 29
- ------------------------------------------------------------------------------------------------------------
Construction and forestry equipment 44 46 30 31
- ------------------------------------------------------------------------------------------------------------
Commercial and consumer equipment 54 52 27 25
- ------------------------------------------------------------------------------------------------------------
Recreational products* 186 183 156 21
- ------------------------------------------------------------------------------------------------------------
Used equipment:
Agricultural equipment 56 56 26 27
- ------------------------------------------------------------------------------------------------------------
Construction and forestry equipment 43 44 25 25
- ------------------------------------------------------------------------------------------------------------
Commercial and consumer equipment 51 52 29 26
- ------------------------------------------------------------------------------------------------------------
Recreational products* 175 168 145 10
- ------------------------------------------------------------------------------------------------------------
Leases 45 46 22 29
- ------------------------------------------------------------------------------------------------------------
*The average actual life for recreational products in 2001 has increased from
prior periods as a result of the Company's decision to discontinue the
origination and sale of notes to several outside financial institutions.
The average original term for recreational products is longer than other
equipment notes because of customer preferences and industry convention.
Competition
- -----------
The businesses in which the Company is engaged are highly competitive.
The Company competes for customers with commercial banks and finance and leasing
companies based upon its service and finance rates charged. The proportion of
John Deere equipment retail sales and leases financed by the Company is
influenced by conditions prevailing in the agricultural equipment, commercial
and consumer equipment, and construction and forestry equipment industries, in
the financial markets, and in business generally. The Company financed a
significant portion of John Deere equipment retail sales and leases during 2001
and 2000.
The Company emphasizes convenient service to customers and endeavors to
offer terms desired in its specialized markets such as seasonal schedules of
repayment and rentals. The Company's retail note finance rates and lease rental
rates are generally believed to be in the range offered by other sales finance
and leasing companies, although not as low as those of some banks and other
lenders and lessors.
Regulation
- ----------
In a number of states, state law limits the maximum finance rate on
receivables. The present state limitations have not, thus far, significantly
limited the Company's variable-rate finance charges or the fixed-rate finance
charges established by the Company. However, if interest rate levels should
increase significantly, maximum state rates could affect the Company by
preventing the variable rates on outstanding variable-rate retail notes from
increasing above the maximum state rate, and by limiting the fixed rates on new
notes. In some states, the Company may be able to qualify new retail notes for a
higher maximum rate limit by using retail installment sales contracts (rather
than loan contracts) or by using fixed-rate rather than variable-rate contracts.
6
In addition to rate regulation, various state and federal laws and
regulations apply to some Receivables and Leases, principally retail notes for
goods sold for personal, family or household use and Farm Plan(TM),
PowerPlan(R), and John Deere Credit Revolving Plan accounts receivable for such
goods. To date, such laws and regulations have not had a significant adverse
effect on the Company's financial position or results of operations.
On December 24, 2000, a federal charter was issued to FPC Financial,
f.s.b. (Thrift), a wholly-owned subsidiary of the Company, by the Office of
Thrift Supervision. The Thrift is headquartered in Madison, Wisconsin and offers
revolving charge products such as John Deere Credit Revolving Plan, Farm
Plan(TM), and PowerPlan(R) on a nationwide basis, and provides retail financing
for manufactured housing.
Financing outside the United States is affected by a diversity of laws,
customs and regulations.
Item 2. Properties.
- ------ ----------
The Company's properties principally consist of office equipment, a
Company-owned office building in Madison, Wisconsin; and leased office space in
Reno, Nevada; Johnston, Iowa; Pittsburgh, Pennsylvania; Bloomington, Illinois;
Brisbane, Australia; Gloucester, England; Monterrey, Mexico; Luxembourg City,
Luxembourg; and Rosario, Argentina.
Item 3. Legal Proceedings.
- ------ -----------------
The Company is subject to various unresolved legal actions which arise
in the normal course of its business, the most prevalent of which relate to
state and federal laws and regulations concerning retail credit. Although it is
not possible to predict with certainty the outcome of these unresolved legal
actions or the range of possible loss, the Company believes these unresolved
legal actions will not have a material effect on its financial position or
results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------ ---------------------------------------------------
Omitted pursuant to instruction I(2).
PART II
-------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
- ------ ---------------------------------------------------------------------
All of the Capital Corporation's common stock is owned by John Deere
Credit Company, a finance holding company that is wholly-owned by Deere &
Company. In 2001, Deere & Company increased its investment in John Deere Credit
Company by $700 million. In turn, John Deere Credit Company increased its
investment in the Capital Corporation by $700 million. The Capital Corporation
did not declare or pay cash dividends to John Deere Credit Company in 2001. This
compares to $20 million in dividends declared and paid to John Deere Credit
Company in 2000. In 2000, John Deere Credit Company paid a comparable dividend
to Deere & Company. During the first quarter of fiscal 2002, the Capital
Corporation declared and paid a dividend of $140 million to John Deere Credit
Company which, in turn, paid a dividend of $140 million to Deere & Company.
Item 6. Selected Financial Data.
- ------ -----------------------
Omitted pursuant to instruction I(2).
7
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- ------ -----------------------------------------------------------------------
of Operations.
- -------------
Results of Operations
- ---------------------
2001 Compared with 2000
-----------------------
Consolidated net income was $41.9 million for the fourth quarter and
$157.8 million for the year, compared with $31.7 million and $140.8 million,
respectively, last year. The results for this year benefited primarily from
higher volumes and improved interest rate spreads, partially offset by a higher
provision for credit losses. The ratio of earnings to fixed charges was 1.53 to
1 for 2001, compared with 1.48 to 1 for 2000.
Revenues totaled $1,216 million in 2001, compared to $1,106 million a
year ago. Revenues increased primarily due to a 12 percent increase in the
average balance of Receivables and Leases financed. Finance income earned on
retail notes totaled $459 million in 2001, up 14 percent compared to $404
million in 2000. This increase was primarily due to an 18 percent increase in
the average balance of retail notes financed. Lease revenues increased $47
million to $436 million in 2001, primarily due to a 6 percent increase in the
average balance of financing and operating leases financed. Finance income
earned on wholesale receivables decreased $17 million, to $78 million in 2001,
from $95 million in 2000. This decrease was primarily the result of a lower
average balance of wholesale receivables financed and lower interest rates
earned on wholesale receivables financed. Revenues earned on revolving charge
accounts amounted to $123 million in 2001, a 12 percent increase over revenues
of $110 million earned during 2000. The increase was primarily due to growth of
Farm PlanTM receivables in 2001, compared with 2000. Revenues earned on
operating loans increased 9 percent to $35 million in 2001, from $32 million in
2000.
The net gain on Receivables and Leases sold totaled $26 million during
2001, compared with $21 million for 2000. The higher net gain for 2001 was
primarily the result of an increase in Receivables and Leases sold when compared
to last year. Securitization and servicing fee income totaled $31 million in
2001, compared with $30 million during 2000. Securitization and servicing fee
income relates to Receivables and Leases sold to other financial institutions or
limited-purpose business trusts and primarily includes the interest earned on
retained interests and reimbursed administrative expenses received. Additional
sales of Receivables and Leases are expected to be made in the future.
Interest expense totaled $453 million in 2001, compared with $440
million in 2000. This increase was primarily due to a 15 percent increase in
average borrowings from $6,624 million in 2000 to $7,611 million in 2001, and
was partially offset by a decrease in the weighted-average annual interest rate
incurred on all borrowings from 6.6 percent in 2000 to 5.9 percent in 2001.
Administrative and operating expenses increased 9 percent from $156
million in 2000 to $170 million in 2001. These increases were attributable to
the higher costs associated with administering a larger Receivable and Lease
portfolio. Depreciation of equipment on operating leases increased to $259
million in 2001, compared to $225 million in 2000 as a result of a higher
average outstanding portfolio balance and an increase in the depreciation of
equipment on operating leases. Fees paid to John Deere were lower in 2001,
compared to 2000.
The provision for credit losses was $75 million in 2001, compared with
$53 million in 2000. Total write-offs of Receivables and Leases financed were
$58 million during 2001, compared with $36 million in 2000. The increase in
write-offs from 2000 was primarily related to the increase in construction and
forestry equipment retail note and revolving charge write-offs.
Receivables and Leases Acquired and Held
----------------------------------------
Receivables and Leases acquired by the Company during 2001 totaled
$11,818 million, an increase of 33 percent, compared with volumes of $8,909
million during 2000. These higher volumes in 2001 resulted mainly
8
from increased volumes of wholesale receivables (see Note 1), agricultural
equipment retail notes, operating loans, and revolving charge accounts,
partially offset by a decrease in the financing of operating leases. Excluding
the purchase of $2.2 billion of trade receivables from John Deere at the end of
October, acquisitions of receivables and leases were 8 percent higher in 2001,
compared to last year. Receivables and Leases held by the Company at October 31,
2001 totaled $11,901 million, compared with $8,609 million at October 31, 2000.
For the 2001 and 2000 fiscal years, Receivable and Lease acquisition volumes and
balances held were as follows (in millions of dollars):
Fiscal Year Volumes Balance at October 31,
-------------------------------------- ----------------------------------------
2001 2000 % Change 2001 2000 % Change
-------------------------------------- ----------------------------------------
Retail notes:
Agricultural equipment $ 2,945.7 $ 2,600.5 13% $ 3,609.7 $ 2,983.0 21%
Construction and forestry equipment 862.1 752.3 15 1,293.0 1,000.1 29
Commercial and consumer equipment 398.5 330.1 21 611.6 465.0 32
Recreational products 578.0 339.3 70 111.0 139.6 (20)
----------------------- -------------------------
Total 4,784.3 4,022.2 19 5,625.3 4,587.7 23
Revolving charge accounts 2,048.1 1,784.6 15 814.3 688.2 18
Operating loans 921.4 635.7 45 501.2 422.3 19
Wholesale receivables 3,299.9 1,517.8 117 2,995.5 937.0 220
Financing leases 207.3 224.5 (8) 479.5 456.4 5
Equipment on operating leases 557.1 723.8 (23) 1,484.8 1,517.1 (2)
----------------------- -------------------------
Total $11,818.1 $ 8,908.6 33% $11,900.6 $ 8,608.7 38%
======================= =========================
Retail note volumes increased by approximately $762 million in 2001,
compared with 2000, primarily due to an increase in the volumes of agricultural
equipment and recreational vehicle retail notes. Revolving charge account and
operating loan volumes increased primarily due to the increased demand for
operating loans, Farm Plan(TM) and John Deere Credit Revolving Plan products.
Wholesale receivable volumes increased in 2001 primarily as a result of the
Company purchasing $2.2 billion of wholesale receivables (trade receivables)
from John Deere in October of 2001. In the future, it is expected that a
significant portion of newly originated wholesale receivables will be purchased
from John Deere on an ongoing basis. Additional information is presented in Note
1 to the Consolidated Financial Statements.
Receivables and Leases administered by the Company, which include retail
notes sold, were as follows (in millions):
October 31, October 31,
2001 2000
--------------------------------------------
Receivables and Leases administered:
Owned by the Company $11,900.6 $ 8,608.7
Sold and serviced - with limited recourse* 1,370.8 1,867.4
Sold and serviced - without recourse** 71.6 91.4
Serviced - without recourse*** 9.7 23.7
--------------------------------------------
Total Receivables and Leases administered $13,352.7 $ 10,591.2
============================================
* The Company's maximum exposure under all Receivable and Lease recourse
provisions at October 31, 2001 and 2000 was $166 million and $168 million,
respectively. In addition, the Company has guaranteed letters of credit on
behalf of John Deere Credit Inc., the John Deere finance subsidiary in Canada,
as part of three retail note sales. At October 31, 2001 and 2000, the maximum
exposure under these agreements was approximately $9 million and $6 million,
respectively.
** These receivables represent recreational product retail notes which the
Company has sold but continues to administer for a fee until the servicing
rights are assumed by their owners.
9
*** On February 1, 1999, the Company began servicing a receivable portfolio on
behalf of Farming and Agricultural Finance Limited. These servicing rights were
obtained in conjunction with the Company's acquisition of John Deere Credit
Limited.
Retail notes bearing variable finance rates totaled 48 percent of the total
retail note portfolio at October 31, 2001, compared with 46 percent at October
31, 2000.
Total Receivable and Lease amounts 60 days or more past due were $47
million at October 31, 2001, compared with $33 million at October 31, 2000.
These past due amounts represented .40 percent and .38 percent of the total
Receivables and Leases held at those respective dates. The balance of retail
notes held (principal plus accrued interest) with any installment 60 days or
more past due was $100 million and $68 million at October 31, 2001 and 2000,
respectively. The balances of retail notes held on which any installment was 60
days or more past due as a percentage of the ending retail notes receivable was
1.78 percent at October 31, 2001 and 1.48 percent at October 31, 2000. See Note
3 to the Consolidated Financial Statements for additional information on past
dues.
Deposits withheld from dealers and merchants, representing mainly the
aggregate dealer retail note and lease withholding accounts from individual John
Deere dealers to which losses from retail notes and leases originating from the
respective dealers can be charged, amounted to $134 million at October 31, 2001,
compared to $133 million at October 31, 2000. The Company's allowance for credit
losses on all Receivables and Leases financed at October 31, 2001 totaled $110
million and represented 0.9 percent of the total Receivables and Leases
financed, compared with $93 million and 1.1 percent, respectively, one year
earlier. The allowance is subject to an ongoing evaluation based on loss
experience and related estimates of anticipated losses inherent in the portfolio
as of year-end to ensure the allowance for credit losses is maintained at an
adequate level.
2000 Compared with 1999
-----------------------
Consolidated net income for the fiscal year ended October 31, 2000 was
$140.8 million, compared with $153.3 million in 1999. Results for 2000 were
adversely affected by higher operating expenses as well as a reduced level of
receivable sales, which resulted in lower gains. Partially offsetting these
factors was higher income from a larger Receivable and Lease portfolio. The
ratio of earnings to fixed charges was 1.48 to 1 for 2000, compared with 1.64 to
1 for 1999.
Revenues totaled $1,106 million in 2000, compared to $959 million in 1999.
Revenues increased primarily due to a 10 percent increase in the average balance
of Receivables and Leases financed and an increase in yield on variable rate
contracts. Finance income earned on retail notes totaled $404 million in 2000,
up slightly, compared to $396 million in 1999. Lease revenues increased $119
million to $389 million in 2000, primarily due to a 40 percent increase in the
average balance of financing and operating leases financed. Finance income
earned on wholesale notes increased $23 million, to $95 million in 2000, from
$72 million earned in 1999. This increase was primarily the result of continued
growth in the financing for dealer inventories of John Deere construction and
forestry equipment and John Deere agricultural equipment, partially offset by
the decrease in financing manufactured housing dealer inventories.
Revenues earned on revolving charge accounts amounted to $110 million in
2000, a 10 percent increase over revenues of $100 million earned during 1999.
The increase was primarily due to growth of Farm Plan(TM) and John Deere Credit
Revolving Plan in 2000, compared with 1999.
Revenues earned on operating loans amounted to $32 million in 2000, a 58
percent increase over revenues of $20 million earned during 1999. The increase
was primarily due to growth of the operating loan portfolio in 2000, compared
with 1999.
The net gain on Receivables and Leases sold totaled $21 million during
2000, compared with $40 million for 1999. The lower net gain for 2000 was
primarily the result of a reduction in Receivables and Leases sold when compared
to 1999. Securitization and servicing fee income totaled $30 million in 2000,
compared with $31 million
10
during 1999. Securitization and servicing fee income relates to Receivables and
Leases sold to other financial institutions or limited-purpose business trusts
and primarily includes the interest earned on retained interests and reimbursed
administrative expenses received.
Interest expense totaled $440 million in 2000, compared with $361 million
in 1999. This increase was primarily due to an increase in the weighted-average
annual interest rate incurred on all borrowings from 5.8 percent in 1999 to 6.6
percent in 2000 and a 10 percent increase in average borrowings from $6,021
million in 1999 to $6,624 million in 2000.
Administrative and operating expenses increased 22 percent from $128
million in 1999 to $156 million in 2000. These increases were attributable to
the higher costs associated with administering a larger Receivable and Lease
portfolio as well as increased start-up costs related to international growth.
Depreciation of equipment on operating leases increased to $225 million in 2000,
compared to $162 million in 1999 as a result of the increase in equipment on
operating leases financed. In addition, the Company paid higher fees to John
Deere.
The provision for credit losses was $53 million in 2000 and $62 million in
1999. Total write-offs of Receivables and Leases financed were $36 million
during 2000, compared with $40 million in 1999. The decrease in write-offs from
1999 was primarily related to a decrease in agricultural equipment retail note
write-offs, partially offset by an increase in lease and wholesale receivable
write-offs.
Receivables and Leases Acquired and Held
----------------------------------------
Receivables and Leases acquired by the Company during 2000 totaled $8,909
million, an increase of 10 percent, compared with volumes of $8,090 million
during 1999. The higher volumes in 2000 resulted mainly from increased volumes
of revolving charge accounts, John Deere equipment retail notes and leases,
partially offset by a decrease in wholesale receivable volumes. Receivables and
Leases held by the Company at October 31, 2000 totaled $8,609 million, compared
with $7,231 million at October 31, 1999. For the 2000 and 1999 fiscal years,
Receivable and Lease acquisition volumes and balances held were as follows (in
millions of dollars):
Fiscal Year Volumes Balance at October 31,
-------------------------------------- ----------------------------------------
2000 1999 % Change 2000 1999 % Change
-------------------------------------- ----------------------------------------
Retail notes:
Agricultural equipment $2,600.5 $2,489.4 4% $2,983.0 $2,602.4 15%
Construction and forestry equipment 752.3 641.2 17 1,000.1 611.5 64
Commercial and consumer equipment 330.1 250.9 32 465.0 346.7 34
Recreational products 339.3 326.3 4 139.6 155.6 (10)
----------------------- -------------------------
Total 4,022.2 3,707.8 8 4,587.7 3,716.2 23
Revolving charge accounts 2,420.3 1,907.6 27 1,110.5 900.6 23
Wholesale receivables 1,517.8 1,683.9 (10) 937.0 957.2 (2)
Financing leases 224.5 149.3 50 456.4 402.2 13
Equipment on operating leases 723.8 641.8 13 1,517.1 1,254.8 21
----------------------- -------------------------
Total $8,908.6 $8,090.4 10% $8,608.7 $7,231.0 19%
======================= =========================
Retail note volumes increased by approximately $314 million in 2000,
compared with 1999, primarily due to an increase in the volumes of agricultural,
construction and forestry, and commercial and consumer equipment retail notes.
Revolving charge account volumes increased primarily due to the increased demand
for operating loans, Farm Plan(TM) and John Deere Credit Revolving Plan
products. Wholesale receivable volumes decreased in 2000 primarily because the
Company discontinued offering wholesale receivable financing for manufactured
housing dealer inventory.
11
Receivables and Leases administered by the Company, which include retail
notes sold, were as follows (in millions):
October 31, October 31,
2000 1999
-----------------------------------------
Receivables and Leases administered:
Owned by the Company $ 8,608.7 $7,231.0
Sold and serviced - with limited recourse* 1,867.4 2,274.9
Sold and serviced - without recourse** 91.4 117.9
Serviced - without recourse*** 23.7 46.1
-----------------------------------------
Total Receivables and Leases administered $ 10,591.2 $9,669.9
=========================================
* The Company's maximum exposure under all Receivable and Lease recourse
provisions at October 31, 2000 and 1999 was $168 million and $161 million,
respectively. In addition, the Company has guaranteed letters of credit on
behalf of John Deere Credit Inc., the John Deere finance subsidiary in Canada,
as part of two retail note sales. At October 31, 2000 and 1999, the maximum
exposure under these agreements was approximately $6 million and $8 million,
respectively.
** On recreational product retail note sales, the Company continues to
administer the portfolio outstanding for a fee until the servicing rights are
assumed by their owner.
*** On February 1, 1999, the Company began servicing a receivable portfolio on
behalf of Farming and Agricultural Finance Limited. These servicing rights were
obtained in conjunction with the Company's acquisition of John Deere Credit
Limited.
Retail notes bearing variable finance rates totaled 46 percent of the total
retail note portfolio at October 31, 2000, compared with 49 percent at October
31, 1999.
Total Receivable and Lease amounts 60 days or more past due were $33
million at October 31, 2000, compared with $30 million at October 31, 1999.
These past due amounts represented .38 percent and .41 percent of the total
Receivables and Leases held at those respective dates. The balance of retail
notes held (principal plus accrued interest) with any installment 60 days or
more past due was $68 million and $54 million at October 31, 2000 and 1999,
respectively. The balances of retail notes held on which any installment was 60
days or more past due as a percentage of the ending retail notes receivable was
1.48 percent at October 31, 2000 and 1.45 percent at October 31, 1999.
Deposits withheld from dealers and merchants, representing mainly the
aggregate dealer retail note and lease withholding accounts from individual John
Deere dealers to which losses from retail notes and leases originating from the
respective dealers can be charged, amounted to $133 million at October 31, 2000,
compared to $123 million at October 31, 1999. The Company's allowance for credit
losses on all Receivables and Leases financed at October 31, 2000 totaled $93
million and represented 1.1 percent of the total Receivables and Leases
financed, compared with $84 million and 1.2 percent, respectively, one year
earlier. The allowance is subject to an ongoing evaluation based on loss
experience and related estimates to ensure the allowance for credit losses is
maintained at an adequate level.
Capital Resources and Liquidity
- -------------------------------
The Company relies on its ability to raise substantial amounts of funds to
finance its Receivable and Lease portfolios. The Company's primary source of
funds for this purpose is a combination of borrowings and equity capital.
Additionally, the Company periodically sells substantial amounts of retail notes
in the public market and in private sales. The Company's ability to obtain funds
is affected by its debt ratings, which are closely related to the outlook for
and the financial condition of Deere & Company, and the nature and availability
of support facilities, such as its lines of credit. For information regarding
Deere & Company and its business, see Exhibit 99.
12
The Company's ability to meet its debt obligations is supported in a
number of ways. All commercial paper issued is backed by bank credit lines. The
assets of the Company are self-liquidating in nature. A strong equity position
is available to absorb unusual losses on these assets. Liquidity is also
provided by the Company's ability to sell these assets.
The Company's business is somewhat seasonal, with overall acquisition
volumes of Receivables and Leases traditionally higher in the second half of the
fiscal year than in the first half, and overall collections of Receivables and
Leases traditionally somewhat higher in the first six months than in the last
six months of the fiscal year.
The aggregate net cash provided by operating and financing activities
was primarily used to acquire additional Receivables and Leases. Net cash
provided by operating activities was $522 million in 2001. Financing activities
provided $3,624 million during the same period, resulting from a $2,924 million
net increase in total borrowings and a capital investment from Deere & Company
of $700 million. Net cash used for investing activities totaled $3,798 million
in 2001, primarily due to Receivable and Lease acquisitions exceeding
collections by $5,442 million, which was partially offset by $1,531 million of
proceeds from the sale of receivables. Cash and cash equivalents increased $346
million during 2001. See "Statements of Consolidated Cash Flows."
Over the past three years, operating activities provided $1,377 million
in cash. In addition, the sale of receivables provided $4,790 million and an
increase in total net borrowings provided $4,153 million. These amounts were
used mainly to fund Receivable and Lease acquisitions, which exceeded
collections by $8,508 million, and to pay $95 million in dividends.
The Company is naturally exposed to various interest rate and foreign
currency risks. As a result, the Company enters into derivative transactions to
manage certain of these exposures that arise in the normal course of business,
and not for the purpose of creating speculative positions or trading. Similar to
other large credit companies, the Company manages the relationship of the types
and amounts of its funding sources to its Receivable and Lease portfolios in an
effort to diminish risk due to interest rate fluctuations, while responding to
favorable financing opportunities. Accordingly, from time to time, the Company
enters into interest rate swap agreements to manage its interest rate exposure
in amounts corresponding to a portion of its borrowings. The credit and market
risks under these interest rate and foreign currency agreements are not
considered to be significant. See Note 15 to the Consolidated Financial
Statements for further details.
Total interest-bearing indebtedness amounted to $10,382 million at
October 31, 2001, compared with $7,330 million at October 31, 2000, generally
corresponding with the level of Receivables and Leases financed and the level of
cash and cash equivalents. Total short-term indebtedness amounted to $6,523
million at October 31, 2001, compared with $4,743 million at October 31, 2000.
Total long-term indebtedness amounted to $3,859 million at October 31, 2001 and
$2,587 million at October 31, 2000. The ratio of total interest-bearing debt to
stockholder's equity was 5.4 to 1 and 6.6 to 1 at October 31, 2001 and 2000,
respectively.
The Company maintained unsecured lines of credit with various banks in
North America and overseas. See Note 5 to the Consolidated Financial Statements.
During 2001, the Company issued $600 million of 5.125% debentures due
in 2006 and $200 million of floating rate notes due in 2003, and retired $200
million of 5.85% notes due in 2001 and $200 million of 5.35% notes due in 2001.
The Capital Corporation also issued $2,750 million and retired $1,342 million of
medium-term notes. Additionally, the Capital Corporation's subsidiary, John
Deere Bank S.A. in Luxembourg City, Luxembourg, retired $63 million of long-term
debt and issued $230 million of long-term debt.
Stockholder's equity was $1,907 million at October 31, 2001, compared
with $1,108 million and $998 million at October 31, 2000 and 1999, respectively.
The increase in 2001 was primarily due to Deere & Company's additional $700
million investment in John Deere Credit Company, which, in turn, increased its
investment in the Capital Corporation. The increase is also attributable to the
Company's net income of $158
13
million and an unrealized loss on derivatives of $62 million. As a result of the
Company's match-funding policy described in Note 15, the Company has entered
into interest rate swaps (pay fixed/receive floating rates) hedging the interest
costs of the Company's floating rate borrowings. The impact of decreasing
interest rates on these swaps is the primary component of the unrealized loss on
derivatives. If interest rates remain unchanged, the unrealized loss will be
realized in income and will be offset by the lower interest expense on the
floating rate borrowings, effectively providing fixed rate funding.
The Capital Corporation did not declare or pay cash dividends to John
Deere Credit Company in 2001. This compares to $20 million in dividends declared
and paid to John Deere Credit Company in 2000. In 2000, John Deere Credit
Company paid a comparable dividend to Deere & Company.
Safe Harbor Statement
- ---------------------
Statements under the "Outlook for John Deere" heading above, the
"Supplemental Information (Unaudited)" on page 40, and other statements herein
that relate to future operating periods are subject to important risks and
uncertainties that could cause actual results to differ materially. Interest
rate changes by the Federal Reserve Board may affect the cost of financing the
Company and the rates it is able to offer. Further information, including
factors that potentially could materially affect the Company's and John Deere's
financial results, is included in the Deere & Company Form 10-K for the fiscal
year ended October 31, 2001 filed with the Securities and Exchange Commission
and filed with this report as Exhibit 99.
Accounting Policies
- -------------------
In preparing the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America,
management must make a variety of decisions which impact the reported amounts
and the related disclosures. Such decisions include the selection of the
appropriate accounting principles to be applied and the assumptions on which to
base accounting estimates. In reaching such decisions, management applies
judgment based on its understanding and analysis of the relevant circumstances.
Note 1 to the consolidated financial statements provides a summary of the
significant accounting policies followed in the preparation of the financial
statements; other footnotes describe various elements of the financial
statements and the assumptions on which specific amounts were determined. While
actual results could, in fact, differ from those estimated at the time of
preparation of the financial statements, management is committed to preparing
financial statements which incorporate accounting principles, assumptions, and
estimates which promote the representational faithfulness, verifiability,
neutrality, and transparency of the accounting information included in the
financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
- ------- ----------------------------------------------------------
See the information under "Management's Discussion and Analysis", the
"Financial Instruments", and the supplementary data under "Sensitivity
Analysis".
Item 8. Financial Statements and Supplementary Data.
- ------ -------------------------------------------
See accompanying table of contents of financial statements.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------ ---------------------------------------------------------------
Financial Disclosure.
--------------------
Not applicable.
PART III
--------
14
Item 10. Directors and Executive Officers of the Registrant.
- ------- --------------------------------------------------
Omitted pursuant to instruction I(2).
Item 11. Executive Compensation.
- ------- ----------------------
Omitted pursuant to instruction I(2).
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- ------- --------------------------------------------------------------
Omitted pursuant to instruction I(2).
Item 13. Certain Relationships and Related Transactions.
- ------- ----------------------------------------------
Omitted pursuant to instruction I(2).
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
- ------- ----------------------------------------------------------------
(a) (1) Financial Statements
(2) Financial Statement Schedules
See the table of contents to financial statements and
schedules immediately preceding the financial
statements and schedules to consolidated financial
statements.
(3) Exhibits
See the index to exhibits immediately preceding the
exhibits filed with this report.
(b) Reports on Form 8-K
Current report on Form 8-K dated August 14, 2001 (Items 5 and
7).
Current report on Form 8-K dated September 13, 2001 (Item
7).
15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Each person signing below also hereby appoints Robert W. Lane, Jon D.
Volkert and Michael A. Harring, and each of them singly, his or her lawful
attorney-in-fact with full power to execute and file any and all amendments to
this report together with exhibits thereto and generally to do all such things
as such attorney-in-fact may deem appropriate to enable John Deere Capital
Corporation to comply with the provisions of the Securities Exchange Act of 1934
and all requirements of the Securities and Exchange Commission.
JOHN DEERE CAPITAL CORPORATION
By: /s/ R. W. LANE
-----------------------------------
R. W. Lane
Chairman and Chief Executive Officer
Date: 8 January 2002
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/ R. W. LANE Director, Chairman and )
----------------------------------------- Chief Executive Officer )
R. W. Lane )
)
)
/s/ JAMES W. EILER Director ) 8 January 2002
----------------------------------------- )
James W. Eiler )
)
)
)
/s/ DAVID C. EVERITT Director )
----------------------------------------- )
David C. Everitt )
)
)
/s/ JAMES A. ISRAEL Director, Senior Vice President )
----------------------------------------- And Principal Accounting Officer )
James A. Israel )
)
)
/s/ JOHN J. JENKINS Director )
----------------------------------------- )
John J. Jenkins )
16
Signature Title Date
--------- ----- ----
/s/ NATHAN J. JONES Director, Senior Vice President )
----------------------------------------- and Principal Financial Officer )
Nathan J. Jones )
)
)
/s/ PIERRE E. LEROY Director ) 8 January 2002
----------------------------------------- )
Pierre E. Leroy )
)
)
/s/ H. J. MARKLEY Director )
----------------------------------------- )
H. J. Markley )
)
)
/s/ M. P. ORR Director )
----------------------------------------- )
M. P. Orr )
)
)
/s/ STEPHEN PULLIN Director )
----------------------------------------- )
Stephen Pullin )
)
)
/s/ JON D. VOLKERT Director and President )
----------------------------------------- )
Jon D. Volkert )
17
[Letterhead]
Deloitte & Touche LLP
Two Prudential Plaza
180 North Stetson Avenue
Chicago, Illinois 60601
INDEPENDENT AUDITORS' REPORT
- ----------------------------
John Deere Capital Corporation:
We have audited the accompanying consolidated balance sheets of John Deere
Capital Corporation and subsidiaries as of October 31, 2001 and 2000 and the
related statements of consolidated income and retained earnings, and of changes
in consolidated stockholder's equity and of consolidated cash flows for each of
the three years in the period ended October 31, 2001. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of John Deere Capital Corporation and
subsidiaries at October 31, 2001 and 2000 and the results of their operations
and their cash flows for each of the three years in the period ended October 31,
2001 in conformity with accounting principles generally accepted in the United
States of America.
DELOITTE & TOUCHE LLP
Chicago, Illinois
November 20, 2001
18
Table of Contents
-----------------
Page
----
Financial Statements:
John Deere Capital Corporation and Subsidiaries:
Statements of Consolidated Income and Retained Earnings
For the Years Ended October 31, 2001, 2000 and 1999 ................................ 20
Consolidated Balance Sheets, October 31, 2001 and 2000 .................................. 21
Statements of Consolidated Cash Flows
For the Years Ended October 31, 2001, 2000 and 1999 ................................ 22
Statement of Changes in Consolidated Stockholder's Equity
For the Years Ended October 31, 2001, 2000 and 1999 ................................ 23
Notes to Consolidated Financial Statements .............................................. 24
SCHEDULES OMITTED
The following schedules are omitted because of the absence of
conditions under which they are required or because the required information is
included in the Notes to the Consolidated Financial Statements:
I, II, III, IV, and V.
19
John Deere Capital Corporation and Subsidiaries
Statements of Consolidated Income and Retained Earnings
(in millions)
For the Year Ended October 31,
--------------------------------------------------
2001 2000 1999
--------------------------------------------------
Revenues
Finance income earned on retail notes $ 458.6 $ 403.8 $ 395.8
Lease revenues 436.3 388.9 269.8
Revolving charge account income 122.5 110.0 100.0
Finance income earned on wholesale receivables 78.2 95.1 71.6
Operating loan income 35.0 31.7 20.1
Securitization and servicing fee income 30.9 29.8 31.1
Net gain on receivables and leases sold 26.3 20.6 40.4
Interest income from short-term investments 11.3 8.4 7.4
Other income 16.6 17.6 22.7
- --------------------------------------------------------------------------------------------------------------------
Total revenues 1,215.7 1,105.9 958.9
- --------------------------------------------------------------------------------------------------------------------
Expenses
Interest expense 453.4 440.2 361.0
Operating expenses:
Administrative and operating expenses 169.8 156.0 127.6
Provision for credit losses 74.5 52.6 62.3
Fees paid to John Deere 13.8 15.5 9.9
Depreciation of equipment on operating leases 258.5 224.8 162.4
- --------------------------------------------------------------------------------------------------------------------
Total operating expenses 516.6 448.9 362.2
- --------------------------------------------------------------------------------------------------------------------
Total expenses 970.0 889.1 723.2
- --------------------------------------------------------------------------------------------------------------------
Income of consolidated group before income taxes 245.7 216.8 235.7
Provision for income taxes 84.6 76.6 82.1
- --------------------------------------------------------------------------------------------------------------------
Income of consolidated group 161.1 140.2 153.6
Equity in income (loss) of unconsolidated affiliates (3.3) 0.6 (.3)
- --------------------------------------------------------------------------------------------------------------------
Net income 157.8 140.8 153.3
Cash dividends declared (20.0) (75.0)
Retained earnings at beginning of the year 1,005.5 884.7 806.4
- --------------------------------------------------------------------------------------------------------------------
Retained earnings at end of the year $1,163.3 $1,005.5 $ 884.7
====================================================================================================================
Ratio of earnings to fixed charges 1.53 1.48 1.64
====================================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral
part of this statement.
20
John Deere Capital Corporation and Subsidiaries
Consolidated Balance Sheets
(in millions)
October 31,
------------------------------
Assets 2001 2000
------------------------------
Cash and cash equivalents $ 502.2 $ 155.9
Receivables and leases:
Retail notes 5,625.3 4,587.7
Revolving charge accounts 814.3 688.3
Operating loans 501.2 422.2
Wholesale receivables 2,995.5 937.0
Financing leases 479.5 456.4
- -------------------------------------------------------------------------------------------------------------
Total receivables 10,415.8 7,091.6
Equipment on operating leases - net 1,484.8 1,517.1
- -------------------------------------------------------------------------------------------------------------
Total receivables and leases 11,900.6 8,608.7
Allowance for credit losses (110.4) (93.3)
- -------------------------------------------------------------------------------------------------------------
Total receivables and leases - net 11,790.2 8,515.4
- -------------------------------------------------------------------------------------------------------------
Other receivables 77.7 86.2
Notes receivable - unconsolidated affiliates 313.9 140.0
Investments in unconsolidated affiliates 5.9 9.7
Other assets 236.6 130.8
- -------------------------------------------------------------------------------------------------------------
Total Assets $ 12,926.5 $ 9,038.0
=============================================================================================================
Liabilities and Stockholder's Equity
Short-term borrowings:
Commercial paper $ 2,358.5 $ 2,474.1
Extendible commercial notes and other notes payable 23.9 3.7
John Deere 1,612.4 495.4
Current maturities of long-term borrowings 2,528.7 1,769.5
- -------------------------------------------------------------------------------------------------------------
Total short-term borrowings 6,523.5 4,742.7
- -------------------------------------------------------------------------------------------------------------
Accounts payable and accrued liabilities:
Accrued interest on debt 44.4 52.3
Other payables 459.0 415.5
- -------------------------------------------------------------------------------------------------------------
Total accounts payable and accrued liabilities 503.4 467.8
- -------------------------------------------------------------------------------------------------------------
Deposits withheld from dealers and merchants 134.2 132.6
- -------------------------------------------------------------------------------------------------------------
Long-term borrowings:
Senior debt 3,708.8 2,436.8
Subordinated debt 150.0 150.0
- -------------------------------------------------------------------------------------------------------------
Total long-term borrowings 3,858.8 2,586.8
- -------------------------------------------------------------------------------------------------------------
Total liabilities 11,019.9 7,929.9
- -------------------------------------------------------------------------------------------------------------
Stockholder's equity
Common stock, without par value (issued and outstanding -
2,500 shares owned by John Deere Credit Company) 812.8 112.8
- -------------------------------------------------------------------------------------------------------------
Retained earnings 1,163.3 1,005.5
- -------------------------------------------------------------------------------------------------------------
Cumulative translation adjustment (7.9) (10.2)
Unrealized loss on derivatives (61.6)
- -------------------------------------------------------------------------------------------------------------
Total accumulated other comprehensive income (loss) (69.5) (10.2)
- -------------------------------------------------------------------------------------------------------------
Total stockholder's equity 1,906.6 1,108.1
- -------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholder's Equity $ 12,926.5 $ 9,038.0
=============================================================================================================
The accompanying Notes to Consolidated Financial Statements are an
integral part of this statement.
21
John Deere Capital Corporation and Subsidiaries
Statements of Consolidated Cash Flows
(in millions)
For the Year Ended October 31,
----------------------------------------------
2001 2000 1999
----------------------------------------------
Cash Flows from Operating Activities:
Net income $ 157.8 $ 140.8 $ 153.3
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 74.5 52.6 62.3
Provision for depreciation and amortization 263.8 228.2 165.4
Provision for deferred income taxes 32.1 17.6 38.1
Undistributed earnings of unconsolidated affiliates 3.3 (0.6) 0.3
Other (9.8) 75.6 (78.3)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 521.7 514.2 341.1
- ------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Cost of receivables and leases acquired (11,818.1) (8,908.6) (8,090.4)
Collections of receivables 6,376.3 6,050.4 5,508.4
Change in notes receivable - unconsolidated affiliates (173.9) (135.2) (5.1)
Proceeds from sales of receivables and leases 1,530.6 978.3 2,281.0
Acquisitions of businesses (7.2) (59.2)
Other 293.9 215.0 140.4
- ------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (3,798.4) (1,800.1) (224.9)
- ------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Change in commercial paper (108.2) 1,209.4 (650.8)
Change in extendible commercial notes and other notes payable 19.8 (2.7) 63.2
Change in payable with John Deere 1,037.0 388.4 (0.3)
Proceeds from issuance of long-term borrowings 3,779.8 1,865.0 2,282.0
Principal payments on long-term borrowings (1,804.9) (2,147.7) (1,777.0)
Dividends paid (20.0) (75.0)
Capital investment from Deere & Company 700.0
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities 3,623.5 1,292.4 (157.9)
- ------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (0.5)
Net increase (decrease) in cash and cash equivalents 346.3 6.5 (41.7)
Cash and cash equivalents at the beginning of year 155.9 149.4 191.1
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of year $ 502.2 $ 155.9 $ 149.4
==================================================================================================================
The accompanying Notes to Consolidated Financial Statements are an
integral part of this statement.
22
John Deere Capital Corporation and Subsidiaries
Statement of Changes in Consolidated Stockholder's Equity
(in millions)
Other
Total Common Retained Comprehensive
Equity Stock Earnings Income (Loss)
------------------------------------------------------------
Balance October 31, 1998 $ 918.4 $ 112.8 $ 806.4 $ (0.8)
- -----------------------------------------------------------------------------------------------------------------
Comprehensive income
Net income 153.3 153.3
Other comprehensive income - cumulative
translation adjustment 1.0 1.0
---------
Total comprehensive income 154.3
---------
Dividends declared (75.0) (75.0)
- -----------------------------------------------------------------------------------------------------------------
Balance October 31, 1999 997.7 112.8 884.7 0.2
- -----------------------------------------------------------------------------------------------------------------
Comprehensive income (loss)
Net income 140.8 140.8
Other comprehensive income (loss) -
cumulative translation adjustment (10.4) (10.4)
---------
Total comprehensive income 130.4
---------
Dividends declared (20.0) (20.0)
- -----------------------------------------------------------------------------------------------------------------
Balance October 31, 2000 1,108.1 112.8 1,005.5 (10.2)
- -----------------------------------------------------------------------------------------------------------------
Comprehensive income (loss)
Net income 157.8 157.8
Other comprehensive income (loss)
Cumulative translation adjustment 2.3 2.3
Unrealized loss on derivatives (61.6) (61.6)
---------
Total comprehensive income 98.5
---------
Capital investment from Deere & Company 700.0 700.0
- -----------------------------------------------------------------------------------------------------------------
Balance October 31, 2001 $ 1,906.6 $ 812.8 $ 1,163.3 $ (69.5)
=================================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of this statement.
23
John Deere Capital Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
- ------ ------------------------------------------
The following are significant accounting policies in addition to those
included in other notes to the consolidated financial statements.
Corporate Organization
- ----------------------
John Deere Capital Corporation (Capital Corporation) and its
subsidiaries are collectively called the Company. John Deere Credit Company, a
wholly-owned finance holding subsidiary of Deere & Company, is the parent of the
Company. The Company conducts business in Argentina, Australia, France (through
a joint venture), Germany, Luxembourg, Mexico, New Zealand, the United Kingdom
and the United States.
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."
Deere & Company has a minority ownership interest in certain John Deere
construction and forestry equipment dealers. Wholesale receivables associated
with these dealers have been classified on the financial statements as "Notes
receivable - unconsolidated affiliates".
The risk of credit losses applicable to John Deere retail notes and
leases, net of recovery from withholdings from John Deere dealers, is borne by
the Company. John Deere is also reimbursed by the Company for staff support and
other administrative services at estimated cost, and for credit lines provided
by John Deere based on utilization of the lines.
In 2001, the Company discontinued offering wholesale receivable
financing for recreational vehicle dealer inventory. The Company will continue
to administer and service the portfolio until it is fully liquidated.
Acquisition volumes for this product totaled $13 million and $361 million for
fiscal 2001 and 2000, respectively, and the wholesale receivables outstanding
were $20 million and $141 million at October 31, 2001 and 2000, respectively.
During 2001, the Company also discontinued offering wholesale receivable
financing for yacht dealer inventories. Acquisition volumes for this product
totaled $37 million for the first six months of 2001. The Company sold this
portfolio during the second quarter of 2001.
In 2001, the Company discontinued the financing of new recreational
product retail notes. The Company will continue to administer and service the
portfolio until it is fully liquidated. Acquisition volumes for this product
totaled $578 million and $338 million for fiscal 2001 and 2000, respectively,
and the notes outstanding were $110 million and $138 million at October 31, 2001
and 2000, respectively.
In 2001, the Company purchased $2.2 billion of wholesale receivables
(trade receivables) from John Deere. In the future, it is expected that a
significant portion of newly originated trade receivables will be purchased from
John Deere on an ongoing basis. John Deere will compensate the Company for the
carrying costs.
In 2001, John Deere Bank S.A. (JDB), a wholly-owned subsidiary of the
Capital Corporation, purchased the portfolio held by John Deere Credit -
Germany, which had been one of the Company's joint ventures accounted for under
the equity method. Future equipment financing in Germany will be offered through
JDB. The purchase of this portfolio added approximately $176 million to the
Company's Receivables and Leases held at the acquisition date.
In 2001, the Company formed iVesta Financial Solutions LLC (iVesta), a
joint venture in which the Company owns 75% of the common stock, with an
unaffiliated entity. iVesta will seek to develop and manage a
24
new service, named Isis, designed to enable agricultural customers to execute
secure financial transactions with companies selling goods or services in an
e-business environment. Agricultural customers are expected to be able to use
the service to select from a choice of Isis network lenders when purchasing a
product or seeking financing and to be able to complete entire loan transactions
online. Due to the Company having the ability to significantly influence, but
not control iVesta, the investment in iVesta is accounted for on the equity
basis.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the financial statements
of the Capital Corporation and its subsidiaries.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
and related disclosures. Actual results could differ from those estimates.
The functional currencies for most of the Company's foreign operations
are their respective local currencies. The assets and liabilities of these
operations are translated to U.S. dollars at the end of the period exchange
rates, and the revenues and expenses are translated at weighted-average rates
for the period. The gains or losses from these translations are included in
other comprehensive income, which is part of stockholder's equity. Gains or
losses from transactions denominated in a currency other than the functional
currency of the subsidiary involved are included in net income.
Accounting Pronouncements
- -------------------------
In the first quarter of 2001, the Company adopted Financial Accounting
Standards Board (FASB) Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended by Statement No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities. Under the new standards,
all derivatives have been recorded at fair value in the financial statements.
Changes in fair values of the derivatives are recognized periodically in other
comprehensive income (equity) for derivatives designated as hedges of future
cash flows or in net income for all other derivatives. The after-tax transition
adjustments for adopting the new standards at November 1, 2000 were an
unrealized loss of $4 million recorded in "Unrealized Loss on Derivatives"
(other comprehensive income) and a loss of $.1 million recorded in income.
Additional information is presented in Note 15.
In the second quarter of 2001, the Company adopted FASB Statement No.
140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. This standard revises FASB Statement No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, and requires additional disclosure as presented in Note 4. The
Statement was effective for sales of receivables after March 31, 2001. The
effects of the adoption of this Standard on the Company's financial position and
net income were not material.
In June 2001, the FASB issued Statement No. 141, Business Combinations,
which requires the purchase method of accounting for business combinations and
eliminates the pooling method effective June 30, 2001. Additionally, in June
2001, the FASB issued Statement No. 142, Goodwill and Other Intangible Assets,
which requires that goodwill related to acquisitions after June 30, 2001 not to
be amortized and written down only for impairments. Upon adoption of Statement
No. 142, the same accounting requirements will apply to goodwill related to
acquisitions prior to June 30, 2001. The Company must adopt Statement No. 142 by
the first quarter of fiscal 2003. In 2001, the Company did not have any goodwill
or goodwill amortization. In July 2001, the FASB issued Statement No. 143,
Accounting for Asset Retirement Obligations, which requires obligations
associated with the retirement of long-lived assets to be recorded as increases
in costs of the related asset. Finally, in 2001 the FASB issued Statement No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets. This
Statement retains the previous cash flow test for impairment and broadens the
presentation of discontinued operations. These Statements are not expected to
have a material effect on the Company's financial position or net income.
25
Reclassifications
- -----------------
Certain amounts for prior years have been reclassified to conform to 2001
financial statement presentations.
Note 2. Receivables and Leases
- ------ ----------------------
Retail Notes Receivable
- -----------------------
The Company provides and administers financing for retail purchases of new
and used equipment manufactured by John Deere's agricultural, construction and
forestry, and commercial and consumer equipment divisions. The Company purchases
retail installment sales and loan contracts (retail notes) from John Deere.
These retail notes are acquired by the Company through John Deere equipment
retail dealers. The Company also purchases and finances certain agricultural,
construction and forestry, and commercial and consumer retail notes unrelated to
John Deere.
Retail notes receivable by product category at October 31 are as follows
(in millions of dollars):
2001 2000
-------------------------------
Agricultural equipment - new $ 2,439.1 $ 1,794.3
Agricultural equipment - used 1,725.5 1,809.6
Construction and forestry equipment - new 1,288.9 1,016.6
Construction and forestry equipment - used 167.8 152.1
Commercial and consumer equipment - new 683.9 511.9
Commercial and consumer equipment - used 38.4 35.1
Recreational products 176.0 219.6
-----------------------------------------------------------------------------------
Total 6,519.6 5,539.2
-----------------------------------------------------------------------------------
Unearned finance income:
Equipment (830.0) (871.5)
Recreational products (64.3) (80.0)
-----------------------------------------------------------------------------------
Total (894.3) (951.5)
-----------------------------------------------------------------------------------
Retail notes receivable $ 5,625.3 $ 4,587.7
===================================================================================
Retail notes acquired by the Company during the year ended October 31, 2001
had an estimated average original term (based on dollar amounts) of 72 months.
During 2000 and 1999, the estimated average original term was 64 and 65 months,
respectively. Historically, because of prepayments, the average actual life of
retail notes has been considerably shorter than the average original term. The
average actual life for retail notes liquidated in 2001, 2000 and 1999 was 28,
27 and 26 months, respectively.
26
Retail note installments at October 31 are scheduled as follows (in millions of
dollars):
2001 2000
-------------------------------
Due in:
0-12 months $ 1,969.2 $ 1,595.9
13-24 months 1,700.0 1,354.0
25-36 months 1,317.2 1,085.9
37-48 months 873.8 769.8
49-60 months 461.1 479.9
Over 60 months 198.3 253.7
-----------------------------------------------------------
Total $ 6,519.6 $ 5,539.2
===========================================================
Company guidelines relating to down payment requirements and contract terms
on retail notes are generally as follows:
Down Contract
Payment Terms
--------------------------------
Agricultural equipment (new and used):
Seasonal payments 30% 4-8 crop years
Monthly payments 20% 48-96 months
Construction and forestry equipment:
New 20% 48-60 months
Used 20% 36 months
Commercial and consumer equipment (new and used):
Seasonal payments 10% 3-6 years
Monthly payments 10% 36-72 months
Recreational products:
New 10% 180 months
Used 10% 144 months
During 2001, 2000 and 1999, the Company received proceeds of $1,531
million, $978 million and $2,281 million, respectively, from the sale of
Receivables and Leases (including securitized sales). The Company acts as agent
for the buyers in collection and administration for a majority of the
Receivables and Leases it has sold. All Receivables and Leases sold are
collateralized by security agreements on the related equipment sold to the
customers. The Company's estimated maximum exposure under all Receivable and
Lease recourse provisions at October 31, 2001, 2000 and 1999 was $166 million,
$168 million and $161 million, respectively. In addition, the Company has
guaranteed letters of credit on behalf of John Deere Credit Inc., the John Deere
finance subsidiary in Canada, as part of three retail note sales. At October 31,
2001 and 2000, the maximum exposure under these agreements was approximately $9
million and $6 million, respectively. At October 31, 2001, 2000 and 1999, the
balance of all Receivables and Leases previously sold, but still administered by
the Company, was $1,442 million, $1,959 million and $2,393 million,
respectively.
Finance income is recognized over the lives of the retail notes on the
effective-yield basis. During 2001, the average effective yield on retail notes
held by the Company was approximately 9.7 percent, compared with 10.2 percent in
2000 and 9.5 percent in 1999. Unearned finance income on variable-rate notes is
adjusted monthly based on fluctuations in the base rate of a specified bank.
Costs incurred in the acquisition of retail notes are deferred and recognized
over the expected lives of the notes on the effective-yield basis.
27
A portion of the finance income earned by the Company arises from financing
of retail sales of John Deere equipment on which finance charges are waived or
reduced by John Deere for a period from the date of sale to a specified
subsequent date. The Company generally receives compensation from John Deere
equal to a competitive interest rate for periods during which finance charges
have been waived or reduced on retail notes and leases. The portions of the
Company's finance income earned that were received from John Deere on retail
notes containing waiver of finance charges or reduced rates were 32 percent in
2001, 30 percent in 2000 and 29 percent in 1999.
A deposit equal to one percent of the face amount of certain John Deere
agricultural and commercial and consumer equipment retail notes originating from
each dealer is withheld by the Company from that dealer. Any subsequent retail
note losses are charged against the withheld deposits. At the end of each
calendar quarter, the balance of each dealer's withholding account in excess of
a specified percent (generally 3 percent, 2 percent for select dealers) of the
total balance outstanding on retail notes originating with that dealer is
remitted to the dealer. To the extent that these deposits withheld from the
dealer from whom the retail note was acquired cannot absorb a loss on a retail
note, it is charged against the Company's allowance for credit losses. There is
no withholding of dealer deposits on John Deere construction and forestry
equipment retail notes or recreational product retail notes.
The Company requires that theft and physical damage insurance be carried on
all goods leased or securing retail notes and wholesale receivables. In most
cases, the customer may, at his own expense, have the Company or the seller of
the goods purchase this insurance or obtain it from other sources.
Revolving Charge Accounts Receivable
- ------------------------------------
Revolving charge account income is generated primarily by three revolving
credit products: Farm Plan(TM), PowerPlan(R) and the John Deere Credit Revolving
Plan. Farm Plan(TM) is primarily used by farmers and ranchers to finance
day-to-day operating expenses, such as parts and services. Merchants offer Farm
Plan(TM) as an alternative to carrying in-house accounts receivable, and can
initially sell existing balances to the Company under a recourse arrangement.
Farm Plan(TM) income includes a discount paid by merchants for transaction
processing and support, and finance charges paid by customers on their
outstanding account balances. PowerPlan(R) is primarily used by construction
companies to finance day-to-day operating expenses, such as parts and services.
Merchants offer PowerPlan(R) as an alternative to carrying in-house accounts
receivable, and can initially sell existing balances to the Company under a
recourse arrangement. PowerPlan(R) income includes a discount paid by merchants
for transaction processing and support and finance charges paid by customers on
their outstanding account balances. The John Deere Credit Revolving Plan is used
primarily by retail customers of John Deere dealers to finance commercial and
consumer equipment. Income includes a discount paid by dealers on most
transactions and finance charges paid by customers on their outstanding account
balances. Revolving charge accounts receivable at October 31, 2001 totaled $814
million, compared with $688 million at October 31, 2000. Generally, account
holders may pay the account balance in full at any time, or make payments over a
number of months according to a payment schedule.
Operating Loans
- ---------------
Operating loan income is generated primarily by operating loans which are
offered through several leading farm input providers to finance the acquisition
of seeds and fertilizers. Income on this product is generated from finance
charges paid by customers on their outstanding account balances. Operating loan
receivables totaled $501 million at October 31, 2001 compared with $422 million
at October 31, 2000.
Financing Leases and Equipment on Operating Leases
- --------------------------------------------------
The Company leases agricultural, construction and forestry, commercial and
consumer and certain other equipment directly to retail customers. At the time
of accepting a lease that qualifies as a financing lease under FASB Statement
No. 13, Accounting for Leases, the Company records the gross amount of lease
28
payments receivable, estimated residual value of the leased equipment and
unearned finance income. The unearned finance income is equal to the excess of
the gross lease receivable plus the estimated residual value over the cost of
the equipment. The unearned finance income is recognized as revenue over the
lease term on the effective-yield method. Rental payments applicable to
equipment on operating leases are recorded as income on a straight-line method
over the lease terms. Operating lease assets are recorded at cost and
depreciated to their estimated residual value generally on a straight-line
method over the terms of the leases. Residual values represent estimates of the
value of the leased assets at the end of the contract terms and are initially
determined based upon appraisals and estimates. Residual values are continually
reviewed to determine that estimated amounts are appropriate. Lease acquisition
costs are accounted for in a manner similar to the procedures for retail notes.
Financing leases receivable by product category at October 31 are as follows (in
millions of dollars):
2001 2000
-----------------------
Agricultural equipment $ 155.3 $ 138.7
Construction and forestry equipment 240.7 246.9
Commercial and consumer equipment 95.1 85.8
Other equipment 22.7 18.4
----------------------------------------------------------------
Total 513.8 489.8
Estimated residual values 57.5 54.6
Unearned finance income (91.8) (88.0)
----------------------------------------------------------------
Financing leases receivable $ 479.5 $ 456.4
================================================================
Initial lease terms for financing leases generally range from 36 months to
60 months. Payments on financing leases receivable at October 31 are scheduled
as follows (in millions of dollars):
2001 2000
---------------------------
Due in:
0-12 months $ 168.2 $ 172.0
13-24 months 143.0 134.4
25-36 months 97.9 90.8
37-48 months 60.2 52.5
Over 48 months 44.5 40.1
-----------------------------------------------------
Total $ 513.8 $ 489.8
=====================================================
The cost of equipment on operating leases by product category at October 31
is as follows (in millions of dollars):
2001 2000
------------------------------
Agricultural equipment $1,211.9 $1,230.6
Construction and forestry equipment 544.1 512.9
Commercial and consumer equipment 147.8 122.1
Other equipment 45.3 37.3
----------------------------------------------------------------------------
Total 1,949.1 1,902.9
Accumulated depreciation (464.3) (385.8)
----------------------------------------------------------------------------
Equipment on operating leases - net $1,484.8 $1,517.1
============================================================================
29
Initial lease terms for equipment on operating leases generally range from
36 months to 60 months. Rental payments for equipment on operating leases at
October 31 are scheduled as follows (in millions of dollars):
2001 2000
--------------------------
Due in:
0-12 months $ 280.2 $ 279.0
13-24 months 187.0 191.9
25-36 months 92.8 91.3
37-48 months 33.8 41.4
Over 48 months 13.8 17.8
------------------------------------------------
Total $ 607.6 $ 621.4
================================================
Deposits withheld from John Deere dealers and related losses on financing
and operating leases are handled in a manner similar to the procedures for
retail notes. In addition, a lease payment discount program, allowing reduced
payments over the term of the lease, is administered in a manner similar to
finance waiver on retail notes.
Equipment returned to the Company upon termination of leases and held for
subsequent sale or lease is recorded at the lower of net book value or estimated
market value of the equipment.
Wholesale Receivables
- ---------------------
The Company also finances wholesale inventories of John Deere engines, John
Deere agricultural equipment, John Deere commercial and consumer equipment, and
John Deere construction and forestry equipment owned by dealers of those
products in the form of wholesale receivables. Wholesale finance income related
to these notes is generally recognized monthly based on the daily balance of
wholesale receivables outstanding and the applicable effective interest rate.
Interest rates vary with a prevailing bank base rate, the type of equipment
financed and the balance outstanding. Wholesale receivables are secured by
equipment financed. Generally, the maximum maturity for wholesale notes that are
included in wholesale receivables is 12 months. Additional information is
presented in Note 1 to the Consolidated Financial Statements.
In October 2001, the Company purchased $2.2 billion of wholesale
receivables (trade receivables) from John Deere. In the future, it is expected
that a significant portion of newly originated trade receivables will be
purchased from John Deere on an ongoing basis. John Deere will compensate the
Company for the carrying costs.
Other Receivables
- -----------------
The Company has sold retail notes to limited-purpose business trusts and to
private third parties, which utilize the notes as collateral for asset-backed
securities issued. Other receivables related to securitizations are recorded at
net present value and relate to payments to be received for retained interests.
These retained interests are subsequently carried at estimated fair value with
changes in fair value included in income. Securitization and servicing fee
income includes the interest earned on these retained interests and reimbursed
administrative expenses.
Concentration of Credit Risk
- ----------------------------
Receivables and Leases have significant concentrations of credit risk in
the agricultural, construction and forestry, commercial and consumer, and
recreational product business sectors as shown in the previous tables. On a
geographic basis, there is not a disproportionate concentration of credit risk
in any area in which the Company operates. The Company retains as collateral a
security interest in the goods associated with Receivables and Leases other than
certain revolving charge accounts.
30
Note 3. Allowance for Credit Losses, Delinquencies and Write-offs
- ------ ---------------------------------------------------------
Allowance for Credit Losses
- ---------------------------
Allowances for credit losses on Receivables and Leases are maintained in
amounts considered to be appropriate in relation to the Receivables and Leases
outstanding based on estimated collectibility and collection experience.
An analysis of the allowance for credit losses on total Receivables and
Leases follows (in millions of dollars):
2001 2000 1999
----------------------------------
Balance, beginning of the year $ 93.3 $ 83.6 $ 81.3
Provision charged to operations 74.5 52.6 62.3
Amounts written off (58.0) (36.2) (40.2)
Transfers primarily related to receivable and lease sales and purchases 0.6 (6.7) (19.8)
- -------------------------------------------------------------------------------------------------------------
Balance, end of the year $110.4 $ 93.3 $ 83.6
=============================================================================================================
The allowance for credit losses represented 0.9 percent, 1.1 percent and
1.2 percent of Receivables and Leases financed at October 31, 2001, 2000 and
1999, respectively. In addition, the Company had $134 million, $133 million and
$123 million at October 31, 2001, 2000 and 1999, respectively, of deposits
primarily withheld from John Deere dealers available for certain potential
credit losses originating from those dealers.
Delinquencies
- -------------
Generally, when retail notes become 120 days delinquent, accrual of finance
income is suspended, the collateral is repossessed or the account is designated
for litigation and the estimated uncollectible amount, after charging the
dealer's withholding account, if any, is written off to the allowance for credit
losses. Accrual of revolving charge account income is suspended generally when
the account becomes 150 days delinquent. Accounts are deemed to be uncollectible
and written off to the allowance for credit losses when delinquency reaches 180
days for a Farm Plan(TM) or PowerPlan(R) account and 150 days for a John Deere
Credit Revolving Plan account. When a lease account becomes 120 days delinquent,
the accrual of lease revenue is suspended, the equipment is repossessed or the
account is designated for litigation, and the estimated uncollectible amount,
after charging the dealer's withholding account, if any, is written off to the
allowance for credit losses. When a wholesale receivable becomes 60 days
delinquent, accrual of finance income is suspended, the collateral is
repossessed or the account is designated for litigation, and the estimated
uncollectible amount is written off to the allowance for credit losses. Although
amounts are not withheld from dealers to cover uncollectible wholesale
receivables, there are usually repurchase agreements with non-John Deere
manufacturers for new inventories held by dealers.
31
Total Receivable and Lease amounts 60 days or more past due, by product and
as a percentage of total balances held were as follows (dollars in millions):
October 31, October 31, October 31,
2001 2000 1999
-------------------------------------------------------------------
Dollars Percent Dollars Percent Dollars Percent
-------------------------------------------------------------------
Retail notes:
Agricultural equipment $ 13.3 .37% $ 8.9 .30% $ 11.7 .45%
Construction and forestry equipment 4.9 .38 4.5 .45 2.1 .34
Commercial and consumer equipment 1.4 .23 0.9 .19 0.8 .23
Recreational products 0.3 .27 0.1 .07 0.1 .06
---------- --------- ---------
Total retail notes 19.9 .35 14.4 .31 14.7 .40
Revolving charge accounts 9.5 1.17 9.3 1.35 8.5 1.33
Operating loans 0.1 .02 0.7 .17 0.4 .15
Wholesale receivables 9.9 .33 3.0 .32 1.1 .11
Leases 7.7 .39 5.5 .28 5.2 .31
---------- --------- ---------
Total Receivables and Leases $ 47.1 .40 $ 32.9 .38 $ 29.9 .41
========== ========= =========
Write-offs
- ----------
Total Receivable and Lease write-off amounts, by product and as a
percentage of average balances held during the year were as follows (dollars in
millions):
2001 2000 1999
-------------------------------------------------------------------
Dollars Percent Dollars Percent Dollars Percent
-------------------------------------------------------------------
Retail notes:
Agricultural equipment $ 7.6 .28% $ 5.4 .20% $ 13.9 .47%
Construction and forestry equipment 16.3 2.11 6.5 .85 4.6 .76
Commercial and consumer equipment 0.3 .08 0.3 .08 0.1 .01
Recreational products 2.4 1.69 2.9 2.03 3.5 .96
---------- --------- ---------
Total retail notes 26.6 .66 15.1 .38 22.1 .52
Revolving charge accounts 14.5 1.81 8.2 1.14 10.0 1.61
Operating loans 0.9 .28 1.4 .66 0.6 .48
Wholesale receivables 7.4 .71 3.5 .34 1.9 .22
Leases 8.6 .47 8.0 .44 5.6 .43
---------- --------- ---------
Total Receivables and Leases $ 58.0 .74 $ 36.2 .46 $ 40.2 .56
========== ========= =========
Note 4. Retail Note Securitizations
- ------------------------------------
The Company periodically sells receivables in securitizations of retail
notes. It retains interest-only strips, servicing rights, and in some cases cash
reserve accounts, all of which are retained interests in the securitized
receivables. Gains or losses on sales of the receivables depend in part on the
previous carrying amount of the financial assets involved in the transfer,
allocated between the assets sold and the retained interest based on their
relative fair values at the date of transfer. The Company generally estimates
fair values based on the present value of future expected cash flows using
management's key assumptions as discussed below. The Company receives annual
servicing fees approximating 1 percent of the outstanding balance, and rights to
future cash flows. The Company's maximum exposure under recourse provisions
related to securitizations was $166 and $168 million at October 31, 2001 and
2000, respectively. Except for this
32
exposure, the investors and securitization trusts have no recourse to the
Company for failure of debtors to pay when due. The Company's retained
interests, which are included in the recourse provisions, are subordinate to
investor's interests and their values are subject to certain key assumptions as
shown below.
The Company recognized a pretax gain of $7 million on retail notes
securitized during 2001. Key assumptions used to initially determine the fair
value of the retained interests included a weighted-average maturity of 20
months, average annual prepayment rate of 20 percent, expected annual credit
losses of .29 percent, and a discount rate on retained interests and subordinate
tranches of 13 percent.
Cash flows received from and paid to securitization trusts in millions of
dollars were as follows:
------------------------------------------------------------------------
2001
------------------------------------------------------------------------
Proceeds from new securitizations $ 800
Servicing fees received 19
Other cash flows received 49
------------------------------------------------------------------------
The total retained interests, weighted-average life, weighted-average
current key economic assumptions and the sensitivity analysis showing the
hypothetical effects on the retained interests from immediate 10 percent and 20
percent adverse changes in those assumptions with dollars in millions were as
follows:
------------------------------------------------------------------------
2001
------------------------------------------------------------------------
Retail Note Securitizations
Carrying amount/fair value of retained interests $ 89
Weighted-average life (in months) 13
Prepayment speed assumption (annual rate) 19%
Impact on fair value of 10% adverse change $ (.2)
Impact on fair value of 20% adverse change $ (.4)
Expected credit losses (annual rate) .35%
Impact on fair value of 10% adverse change $ (.5)
Impact on fair value of 20% adverse change $ (.9)
Residual cash flows discount rate (annual) 13%
Impact on fair value of 10% adverse change $ (2.1)
Impact on fair value of 20% adverse change $ (4.2)
------------------------------------------------------------------------
These sensitivities are hypothetical changes in fair value and cannot be
extrapolated because the relationship of the changes in assumption to the
changes in fair value may not be linear. Also, the effect of a variation in a
particular assumption is calculated without changing any other assumption,
whereas, changes in one factor may result in changes in another. Accordingly, no
assurance can be given that actual results would be consistent with the results
of these estimates.
Principal balances of managed and securitized retail notes, past due
amounts and credit losses, net of recoveries, as of and for the year ended
October 31, 2001 in millions of dollars follow:
------------------------------------------------------------------------
Principal Principal 60 Days Net Credit
Outstanding or More Past Due Losses
------------------------------------------------------------------------
Owned $ 5,400 $ 19 $ 26
Securitized 1,300 12 9
------------------------------------------------------------------------
Managed $ 6,700 $ 31 $ 35
========================================================================
The amount of actual and projected future credit losses (expected static
pool losses) for securitizations
33
during 2001 was .60 percent of the amount of retail notes sold.
In November 2001, the Company securitized and sold approximately $930
million of retail notes, which were included in total Receivables and Leases at
year end. The Company recognized a pretax gain on the sale of $23 million in the
first quarter of 2002.
Note 5. Short-Term Borrowings
- ------ ---------------------
On October 31, 2001, short-term borrowings were $6,524 million, $2,359
million of which was commercial paper. Short-term borrowings were $4,743 million
on October 31, 2000, $2,474 million of which was commercial paper. The Capital
Corporation's short-term debt also includes amounts borrowed from John Deere,
which totaled $1,612 million and $495 million at October 31, 2001 and 2000,
respectively. The Capital Corporation pays a market rate of interest to John
Deere based on the average outstanding borrowings each month. The
weighted-average interest rate on total short-term borrowings at October 31,
2001 and 2000, excluding current maturities of long-term borrowings, was 3.0
percent and 6.5 percent, respectively.
At October 31, 2001, the Company and Deere & Company jointly maintained
$4,280 million of unsecured lines of credit with various banks in North America
and overseas, $1,018 million of which was unused. For the purpose of computing
unused credit lines, commercial paper and short-term bank borrowings, excluding
the current portion of long-term borrowings, of the Company and John Deere, were
considered to constitute utilization. These agreements include a $2,113 million
long-term commitment of the banks expiring on February 20, 2006. The credit
agreement has various requirements of the Company, including the maintenance of
its consolidated ratio of earnings before fixed charges to fixed charges at not
less than 1.05 to 1 for each fiscal quarter (as described below) and the
Company's ratio of senior debt to total stockholder's equity plus subordinated
debt may not be more than 8 to 1 at the end of any fiscal quarter. "Senior debt"
consists of the Company's total interest-bearing obligations, excluding
subordinated debt, but including borrowings from John Deere. The Company's ratio
of senior debt to total stockholder's equity plus subordinated debt was 5.0 to 1
at October 31, 2001, compared to 5.7 to 1 at October 31, 2000. An annual
facility fee on the credit agreement is charged to the Capital Corporation based
on utilization.
Deere & Company has an agreement with the Capital Corporation to make
income maintenance payments to the Capital Corporation such that its
consolidated ratio of earnings before fixed charges to fixed charges is not less
than 1.05 to 1 for any fiscal quarter. For purposes of these calculations,
"earnings before fixed charges" consist of income before income taxes, the
cumulative effect of changes in accounting principles 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. The Company's ratio of earnings before fixed charges to fixed
charges was 1.53 to 1, 1.48 to 1 and 1.64 to 1 in 2001, 2000 and 1999,
respectively. Deere & Company also agreed to maintain the Capital Corporation's
tangible net worth at not less than $50 million and to continue to own at least
51 percent of Capital Corporation's voting capital stock. This arrangement is
not intended to make Deere & Company responsible for the payment of any
indebtedness, obligation or liability of the Company or any of its direct or
indirect subsidiaries.
34
Note 6. Long-Term Borrowings
- ------ --------------------
Long-term borrowings of the Company at October 31 consisted of the following
(in millions of dollars):
2001 2000
-------------------------------
Senior Debt:
Medium-term notes due 2003-2007:
($2,555 principal) Average interest rate of 4.6% as of year end
2001 and 7.1% as of year end 2000 $ 2,573* $ 1,775
7% Notes due 2002:
Swapped to variable interest rate of 7.1% as of year end 2000 300
Floating Rate Notes due 2003
Interest rate of 2.7% as of year end 2001 200
5.125% Notes due 2006:
($600 principal) Swapped to variable interest rate of 3.0% as of
year end 2001 601*
6% Notes due 2009:
($300 principal) Swapped to variable interest rate of 3.8% as of
year end 2001 and 6.9% as of year end 2000 316* 300
Other Notes 21 63
- ------------------------------------------------------------------------------------------------------------------
Total senior debt 3,711 2,438
Unamortized debt discount (2) (1)
- ------------------------------------------------------------------------------------------------------------------
Net senior debt 3,709 2,437
- ------------------------------------------------------------------------------------------------------------------
Subordinated Debt:
8-5/8% Subordinated Debentures due 2019 150 150
- ------------------------------------------------------------------------------------------------------------------
Total subordinated debt 150 150
- ------------------------------------------------------------------------------------------------------------------
Total $ 3,859 $ 2,587
==================================================================================================================
* These carrying values include fair value adjustments related to interest rate
swaps designated as fair value hedges under FASB Statement No. 133 adopted in
2001.
The approximate amounts of long-term borrowings maturing and sinking
fund payments required in each of the next five years, in millions of dollars,
are as follows: 2002 - $2,529, 2003 - $1,728, 2004 - $756, 2005 - $0 and 2006 -
$825.
Note 7. Leases
- ------ ------
Total rental expense for operating leases was $6 million, $6 million
and $5 million for the years 2001, 2000 and 1999, respectively. At October 31,
2001, future minimum lease payments under operating leases amounted to $54
million as follows: 2002 - $7, 2003 - $4, 2004 - $3, 2005 - $3, 2006 - $3 and
later years $34.
Note 8. Common Stock
- ------ ------------
All of the Capital Corporation's common stock is owned by John Deere
Credit Company, a wholly-owned finance holding subsidiary of Deere & Company. No
shares of common stock of the Company were reserved for officers or employees or
for options, warrants, conversions or other rights at October 31, 2001 or 2000.
At October 31, 2001, the Company had authorized, but not issued, 10,000 shares
of $1 par value preferred stock. In addition, in 2001, Deere & Company increased
its investment in John Deere Credit Company by $700 million. In turn,
John Deere Credit Company increased its investment in Capital Corporation by
$700 million.
35
Note 9. Dividends
- ------ ---------
The Capital Corporation did not declare or pay cash dividends to John
Deere Credit Company in 2001. This compares to $20 million in dividends declared
and paid to John Deere Credit Company in 2000. In 2000, John Deere Credit
Company paid a comparable dividend to Deere & Company.
Note 10. Pension and Other Retirement Benefits
- ------- -------------------------------------
The Company participates in the Deere & Company salaried pension plan,
which is a defined benefit plan 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 $1.3 million in 2001, $2.5 million in 2000 and $2.0 million
in 1999. The Company generally provides defined benefit health care and life
insurance plans for retired employees 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 $1.4
million in 2001, $1.3 million in 2000 and $1.5 million in 1999. Further
disclosure for these plans is included in the notes to the Deere & Company 2001
Annual Report on Form 10-K.
Note 11. Income Taxes
- ------- ------------
Taxes on Income and Income Tax Credits
- --------------------------------------
The taxable income of the Company is included in the consolidated
United States income tax return of Deere & Company. Provisions for income taxes
are made generally as if the Capital Corporation and each of its subsidiaries
filed separate income tax returns.
Deferred Income Taxes
- ---------------------
Deferred income taxes arise because certain items are treated
differently for financial accounting than for income tax reporting purposes. An
analysis of deferred income tax assets and liabilities at October 31 is as
follows (in millions of dollars):
2001 2000
------------------------- -------------------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liabilities Assets Liabilities
------------------------- -------------------------
Deferred lease income $ 142.7 $ 100.9
Deferred retail note finance income 7.5 5.4
Allowance for credit losses $ 41.6 $ 39.0
Accrual for retirement and other benefits 6.8 4.5
Securitization income 16.0 9.1
Unrealized gain/loss on derivatives 31.8
Net operating loss carry forward 1.8
Miscellaneous accruals and other 1.1 0.7
---------------------------------------------------------------------------------- -------------------------
Total $ 98.0 $ 151.3 $ 53.3 $ 106.3
================================================================================== =========================
The provision for income taxes consisted of the following (in millions of
dollars):
36
2001 2000 1999
-----------------------------------
Current $ 52.5 $ 59.0 $ 44.0
Deferred 32.1 17.6 38.1
----------------------------------------------------------------------------
Total provision for income taxes $ 84.6 $ 76.6 $ 82.1
============================================================================
Effective Income Tax Provision
- ------------------------------
A comparison of the statutory and effective income tax provisions and
reasons for related differences follows (in millions of dollars):
2001 2000 1999
-------------------------------
United States federal income tax provision
at a statutory rate of 35 percent $ 86.0 $ 75.8 $ 82.5
Municipal lease income not taxable (1.7) (1.7) (1.5)
Taxes on foreign activities (.5) .4 (.4)
Other adjustments - net 0.8 2.1 1.5
--------------------------------------------------------------------------------
Total provision for income taxes $ 84.6 $ 76.6 $ 82.1
================================================================================
================================================================================
Note 12. Cash Flow Information
- ------- ---------------------
For purposes of the statements of consolidated cash flows, the Company
considers investments with original maturities of three months or less to be
cash equivalents. Substantially all of the Company's short-term investments
mature within three months or less.
Cash payments by the Company for interest incurred on borrowings in
2001, 2000 and 1999 were $462 million, $428 million and $381 million,
respectively. Cash payments for income taxes during these same periods were $50
million, $55 million and $47 million, respectively.
Note 13. Legal Proceedings
- ------- -----------------
The Company is subject to various unresolved legal actions that arise
in the normal course of its business, the most prevalent of which relate to
state and federal laws and regulations concerning retail credit. Although it is
not possible to predict with certainty the outcome of these unresolved legal
actions or the range of possible loss, the Company believes these unresolved
legal actions will not have a material effect on its financial position or
results of operations.
37
Note 14. Comprehensive Income Items
- -----------------------------------
Comprehensive income includes all changes in the Company's equity during
the period, except transactions with stockholders of the Company. Comprehensive
income for the twelve months ended October 31, 2001, 2000 and 1999 consisted of
the following (in millions of dollars):
---------------------------------------------------------------------------------------------------------------
Before Tax Tax After Tax
Amount (Expense) Amount
Credit
---------------------------------------------------------------------------------------------------------------
2001
----
Change in cumulative translation adjustment $ 2.3 $ 2.3
Unrealized loss on derivatives:
Hedging loss (130.3) 44.5 (85.8)
Reclassification of realized net loss to net income 36.9 (12.7) 24.2
---------------------------------------------------------------------------------------------------------------
Net unrealized loss on derivatives (93.4) 31.8 (61.6)
---------------------------------------------------------------------------------------------------------------
Total other comprehensive loss $ (91.1) $ 31.8 $ (59.3)
===============================================================================================================
---------------------------------------------------------------------------------------------------------------
Before Tax Tax After Tax
Amount (Expense) Amount
Credit
---------------------------------------------------------------------------------------------------------------
2000
----
Change in cumulative translation adjustment and total $ (10.4) $ (10.4)
other comprehensive loss
===============================================================================================================
---------------------------------------------------------------------------------------------------------------
Before Tax Tax After Tax
Amount (Expense) Amount
Credit
---------------------------------------------------------------------------------------------------------------
1999
----
Change in cumulative translation adjustment and total $ 1.0 $ 1.0
other comprehensive income
===============================================================================================================
Note 15. Financial Instruments
- ------- ---------------------
The fair values of financial instruments that do not approximate the
carrying values in the financial statements at October 31 are as follows (in
millions of dollars):
2001 2000
---------------------------- ---------------------------
Carrying Fair Carrying Fair
Value Value Value Value
---------------------------- ---------------------------
Receivables financed $ 10,305 $ 10,326 $ 6,998 $ 6,991
====================================================================================== ===========================
Long-term borrowings $ 3,859 $ 3,858 $ 2,587 $ 2,574
====================================================================================== ===========================
Fair Value Estimates
- --------------------
Fair values of the long-term financing receivables with fixed rates were
based on the discounted values of their related cash flows at current market
interest rates. The fair values of the remaining financing receivables
approximated the carrying amounts.
Fair values of long-term borrowings with fixed rates were based on the
discounted values of their related cash flows at current market interest rates.
Certain long-term borrowings of the Company have been
38
swapped to current variable interest rates. The carrying values of these
long-term borrowings include adjustments related to fair value hedges under FASB
Statement No. 133, which was adopted in 2001. See Notes 1 and 6.
Derivatives
- -----------
It is the Company's policy that derivative transactions are executed only
to manage exposures arising in the normal course of business, and not for the
purpose of creating speculative positions or trading. The Company manages the
relationship of the types and amounts of funding sources to the Receivable and
Lease portfolio in an effort to diminish risk due to interest rate and foreign
currency fluctuations, while responding to favorable financing opportunities.
The Company also has foreign currency exposures at some of its foreign and
domestic operations related to buying, selling and financing in currencies other
than the local currencies.
Interest Rate Swaps
- -------------------
The Company enters into interest rate swap agreements primarily to more
closely match the fixed or floating interest rates of the borrowings to those of
the assets being funded.
Certain interest rate swaps were designated as hedges of future cash flows
from commercial paper and variable interest rate borrowings. The effective
portion of the fair value gains or losses on these cash flow hedges are recorded
in other comprehensive income and subsequently reclassified into interest
expense as payments become due and the swaps approach maturity. The amounts
offset the effects of interest rate changes on the related borrowings. The
amount of the loss recorded in other comprehensive income at October 31, 2001
that is expected to be reclassified to earnings in the next 12 months if
interest rates remain unchanged is approximately $38 million after-tax. These
swaps mature in up to 57 months.
Certain interest rate swaps were designated as fair value hedges of
fixed-rate, long-term borrowings. The effective portion of the fair value gains
or losses on these swaps were offset by fair value adjustments in the underlying
borrowings. See Note 6.
Any ineffective portions of the gains or losses on all cash flow and fair
value interest rate swaps designated as hedges were recognized immediately in
interest expense and were not material in 2001. There were no components of cash
flow or fair value hedges that were excluded from the assessment of
effectiveness.
Foreign Exchange Forward Contracts
- ----------------------------------
The Company has entered into foreign exchange forward contracts and
purchased options in order to manage the currency exposure of certain
receivables and liabilities. These derivatives were not designated as hedges
under FASB Statement No. 133. The fair value gains or losses from these foreign
currency derivatives are recognized directly in earnings, generally offsetting
the foreign exchange gains or losses on the exposures being managed.
Note 16. Geographic Area Information
- ------- ---------------------------
Based on the way the operations are managed and evaluated by management and
materiality considerations, the Company is viewed as one operating segment.
However, geographic area information for revenues and operating profit, which is
income before income taxes, attributed to the United States and foreign
countries for the years ended October 31, 2001, 2000, and 1999 are shown below
(in millions of dollars):
2001 2000 1999
-------------- -------------- ---------------
39
Revenues:
United States $ 1,152 $1,047 $ 919
Foreign countries 64 59 40
--------------------------------------------------------------------------------------------------------------------
Total $ 1,216 $1,106 $ 959
====================================================================================================================
Operating profit:
United States $ 242 $ 215 $ 233
Foreign countries 4 2 3
--------------------------------------------------------------------------------------------------------------------
Total $ 246 $ 217 $ 236
====================================================================================================================
Supplemental Information (Unaudited)
- ------------------------------------
Quarterly Information
- ---------------------
Supplemental quarterly information for the Company follows (in millions
of dollars):
First Second Third Fourth Fiscal Year
Quarter Quarter Quarter Quarter
----------------------------------------------------------------
2001:
Revenues $303.5 $303.0 $303.0 $306.2 $ 1,215.7
Interest expense 123.4 119.8 113.5 96.7 453.4
Operating expenses 113.9 125.1 132.5 145.1 516.6
Provision for income taxes 22.2 21.2 20.0 21.2 84.6
Equity in income (loss) of unconsolidated
Affiliates .5 (1.5) (1.0) (1.3) (3.3)
- ------------------------------------------------------------------------------------------------------------------
Net income $ 44.5 $ 35.4 $ 36.0 $ 41.9 $ 157.8
==================================================================================================================
2000:
Revenues $251.1 $261.3 $292.5 $301.0 $ 1,105.9
Interest expense 99.1 103.4 116.7 121.0 440.2
Operating expenses 96.8 108.5 113.7 129.9 448.9
Provision for income taxes 19.1 17.1 21.8 18.6 76.6
Equity in income of unconsolidated
Affiliates 0.1 0.1 0.2 0.2 0.6
- ------------------------------------------------------------------------------------------------------------------
Net income $ 36.2 $ 32.4 $ 40.5 $ 31.7 $ 140.8
==================================================================================================================
Dividend
- --------
On December 7, 2001, the Capital Corporation declared a $140 million
dividend, to be paid to John Deere Credit Company on December 12, 2001. John
Deere Credit Company, in turn, declared a $140 million dividend to Deere &
Company, also payable on December 12, 2001.
40
Financial Instrument Risk Information
- -------------------------------------
Sensitivity Analysis
The following table includes sensitivity analysis for the Company's
derivatives and other financial instruments that have interest rate risk. These
instruments are held for other than trading purposes. Quarterly, the Company
uses a combination of cash flow models to assess the sensitivity of earnings to
changes in market interest rates. The models calculate the effect of adjusting
interest rates as follows. Cash flows for financing receivables are discounted
at the current prevailing rate for each receivable portfolio. Cash flows for
borrowings are discounted at the treasury yield curve plus a market credit
spread for similarly rated borrowers. Cash flows for interest rate swaps are
projected and discounted using forecasted rates from the swap yield curve at the
repricing dates.
The gains or losses in the following table represent the changes in the
financial instruments fair values which would be caused by instantaneously
increasing the interest rates by 10 percent of the current market rates at
October 31, 2001. The gains or losses in fair values would have been as follows
in millions of dollars:
Fair Value Fair Value
Gains (Losses) Gains (Losses)
October 31, 2001 October 31, 2000
-------------------------------------------
Financing receivables $ (42) $ (43)
Interest rate swaps related to short-term borrowings 9 8
Long-term borrowings and related swaps 24 28
Interest rate and foreign currency swaps (20) (11)
-------------------------------------------
Total $ (29) $ (18)
===========================================
Tabular Information
- -------------------
The following foreign exchange forward contracts were held by the Company
related to certain currency exposures. All contracts have maturity dates of less
than one year. The notional amounts and fair values in millions of dollars at
October 31, 2001 were as follows:
- -----------------------------------------------------------------------------------------------------
Average Notional Fair Value
Contractual Amount Gains (Losses)
Rate*
- -----------------------------------------------------------------------------------------------------
Buy US$ / Sell Australian dollars 1.9947 $230 $ (0.6)
Buy US$ / Sell Euro 1.1010 154 (0.8)
Other 41 (0.2)
--------------- ----------------
Total $425 $ (1.6)
=============== ================
*Currency per United States dollar (US$)
- --------------------------------------------------------------------------------
41
The Company held certain financial instruments in currencies other than the
functional currencies. These significant carrying values, in millions of
dollars at October 31, 2001 by maturity dates and average interest rates
were as follows:
- -----------------------------------------------------------------------------------------------------------------
Expected Maturity Date
----------------------------------------------------------------------
Fair
Functional Currency (FC) 2002 2003 2004 2005 2006 Total Values
- -----------------------------------------------------------------------------------------------------------------
Euro (FC)
--------
Short-term borrowings (US$) $ 99 $ 99 *
Average interest rates 3.3%
Australian Dollar (FC)
---------------------
Short-term borrowings (US$) $ 295 $ 295 *
Average interest rates 2.6%
*These fair values were approximately equal to the values in the total column.
- -----------------------------------------------------------------------------------------------------------------
42
Index to Exhibits
-----------------
2. Not applicable.
3.1 Certificate of Incorporation, as amended (Exhibit 3.1 to Form 10-K of
the registrant for the year ended October 31, 1999*).
3.2 Bylaws, as amended (Exhibit 3.2 to Form 10-K of the registrant for the
year ended October 31, 1999*).
4.1 Five-Year Credit Agreement among registrant, Deere & Company, various
financial institutions, The Chase Manhattan Bank as administrative
agent, Bank of America, N.A. and Bank One, N.A. as documentation agents,
and Deutsche Bank AG, New York Branch as syndication agent, et al, dated
as of February 22, 2001. (Exhibit 4.1 to Form 10-Q of Deere & Company
for the quarter ended January 31, 2001, Securities and Exchange
Commission file number 1-4121*)
4.2 364-Day Credit Agreement among registrant, Deere & Company, various
financial institutions, The Chase Manhattan Bank, as administrative
agent, Bank of America, N.A. and Bank One, N.A. as documentation agents,
and Deutsche Bank AG, New York Branch as syndication agent, et al, dated
as of February 22, 2001. (Exhibit 4.2 to Form 10-Q of Deere & Company
for the quarter ended January 31, 2001, Securities and Exchange
Commission file number 1-4121*)
4.3 Senior Indenture dated as of March 15, 1997 between the registrant and
The Chase Manhattan Bank, as Trustee (Exhibit 4.1 to registration
statement on Form S-3 no. 333-68355, filed December 4, 1998*).
4.4 Subordinated Indenture dated as of March 15, 1997 between the registrant
and Bank One Trust Company, National Association (successor by merger to
the First National Bank of Chicago), as Trustee (Exhibit 4.3 to
registration statement on Form S-3 no. 333-68355, filed December 4,
1998*).
4.5 Form of certificate for common stock (Exhibit 4.6 to Form 10-K of the
registrant for the year ended October 31, 1998*).
Certain instruments relating to long-term debt constituting less than
10% of the registrant's total assets may not be filed as exhibits
herewith pursuant to Item 604(b)(4)(iii)(A) of Regulation S-K. The
registrant will file copies of such instruments upon request of the
Commission.
10.1 Agreement as amended November 1, 1994 between the registrant and Deere &
Company concerning agricultural retail notes (Exhibit 10.1 to Form 10-K
of Deere & Company for the year ended October 31, 1998*).
10.2 Agreement as amended November 1, 1994 between the registrant and Deere &
Company concerning lawn and grounds care retail notes (Exhibit 10.2 to
the Form 10-K of Deere & Company for the year ended October 31, 1998*).
10.3 Agreement as amended November 1, 1994 between the registrant and John
Deere Industrial Equipment Company concerning industrial retail notes
(Exhibit 10.3 to the Form 10-K of Deere & Company for the year ended
October 31, 1998*).
43
10.4 Agreement dated October 15, 1996 between the registrant and Deere &
Company relating to fixed charges ratio, ownership and minimum net worth
(Exhibit 10.7 to Form 10-K of the registrant for the year ended October
31, 1996*).
10.5 Agreement dated July 14, 1997 between the registrant and John Deere
Construction Equipment Company concerning construction retail notes
(Exhibit 10.8 to Form 10-K of the registrant for the year ended October
31, 1997*).
10.6 Asset Purchase Agreement dated October 29, 2001 between Deere & Company
and Deere Capital, Inc. concerning the sale of trade receivables.
(Exhibit 10-19 to Form 10-K of Deere & Company for the year ended
October 31, 2001, Securities and Exchange Commission file number
1-4121*)
10.7 Asset Purchase Agreement dated October 29, 2001 between John Deere
Construction & Forestry Company and Deere Capital, Inc. concerning the
sale of trade receivables. (Exhibit 10.20 to Form 10-K of Deere &
Company for the year ended October 31, 2001, Securities and Exchange
Commission file number 1-4121*)
11. Not applicable.
12. Computation of Ratio of Earnings to Fixed Charges for each of the five
years in the period ended October 31, 2001.
13. Not applicable.
16. Not applicable.
18. Not applicable.
21. Omitted pursuant to instruction I(2).
22. Not applicable.
23. Consent of Deloitte & Touche LLP.
24. Not applicable.
99. Parts I and II of the Deere & Company Form 10-K for the fiscal year
ended October 31, 2001 (Securities and Exchange Commission file number
1-4121*).
----------------------
* Incorporated by reference. Copies of these exhibits are available from the
Company upon request.
44