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EX-31.2 - EX-31.2 - DEERE JOHN CAPITAL CORPjdcc-20171029ex3128e867b.htm
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EX-12 - EX-12 - DEERE JOHN CAPITAL CORPjdcc-20171029ex12e67a36c.htm

 

 

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 29, 2017

 

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 No.)

 

 

 

 

 

 

 

 

10587 Double R Boulevard, Suite 100

Reno, Nevada

 

89521

 

(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

2.75% Senior Notes Due 2022

 

New York Stock Exchange

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ☒   No ☐

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ☐   No ☒

 

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 ☒   No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☒   No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

Large accelerated filer ☐

 

Accelerated filer ☐

Non-accelerated filer ☒ (Do not check if a smaller reporting company)

 

Smaller reporting company ☐

 

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes ☐   No ☒

 

At November 26, 2017, 2,500 shares of common stock, without par value, of the registrant were outstanding, all of which were owned by John Deere Financial Services, Inc.

 

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.

This Annual Report on Form 10-K contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this Annual Report on Form 10-K are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, and other important information about forward-looking statements are disclosed under Item 1A, “Risk Factors” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Safe Harbor Statement” in this Annual Report on Form 10-K.

The Company

John Deere Capital Corporation (Capital Corporation) and its subsidiaries are collectively called the Company. John Deere Financial Services, Inc. (JDFS), a wholly-owned finance holding subsidiary of Deere & Company, owns all of the outstanding common stock of Capital Corporation. See “Relationships of the Company with John Deere” for additional information regarding agreements between the Company and Deere & Company. The Company conducts business in Australia, New Zealand, the United States (U.S.), and in several countries in Africa, Asia, Europe, and Latin America.

The Company provides and administers financing for retail purchases of new equipment manufactured by Deere & Company’s agriculture and turf and construction and forestry operations and used equipment taken in trade for this equipment. The Company generally purchases retail installment sales and loan contracts (retail notes) from Deere & Company and its wholly-owned subsidiaries (collectively called John Deere). John Deere generally acquires these retail notes through John Deere retail dealers. The Company also purchases and finances a limited amount of non-Deere retail notes. The Company also finances and services revolving charge accounts, in most cases acquired from and offered through merchants in the agriculture and turf and construction and forestry markets (revolving charge accounts). The Company also provides wholesale financing for inventories of John Deere agriculture and turf and construction and forestry equipment owned by dealers of those products (wholesale receivables). In addition, the Company leases John Deere equipment and a limited amount of non-Deere equipment to retail customers (financing and operating leases). The Company also offers credit enhanced international export financing to select customers and dealers, which generally involves John Deere products. Retail notes, revolving charge accounts, wholesale receivables, and financing leases are collectively called “Receivables.” Receivables and equipment on operating leases are collectively called “Receivables and Leases.”

Capital Corporation was incorporated under the laws of Delaware and commenced operations in 1958. At October 29, 2017, the Company had 1,616 full-time and part-time employees.

Business of John Deere

John Deere’s operations are categorized into three major business segments:

The agriculture and turf segment primarily manufactures and distributes a full line of agriculture and turf equipment and related service parts – including large, medium, and utility tractors; tractor loaders; combines, cotton pickers, cotton strippers, and sugarcane harvesters; related harvesting front-end equipment; sugarcane loaders and pull‑behind scrapers; tillage, seeding, and application equipment, including sprayers, nutrient management and soil preparation machinery; hay and forage equipment, including self-propelled forage harvesters and attachments, balers, and mowers; turf and utility equipment, including riding lawn equipment and walk-behind mowers, golf course equipment, utility vehicles, and commercial mowing equipment, along with a broad line of associated implements; integrated agricultural management systems technology and solutions; and other outdoor power products.

1


 

 

The construction and forestry segment primarily manufactures and distributes a broad range of machines and service parts 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; landscape loaders; skid-steer loaders; and log skidders, feller bunchers, log loaders, log forwarders, log harvesters, and related attachments.

John Deere’s worldwide agriculture and turf and construction and forestry operations are sometimes collectively referred to as the “Equipment Operations.” The products and services produced by the segments above are marketed primarily through independent retail dealer networks and major retail outlets.

The financial services segment includes the operations of the Company (described herein), and additional operations in the U.S., Canada, Brazil, China, India, Russia, and Thailand. The segment primarily finances sales and leases by John Deere dealers of new and used agriculture and turf equipment and construction and forestry equipment. In addition, it provides wholesale financing to dealers of the foregoing equipment, finances retail revolving charge accounts, and offers extended equipment warranties.

Worldwide net income attributable to Deere & Company in 2017 was $2,159 million, or $6.68 per share diluted ($6.76 basic), compared with $1,524 million, or $4.81 per share diluted ($4.83 basic), in 2016.

John Deere’s net sales and revenues increased 12 percent to $29,738 million in 2017, compared with $26,644 million in 2016. Net sales of the Equipment Operations increased 11 percent in 2017 to $25,885 million from $23,387 million last year. Sales included price realization of 1 percent and a favorable currency translation effect of 1 percent. Net sales in the U.S. and Canada increased 5 percent for 2017. Outside the U.S. and Canada, net sales increased 20 percent for the year, with a favorable currency translation effect of 1 percent for 2017.

The agriculture and turf segment had net sales of $20,167 million in 2017, compared with $18,487 million in 2016. The construction and forestry segment had net sales of $5,718 million in 2017, compared with $4,900 million in 2016. The financial services segment had revenues of $2,935 million in 2017, compared with $2,694 million in 2016.

Outlook for John Deere

Deere & Company’s equipment sales are projected to increase by about 22 percent for fiscal year 2018 and by about 38 percent for the first quarter, compared with the same periods in 2017. For fiscal year 2018, net income attributable to Deere & Company is anticipated to be about $2.6 billion.

Agriculture and Turf.  Deere & Company’s worldwide sales of agriculture and turf equipment are forecast to increase by about 9 percent for fiscal year 2018, including a positive currency translation effect of about 2 percent. Industry sales for agricultural equipment in the U.S. and Canada are forecast to be up 5 to 10 percent for 2018, supported by higher demand for large equipment.

Full year 2018 industry sales in the European Union (EU)28 member nations are forecast to be up about 5 percent due to improving conditions in the dairy and livestock sectors. South American industry sales of tractors and combines are projected to be flat to up 5 percent as a result of continued positive conditions, particularly in Argentina. Asian sales are forecast to be flat with strength in India offsetting weakness in China.

Industry sales of turf and utility equipment in the U.S. and Canada are expected to be about flat for 2018, with John Deere sales expected to outperform the industry.

Construction and Forestry.  Deere & Company’s worldwide sales of construction and forestry equipment are anticipated to be up about 69 percent for 2018, including a positive currency translation effect of about 1 percent. The Wirtgen acquisition is expected to add about 54 percent to the division’s sales for the year. The outlook reflects moderate economic growth worldwide, including higher housing starts in the U.S. and increased activity in the oil and gas sector. In forestry, global industry sales are expected to be flat to up 5 percent mainly as a result of improved lumber prices in North America.

2


 

 

Financial Services.  Net income for the financial services operations in fiscal year 2018, which includes the Company, is expected to increase about 8% to approximately $515 million. The outlook reflects a higher average portfolio, partially offset by increased selling, administrative and general expenses. Net income attributable to the Company for 2018, which does not include the financial services operations in Canada, Brazil, China, India, Russia, and Thailand or the insurance business related to extended equipment warranties, is projected to increase about 12% to approximately $368 million. The outlook reflects a higher average portfolio, partially offset by increased selling, administrative and general expenses.

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, the compensation paid by John Deere in connection with the Company’s purchase of trade receivables 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 certain 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. The majority of the Company’s businesses are affected by changes in interest rates, demand for credit, and competition.

The Company bears substantially all of the credit risk (net of recovery from withholdings from certain John Deere dealers and merchants) associated with its holding of Receivables and Leases. A small portion of the Receivables and Leases held (less than 5 percent) is guaranteed by certain subsidiaries of Deere & Company. The Company also performs substantially all servicing and collection functions. Servicing and collection functions for a small portion of the Receivables and Leases held (less than 5 percent) are provided by John Deere. 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, generally 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 retail notes and wholesale receivables 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.

The basis on which John Deere acquires retail notes and wholesale receivables from the dealers is governed by agreements with the John Deere dealers, which may be terminated in accordance with their terms and applicable law. 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. 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.

3


 

 

Deere & Company has an agreement with Capital Corporation pursuant to which it has agreed to continue to own, directly or through one or more wholly-owned subsidiaries, at least 51 percent of the voting shares of capital stock of Capital Corporation and to maintain the Company’s consolidated tangible net worth at not less than $50.0 million. This agreement also obligates Deere & Company to make payments to the Company such that its consolidated ratio of earnings to fixed charges is not less than 1.05 to 1 for each fiscal quarter. For 2017 and 2016, the Company’s ratios were 1.95 to 1 and 2.22 to 1, respectively, and never less than 1.79 to 1 and 2.01 to 1 for any fiscal quarter of 2017 and 2016, respectively. Deere & Company’s obligations to make payments to the Company under the agreement are independent of whether the Company is in default on its indebtedness, obligations or other liabilities. Further, Deere & Company’s obligations under the agreement are not measured by the amount of the Company’s indebtedness, obligations, or other liabilities. Deere & Company’s obligations to make payments under this agreement are expressly stated not to be a guaranty of any specific indebtedness, obligation, or liability of the Company and are enforceable only by or in the name of Capital Corporation. No payments were required under this agreement during the periods included in the consolidated financial statements.

The Company purchases certain wholesale trade receivables from John Deere. These trade receivables arise from John Deere’s sales of goods to independent dealers. Under the terms of the sales to dealers, interest is primarily 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 at the time of the sale to the dealer, until payment is received by the Company. Dealers cannot cancel purchases after the equipment is 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 twelve months for most equipment. Interest-free periods may not be extended. Interest charged may not be forgiven and the past due interest rates exceed market rates. The Company receives compensation from John Deere at approximate market interest rates for these interest-free periods. The Company computes the compensation from John Deere for interest-free periods based on the Company’s estimated funding costs, administrative and operating expenses, credit losses, and required return on equity.

Description of Receivables and Leases

Receivables and Leases arise mainly from retail and wholesale 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 accounts receivable. At October 29, 2017 and October 30, 2016, at least 90 percent of the Receivables and Leases administered by the Company were for financing that facilitated the purchase or lease of John Deere products.

John Deere Financial, f.s.b. (Thrift), is a wholly-owned subsidiary of Capital Corporation. It holds a federal thrift charter and is regulated by the Office of the Comptroller of the Currency (OCC). The U.S. Federal Reserve Board has oversight of the Company, as the owner of the Thrift. The Thrift is headquartered in Madison, Wisconsin and offers revolving charge products including John Deere Financial multi-use, PowerPlanâ, and John Deere Financial Revolving Plan throughout the U.S. Through its John Deere Financial multi-use product, the Thrift finances revolving charge accounts offered by more than 9,000 retailers to their customers for the purchase of goods and services. John Deere Financial multi‑use account holders purchase parts and service at equipment dealerships and farm inputs such as seed, crop protection products, fertilizer, and other supplies. The PowerPlanâ revolving charge account is primarily used by construction and forestry customers to finance the purchase of equipment parts, equipment rentals, and service work performed at John Deere construction and forestry dealers. John Deere Financial Revolving Plan is used primarily by retail customers of John Deere dealers to finance purchases of turf and utility equipment. See Note 4 to the Consolidated Financial Statements under “Revolving Charge Accounts Receivable.”

The Company finances wholesale inventories of John Deere agriculture and turf and construction and forestry equipment. A large portion of the wholesale financing is provided by the Company to dealers from whom it also purchases agriculture and turf and construction and forestry retail notes. See Note 4 to the Consolidated Financial Statements under “Wholesale Receivables.”

4


 

 

The Company generally requires that theft and physical damage insurance be carried on all goods leased or securing retail notes and wholesale receivables. The customer may, at the customer’s own expense, have the Company or the seller of the goods purchase this insurance or obtain it from other sources. Insurance is not required for goods purchased under 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 4 and Note 7 to the Consolidated Financial Statements.

In limited 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 Receivables and Leases should be accepted and how they should be serviced. Acceptance of these Receivables and Leases is dependent on having one or more risk mitigation enhancements that may include the pledge of additional collateral as security, the assignment of specific earnings to the Company, or the acceptance of accelerated payment schedules. Officers of the Company are responsible for establishing policies and reviewing the performance of the Company in accepting and collecting Receivables and Leases. The Company normally makes all of its own routine collections, settlements, and repossessions on Receivables and Leases.

John Deere retail notes and wholesale receivables are generally supported by perfected security interests in goods financed under laws such as the Uniform Commercial Code (UCC), certain federal statutes, and state motor vehicle laws in the U.S. and by security in goods or other security under applicable laws in other countries and jurisdictions. UCC financing statements are also prepared and filed on leases; however, these filings for operating leases are made for informational purposes only.

Finance Rates on Retail Notes

As of October 29, 2017 and October 30, 2016, approximately 95 percent of the retail notes held by the Company bore a fixed finance rate. 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 4 to the Consolidated Financial Statements for additional information.

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

 

 

    

2017

    

2016

    

2017

    

2016

 

Retail notes:

 

56

 

55

 

40

 

37

 

New equipment:

 

 

 

 

 

 

 

 

 

Agriculture and turf

 

56

 

56

 

38

 

35

 

Construction and forestry

 

48

 

48

 

36

 

33

 

Used equipment:

 

 

 

 

 

 

 

 

 

Agriculture and turf

 

58

 

57

 

44

 

41

 

Construction and forestry

 

46

 

46

 

33

 

31

 

Financing leases

 

36

 

39

 

32

 

35

 

Equipment on operating leases

 

39

 

33

 

25

 

25

 

5


 

 

Maturities

The following table presents the contractual maturities of net Receivables and Leases owned by the Company at October 29, 2017 (in millions of dollars), and a summary of net Receivables and Leases owned by the Company at the end of the last five years (in millions of dollars):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

or less

 

One to five years

 

Over five years

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

  

Fixed

  

 Variable 

  

Fixed

  

 Variable 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

 

 

 

rate

 

rate

 

rate

 

rate

 

2017

 

2016

 

2015

 

2014

 

2013

 

Retail notes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture and turf

 

$

5,140.2

 

$

9,025.1

 

$

257.5

 

$

215.0

 

$

5.1

 

$

14,642.9

 

$

14,965.8

 

$

16,194.9

 

$

17,205.5

 

$

16,501.6

 

Construction and forestry

 

 

1,112.0

 

 

1,444.0

 

 

12.8

 

 

2.9

 

 

 

 

 

2,571.7

 

 

2,502.4

 

 

2,464.1

 

 

2,255.8

 

 

1,744.9

 

Total retail notes

 

$

6,252.2

 

$

10,469.1

 

$

270.3

 

$

217.9

 

$

5.1

 

 

17,214.6

 

 

17,468.2

 

 

18,659.0

 

 

19,461.3

 

 

18,246.5

 

Revolving charge accounts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,572.6

 

 

3,078.5

 

 

2,680.8

 

 

2,535.9

 

 

2,534.9

 

Wholesale receivables

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,894.3

 

 

6,562.5

 

 

7,185.5

 

 

7,919.1

 

 

7,464.7

 

Financing leases

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

714.2

 

 

605.3

 

 

567.1

 

 

589.6

 

 

555.3

 

Operating loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31.9

 

Equipment on operating leases

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,718.3

 

 

4,396.2

 

 

3,609.8

 

 

2,590.3

 

 

1,872.1

 

Total Receivables and Leases

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

33,114.0

 

$

32,110.7

 

$

32,702.2

 

$

33,096.2

 

$

30,705.4

 

Total net Receivables and Leases by geographic area are as follows (in millions of dollars):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

2017

   

2016

   

2015

   

2014

   

2013

 

U.S.

 

$

28,863.4

 

$

28,640.7

 

$

29,335.7

 

$

29,107.5

 

$

26,725.5

 

Outside the U.S.

 

 

4,250.6

 

 

3,470.0

 

 

3,366.5

 

 

3,988.7

 

 

3,979.9

 

Total Receivables and Leases

 

$

33,114.0

 

$

32,110.7

 

$

32,702.2

 

$

33,096.2

 

$

30,705.4

 

Receivables and Leases have significant concentrations of credit risk in the agriculture and turf sector and construction and forestry sector.

Delinquencies

Past due balances of Receivables still accruing finance income, which represent the total balance held (principal plus accrued interest) with any payment amounts 30 days or more past the contractual payment due date, are as follows (in millions of dollars):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

2017

    

2016

   

2015

   

2014

   

2013

 

U.S.

 

$

373.5

 

$

376.2

 

$

322.9

 

$

230.5

 

$

197.8

 

Outside the U.S.

 

 

28.5

 

 

25.1

 

 

23.2

 

 

35.7

 

 

35.4

 

Total

 

$

402.0

 

$

401.3

 

$

346.1

 

$

266.2

 

$

233.2

 

Total non-performing Receivables, which represent loans for which the Company has ceased accruing finance income, are as follows (in millions of dollars):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

2017

   

2016

   

2015

   

2014

   

2013

 

U.S.

 

$

85.2

 

$

110.3

 

$

60.3

 

$

49.5

 

$

40.4

 

Outside the U.S.

 

 

22.6

 

 

13.9

 

 

26.2

 

 

21.7

 

 

19.6

 

Total

 

$

107.8

 

$

124.2

 

$

86.5

 

$

71.2

 

$

60.0

 

See Note 5 to the Consolidated Financial Statements for the policy for placing Receivables on non-performing status.

6


 

 

Write-offs and Recoveries

Total Receivable write-offs and recoveries, by product, were as follows (in millions of dollars):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

2017

    

2016

    

2015

    

2014

    

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses, beginning of year 

 

$

111.7

 

$

109.8

 

$

112.4

 

$

111.4

 

$

114.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for credit losses

 

 

70.3

 

 

68.8

 

 

32.3

 

 

27.3

 

 

6.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Write-offs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail notes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture and turf

 

 

(17.0)

 

 

(10.5)

 

 

(9.5)

 

 

(6.1)

 

 

(4.3)

 

Construction and forestry

 

 

(21.2)

 

 

(19.4)

 

 

(8.3)

 

 

(6.6)

 

 

(5.1)

 

Total retail notes

 

 

(38.2)

 

 

(29.9)

 

 

(17.8)

 

 

(12.7)

 

 

(9.4)

 

Revolving charge accounts

 

 

(52.2)

 

 

(54.3)

 

 

(36.2)

 

 

(24.6)

 

 

(19.8)

 

Wholesale receivables

 

 

(.2)

 

 

(4.1)

 

 

(.3)

 

 

(7.7)

 

 

(.3)

 

Financing leases

 

 

(5.7)

 

 

(3.0)

 

 

(1.6)

 

 

(.5)

 

 

(1.8)

 

Operating loans

 

 

 

 

 

 

 

 

 

 

 

(.2)

 

 

(.1)

 

Total write-offs

 

 

(96.3)

 

 

(91.3)

 

 

(55.9)

 

 

(45.7)

 

 

(31.4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recoveries:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail notes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture and turf

 

 

5.8

 

 

4.3

 

 

4.7

 

 

3.3

 

 

3.6

 

Construction and forestry

 

 

2.0

 

 

1.5

 

 

1.8

 

 

2.2

 

 

2.3

 

Total retail notes

 

 

7.8

 

 

5.8

 

 

6.5

 

 

5.5

 

 

5.9

 

Revolving charge accounts

 

 

19.9

 

 

18.5

 

 

15.3

 

 

14.3

 

 

15.3

 

Wholesale receivables

 

 

 

 

 

.1

 

 

.6

 

 

.1

 

 

.2

 

Financing leases

 

 

.3

 

 

.5

 

 

.2

 

 

.2

 

 

.5

 

Operating loans

 

 

 

 

 

 

 

 

 

 

 

.1

 

 

.6

 

Total recoveries

 

 

28.0

 

 

24.9

 

 

22.6

 

 

20.2

 

 

22.5

 

Total net write-offs

 

 

(68.3)

 

 

(66.4)

 

 

(33.3)

 

 

(25.5)

 

 

(8.9)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Translation adjustments

 

 

.1

 

 

(.5)

 

 

(1.6)

 

 

(.8)

 

 

(.1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses, end of year

 

$

113.8

 

$

111.7

 

$

109.8

 

$

112.4

 

$

111.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net write-offs as a percentage of average Receivables

 

 

.25

 

.23

 

.11

 

.09

 

.03

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance as a percentage of total Receivables, end of year

 

 

.40

 

.40

 

.38

 

.37

 

.39

%

 

7


 

 

Total Receivable write-offs and recoveries from outside the U.S. were as follows (in millions of dollars):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

2017

    

2016

    

2015

    

2014

    

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses, beginning of year

 

$

10.7

 

$

10.8

 

$

11.2

 

$

10.6

 

$

11.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for credit losses

 

 

5.2

 

 

7.1

 

 

4.4

 

 

3.9

 

 

.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Write-offs

 

 

(3.1)

 

 

(7.3)

 

 

(3.7)

 

 

(3.1)

 

 

(2.2)

 

Recoveries

 

 

.8

 

 

.6

 

 

.5

 

 

.6

 

 

1.1

 

Total net write-offs

 

 

(2.3)

 

 

(6.7)

 

 

(3.2)

 

 

(2.5)

 

 

(1.1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Translation adjustments

 

 

.2

 

 

(.5)

 

 

(1.6)

 

 

(.8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses, end of year

 

$

13.8

 

$

10.7

 

$

10.8

 

$

11.2

 

$

10.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net write-offs as a percentage of average Receivables from outside the U.S.

 

 

.06

 

.20

 

.09

 

.06

 

.03

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance as a percentage of total Receivables from outside the U.S., end of year

 

 

.33

 

.31

 

.33

 

.28

 

.27

%

 

Allowance for Credit Losses

The total Receivable allowance for credit losses, by product, at October 29, 2017, October 30, 2016, November 1, 2015, November 2, 2014, and October 27, 2013, and the Receivable portfolio, by product, as a percent of total portfolio is presented below (in millions of dollars):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

2016

 

2015

 

2014

 

2013

 

 

  

Dollars

  

Percent

  

Dollars

  

Percent

  

Dollars

  

Percent

  

Dollars

  

Percent

  

Dollars

  

Percent

 

Retail notes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture and turf

 

$

29.6

 

52

$

29.5

 

54

$

27.2

 

56

$

29.6

 

57

$

24.2

 

57

%

Construction and forestry

 

 

26.1

 

 9

 

 

26.8

 

 9

 

 

26.1

 

 8

 

 

26.5

 

 7

 

 

26.5

 

 6

 

Total retail notes

 

 

55.7

 

61

 

 

56.3

 

63

 

 

53.3

 

64

 

 

56.1

 

64

 

 

50.7

 

63

 

Revolving charge accounts

 

 

39.7

 

13

 

 

39.7

 

11

 

 

39.7

 

 9

 

 

39.9

 

 8

 

 

39.7

 

 9

 

Wholesale receivables

 

 

9.9

 

24

 

 

7.2

 

24

 

 

8.1

 

25

 

 

7.6

 

26

 

 

6.4

 

26

 

Financing leases

 

 

8.5

 

 2

 

 

8.5

 

 2

 

 

8.7

 

 2

 

 

8.8

 

 2

 

 

8.1

 

 2

 

Operating loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6.5

 

 

 

Total

 

$

113.8

 

100

%  

$

111.7

 

100

%  

$

109.8

 

100

%  

$

112.4

 

100

%  

$

111.4

 

100

%

 

The total Receivable allowance for credit losses, by geographic area, at October 29, 2017, October 30, 2016, November 1, 2015, November 2, 2014, and October 27, 2013, and the Receivable portfolio, by geographic area, as a percent of total portfolio is presented below (in millions of dollars):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

2016

 

2015

 

2014

 

2013

 

 

 

Dollars

 

Percent

  

Dollars

 

Percent

  

Dollars

 

Percent

  

Dollars

 

Percent

  

Dollars

 

Percent

 

U.S.

 

$

100.0

 

85

$

101.0

 

88

$

99.0

 

89

$

101.2

 

87

$

100.8

 

86

%

Outside the U.S.

 

 

13.8

 

15

 

 

10.7

 

12

 

 

10.8

 

11

 

 

11.2

 

13

 

 

10.6

 

14

 

Total

 

$

113.8

 

100

$

111.7

 

100

$

109.8

 

100

$

112.4

 

100

$

111.4

 

100

%

 

8


 

 

The allowance for credit losses is an estimate of the losses inherent in the Company’s Receivable portfolio. The level of the allowance is based on many quantitative and qualitative factors, including historical loss experience by product category, portfolio duration, delinquency trends, economic conditions, and credit risk quality. The Company has an established process to calculate a range of possible outcomes and determine the adequacy of the allowance. No single statistic or measurement determines the adequacy of the allowance. Historical Receivable recoveries and write-offs are considered as part of the loss experience by product category. The adequacy of the allowance is assessed quarterly. Different assumptions or changes in economic conditions would result in changes to the allowance for credit losses and the provision for credit losses.

The allowance is determined at an aggregate level by product category for all Receivables that are performing in accordance with payment terms and are not materially past due. The Company assigns loss factors to each aggregation and loss factors are applied to the applicable Receivable balance to determine the allowance level for each product category. The loss factors are determined based on quantitative and qualitative factors, including historical loss experience by product category, portfolio duration, delinquency trends, economic conditions, and credit risk quality.

The Company also reviews Receivables for impairment based on delinquencies and changes in cash flows or collateral. These Receivables consist of materially past due Receivables, customers that have provided bankruptcy notification, and other Receivables requiring significant collection efforts, including litigation. The Company identifies these Receivables during reviews of portfolio credit quality. The Company includes the impairment on non-performing Receivables as a separate component in the allowance unless it has already been recognized as a loss.

In addition to the calculations discussed above, other qualitative factors are taken into account to arrive at the allowance balance. The total allowance reflects management’s estimate of credit losses inherent in the Receivables portfolio at the balance sheet date. See further discussion of the allowance for credit losses in the Critical Accounting Policies.

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, finance rates charged, and other finance terms. The proportion of John Deere equipment retail sales and leases financed by the Company is influenced by conditions prevailing in the agriculture and turf 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 in many of the countries in which the Company operated during 2017 and 2016.

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 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 U.S. states, state law limits the maximum finance rate on receivables. The present state limitations have not, thus far, significantly limited 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.

In addition to rate regulation, various U.S. 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 John Deere Financial Revolving Plan, John Deere Financial multi-use, and PowerPlanâ accounts receivable. To date, these laws and regulations have not had a significant adverse effect on the Company.

9


 

 

The Thrift holds a federal thrift charter and is subject to regulation and examination by the OCC. The U.S. Federal Reserve Board has oversight of the Company, as the owner of the Thrift.

The manner in which the Company offers financing outside the U.S. is affected by a variety of country specific laws, regulations, and customs, including those governing property rights and debtor obligations, that are subject to change and that may introduce greater risk to the Company.

Item 1A.  Risk Factors.

The Company is a subsidiary of JDFS, a wholly-owned finance holding subsidiary of Deere & Company. The results of operations of the Company are affected by its relationships with Deere & Company. See “Relationships of the Company with John Deere” on page 3 for additional information regarding the relationship between the Company and Deere & Company.

The following risks are considered the most significant to the Company’s business based upon current knowledge, information, and assumptions. This discussion of risk factors should be considered closely in conjunction with “Management’s Discussion and Analysis” beginning on page 17, including the risks and uncertainties described in the “Safe Harbor Statement” on pages 23-24, the Notes to Consolidated Financial Statements beginning on page 37, and the risk factors of Deere & Company included in Exhibit 99 to this Annual Report on Form 10-K and incorporated herein by reference. These risk factors and other forward-looking statements that relate to future events, expectations, trends, and operating periods involve certain factors that are subject to change, and important risks and uncertainties that could cause actual results to differ materially. Some of these risks and uncertainties could affect particular lines of business, while others could affect all of the Company’s businesses. Although each risk is discussed separately, many are interrelated. The Company, except as required by law, undertakes no obligation to update or revise this risk factors discussion, whether as a result of new developments or otherwise. The risks described in this Annual Report on Form 10-K and the “Safe Harbor Statement” in this report are not the only risks faced by the Company.

The Company is subject to interest rate risks. Changes in interest rates can reduce demand for equipment, adversely affect interest margins, and limit the ability to access capital markets while increasing borrowing costs.

Rising interest rates could have a dampening effect on overall economic activity and/or the financial condition of the Company’s customers, either or both of which could negatively affect customer demand for John Deere equipment and customers’ ability to repay obligations to the Company. In addition, credit market dislocations could have an impact on funding costs which are very important to the Company because such costs affect the Company’s ability to offer customers competitive financing rates. In addition, changing interest rates could have an adverse effect on the Company’s net interest rate margin–the difference between the yield the Company earns on its assets and the interest rates the Company pays for funding, which could in turn affect the Company’s net interest income and earnings. Actions by credit rating agencies, such as downgrades or negative changes to rating outlooks, can affect the availability and cost of funding for the Company and can increase the Company’s cost of capital and hurt its competitive position.

10


 

 

International, national and regional trade laws, regulations and policies (particularly those related to or restricting global trade), and government farm programs and policies could significantly impair John Deere’s profitability and growth prospects.

International, national, and regional laws, regulations, and policies directly or indirectly related to or restricting the import and export of John Deere’s products, services, and technology, including protectionist policies in particular jurisdictions or for the benefit of favored industries or sectors, could harm John Deere’s multinational business and subject John Deere to civil and criminal sanctions. John Deere’s profitability and growth prospects are tied directly to the global marketplace. Restricted access to global markets impairs John Deere’s ability to export goods and services from its various manufacturing locations around the world, and limits the ability to access raw materials and high quality parts and components at competitive prices on a timely basis. Trade restrictions, including potential limitations on existing trade agreements and trade terms, could limit John Deere’s ability to capitalize on current and future growth opportunities in international markets and impair John Deere’s ability to expand the business by offering new technologies, products, and services. These restrictions may affect John Deere’s competitive position. Additionally, John Deere’s competitive position and results could be adversely affected by changes in—or uncertainty surrounding—U.S. trade policy. Furthermore, the ability to export agricultural and forestry commodities is critical to John Deere’s agricultural and forestry customers. Policies impacting exchange rates and commodity prices or those limiting the export or import of commodities could have a material adverse effect on the international flow of agricultural and other commodities that may result in a corresponding negative effect on the demand for agricultural and forestry equipment in many areas of the world. John Deere’s agricultural equipment sales could be especially harmed because farm income strongly influences sales of agricultural equipment around the world, including the withdrawal or material modification of the North American Free Trade Agreement. Furthermore, trade restrictions could impede those in developing countries from achieving a higher standard of living, which could negatively impact John Deere’s future growth opportunities arising from increasing global demand for food, fuel, and infrastructure. Additionally, changes in government farm programs and policies, including direct payments and other subsidies, can significantly influence demand for agricultural equipment. Furthermore, sanctions and export controls imposed by the U.S. and other governments restricting or prohibiting transactions with certain persons, including financial institutions, to certain countries, or involving certain products expose John Deere to potential criminal and civil sanctions. Embargoes and sanctions laws are changing rapidly for certain geographies, including with respect to Russia, Cuba, Iran, and Sudan. Although John Deere has a compliance program in place designed to reduce the likelihood of potential violations of import and export laws and sanctions, violations of these laws or sanctions could have an adverse effect on John Deere’s reputation, business, and results of operations and financial condition.

Changes in government banking, monetary, and fiscal policies could have a negative effect on the Company.

Policies of the U.S. and other governments regarding banking, monetary, and fiscal policies intended to promote or maintain liquidity, stabilize financial markets, and/or address local deficit or structural economic issues may not be effective and could have a material impact on the Company’s customers and markets. The Company’s operations and results could also be impacted by financial regulatory reform that could have an adverse effect on the Company and its customers by limiting their ability to enter into hedging transactions or to finance purchases of John Deere products. Government policies on spending can also affect John Deere, especially its construction and forestry business due to the impact of government spending on infrastructure development. The Dodd-Frank Wall Street Reform and Consumer Protection Act and its regulations impose, or may impose, additional reporting, stress testing, leverage liquidity, capital requirements, and other supervisory and financial standards and restrictions that increase regulatory compliance costs for the Company and could adversely affect the Company’s funding activities, liquidity, structure (including relationships with affiliates), operations, and performance. Moreover, the Company’s and John Deere’s operations, including those outside of the United States, may also be impacted by non-U.S. regulatory reforms being implemented to further regulate non-U.S. financial institutions and markets.

11


 

 

Changes in tax rates, tax legislation, or exposure to additional tax liabilities could have a negative effect on John Deere.

John Deere is subject to income taxes in the U.S. and numerous foreign jurisdictions. John Deere’s domestic and international tax liabilities are dependent upon the location of earnings among these different jurisdictions. Tax rates in various jurisdictions may be subject to significant change. John Deere’s effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation. If John Deere’s effective tax rates were to increase, or if the ultimate determination of our taxes owed is for an amount in excess of amounts previously accrued, John Deere’s operating results, cash flows, and financial condition could be adversely affected.

Changing worldwide demand for food and different forms of bio-energy could have an effect on the price of farm commodities and consequently the demand for certain John Deere equipment and could also result in higher research and development costs related to changing machine fuel requirements.

Changing worldwide demand for farm outputs to meet the world’s growing food and bio-energy demands, driven in part by government policies and a growing world population, are likely to result in fluctuating agricultural commodity prices, which directly affect sales of agricultural equipment. Lower farm commodity prices directly affect farm incomes, which could negatively affect sales of agricultural equipment. While higher commodity prices benefit John Deere’s crop-producing agricultural equipment customers, higher commodity prices also could result in greater feed costs for livestock and poultry producers, which in turn may result in lower levels of equipment purchased by these customers. Furthermore, changing bio-fuel demands may cause farmers to change the types or quantities of the crops they raise, with corresponding changes in equipment demands. Finally, changes in governmental policies regulating bio-fuel utilization could affect demand for John Deere’s diesel-fueled equipment and result in higher research and development costs related to equipment fuel standards.

As John Deere seeks to expand its business globally, growth opportunities may be impacted by greater political, economic, and social uncertainty and the continuing and accelerating globalization of businesses could significantly change the dynamics of John Deere’s competition, customer base, and product offerings.

John Deere’s efforts to grow its businesses depend to a large extent upon access to additional geographic markets, including, but not limited to, Brazil, China, India, and Russia, and its success in developing market share and operating profitably in such markets. In some cases, these countries have greater political and economic volatility, greater vulnerability to infrastructure and labor disruptions, and differing local customer product preferences and requirements than John Deere’s other markets. Operating and seeking to expand business in a number of different regions and countries exposes the Company and John Deere to multiple and potentially conflicting cultural practices, business practices, and legal and regulatory requirements that are subject to change, including those related to tariffs and trade barriers, investments, property ownership rights, taxation, sanctions requirements, repatriation of earnings, and advanced technologies. Expanding business operations globally also increases exposure to currency fluctuations which can materially affect the Company’s and John Deere’s financial results. As these emerging geographic markets become more important to John Deere, its competitors are also seeking to expand their production capacities and sales in these same markets. While John Deere maintains a positive corporate image and the John Deere brand is widely recognized and valued in its traditional markets, the brand is less well known in some emerging markets which could impede John Deere’s efforts to successfully compete in these markets. Although John Deere is taking measures to adapt to these changing circumstances, John Deere’s reputation and/or business results could be negatively affected should these efforts prove unsuccessful.

12


 

 

John Deere is subject to extensive anti-corruption laws and regulations.

John Deere’s global operations must comply with all applicable laws, which include the U.S. Foreign Corrupt Practices Act (FCPA), the UK Bribery Act, and other anti-corruption laws. These anti-corruption laws generally prohibit companies and their intermediaries from making improper payments or providing anything of value to improperly influence government officials or private individuals for the purpose of obtaining or retaining a business advantage regardless of whether those practices are legal or culturally expected in a particular jurisdiction. Recently, there has been a substantial increase in the global enforcement of anti-corruption laws. Although John Deere has a compliance program in place designed to reduce the likelihood of potential violations of such laws, violations of these laws could result in criminal and civil sanctions and have an adverse effect on John Deere’s reputation, business, and results of operations and financial condition.

Negative economic conditions and outlook can materially weaken demand for John Deere’s equipment and services, limit access to funding, and result in higher funding costs.

The demand for the Company’s and John Deere’s products and services can be significantly reduced in an economic environment characterized by high unemployment, cautious consumer spending, lower corporate earnings, U.S. budget issues, and lower business investment. Negative or uncertain economic conditions causing John Deere’s customers to lack confidence in the general economic outlook can significantly reduce their likelihood of purchasing John Deere’s equipment. Sustained negative economic conditions and outlook affect housing starts and other construction which dampens demand for certain construction equipment. John Deere’s turf operations and its construction and forestry business are dependent on construction activity and general economic conditions. Decreases in construction activity and housing starts could have a material adverse effect on John Deere’s results of operations. If negative economic conditions affect the overall farm economy, there could be a similar effect on John Deere’s agricultural equipment sales. In addition, uncertain or negative outlook with respect to ongoing U.S. budget issues as well as general economic conditions and outlook can cause significant changes in market liquidity conditions. Such changes could impact access to funding and associated funding costs, which could reduce the Company’s earnings and cash flows. Additionally, the Company’s and John Deere’s investment management activities could be adversely affected by changes in the equity and bond markets, which would negatively affect earnings.

In addition, demand for John Deere’s products and services can be significantly reduced by concerns regarding the diverse economic and political circumstances of the individual countries in the eurozone, the debt burden of certain eurozone countries and their ability to meet future financial obligations, uncertainty related to the anticipated withdrawal of the United Kingdom from the European Union, the risk that one or more other European Union countries could come under increasing pressure to leave the European Union, or the long-term stability of the euro as a single common currency. Persistent disparity with respect to the widely varying economic conditions within the individual countries in the eurozone, and its implications for the euro as well as market perceptions concerning these and related issues, could adversely affect the value of the Company’s and John Deere’s euro-denominated assets and obligations, have an adverse effect on demand for John Deere’s products and services in the eurozone, and have an adverse effect on financial markets in Europe and globally. More specifically, it could affect the ability of the Company’s and John Deere’s customers, suppliers, and lenders to finance their respective businesses, to access liquidity at acceptable financing costs, if at all, and the availability of supplies and materials and on the demand for John Deere’s products.

The Company’s consolidated financial results are reported in U.S. dollars while certain assets and other reported items are denominated in the currencies of other countries, creating currency exchange and translation risk.

The Company operates in many areas of the world, involving transactions denominated in a variety of currencies. The Company is subject to currency exchange risk to the extent that its costs are denominated in currencies other than those in which it earns revenues. Additionally, the reporting currency for the Company’s consolidated financial statements is the U.S. dollar. Certain of the Company’s assets, liabilities, expenses, and revenues are denominated in other countries’ currencies. Those assets, liabilities, expenses, and revenues are translated into U.S. dollars at the applicable exchange rates to prepare the Company’s consolidated financial statements. Therefore, increases or decreases in exchange rates between the U.S. dollar and those other currencies affect the value of those items as reflected in the Company’s consolidated financial statements, even if their value remains unchanged in their original currency. Substantial fluctuations in the value of the U.S. dollar could have a significant impact on the Company’s results.

13


 

 

Because the Company is a financing company, the Company’s operations and financial results could be impacted materially should negative economic conditions affect the financial industry.

Negative economic conditions can have an adverse effect on the financial industry in which the Company operates. The Company provides financing for a significant portion of John Deere’s sales in many of the countries in which the Company operates. The Company is exposed to the risk that customers and others will default on contractual obligations. The Company may experience credit losses that exceed its expectations and adversely affect its financial condition and results of operations. The Company’s inability to access funds at cost-effective rates to support its financing activities could have a material adverse effect on the Company’s business. The Company’s liquidity and ongoing profitability depend largely on timely access to capital in order to meet future cash flow requirements, and to fund operations and costs associated with engaging in diversified funding activities. Additionally, negative market conditions could reduce customer confidence levels, resulting in declines in credit applications and increases in delinquencies and default rates, which could materially impact the Company’s write-offs and provision for credit losses.

The Company’s results could be adversely affected by a decrease in the value or higher than estimated returns of equipment on operating lease.

The Company estimates the end-of-lease term residual value at the inception of the operating leases based on a number of factors, including historical sales, end-of-lease term return experience, intended use of the equipment, and current economic conditions in John Deere’s markets. Used equipment values may decrease as a result of any one or a combination of factors including market conditions, supply of and demand for used equipment, and technological advancements in new equipment. Lower residual value estimates could result in increasing operating lease depreciation and impairment losses, which would decrease the Company’s earnings.

John Deere’s business results depend largely on its ability to understand its customers’ specific preferences and requirements, and to develop, manufacture, and market products that meet customer demand.

John Deere’s ability to match new product offerings to diverse global customers’ anticipated preferences for different types and sizes of equipment and various equipment features and functionality, at affordable prices, is critical to its success. This requires a thorough understanding of John Deere’s existing and potential customers on a global basis, particularly in potentially high-growth and emerging markets, including Brazil, China, India, and Russia. Failure to deliver quality products that meet customer needs at competitive prices ahead of competitors could have a significant adverse effect on John Deere’s business.

John Deere’s business may be directly and indirectly affected by unfavorable weather conditions or natural disasters that reduce agricultural production and demand for agriculture and turf equipment.

Poor or unusual weather conditions, particularly during the planting and early growing season, can significantly affect the purchasing decisions of John Deere’s customers, particularly the purchasers of agriculture and turf equipment. The timing and quantity of rainfall are two of the most important factors in agricultural production. Insufficient levels of rain prevent farmers from planting new crops and may cause growing crops to die or result in lower yields. Excessive rain or flooding can prevent planting from occurring at optimal times, and may cause crop loss through increased disease or mold growth. Temperatures outside normal ranges can also cause crop failure or decreased yields, and may also affect disease incidence. Temperature affects the rate of growth, crop maturity, and crop quality. Natural calamities such as regional floods, hurricanes or other storms, and droughts can have significant negative effects on agricultural and livestock production. The resulting negative impact on farm income can strongly affect demand for agricultural equipment. Sales of turf equipment, particularly during the important spring selling season, can be dramatically impacted by weather. Adverse weather conditions in a particular geographic region may adversely affect sales of some turf equipment. Drought conditions can adversely affect sales of certain mowing equipment and unusually rainy weather can similarly cause lower sales volumes.

14


 

 

Security breaches and other disruptions to the Company’s information technology infrastructure could interfere with the Company’s operations and could compromise the Company’s and its customer’s information, exposing the Company to liability that would cause the Company’s business and reputation to suffer.

In the ordinary course of business, the Company relies upon information technology networks and systems, some of which are managed by third parties, to process, transmit and store electronic information, and to manage or support a variety of business processes and activities, including loan application and collection of payments from dealers or other purchasers of John Deere equipment. The Company uses information technology systems to record, process and summarize financial information and results of operations for internal reporting purposes, and to comply with regulatory financial reporting, legal, and tax requirements. Additionally, the Company collects and stores sensitive data, including personally identifiable information of the Company’s customers and employees, in data centers and on information technology networks. The secure operation of these information technology networks and the processing and maintenance of this information is critical to the Company’s business operations and strategy. Despite security measures and business continuity plans, the Company’s information technology networks and infrastructure may be vulnerable to damage, disruptions, or shutdowns due to attacks by cyber criminals or breaches due to employee error or malfeasance or other disruptions during the process of upgrading or replacing computer software or hardware, power outages, computer viruses, telecommunication or utility failures, terrorist acts, or natural disasters or other catastrophic events. The occurrence of any of these events could compromise the Company’s networks, and the information stored there could be accessed, publicly disclosed, lost, or stolen. Any such access, disclosure, or other loss of information could result in legal claims or proceedings, liability, or regulatory penalties under laws protecting the privacy of personal information, disrupt operations, and damage the Company’s reputation, which could adversely affect the Company’s business. In addition, as security threats continue to evolve the Company may need to invest additional resources to protect the security of its systems.

The Company is subject to governmental laws, regulations, and other legal obligations related to privacy and data protection.

The legislative and regulatory framework for privacy and data protection issues worldwide is rapidly evolving and is likely to remain uncertain for the foreseeable future. The Company collects personally identifiable information (PII) and other data as an integral part of its business processes and activities. This data is subject to a variety of U.S. and international laws and regulations, including oversight by various regulatory or other governmental bodies. Many foreign countries and governmental bodies, including the European Union and other relevant jurisdictions where the Company conducts business, have laws and regulations concerning the collection and use of PII and other data obtained from their residents or by businesses operating within their jurisdiction that are more restrictive than those in the U.S. Additionally, in May 2016, the European Union adopted the General Data Protection Regulation that will impose more stringent data protection requirements and will provide for greater penalties for noncompliance beginning in May 2018. While the Company has developed and is executing comprehensive plans to meet these requirements and does not currently foresee significant obstacles that would prevent timely compliance, these plans are subject to many variables that could delay or otherwise affect implementation. Any inability, or perceived inability, to adequately address privacy and data protection concerns, even if unfounded, or comply with applicable laws, regulations, policies, industry standards, contractual obligations, or other legal obligations could result in additional cost and liability to the Company or company officials, damage our reputation, inhibit sales, and adversely affect our business.

The Company’s ability to execute its strategy is dependent upon the ability to attract, train, and retain qualified personnel.

The Company’s continued success depends, in part, on its ability to identify, attract, motivate, train, and retain qualified personnel in key functions. In particular, the Company is dependent on its ability to identify, attract, motivate, train, and retain qualified personnel with the requisite education, background, and industry experience. Failure to attract, train, and retain qualified personnel, whether as a result of an insufficient number of qualified applicants, difficulty in recruiting new personnel, or the allocation of inadequate resources to training, integration, and retention of qualified personnel, could impair the Company’s ability to execute its business strategy and could adversely affect the Company’s business. In addition, while the Company strives to reduce the impact of the departure of its employees, the Company’s operations or ability to execute its business strategy may be impacted by the loss of personnel.

15


 

 

Item 1B.  Unresolved Staff Comments.

None.

Item 2.  Properties.

The Company’s properties principally consist of office equipment; Company-owned office buildings in Johnston, Iowa and Madison, Wisconsin; and leased office space in Reno, Nevada; Miami, Florida; Rosario, Argentina; Brisbane, Australia; Santiago, Chile; Gloucester, England; Langar, England; Ormes, France; Bruchsal, Germany; Vignate, Italy; Luxembourg City, Luxembourg; Monterrey, Mexico; Parla, Spain; Schaffhausen, Switzerland; and Poznan, Poland.

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 retail credit. The Company believes the reasonably possible range of losses for these unresolved legal actions would not have a material effect on its consolidated financial statements.

Item 4.  Mine Safety Disclosures.

Not applicable.

16


 

 

PART II

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.

(a)

All of Capital Corporation’s common stock is owned by JDFS, a finance holding company that is wholly-owned by Deere & Company. In 2017 and 2016, Capital Corporation declared and paid cash dividends of $285.0 million and $485.0 million, respectively, to JDFS. In turn, JDFS declared and paid comparable dividends to Deere & Company.

(b)

Not applicable.

(c)

Not applicable.

Item 6.  Selected Financial Data.

Omitted pursuant to instruction I(2).

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Results of Operations

Overview

Organization

The Company primarily generates revenues and cash by financing John Deere dealers’ sales and leases of new and used agriculture and turf equipment and construction and forestry equipment. In addition, the Company also provides wholesale financing to dealers of the foregoing equipment and finances retail revolving charge accounts.

Trends and Economic Conditions

The Company’s business is currently affected by the following key trends and economic conditions. The Company’s business is closely related to John Deere’s business. John Deere’s agriculture and turf equipment sales increased 9 percent in 2017 and are projected to increase about 9 percent for 2018. Industry agricultural machinery sales in the U.S. and Canada for 2018 are forecast to increase 5 to 10 percent, compared to 2017. Industry sales in the EU28 member nations are forecast to increase approximately 5 percent in 2018, while South American industry sales are projected to be about the same or increase 5 percent from 2017 levels. Asian sales are forecast to be about the same in 2018. Industry sales of turf and utility equipment in the U.S. and Canada are expected to be approximately the same for 2018. John Deere’s construction and forestry sales increased 17 percent in 2017 and are forecast to increase about 69 percent in 2018. Global forestry industry sales are expected to be about the same to 5 percent higher in 2018, compared to 2017. Net income attributable to the Company in 2018 is expected to be approximately $368 million.

Items of concern include the uncertainty of the effectiveness of governmental actions in respect to monetary and fiscal policies, the impact of sovereign debt, eurozone issues, capital market disruptions, trade agreements, changes in demand and pricing for used equipment, and geopolitical events. Significant fluctuations in foreign currency exchange rates and volatility in the price of many commodities could also impact the Company’s results.

John Deere completed a successful year as markets for farm and construction equipment improved. John Deere sales of farm machinery in South America made especially strong gains. The Wirtgen acquisition was finalized in December, which will establish John Deere as a more prominent participant in the global construction equipment markets. John Deere is confident in the present course and believes it is positioned to deliver stronger, more consistent results in the future.

17


 

 

2017 Compared with 2016

Net income attributable to the Company was $328.4 million in 2017, compared with $341.6 million in 2016. Results were lower primarily due to less favorable financing spreads and higher selling, administrative, and general expenses, partially offset by lower losses on lease residual values. The ratio of earnings to fixed charges was 1.95 to 1 for 2017, compared with 2.22 to 1 for 2016.

Revenues totaled $2,227.0 million in 2017, compared with $2,094.2 million in 2016. Finance income earned on retail notes totaled $693.6 million in 2017, compared with $695.0 million in 2016. The decrease was primarily due to a decline in the average balance of retail notes, partially offset by higher average financing rates. Revenues earned on revolving charge accounts amounted to $297.2 million in 2017, compared with $260.7 million earned during 2016. The increase was primarily due to an increase in the average balance of revolving charge accounts, partially offset by lower average financing rates. Finance income earned on wholesale receivables totaled $363.8 million in 2017, compared with $354.5 million in 2016. The increase was primarily due to higher average financing rates, partially offset by a decline in the average balance of wholesale receivables. Lease revenues totaled $812.9 million in 2017, compared with $740.2 million in 2016. The increase was primarily due to an increase in the average balance of leases. Revenues earned from John Deere totaled $521.6 million in 2017, compared with $469.5 million in 2016. The increase was primarily the result of increased compensation paid by John Deere for waived or reduced finance charges on Receivables and Leases. Revenues earned from John Deere are included in the revenue amounts discussed above and in “Other income – net” on the statement of consolidated income.

Interest expense totaled $521.1 million in 2017, compared with $422.1 million in 2016. The increase was primarily due to higher average borrowing rates.

Administrative and operating expenses totaled $422.5 million in 2017, compared with $466.9 million in 2016. The decrease was primarily due to lower losses on lease residual values, partially offset by increased incentive compensation expenses and voluntary employee-separation program expenses.

The provision for credit losses was $70.3 million in 2017, compared with $68.8 million in 2016. The increase was primarily due to higher net write-offs of retail notes and financing leases. Total net write-offs of Receivables financed were $68.3 million during 2017, compared with $66.4 million in 2016. The provision for credit losses, as a percentage of the total average balance of Receivables financed, was .26 percent for 2017 and .24 percent for 2016.

Depreciation of equipment on operating leases was $648.0 million in 2017, compared with $564.5 million in 2016. The increase was primarily the result of higher average balances of equipment on operating leases and updated depreciation estimates.

Provision for income taxes was $171.5 million in 2017, compared with $180.3 million in 2016. The decrease was primarily due to lower pretax income.

18


 

 

Receivables and Leases Acquired and Held

For the fiscal years ended October 29, 2017 and October 30, 2016, Receivable and Lease (excluding wholesale) acquisition volumes and balances held were as follows (in millions of dollars):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year Volumes

 

 

Fiscal Year End Balances

 

 

   

2017

  

2016

  

% Change

   

 

2017

  

2016

  

% Change

 

Retail notes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture and turf

 

$

6,613.0

 

$

6,225.6

 

 6

%

 

$

14,642.9

 

$

14,965.8

 

(2)

%

Construction and forestry

 

 

1,442.2

 

 

1,335.4

 

 8

 

 

 

2,571.7

 

 

2,502.4

 

 3

 

Total retail notes

 

 

8,055.2

 

 

7,561.0

 

 7

 

 

 

17,214.6

 

 

17,468.2

 

(1)

 

Revolving charge accounts

 

 

6,146.1

 

 

5,687.9

 

 8

 

 

 

3,572.6

 

 

3,078.5

 

16

 

Financing leases

 

 

435.9

 

 

331.3

 

32

 

 

 

714.2

 

 

605.3

 

18

 

Equipment on operating leases

 

 

2,114.5

 

 

2,470.8

 

(14)

 

 

 

4,718.3

 

 

4,396.2

 

 7

 

Total Receivables and Leases (excluding wholesale)

 

$

16,751.7