10-Q 1 edgjdccfinal.txt JDCC 10-Q 4/30/2001 =============================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 30, 2001 Commission file no: 1-6458 __________________________ JOHN DEERE CAPITAL CORPORATION Delaware 36-2386361 (State of incorporation) (IRS employer identification no.) 1 East First Street, Suite 600 Reno, Nevada 89501 (Address of principal executive offices) Telephone Number: (775) 786-5527 _________________________________ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No At April 30, 2001, 2,500 shares of common stock, without par value, of the registrant were outstanding, all of which were owned by John Deere Credit Company, a wholly-owned subsidiary of Deere & Company. The registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with certain reduced disclosures as permitted by those instructions. =============================================================== Page 1 of 19 Pages Index to Exhibits: Page 18 PART I. FINANCIAL INFORMATION Item 1. Financial Statements -------------------- John Deere Capital Corporation and Subsidiaries Statements of Consolidated Income and Retained Earnings (Unaudited) (in millions) Three Months Ended Six Months Ended April 30, April 30, ----------------------------------- 2001 2000 2001 2000 ----------------------------------- Revenues Finance income earned on retail notes $ 109.2 $ 97.7 $ 222.8 $ 185.3 Lease revenues 107.8 94.7 214.5 183.6 Finance income earned on wholesale notes 20.0 22.4 43.4 44.2 Revolving charge account income 28.2 23.2 55.7 49.9 Operating loan income 9.1 7.0 17.8 13.5 Securitization and servicing fee income 9.2 7.1 17.3 15.2 Net gain on receivables and leases sold 7.3 3.2 16.9 7.0 Interest income from short-term investments 6.3 2.2 7.2 4.7 Other income 5.9 3.8 10.9 9.0 - ------------------------------------------------------------- Total revenues 303.0 261.3 606.5 512.4 - ------------------------------------------------------------- Expenses Interest expense 119.8 103.4 243.2 202.6 Operating expenses: Administrative and operating expenses 39.7 35.9 79.5 69.2 Provision for credit 20.6 17.4 28.2 25.8 losses Fees paid to John Deere 4.1 2.8 7.9 5.9 Depreciation of equipment on operating leases 60.7 52.4 123.4 104.4 - ------------------------------------------------------------- Total operating expenses 125.1 108.5 239.0 205.3 - ------------------------------------------------------------- Total expenses 244.9 211.9 482.2 407.9 - ------------------------------------------------------------- Income of consolidated group before income taxes 58.1 49.4 124.3 104.5 Provision for income taxes 21.2 17.1 43.4 36.2 - ------------------------------------------------------------- Income of consolidated group 36.9 32.3 80.9 68.3 Equity in income (loss) of unconsolidated affiliates (1.5) .1 (1.0) .2 - ------------------------------------------------------------- Net income 35.4 32.4 79.9 68.5 Cash dividends declared (5.0) (10.0) Retained earnings at beginning of period 1,050.0 915.8 1,005.5 884.7 - ------------------------------------------------------------- Retained earnings at end of period $1,085.4 $ 943.2 $1,085.4 $ 943.2 = ============================================================== See Notes to Interim Financial Statements. Page 2 John Deere Capital Corporation and Subsidiaries Consolidated Balance Sheets (Unaudited) (in millions) April 30, October 31, April 30, 2001 2000 2000 ------------------------------- Assets Cash and cash equivalents $ 289.4 $ 155.9 $ 187.5 Receivables and leases: Retail notes 4,592.0 4,587.7 4,221.9 Wholesale notes 725.3 937.0 938.6 Revolving charge accounts 640.9 688.3 640.2 Operating loans 428.7 422.2 295.2 Financing leases 444.8 456.4 427.9 - ------------------------------------------------------------- Total receivables 6,831.7 7,091.6 6,523.8 Equipment on operating leases - net 1,489.0 1,517.1 1,415.0 - ------------------------------------------------------------- Total receivables and leases 8,320.7 8,608.7 7,938.8 Allowance for credit losses (90.6) (93.3) (91.2) - ------------------------------------------------------------- Total receivables and leases - net 8,230.1 8,515.4 7,847.6 - ------------------------------------------------------------- Notes receivable - unconsolidated affiliates 195.3 140.0 92.7 Other receivables 97.4 86.2 75.2 Investment in unconsolidated affiliates 7.0 9.7 10.9 Other assets 180.2 130.8 135.2 - ------------------------------------------------------------- Total Assets $ 8,999.4 $ 9,038.0 $ 8,349.1 = ============================================================= Liabilities and Stockholder's Equity Short-term borrowings: Commercial paper $ 1,128.4 $ 2,474.1 $ 2,129.1 Extendible commercial notes and other notes payable 23.3 3.7 7.6 John Deere 67.6 495.4 125.8 Current maturities of long-term borrowings 2,179.4 1,769.5 1,893.2 - ------------------------------------------------------------- Total short-term Borrowings 3,398.7 4,742.7 4,155.7 - ------------------------------------------------------------- Accounts payable and accrued liabilities: Accrued interest on debt 52.7 52.3 37.2 Other payables 559.1 415.5 405.1 - ------------------------------------------------------------- Total accounts payable and accrued liabilities 611.8 467.8 442.3 - ------------------------------------------------------------- Deposits withheld from dealers and merchants 131.0 132.6 122.2 - ------------------------------------------------------------- Long-term borrowings: Senior debt 3,553.9 2,436.8 2,425.2 Subordinated debt 150.0 150.0 150.0 - ------------------------------------------------------------- Total long-term borrowings 3,703.9 2,586.8 2,575.2 - ------------------------------------------------------------- Total liabilities 7,845.4 7,929.9 7,295.4 - ------------------------------------------------------------- Stockholder's equity: Common stock, without par value (issued and outstanding -- 2,500 shares owned by John Deere Credit Company) 112.8 112.8 112.8 Retained earnings 1,085.4 1,005.5 943.2 Accumulated other comprehensive income (loss) (44.2) (10.2) (2.3) - ------------------------------------------------------------- Total stockholder's equity 1,154.0 1,108.1 1,053.7 - ------------------------------------------------------------- Total Liabilities and Stockholder's Equity $ 8,999.4 $ 9,038.0 $ 8,349.1 = ============================================================= See Notes to Interim Financial Statements. Page 3 John Deere Capital Corporation and Subsidiaries Statements of Consolidated Cash Flows (Unaudited) (in millions) Six Months Ended April 30, 2001 2000 ----------------------------- Cash Flows from Operating Activities: Net income $ 79.9 $ 68.5 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 28.2 25.8 Provision for depreciation and amortization 125.5 105.6 Undistributed earnings of unconsolidated affiliates 1.0 (.2) Other 38.4 61.0 - ------------------------------------------------------------- Net cash provided by operating activities 273.0 260.7 - ------------------------------------------------------------- Cash Flows from Investing Activities: Cost of Receivables acquired (3,883.8) (3,792.7) Collections of Receivables 2,915.3 3,074.6 Cost of operating leases acquired (274.0) (377.5) Proceeds from sale of equipment on operating leases 154.8 101.0 Change in notes receivable - unconsolidated affiliates (55.3) (87.8) Proceeds from sales of receivables 1,204.6 154.1 Acquisition of business (5.1) Other 56.2 17.7 - ------------------------------------------------------------- Net cash provided by (used for) investing activities 112.7 (910.6) - ------------------------------------------------------------- Cash Flows from Financing Activities: Change in commercial paper (1,340.6) 864.4 Change in extendible commercial notes and other notes payable 19.6 1.2 Change in receivable from/payable to John Deere (439.0) (2.8) Proceeds from issuance of long-term borrowings 2,427.2 945.0 Principal payments on long-term Borrowings (919.4) (1,115.4) Dividends paid (10.0) - ------------------------------------------------------------- Net cash provided by (used for) financing activities (252.2) 688.0 - ------------------------------------------------------------- Net increase in cash and cash equivalents 133.5 38.1 Cash and cash equivalents at beginning of period 155.9 149.4 - ------------------------------------------------------------- Cash and cash equivalents at end of period $ 289.4 $ 187.5 = ============================================================= See Notes to Interim Financial Statements. Page 4 John Deere Capital Corporation and Subsidiaries Notes to Interim Financial Statements (Unaudited) (1) The consolidated financial statements of John Deere Capital Corporation (Capital Corporation) and its subsidiaries (collectively called the Company) have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted as permitted by such rules and regulations. All adjustments, consisting of normal recurring adjustments, have been included. Management believes that the disclosures are adequate to present fairly the financial position, results of operations and cash flows at the dates and for the periods presented. It is suggested that these interim financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's latest annual report on Form 10-K. Results for interim periods are not necessarily indicative of those to be expected for the year. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and related disclosures. Actual results could differ from those estimates. Certain amounts for prior years have been reclassified to conform with 2001 financial statement presentation. Based on the way the Company's operations are managed and evaluated by management, the Company is viewed as having one operating segment. (2) The Company provides and administers financing for retail purchases of new and used equipment manufactured by Deere & Company's agricultural, commercial and consumer, and construction equipment 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 equipment retail dealers. The Company also purchases and finances certain agricultural, construction and lawn and grounds care retail notes unrelated to John Deere. In addition, the Company purchases and finances recreational vehicle and manufactured housing unit retail notes acquired from dealers (recreational product retail notes). 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 and construction and lawn and grounds care markets as well as insured international export financing products (revolving charge accounts and operating loans), and provides wholesale financing for inventories of John Deere engines and agricultural and construction equipment owned by dealers of those products (wholesale notes). Retail notes, revolving charge accounts, operating loans, financing leases and wholesale notes receivable are collectively called "Receivables." Receivables and operating leases are collectively called "Receivables and Leases." (3) In the first quarter of fiscal 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. Page 5 (4) In the first quarter of 2001, the Company formed a joint venture company, iVesta Financial Solutions LLC (iVesta). iVesta will develop and manage a new service designed to enable customers to execute secure financial transactions with companies selling goods or services in an e-business environment. The service, named Isis, will provide an electronic financial network for the agricultural market. Agricultural customers will be able to use the service to select from a choice of Isis network lenders when purchasing a product or seeking financing and are expected to be able to complete entire loan transactions online. The investment in iVesta is being accounted for as an equity basis investment. (5) During the second quarter of 2001, the Company discontinued offering wholesale note 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. (6) The Company's ratio of earnings before fixed charges to fixed charges was 1.48 to 1 for the second quarter of 2001 compared with 1.46 to 1 for the second quarter of 2000. The ratios of earnings before fixed charges was 1.50 to 1 for the first six months of 2001 and 1.51 to 1 for the first six months of 2000. "Earnings before fixed charges" consist of income before income taxes, the cumulative effect of changes in accounting and fixed charges. "Fixed charges" consist of interest on indebtedness, "amortization of debt discount and expense," an estimated amount of rental expense under capitalized leases which is deemed to be representative of the interest factor, and rental expense under operating leases. (7) In the first quarter of 2001, the Company adopted Financial Accounting Standards Board (FASB) Statement 133, Accounting for Derivative Instruments and Hedging Activities, as amended by FASB 138. 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 $3.6 million recorded in "Unrealized loss on Derivatives" (other comprehensive income) and a loss of $.1 million recorded in income. The amount of the transition adjustment loss which was recorded in other comprehensive income at November 1, 2000 that will be reclassified to earnings in fiscal year 2001 is approximately $1 million. The effects of the adoption of the new standards on the Company's financial position and net income were not material. The Company enters into derivative transactions 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 its funding sources to its 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 financing in currencies other than the local currencies. Interest Rate Swaps Certain interest rate swaps were designated as hedges of future cash flows from commercial paper and variable interest rate borrowings. The fair value gains or losses on these swaps are recorded in other comprehensive income with the effective portion of the gains or losses subsequently recognized in interest expense, offsetting the effects of interest rate changes on the related borrowings. 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 Page 6 offset by fair value adjustments in the underlying borrowings. The ineffective portions of the gains or losses on all the cash flow and fair value interest rate swaps designated as hedges were recognized immediately in interest expense and were not material in the first six months of 2001. There were no components of the cash flow or fair value hedges that were excluded from the assessment of the hedge's effectiveness. Foreign Exchange Forward Contracts, Swaps and Options The Company has entered into foreign exchange forward contracts in order to manage the currency exposure of certain receivables and liabilities. These derivatives were not designated as hedges. The fair value gains or losses from these foreign currency derivatives are recorded in earnings, generally offsetting the foreign exchange gains or losses on the exposures being managed. (8) In 2000, the FASB issued 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 below. The Statement was effective for sales of receivables after March 31, 2001 and did not have a material impact on the Company's financial position or net income. When the Company sells receivables in securitizations of retail notes, it retains interest-only strips, servicing rights, and in some cases a cash reserve account, 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 interests 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 $188 million at April 30, 2001. Except for this 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 provision, are subordinate to investor's interests and their values are subject to the key assumptions as shown below on the transferred financial assets. The Company recognized a pretax gain of $7 million on retail notes securitized during the first six months of 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. The table below summarizes cash flows received from and paid to securitization trusts (in millions): Six Months Ended April 30, 2001 Proceeds from new securitizations $ 800 Servicing fees received 10 Other cash flows received 28 Page 7 The total retained interests, weighted-average life, 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 were as follows ($ in millions): Retail Note Securitizations April 30, 2001 --------------------------- -------------- Carrying amount/fair value of retained interests $111 Weighted-average life (in months) 15 Prepayment speed assumption (annual rate) 19% Impact on fair value of 10% adverse change $ .5 Impact on fair value of 20% adverse change $ .8 Expected credit losses (annual rate) .38% Impact on fair value of 10% adverse change $ .7 Impact on fair value of 20% adverse change $ 1.5 Residual cash flows discount rate (annual) 13% Impact on fair value of 10% adverse change $ 2.5 Impact on fair value of 20% adverse $ 5.0 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. The following table presents information about principal balances of managed and securitized retail note receivables as of and for the six months ended April 30, 2001 (in millions): Principal Principal Net credit outstanding 60 days or more losses past due --------------------------------------------- Owned $4,292 $16 $11 Securitized 1,696 19 4 --------------------------------------------- Managed $5,988 $35 $15 ============================================= The amount of expected static pool losses (actual and projected future credit losses) for securitizations during the first six months of 2001 was .53 percent of the retail notes sold. (9) Comprehensive income, which includes all changes in the Company's equity during the period except for transactions with the stockholder, was as follows in millions of dollars: Three Months Ended Six Months Ended April 30, April 30, 2001 2000 2001 2000 --------------------------------------- Net income $ 35.4 $ 32.4 $ 79.9 $ 68.5 Other comprehensive income (loss), net of tax: Change in cumulative translation adjustment (2.8) (2.0) .6 (2.5) Unrealized loss on derivatives (12.0) (34.6) --------------------------------------- - Comprehensive income $ 20.6 $ 30.4 $ 45.9 $ 66.0 ======================================= Page 8 Item 2. Management's Discussion and Analysis of Financial ------------------------------------------------- Condition and Results of Operations. ----------------------------------- Results of Operations --------------------- Net income was $35.4 million for the second quarter and $79.9 million for the first six months of 2001, compared with $32.4 million and $68.5 million, respectively, last year. The improvements for both periods were primarily due to growth of the receivable and lease portfolio and higher income from increased sales of retail notes, partially offset by higher selling and administrative expenses and increased receivable write-offs primarily related to construction equipment. Revenues totaled $303.0 million and $606.5 million for the second quarter and for the first six months, respectively, of 2001, compared to $261.3 million and $512.4 million for the same periods 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 $222.8 million for the first six months of 2001, compared to $185.3 million for the same period in 2000. This increase was primarily due to the increase in the average balance of Receivables financed and higher yields on variable rate contracts compared to one year ago. Lease revenues increased $30.9 million, to $214.5 million in the first six months of 2001, from $183.6 million in the first six months of 2000, due to a 10 percent increase in the average balance of equipment on operating leases and financing leases. Finance income earned on wholesale notes decreased $.8 million, to $43.4 million for the first six months of 2001, from $44.2 million in the first six months of 2000. This decrease occurred primarily because the Company discontinued offering wholesale note financing for manufactured housing, recreational vehicle and yacht dealer inventories. Revolving charge account income was $55.7 million for the first six months of 2001, compared to $49.9 million during the same period last year. Operating loan income increased $4.3 million to $17.8 million, from $13.5 million in the first six months of 2000. Net gains on the sales of retail notes, including adjustments to prior sales, totaled $7.3 million and $16.9 million for the second quarter and for the first six months of 2001, respectively, compared to $3.2 million and $7.0 million for the same periods a year ago. The increase was primarily related to the sale of agricultural retail notes (approximately $800 million total principal value) during the first six months of 2001. There were no similar sales during the first six months of 2000. Additional sales of receivables and leases are expected to be made in the future. Interest expense totaled $119.8 million for the second quarter of 2001 and $243.2 million for the first six months of 2001, compared to $103.4 million and $202.6 million for the same periods in 2000. This increase was primarily due to average borrowings increasing 11 percent to $7,010 million in the first six months of 2001 compared to $6,311 million in the first six months of 2000. In addition, the weighted-average annual interest rate incurred on all borrowings increased from 6.3 percent for the first six months of 2000 to 6.8 percent for the first six months of 2001. Administrative and operating expenses were $39.7 million in the second quarter of 2001 and $79.5 million for the first six months of 2001, compared with $35.9 million and $69.2 million for the same periods in 2000. 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 $60.7 million in the second quarter of 2001 and $123.4 million for the first six months of 2001, compared to $52.4 million and $104.4 million for the same periods in 2000, as a result of the increase in average balance of equipment on operating leases financed. During the second quarter and the first six months of 2001, the provision for credit losses totaled $20.6 million and $28.2 million, respectively, compared with $17.4 million and $25.8 million in the same periods last year. The annualized provision for credit losses, as a percentage of the total average portfolio Page 9 outstanding, was 1.03 percent for the second quarter of 2001 and .68 percent for the first six months of 2001, compared with .92 percent and .70 percent for the same periods last year. Receivable and Lease acquisition volumes were as follows (in millions of dollars): Three Months Ended April 30, 2001 2000 $ Change % Change ------------------------------------- Retail notes: Agricultural equipment $ 647 $ 639 $ 8 1% Construction equipment 180 185 (5) (3) Lawn and grounds care equipment 99 85 14 16 Recreational products 202 72 130 181 ---------------------------- Total 1,128 981 147 15 ---------------------------- Wholesale notes 216 411 (195) (47) Revolving charge accounts 459 433 26 6 Operating loans 254 192 62 32 Financing leases 44 48 (4) (8) Equipment on operating leases 184 217 (33) (15) ---------------------------- Total $ 2,285 $ 2,282 $ 3 0% ============================ Six Months Ended April 30, ----------------- 2001 2000 $ Change % Change -------------------------------------- Retail notes: Agricultural equipment $ 1,262 $ 1,309 $ (47) (4)% Construction equipment 347 318 29 9 Lawn and grounds care equipment 142 130 12 9 Recreational products 290 144 146 101 ----------------------------- Total 2,041 1,901 140 7 ----------------------------- Wholesale notes 455 763 (308) (40) Revolving charge accounts 813 757 56 7 Operating loans 497 288 209 73 Financing leases 78 83 (5) (6) Equipment on operating Leases 274 378 (104) (28) ---------------------------- Total $ 4,158 $ 4,170 $ (12) 0% ============================ Wholesale note volumes decreased in the first six months of 2001 when compared to the same period last year primarily because the Company discontinued offering wholesale note financing for manufactured housing, recreational vehicle and yacht dealer inventories. Operating lease volumes decreased $104 million when compared to the same period one year ago primarily due to a decrease in agricultural operating lease volumes. These decreases were partially offset by increases in recreational product retail note and operating loan volumes in the first six months of 2001, when compared to the same period last year. Page 10 Total Receivables and Leases held were as follows (in millions of dollars): April 30, October 31, April 30, 2001 2000 2000 -------------------------------------- Retail notes: Agricultural equipment $ 2,858 $ 2,983 $ 2,925 Construction equipment 1,096 1,000 781 Lawn and grounds care equipment 506 465 380 Recreational products 132 140 136 ------------------------------------- Total 4,592 4,588 4,222 ------------------------------------- Wholesale notes 725 937 939 Revolving charge accounts 641 689 640 Operating loans 429 422 295 Financing leases 445 456 428 Equipment on operating leases 1,489 1,517 1,415 ------------------------------------- Total $ 8,321 $ 8,609 $ 7,939 ===================================== Receivables and Leases administered by the Company were as follows (in millions of dollars): April 30, October 31, April 30, 2001 2000 2000 -------------------------------------- Receivables and Leases administered: Owned by the Company $ 8,321 $ 8,609 $ 7,939 Sold and serviced - with limited recourse* 1,865 1,867 1,611 Sold and serviced - without recourse** 85 91 104 Serviced - without recourse*** 15 24 32 -------------------------------------- Total Receivables and Leases administered $ 10,286 $ 10,591 $ 9,686 ====================================== * The Company's maximum exposure under all Receivable and Lease recourse provisions at April 30, 2001, October 31, 2000 and April 30, 2000 was $188 million, $168 million and $144 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 April 30, 2001, October 31, 2000 and April 30, 2000, the maximum exposure under these agreements was approximately $11 million, $6 million and $7 million, respectively. ** These Receivables and Leases represent a portfolio of recreational product retail notes which the Company continues to administer for a fee until the servicing rights are assumed by their owners. *** On February 1, 1999, the Company began servicing a receivable portfolio on behalf of Farming and Agricultural Financing Limited. These servicing rights were obtained in conjunction with the Company's acquisition of the remaining 50 percent interest in John Deere Credit Limited. (John Deere Credit Limited since has been liquidated, and its Receivables have been transferred to John Deere Bank S.A.) Page 11 Total Receivable and Lease amounts 60 days or more past due, by product and as a percent of total balances held, were as follows (in millions of dollars): April 30, October 31, April 30, 2001 2000 2000 ------------------------------------ $ % $ % $ % ------------------------------------ Retail notes: Agricultural equipment $10.9 .38% $ 8.9 .30% $12.0 .41% Construction equipment 5.1 .47 4.5 .45 2.2 .28 Lawn and grounds care equipment 1.0 .20 .9 .19 .9 .24 Recreational products .1 .08 .1 .07 .1 .07 ------ ----- ------ Total 17.1 .37 14.4 .31 15.2 .36 Wholesale notes 8.7 1.20 3.0 .32 1.2 .13 Revolving charge accounts 12.2 1.90 9.3 1.35 7.5 1.17 Operating loans 2.6 .61 .7 .17 8.5 2.88 Leases 10.0 .52 5.5 .28 5.8 .31 ------ ------ ------ Total $50.6 .61% $32.9 .38% $38.2 .48% ====== ====== ====== The balance of retail notes held (principal plus accrued interest) with any installment 60 days or more past due was $81 million, $68 million and $55 million at April 30, 2001, October 31, 2000 and April 30, 2000, respectively. The balance of retail notes held on which any installment is 60 days or more past due as a percent of retail notes held represented 1.76, 1.48 and 1.30 percent of the ending retail notes receivable at April 30, 2001, October 31, 2000 and April 30, 2000, respectively. During the second quarter and the first six months of 2001, write-offs (net of recoveries) of Receivables and Leases totaled $15.6 million and $25.4 million, respectively, compared with $10.1 million and $16.5 million in the same periods last year. Annualized write-offs, as a percentage of the average total receivables and leases held, were .78 percent for the second quarter of 2001 and .61 percent for the first six months of 2001, compared with .53 percent and .45 percent for the same periods last year. Write-offs relating to retail notes increased $4.4 million in the first six months of 2001, when compared with the first six months of 2000, primarily due to increased write-offs of construction equipment retail notes. Lease write-offs increased $1.3 million in the first six months of 2001 when compared to last year primarily due to higher write-offs on construction leases. Wholesale note write-offs increased $2.6 million in the first six months of 2001 when compared to the same period last year primarily due to increased write-offs of recreational vehicle dealer inventory notes. 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 $131 million at April 30, 2001, compared with $133 million at October 31, 2000 and $122 million at April 30, 2000. The Company's allowance for credit losses on all Receivables and Leases held totaled $91 million at April 30, 2001, $93 million at October 31, 2000 and $91 million at April 30, 2000. The allowance for credit losses represented 1.09 percent of the total Receivables and Leases held at April 30, 2001, 1.08 percent at October 31, 2000 and 1.15 percent at April 30, 2000. The allowance is subject to an ongoing evaluation based on loss experience. The Company believes the allowance is sufficient to provide for losses in its existing Receivable and Lease portfolio. Page 12 Safe Harbor Statement --------------------- Statements under "Financial Instrument Risk Information" 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. In addition, the Company's business is closely related to John Deere's business. Further information, including factors that potentially could materially affect the Company's and John Deere's financial results, is included in the most recent Deere & Company Form 10-Q and other Deere & Company and Capital Corporation filings with the Securities and Exchange Commission. Capital Resources and Liquidity ------------------------------- The Company relies on its ability to raise substantial amounts of funds to finance its Receivables and Leases. The Company's primary sources of funds for this purpose are a combination of borrowings and equity capital. Additionally, the Company periodically sells substantial amounts of receivables and leases 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. 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 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 year. During the first six months of 2001, the aggregate net cash provided by operating and investing activities was primarily used to decrease borrowings. Net cash provided by operating activities was $273 million in the first six months of 2001. Investing activities provided $113 million in the first six months of 2001. Receivable and Lease sales provided $1,205 million, which was partially offset by Receivable and Lease acquisitions exceeding collections by $1,088 million. Financing activities used $252 million during the same period, resulting primarily from a decrease in total borrowings, including a reduction in amounts payable to John Deere. Cash and cash equivalents increased $134 million during the first six months of 2001. See "Statement of Consolidated Cash Flows." During the first six months of 2000, the aggregate net cash provided by operating and financing activities was primarily used to increase Receivables and Leases. Net cash provided by operating activities was $261 million in the first six months of 2000. Net cash used for investing activities totaled $911 million in the first six months of 2000, primarily due to Receivable and Lease acquisitions exceeding collections by $1,096 million, which was partially offset by the $154 million in proceeds from the sale of receivables. Financing activities provided $688 million during the same period, resulting from a $698 million net increase in total borrowings, which was partially offset by a $10 million dividend payment to John Deere Credit Company. Cash and cash equivalents increased $38 million during the first six months of 2000. Total interest-bearing indebtedness amounted to $7,103 million at April 30, 2001, compared with $7,330 million at October 31, 2000 and $6,731 million at April 30, 2000, generally corresponding with the level Page 13 of Receivables and Leases financed and the level of cash and cash equivalents. Total short-term indebtedness amounted to $3,399 million at April 30, 2001, compared with $4,743 million at October 31, 2000 and $4,156 million at April 30, 2000, while total long-term indebtedness amounted to $3,704 million, $2,587 million and $2,575 million at these dates, respectively. The ratio of total interest-bearing debt to stockholder's equity was 6.2 to 1, 6.6 to 1 and 6.4 to 1 at April 30, 2001, October 31, 2000 and April 30, 2000, respectively. During the first six months of 2001, the Company retired $200 million of 5.85% long-term notes due in 2001. During the same period, the Capital Corporation's subsidiary, John Deere Credit Limited in Gloucester, England, retired $44 million of long- term debt. The Capital Corporation's subsidiary, John Deere Bank S.A., issued $227 million of medium-term notes and the Capital Corporation issued $2,200 million and retired $675 million of medium-term notes during the first six months of 2001. At April 30, 2001, the Capital Corporation and Deere & Company jointly maintained $4,254 million of unsecured lines of credit with various banks in North America and overseas, $932 million of which were 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 Capital Corporation and Deere & Company, were considered to constitute utilization. These agreements include a $2,113 million long-term commitment of the banks expiring on February 20, 2006. The facility fees payable under these credit agreements are divided between Deere & Company and the Capital Corporation based on the proportion of their respective commercial paper outstanding. Stockholder's equity was $1,154 million at April 30, 2001, compared with $1,108 million at October 31, 2000 and $1,054 million at April 30, 2000. The increase of $46 million in the first six months of 2001 resulted primarily from net income of $80 million, partially offset by an unrealized loss on derivatives of $35 million. This loss is primarily due to an unrealized loss on interest rate swaps (pay fixed rates / receive floating rates) hedging the interest costs of the credit operations' short-term borrowings resulting from a decrease in interest rates. If interest rates remain unchanged, the unrealized loss will be realized in income and will be offset by lower future interest expense on the credit operations' short-term borrowings, which will be based on the lower interest rates. Item 3. Quantitative and Qualitative Disclosures About Market ----------------------------------------------------- Risk. ---- Financial Instrument Risk Information ------------------------------------- Sensitivity Analysis -------------------- The following is a 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. 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 prevailing rate for each receivable portfolio in effect at the end of the quarter. Cash flows for borrowings are discounted at the treasury yield curve plus a market credit spread for similarly rated borrowers in similar industries. Cash flows for interest rate swaps are projected and discounted using forecasted rates from the swap yield curve at the repricing dates as of the end of the quarter. Page 14 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 April 30, 2001. The gains or losses in fair values would have been as follows in millions of dollars: Fair Value Gains (Losses) April 30, 2001 ------------------ Financing receivables $ (38) Long-term interest rate swaps related to short-term borrowings 8 Long-term borrowings and related swaps: Long-term borrowings 20 Interest rate swaps (9) ------------------ Total $ (19) ================== 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 April 30, 2001 were as follows: --------------------------------------------------------------- Average Notional Fair Value Contractual Amount Gains Rate* (Losses) --------------------------------------------------------------- Buy US$ / Sell Australian dollars 1.9798 $161.2 $ (1.7) Buy Yen / Sell Euro 122.7226 36.7 ( .1) Buy US$ / Sell Euro 1.1092 35.7 ( .1) Other 35.8 .1 ---------------------------------- Total $269.4 $ (1.8) ================================== *Currency per United States dollar (US$) --------------------------------------------------------------- The Company held certain financial instruments in currencies other than the functional currencies. These amounts, excluding short-term receivables and payables, in millions of dollars at April 30, 2001 by maturity dates and average interest rates were as follows: --------------------------------------------------------------- Expected Maturity Date ----------------------------------------------- Last Functional 6 Mos. Fair Currency(FC) 2001 2002 2003 2004 2005 2006 Total Value --------------------------------------------------------------- Euro (FC) Short-term borrowings (US$) $ 45 $ 45 * Average interest rates 5.0% Short-term borrowings (Yen) $ 37 $ 37 * Average interest rates .11% Australian Dollar (FC) Short-term borrowings (US$) $161 $161 * Average interest rates 4.9% *These fair values were approximately equal to the values in the total column. --------------------------------------------------------------- Page 15 PART II. OTHER INFORMATION Item 1. Legal Proceedings. ----------------- The Company is 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 2. Changes in Securities and Use of Proceeds. ----------------------------------------- Omitted pursuant to instruction H(2). Item 3. Defaults Upon Senior Securities. ------------------------------- Omitted pursuant to instruction H(2). Item 4. Submission of Matters to a Vote of Security Holders. --------------------------------------------------- Omitted pursuant to instruction H(2). Item 5. Other Information. ----------------- None. Item 6. Exhibits and Reports on Form 8-K. -------------------------------- (a) Exhibits. See the index to exhibits immediately preceding the exhibits filed with this report. Certain instruments relating to long-term debt, constituting less than 10% of the registrant's total assets, are not filed as exhibits herewith pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K. The registrant will file copies of such instruments upon request of the Commission. (b) Reports on Form 8-K. Current report on Form 8-K dated February 13,2001 (Items 5 and 7). Page 16 SIGNATURES Pursuant to the requirements 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. JOHN DEERE CAPITAL CORPORATION Date: June 7, 2001 By: /s/ Nathan J. Jones ------------------------------ Nathan J. Jones Senior Vice President and Principal Financial Officer Page 17 INDEX TO EXHIBITS Exhibit (12) Computation of ratio of earnings to fixed charges (99) Part I of Deere & Company Form 10-Q for the quarter ended April 30, 2001 (Securities and Exchange Commission file number 1-4121*). __________________________ *Incorporated by reference. Copies of these exhibits are available from the Company upon request. Page 18