Attached files

file filename
EX-32 - EX-32 - DEERE JOHN CAPITAL CORPa11-6424_1ex32.htm
EX-31.1 - EX-31.1 - DEERE JOHN CAPITAL CORPa11-6424_1ex31d1.htm
EX-31.2 - EX-31.2 - DEERE JOHN CAPITAL CORPa11-6424_1ex31d2.htm
EX-12 - EX-12 - DEERE JOHN CAPITAL CORPa11-6424_1ex12.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 


 

FORM 10-Q

 


 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended January 31, 2011

 

Commission file no: 1-6458

 


 

JOHN DEERE CAPITAL CORPORATION

 

Delaware
(State of Incorporation)

 

36-2386361
(IRS Employer Identification No.)

 

1 East First Street, Suite 600
Reno, Nevada  89501
(Address of principal executive offices)

 

Telephone Number:  (775) 786-5527

 


Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes

X

No 

 

 

 

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

 

Large accelerated filer

 

 

Accelerated filer

 

 

Non-accelerated filer

X

 

Smaller reporting company

 

 

(Do not check if a smaller reporting company)

 

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

Yes

 

No 

X

 

 

At January 31, 2011, 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., 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.

 

 

 

Index to Exhibits: Page 27

 



 

PART I. FINANCIAL INFORMATION

 

Item 1.     Financial Statements.

 

John Deere Capital Corporation and Subsidiaries

Statements of Consolidated Income

For the Three Months Ended January 31, 2011 and 2010

(Unaudited)

(in millions)

 

 

 

2011

 

 

 

2010

 

Revenues

 

 

 

 

 

 

 

Finance income earned on retail notes

$

174.5

 

 

$

179.8

 

Lease revenues

 

74.0

 

 

 

71.2

 

Revolving charge account income

 

57.4

 

 

 

61.8

 

Finance income earned on wholesale receivables

 

67.1

 

 

 

56.7

 

Operating loan income

 

2.6

 

 

 

3.6

 

Crop insurance commissions

 

 

 

 

 

16.8

 

Other income - net

 

18.7

 

 

 

24.5

 

Total revenues

 

394.3

 

 

 

414.4

 

Expenses

 

 

 

 

 

 

 

Interest expense

 

132.4

 

 

 

150.0

 

Operating expenses:

 

 

 

 

 

 

 

Administrative and operating expenses

 

73.2

 

 

 

94.4

 

Provision for credit losses

 

3.8

 

 

 

23.0

 

Fees paid to John Deere

 

9.1

 

 

 

9.1

 

Depreciation of equipment on operating leases

 

48.1

 

 

 

45.9

 

Total operating expenses

 

134.2

 

 

 

172.4

 

Total expenses

 

266.6

 

 

 

322.4

 

Income of consolidated group before income taxes

 

127.7

 

 

 

92.0

 

Provision for income taxes

 

44.2

 

 

 

28.4

 

Income of consolidated group

 

83.5

 

 

 

63.6

 

Equity in income of unconsolidated affiliates

 

.3

 

 

 

.3

 

Net income

 

83.8

 

 

 

63.9

 

Less: Net income attributable to noncontrolling interests

 

 

 

 

 

 

 

Net income attributable to the Company

$

83.8

 

 

$

63.9

 

 

 

See Condensed Notes to Interim Consolidated Financial Statements.

 

2



 

John Deere Capital Corporation and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

(in millions)

 

 

 

January 31,

 

October 31,

 

January 31,

 

 

2011

 

2010

 

2010

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

430.7

 

 

$

355.7

 

 

$

1,558.7

 

Receivables:

 

 

 

 

 

 

 

 

 

 

 

 

Retail notes

 

 

10,468.8

 

 

 

9,989.3

 

 

 

8,448.1

 

Restricted securitized retail notes

 

 

1,788.1

 

 

 

2,264.9

 

 

 

2,611.2

 

Revolving charge accounts

 

 

1,813.1

 

 

 

2,287.9

 

 

 

1,791.5

 

Wholesale receivables

 

 

5,136.7

 

 

 

4,658.7

 

 

 

4,259.3

 

Financing leases

 

 

414.4

 

 

 

420.4

 

 

 

375.5

 

Operating loans

 

 

223.6

 

 

 

239.1

 

 

 

232.1

 

Total receivables

 

 

19,844.7

 

 

 

19,860.3

 

 

 

17,717.7

 

Allowance for credit losses

 

 

(145.4

)

 

 

(148.6

)

 

 

(144.9

)

Total receivables – net

 

 

19,699.3

 

 

 

19,711.7

 

 

 

17,572.8

 

Other receivables

 

 

28.2

 

 

 

22.3

 

 

 

43.8

 

Receivable from John Deere

 

 

2.6

 

 

 

 

 

 

 

30.9

 

Equipment on operating leases – net

 

 

1,049.8

 

 

 

1,141.8

 

 

 

937.4

 

Notes receivable from John Deere

 

 

 

 

 

 

575.5

 

 

 

738.1

 

Investment in unconsolidated affiliates

 

 

7.2

 

 

 

7.0

 

 

 

6.4

 

Other assets

 

 

698.2

 

 

 

810.5

 

 

 

960.8

 

Total Assets

 

$

21,916.0

 

 

$

22,624.5

 

 

$

21,848.9

 

Liabilities and Stockholder’s Equity

 

 

 

 

 

 

 

 

 

 

 

 

Short-term borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

1,717.9

 

 

$

1,349.3

 

 

$

1,064.9

 

Other notes payable

 

 

1,764.8

 

 

 

2,209.0

 

 

 

2,656.4

 

John Deere

 

 

1,220.2

 

 

 

1,255.6

 

 

 

 

 

Current maturities of long-term borrowings

 

 

2,740.9

 

 

 

2,888.8

 

 

 

2,704.1

 

Total short-term borrowings

 

 

7,443.8

 

 

 

7,702.7

 

 

 

6,425.4

 

Other payables to John Deere

 

 

11.2

 

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

 

635.1

 

 

 

694.2

 

 

 

682.6

 

Deposits withheld from dealers and merchants

 

 

160.9

 

 

 

164.8

 

 

 

158.5

 

Deferred income taxes

 

 

184.3

 

 

 

161.7

 

 

 

74.6

 

Long-term borrowings

 

 

11,022.9

 

 

 

11,452.0

 

 

 

12,207.3

 

Total liabilities

 

 

19,458.2

 

 

 

20,175.4

 

 

 

19,548.4

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

 

 

 

 

 

Stockholder’s equity:

 

 

 

 

 

 

 

 

 

 

 

 

Common stock, without par value (issued and outstanding – 2,500 shares owned by John Deere Financial Services, Inc.)

 

 

1,272.8

 

 

 

1,272.8

 

 

 

1,272.8

 

Retained earnings

 

 

1,161.3

 

 

 

1,156.5

 

 

 

1,026.0

 

Accumulated other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

 

47.4

 

 

 

48.6

 

 

 

39.0

 

Unrealized loss on derivatives

 

 

(24.1

)

 

 

(29.2

)

 

 

(37.7

)

Total accumulated other comprehensive income (loss)

 

 

23.3

 

 

 

19.4

 

 

 

1.3

 

Total Company stockholder’s equity

 

 

2,457.4

 

 

 

2,448.7

 

 

 

2,300.1

 

Noncontrolling interests

 

 

.4

 

 

 

.4

 

 

 

.4

 

Total stockholder’s equity

 

 

2,457.8

 

 

 

2,449.1

 

 

 

2,300.5

 

Total Liabilities and Stockholder’s Equity

 

$

21,916.0

 

 

$

22,624.5

 

 

$

21,848.9

 

 

 

See Condensed Notes to Interim Consolidated Financial Statements.

 

3



 

John Deere Capital Corporation and Subsidiaries

Statements of Consolidated Cash Flows

For the Three Months Ended January 31, 2011 and 2010

(Unaudited)

(in millions)

 

 

 

2011

 

 

 

2010

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

Net income

$

83.8

 

 

$

63.9

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Provision for credit losses

 

3.8

 

 

 

23.0

 

Provision for depreciation and amortization

 

52.2

 

 

 

50.3

 

Provision for deferred income taxes

 

19.9

 

 

 

4.2

 

Undistributed earnings of unconsolidated affiliates

 

(.3

)

 

 

(.3

)

Change in accounts payable and accrued expenses

 

(18.5

)

 

 

(56.1

)

Change in accrued income taxes payable/receivable

 

7.7

 

 

 

12.2

 

Other

 

15.4

 

 

 

83.7

 

Net cash provided by operating activities

 

164.0

 

 

 

180.9

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

Cost of receivables acquired

 

(9,774.5

)

 

 

(6,700.3

)

Collections of receivables

 

9,758.3

 

 

 

6,931.1

 

Cost of equipment on operating leases acquired

 

(101.4

)

 

 

(67.2

)

Proceeds from sales of equipment on operating leases

 

147.9

 

 

 

101.7

 

Cost of notes receivable with John Deere

 

(24.5

)

 

 

(35.9

)

Collection of notes receivable with John Deere

 

600.0

 

 

 

37.0

 

Proceeds from sales of receivables

 

 

 

 

 

9.4

 

Change in restricted cash

 

(24.2

)

 

 

(28.6

)

Other

 

(61.0

)

 

 

(6.3

)

Net cash provided by investing activities

 

520.6

 

 

 

240.9

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

Increase in commercial paper - net

 

355.9

 

 

 

1,061.3

 

Decrease in other notes payable - net

 

(444.2

)

 

 

(456.6

)

Decrease in payable to John Deere - net

 

(32.8

)

 

 

(46.5

)

Proceeds from issuance of long-term borrowings

 

22.4

 

 

 

60.4

 

Payments of long-term borrowings

 

(427.6

)

 

 

(278.7

)

Dividends paid

 

(79.0

)

 

 

(70.0

)

Debt issuance costs

 

(4.1

)

 

 

(2.3

)

Net cash provided by (used for) financing activities

 

(609.4

)

 

 

267.6

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(.2

)

 

 

(1.3

)

Net increase in cash and cash equivalents

 

75.0

 

 

 

688.1

 

Cash and cash equivalents at beginning of period

 

355.7

 

 

 

870.6

 

Cash and cash equivalents at end of period

$

430.7

 

 

$

1,558.7

 

 

 

See Condensed Notes to Interim Consolidated Financial Statements.

 

4



 

John Deere Capital Corporation and Subsidiaries

Statements of Changes in Consolidated Stockholder’s Equity

For the Three Months Ended January 31, 2010 and 2011

(Unaudited)

(in millions)

 

 

 

 

 

Company Stockholder

 

 

 

 

 

Total
Stockholder’s
Equity

 

Common
Stock

 

Retained
Earnings

 

Total
Accumulated
Other
Comprehensive
Income (Loss)

 

Noncontrolling
Interests

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance October 31, 2009

 

$    2,317.0

 

 

$   1,272.8

 

 

$    1,032.1

 

 

$  11.7

 

 

$  .4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

63.9

 

 

 

 

 

63.9

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

(16.8

)

 

 

 

 

 

 

 

(16.8

)

 

 

 

 

Unrealized gain on derivatives

 

6.4

 

 

 

 

 

 

 

 

6.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

53.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends paid

 

(70.0

)

 

 

 

 

(70.0

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance January 31, 2010

 

$    2,300.5

 

 

$   1,272.8

 

 

$  1,026.0

 

 

$  1.3

 

 

$  .4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance October 31, 2010

 

$    2,449.1

 

 

$  1,272.8

 

 

$  1,156.5

 

 

$    19.4

 

 

$  .4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

83.8

 

 

 

 

 

83.8

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

(1.2

)

 

 

 

 

 

 

 

(1.2

)

 

 

 

 

Unrealized gain on derivatives

 

5.1

 

 

 

 

 

 

 

 

5.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

87.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends paid

 

(79.0

)

 

 

 

 

(79.0

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance January 31, 2011

 

$    2,457.8

 

 

$   1,272.8

 

 

$  1,161.3

 

 

$  23.3

 

 

$  .4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Condensed Notes to Interim Consolidated Financial Statements.

 

5



 

John Deere Capital Corporation and Subsidiaries

Condensed Notes to Interim Consolidated Financial Statements

(Unaudited)

 

(1)

John Deere Capital Corporation and its subsidiaries (Capital Corporation), and its other consolidated entities are collectively called the Company. The consolidated financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the U.S. 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 consolidated financial statements and the notes thereto appearing 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 fiscal year.

 

 

 

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts and related disclosures. Actual results could differ from those estimates.

 

 

 

During the first quarter of 2011, the variable interest entity (VIE) created by the Capital Corporation’s parent, John Deere Financial Services, Inc. (JDFS), that serves as a centralized hedging center, was merged into JDFS. As a result, the VIE was deconsolidated with no gains or losses recognized. All of the Capital Corporation’s derivative agreements and transactions outstanding with the VIE at the time of the merger were assumed by JDFS. In conjunction with this merger, the Capital Corporation began utilizing JDFS as a centralized hedging center to execute certain derivative transactions. Further detail regarding the structure of this centralized hedging center can be found in Note 10.

 

 

(2)

The Company provides and administers financing for retail purchases of new equipment manufactured by Deere & Company’s agriculture and turf and construction and forestry divisions 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 and continues to service a small portfolio of recreational products and other retail notes. In addition, the Company leases John Deere equipment and a limited amount of non-Deere equipment to retail customers (financing and operating leases). The Company also finances and services revolving charge accounts, in most cases acquired from and offered through merchants in the agriculture and turf and construction and forestry markets (revolving charge accounts). Further, the Company finances and services operating loans, in most cases offered through and acquired from farm input providers or through direct relationships with agricultural producers or agribusinesses (operating loans). 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). 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, operating loans, financing leases and wholesale receivables are collectively called “Receivables.” Receivables and operating leases are collectively called “Receivables and Leases.”

 

 

(3)

New accounting standards adopted in the first three months of 2011 were as follows:

 

 

 

In the first quarter of 2011, the Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2009-16, Accounting for Transfers of Financial Assets, which amends Accounting Standards Codification (ASC) 860, Transfers and Servicing (FASB Statement No. 166, Accounting for Transfers of Financial Assets an amendment of FASB Statement No. 140). This ASU eliminates the qualifying special purpose entities from the consolidation guidance and clarifies the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting. It requires additional disclosures about the risks from continuing involvement in transferred financial assets accounted for as sales. The adoption did not have a material effect on the Company’s consolidated financial statements.

 

6



 

 

In the first quarter of 2011, the Company adopted FASB ASU No. 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, which amends ASC 810, Consolidation (FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R)). This ASU requires a qualitative analysis to determine the primary beneficiary of a VIE. The analysis identifies the primary beneficiary as the enterprise that has both the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits that could be significant to the VIE. The ASU also requires additional disclosures about an enterprise’s involvement in a VIE. The adoption did not have a material effect on the Company’s consolidated financial statements.

 

 

 

In the first quarter of 2011, the Company adopted FASB ASU No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, which amends ASC 310, Receivables. This ASU requires disclosures related to receivables and the allowance for credit losses by portfolio segment. The ASU also requires disclosures of information regarding the credit quality, aging, nonaccrual status and impairments by class of receivable. A portfolio segment is the level at which a creditor develops a systematic methodology for determining its credit allowance. A receivable class is a subdivision of a portfolio segment with similar measurement attributes, risk characteristics and common methods to monitor and assess credit risk. The adoption did not have a material effect on the Company’s consolidated financial statements.

 

 

 

New accounting standards to be adopted are as follows:

 

 

 

In January 2010, the FASB issued ASU No. 2010-06, Improving Disclosures about Fair Value Measurements, which amends ASC 820, Fair Value Measurements and Disclosures. This ASU requires disclosures of transfers into and out of Levels 1 and 2, more detailed roll forward reconciliations of Level 3 recurring fair value measurements on a gross basis, fair value information by class of assets and liabilities, and descriptions of valuation techniques and inputs for Level 2 and 3 measurements. The effective date was the second quarter of fiscal year 2010 except for the roll forward reconciliations, which are required in the first quarter of fiscal year 2012. The adoption in 2010 did not have a material effect and the future adoption will not have a material effect on the Company’s consolidated financial statements.

 

 

(4)

Comprehensive income, which includes all changes in the Company’s equity during the period except transactions with the stockholder, was as follows (in millions of dollars):

 

 

 

Three Months Ended January 31,

 

 

 

 

 

 

 

2011

 

 

2010

 

 

 

 

 

 

 

 

 

 

Net Income

 

  $

83.8

 

 

 $

63.9

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

(1.2

)

 

(16.8

)

 

 

 

 

 

 

 

 

 

Unrealized gain on derivatives

 

5.1

 

 

6.4

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

  $

87.7

 

 

 $

53.5

 

 

 

    (5)

Past due balances of Receivables represent the total balance held (principal plus accrued interest) with any payment amounts 30 days or more past the contractual payment due date.

 

 

 

Generally, when retail notes are approximately 120 days delinquent, accrual of finance income is suspended, the collateral is repossessed or the account is designated for litigation and the estimated uncollectible amount, after charging the dealer’s withholding account, if any, is written off to the allowance for credit losses. Accrual of revolving charge account income is suspended generally when the account becomes 120 days delinquent. Accounts are deemed to be uncollectible and written off to the allowance for credit losses when delinquency reaches 120 days for a Farm Planä, PowerPlanâ or John Deere Financial Revolving Plan account. When a financing lease account becomes 120 days delinquent, the accrual of lease revenue is suspended, the equipment is repossessed or the account is designated for litigation, and the estimated uncollectible amount, after charging the dealer’s withholding account, if any, is written off to the allowance for credit losses. Generally, when a wholesale receivable becomes 60 days delinquent, the Company determines whether the accrual of finance income on

 

7



 

 

interest-bearing wholesale receivables should be suspended, the collateral should be repossessed or the account should be designated for litigation and the estimated uncollectible amount written off to the allowance for credit losses. Finance income for non-performing Receivables is recognized on a cash basis. Accrual of finance income is resumed when the receivable becomes contractually current and collections are reasonably assured.

 

 

 

The Company monitors the credit quality of Receivables as either performing or non-performing monthly. Non-performing Receivables represent loans for which the Company has ceased accruing finance income.

 

 

 

An aging of total Receivables and non-performing Receivables was as follows (in millions of dollars):

 

 

 

 

January 31, 2011

 

 

 

 

30-59 Days
Past Due

 

60-89 Days
Past Due

 

90 Days or
Greater
Past Due *

 

Total Past
Due

 

Retail notes:

 

 

 

 

 

 

 

 

 

 

Agriculture and turf equipment

 

 

$

86.1

 

   $

40.5

 

 

   $

30.4

 

 

   $

157.0

 

 

Construction and forestry equipment

 

 

48.3

 

28.6

 

 

24.6

 

 

101.5

 

 

Recreational products

 

 

.1

 

.1

 

 

.1

 

 

.3

 

 

Revolving charge accounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture and turf equipment

 

 

20.0

 

8.4

 

 

4.4

 

 

32.8

 

 

Construction and forestry equipment

 

 

2.4

 

1.0

 

 

.6

 

 

4.0

 

 

Wholesale receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture and turf equipment

 

 

1.4

 

.6

 

 

2.2

 

 

4.2

 

 

Construction and forestry equipment

 

 

.8

 

 

 

 

.2

 

 

1.0

 

 

Financing leases:

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture and turf equipment

 

 

7.1

 

2.8

 

 

11.0

 

 

20.9

 

 

Construction and forestry equipment

 

 

2.3

 

1.9

 

 

3.7

 

 

7.9

 

 

Operating loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture and turf equipment

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Receivables

 

 

$

168.5

 

   $

83.9

 

 

   $

77.2

 

 

   $

329.6

 

 

 

 

*                           Receivables that are 90 days or greater past due and still accruing finance income.

 

 

 

 

Total
Past Due

 

Total Non-Performing

 

Current

 

Total
Receivables

 

Retail notes:

 

 

 

 

 

 

 

 

 

 

Agriculture and turf equipment

 

 

$

157.0

 

   $

47.6

 

 

   $

10,903.7

 

 

   $

11,108.3

 

 

Construction and forestry equipment

 

 

101.5

 

25.1

 

 

1,017.7

 

 

1,144.3

 

 

Recreational products

 

 

.3

 

.1

 

 

3.9

 

 

4.3

 

 

Revolving charge accounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture and turf equipment

 

 

32.8

 

1.9

 

 

1,731.0

 

 

1,765.7

 

 

Construction and forestry equipment

 

 

4.0

 

 

 

 

43.4

 

 

47.4

 

 

Wholesale receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture and turf equipment

 

 

4.2

 

1.9

 

 

4,525.5

 

 

4,531.6

 

 

Construction and forestry equipment

 

 

1.0

 

6.4

 

 

597.7

 

 

605.1

 

 

Financing leases:

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture and turf equipment

 

 

20.9

 

10.5

 

 

242.5

 

 

273.9

 

 

Construction and forestry equipment

 

 

7.9

 

4.0

 

 

128.6

 

 

140.5

 

 

Operating loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture and turf equipment

 

 

 

 

2.8

 

 

220.8

 

 

223.6

 

 

Total Receivables

 

 

$

329.6

 

   $

100.3

 

 

   $

19,414.8

 

 

   $

19,844.7

 

 

 

8



 

 

Allowance for credit losses on Receivables are maintained in amounts considered to be appropriate in relation to the Receivables outstanding based on collection experience, economic conditions and credit risk quality.

 

 

 

An analysis of the allowance for credit losses on Receivables was as follows (in millions of dollars):

 

 

 

 

Three Months Ended

 

 

 

January 31, 2011

 

 

 

Retail
Notes

 

Revolving
Charge
Accounts

 

Wholesale
Receivables

 

Other

 

Total
Receivables

 

Allowance:

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of the period

 

 

$

82.1

 

$

43.3

 

 

$

7.4

 

 

$

15.8

 

 

$

148.6

 

 

Provision for credit losses

 

 

1.7

 

2.7

 

 

(1.2

)

 

.6

 

 

3.8

 

 

Write-offs

 

 

(6.5

)

(9.3

)

 

(.1

)

 

(1.4

)

 

(17.3

)

 

Recoveries

 

 

2.6

 

7.4

 

 

 

 

 

.1

 

 

10.1

 

 

Other changes *

 

 

.1

 

 

 

 

.2

 

 

(.1

)

 

.2

 

 

Balance, end of the period

 

 

$

80.0

 

$

44.1

 

 

$

6.3

 

 

$

15.0

 

 

$

145.4

 

 

Balance individually evaluated

 

 

$

1.2

 

$

.8

 

 

$

.4

 

 

$

3.8

 

 

$

6.2

 

 

Balance collectively evaluated

 

 

$

78.8

 

$

43.3

 

 

$

5.9

 

 

$

11.2

 

 

$

139.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance

 

 

$

12,256.9

 

$

1,813.1

 

 

$

5,136.7

 

 

$

638.0

 

 

$

19,844.7

 

 

Balance individually evaluated

 

 

$

14.2

 

$

2.4

 

 

$

.8

 

 

$

9.9

 

 

$

27.3

 

 

Balance collectively evaluated

 

 

$

12,242.7

 

$

1,810.7

 

 

$

5,135.9

 

 

$

628.1

 

 

$

19,817.4

 

 

 

 

*                                         Primarily translation adjustments

 

 

 

Receivables are considered impaired when it is probable the Company will be unable to collect all amounts due according to the contractual terms.

 

 

 

An analysis of  impaired Receivables was as follows (in millions of dollars):

 

 

 

 

January 31, 2011

 

 

 

 

Recorded
Investment

 

Unpaid
Principal
Balance

 

Specific
Allowance

 

Average
Recorded
Investment

 

Receivables with specific allowance: *

 

 

 

 

 

 

 

 

 

 

Retail notes

 

 

$

1.6

 

$

1.5

 

$

1.2

 

$

3.3

 

Revolving charge accounts

 

 

.8

 

.8

 

.8

 

.4

 

Wholesale receivables

 

 

.8

 

.8

 

.4

 

9.8

 

Financing leases

 

 

.6

 

.6

 

.5

 

.8

 

Operating loans

 

 

4.3

 

4.3

 

3.3

 

4.6

 

Total

 

 

8.1

 

8.0

 

6.2

 

18.9

 

 

 

 

 

 

 

 

 

 

 

 

Receivables without specific allowance:

 

 

 

 

 

 

 

 

 

 

Retail notes

 

 

9.3

 

9.1

 

 

 

9.0

 

Total

 

 

$

17.4

 

$

17.1

 

$

6.2

 

$

27.9

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture and turf

 

 

$

12.4

 

$

12.3

 

$

5.5

 

$

13.0

 

Construction and forestry

 

 

$

5.0

 

$

4.8

 

$

.7

 

$

14.9

 

 

 

*                                         Finance income recognized was not material.

 

9



 

(6)

Securitization of receivables:

 

 

 

The Company, as a part of its overall funding strategy, periodically transfers certain receivables (retail notes) into VIEs that are special purpose entities (SPEs), or a non-VIE banking operation, as part of its asset-backed securities programs (securitizations). The structure of these transactions is such that the transfer of the retail notes did not meet the criteria of sales of receivables, and is, therefore, accounted for as a secured borrowing. SPEs utilized in securitizations of retail notes differ from other entities included in the Company’s consolidated statements because the assets they hold are legally isolated. Use of the assets held by the SPEs or the non-VIE is restricted by terms of the documents governing the securitization transactions.

 

 

 

In securitizations of retail notes related to secured borrowings, the retail notes are transferred to certain SPEs or to a non-VIE banking operation, which in turn issue debt to investors. The resulting secured borrowings are included in short-term borrowings on the balance sheet. The securitized retail notes are recorded as “Restricted securitized retail notes” on the balance sheet. The total restricted assets on the balance sheet related to these securitizations include the restricted securitized retail notes less an allowance for credit losses, and other assets primarily representing restricted cash. For those securitizations in which retail notes are transferred into SPEs, the SPEs supporting the secured borrowings are consolidated unless the Company does not have both the power to direct the activities that most significantly impact the SPEs’ economic performance and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the SPEs. No additional support to these SPEs beyond what was previously contractually required has been provided during the reporting periods.

 

 

 

In certain securitizations, the Company consolidates the SPEs since it has both the power to direct the activities that most significantly impact the SPEs’ economic performance, through its role as servicer of all the Receivables held by the SPEs, and the obligation, through variable interests in the SPEs, to absorb losses or receive benefits that could potentially be significant to the SPEs. The restricted assets (retail notes, allowance for credit losses and other assets) of the consolidated SPEs totaled $1,133 million, $1,739 million and $1,842 million at January 31, 2011, October 31, 2010 and January 31, 2010, respectively. The liabilities (other notes payable and accounts payable and accrued expenses) of these SPEs totaled $1,073 million, $1,654 million and $1,827 million at January 31, 2011, October 31, 2010 and January 31, 2010, respectively. The credit holders of these SPEs do not have legal recourse to the Company’s general credit.

 

 

 

In certain securitizations, the Company transfers retail notes to a non-VIE bank operation, which is not consolidated since the Company does not have a controlling interest in the entity. The Company’s carrying values and interests related to these securitizations with the unconsolidated non-VIE were restricted assets (retail notes, allowance for credit losses and other assets) of $177 million and liabilities (other notes payable and accounts payable and accrued expenses) of $173 million at January 31, 2011.

 

 

 

In certain securitizations, the Company transfers retail notes into bank-sponsored, multi-seller, commercial paper conduits, which are SPEs that are not consolidated. The Company does not service a significant portion of the conduits’ receivables, and, therefore, does not have the power to direct the activities that most significantly impact the conduits’ economic performance. These conduits provide a funding source to the Company (as well as other transferors into the conduit) as they fund the retail notes through the issuance of commercial paper. The Company’s carrying values and variable interests related to these conduits were restricted assets (retail notes, allowance for credit losses and other assets) of $531 million, $589 million and $849 million at January 31, 2011, October 31, 2010 and January 31, 2010, respectively. The liabilities (other notes payable and accounts payable and accrued expenses) related to these conduits were $520 million, $557 million and $831 million at January 31, 2011, October 31, 2010 and January 31, 2010, respectively.

 

 

 

The Company’s carrying amount of the liabilities to the unconsolidated conduits, compared to the maximum exposure to loss related to these conduits, which would only be incurred in the event of a complete loss on the restricted assets was as follows (in millions of dollars):

 

 

 

 

January 31,

 

 

 

 

 

2011 

 

 

 

Carrying value of liabilities

  $

519.6 

 

 

 

Maximum exposure to loss

 

531.4 

 

 

 

10



 

 

The assets of unconsolidated conduits related to securitizations in which the Company’s variable interests were considered significant were approximately $22 billion at January 31, 2011.

 

 

 

The components of consolidated restricted assets related to secured borrowings in securitization transactions were as follows (in millions of dollars):

 

 

 

 

January 31,
2011

 

October 31,
2010

 

January 31,
2010

 

Restricted securitized retail notes

 

 

$

1,788.1

 

$

2,264.9

 

$

2,611.2

 

Allowance for credit losses

 

 

(19.9

)

(26.6

)

(25.5

)

Other assets

 

 

72.9

 

90.0

 

104.8

 

Total restricted securitized assets

 

 

$

1,841.1

 

$

2,328.3

 

$

2,690.5

 

 

 

The components of consolidated secured borrowings and other liabilities related to securitizations were as follows (in millions of dollars):

 

 

 

 

January 31,
2011

 

October 31,
2010

 

January 31,
2010

 

Other notes payable

 

 

$

1,764.8

 

$

2,208.8

 

$

2,655.3

 

Accounts payable and accrued expenses

 

 

1.3

 

1.8

 

2.4

 

Total liabilities related to restricted securitized assets

 

 

$

1,766.1

 

$

2,210.6

 

$

2,657.7

 

 

 

The secured borrowings related to these restricted securitized retail notes are obligations that are payable as the retail notes are liquidated. Repayment of the secured borrowings depends primarily on cash flows generated by the restricted assets. Due to the Company’s short-term credit rating, cash collections from these restricted assets are not required to be placed into a restricted collection account until immediately prior to the time payment is required to the secured creditors. At January 31, 2011, the maximum remaining term of all restricted receivables was approximately six years.

 

 

(7)

Commitments and contingencies:

 

 

 

At January 31, 2011, John Deere Credit Inc., the John Deere finance subsidiary in Canada, had $453 million of commercial paper, $1,636 million of medium-term notes outstanding, and a fair value liability of $5 million for derivatives with a notional amount of $708 million that were guaranteed by the Company.

 

 

 

The Company has commitments to extend credit to customers and John Deere dealers through lines of credit and other pre-approved credit arrangements. The Company applies the same credit policies and approval process for these commitments to extend credit as it does for its Receivables. Collateral is not required for these commitments, but if credit is extended, collateral may be required upon funding. The amount of unused commitments to extend credit to John Deere dealers was $3.5 billion at January 31, 2011. The amount of unused commitments to extend credit to customers was $34.5 billion at January 31, 2011. A significant portion of these commitments is not expected to be fully drawn upon; therefore, the total commitment amounts likely do not represent a future cash requirement. The Company generally has the right to unconditionally cancel, alter or amend the terms of these commitments at any time. Over 95 percent of these unused commitments to extend credit to customers relate to revolving charge accounts.

 

 

 

At January 31, 2011, the Company had restricted other assets of $54 million. See Note 6 for additional restricted assets associated with borrowings related to securitizations.

 

 

 

The Company also had other miscellaneous contingent liabilities totaling approximately $1 million at January 31, 2011, for which it believes the probability for payment is substantially remote. The accrued liability for these contingencies was not material at January 31, 2011.

 

11



 

(8)

The fair values of financial instruments that do not approximate the carrying values were as follows (in millions of dollars):

 

 

 

January 31, 2011

 

  October 31, 2010

 

  January 31, 2010

 

 

 

Carrying
Value

 

Fair
Value

 

Carrying
Value

 

Fair
Value

 

Carrying
Value

 

Fair
Value

 

Receivables financed – net

 

$ 17,931

 

$ 17,915

 

$ 17,474

 

$ 17,509

 

$ 14,987

 

$ 15,067

 

Restricted securitized retail notes – net

 

1,768

 

1,777

 

2,238

 

2,257

 

2,586

 

2,631

 

Short-term secured borrowings

 

1,765

 

1,778

 

2,209

 

2,229

 

2,655

 

2,660

 

Long-term borrowings due within one year

 

2,741

 

2,777

 

2,889

 

2,922

 

2,704

 

2,718

 

Long-term borrowings

 

11,023

 

11,419

 

11,452

 

11,952

 

12,207

 

12,694

 

 

 

Fair values of the long-term Receivables were based on the discounted values of their related cash flows at current market interest rates. The fair values of the remaining Receivables approximated the carrying amounts.

 

 

 

Fair values of long-term borrowings and short-term secured borrowings were based on current market quotes for identical or similar borrowings and credit risk, or the discounted values of their related cash flows at current market interest rates. Certain long-term borrowings have been swapped to current variable interest rates. The carrying values of these long-term borrowings included adjustments related to fair value hedges.

 

 

(9)

Assets and liabilities measured at fair value as Level 2 measurements on a recurring basis were as follows (in millions of dollars):

 

 

 

 

January 31,

 

October 31,

 

January 31,

 

 

 

 

2011

 

2010

 

2010

 

Receivables from John Deere

 

 

 

 

 

 

 

 

Derivatives:

 

 

 

 

 

 

 

 

Interest rate contracts

 

 

$

2.6

 

 

 

 

 

Other assets

 

 

 

 

 

 

 

 

Derivatives:

 

 

 

 

 

 

 

 

Interest rate contracts

 

 

335.3

 

$

454.3

 

$

463.9

 

Foreign exchange contracts

 

 

1.6

 

4.0

 

17.5

 

Cross-currency interest rate contracts

 

 

2.2

 

2.9

 

7.0

 

Total assets

 

 

$

341.7

 

$

461.2

 

$

488.4

 

 

 

 

 

 

 

 

 

 

Other payables to John Deere

 

 

 

 

 

 

 

 

Derivatives:

 

 

 

 

 

 

 

 

Interest rate contracts

 

 

$

11.2

 

 

 

 

 

Accounts payable and accrued expenses

 

 

 

 

 

 

 

 

Derivatives:

 

 

 

 

 

 

 

 

Interest rate contracts

 

 

20.7

 

$

31.2

 

$

93.3

 

Foreign exchange contracts

 

 

5.5

 

4.5

 

.8

 

Cross-currency interest rate contracts

 

 

64.0

 

48.2

 

23.2

 

Total liabilities

 

 

$

101.4

 

$

83.9

 

$

117.3

 

 

 

*                 Excluded from this table are the Company’s cash and cash equivalents, which are carried at par value or amortized cost approximating fair value. The cash and cash equivalents consist primarily of money market funds.

 

12



 

 

Fair value, nonrecurring, Level 3 measurements were as follows (in millions of dollars):

 

 

 

Fair Value *

 

Losses

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

January 31,

 

October 31,

 

January 31,

 

January 31,

 

 

 

2011

 

2010

 

2010

 

2011

 

2010

 

Receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail notes

 

$     .4

 

 

$   1.7

 

 

$   1.7

 

 

 

 

 

$   .1

 

 

Revolving charge accounts

 

 

 

 

 

 

 

 

 

 

$  .8

 

 

 

 

 

Wholesale receivables

 

.4

 

 

16.9

 

 

4.6

 

 

 

 

 

 

 

 

Financing leases

 

.1

 

 

.2

 

 

.6

 

 

 

 

 

 

 

 

Operating loans

 

1.0

 

 

1.1

 

 

3.1

 

 

 

 

 

 

 

 

Total Receivables

 

$   1.9

 

 

$  19.9

 

 

$ 10.0

 

 

$  .8

 

 

$   .1

 

 

 

 

*                 Does not include cost of sale.

 

 

 

Level 1 measurements consist of quoted prices in active markets for identical assets or liabilities. Level 2 measurements include significant other observable inputs such as quoted prices for similar assets or liabilities in active markets; identical assets or liabilities in inactive markets; observable inputs such as interest rates and yield curves; and other market-corroborated inputs. Level 3 measurements include significant unobservable inputs. There were no assets or liabilities valued using Level 1 measurements at January 31, 2011.

 

 

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods including market and income approaches. The Company utilizes valuation models and techniques that maximize the use of observable inputs. The models are industry-standard models that consider various assumptions including time values and yield curves as well as other economic measures. These valuation techniques are consistently applied.

 

 

 

The following is a description of the valuation methodologies the Company uses to measure financial instruments at fair value:

 

 

 

Derivatives – The Company’s derivative financial instruments consist of interest rate swaps and caps, foreign currency forwards and swaps and cross-currency interest rate swaps. The portfolio is valued based on an income approach (discounted cash flow) using market observable inputs, including swap curves and both forward and spot exchange rates for currencies.

 

 

 

Receivables – Specific reserve impairments are based on the fair value of the collateral, which is measured using an income approach (discounted cash flow) or a market approach (appraisal values or realizable values). Inputs include interest rates and selection of realizable values.

 

 

(10)

It is the Company’s policy that derivative transactions are executed only to manage exposures arising in the normal course of business and not for the purpose of creating speculative positions or trading. The Company manages the relationship of the types and amounts of 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 functional currencies.

 

 

 

All derivatives are recorded at fair value on the balance sheet. Each derivative is designated as a cash flow hedge, a fair value hedge, or remains undesignated. All designated hedges are formally documented as to the relationship with the hedged item as well as the risk-management strategy. Both at inception and on an ongoing basis the hedging instrument is assessed as to its effectiveness, when applicable. If and when a derivative is determined not to be highly effective as a hedge, or the underlying hedged transaction is no longer likely to occur, or the hedge designation is removed, or the derivative is terminated, hedge accounting is discontinued. Any past or future changes in the derivative’s fair value, which will not be effective as an offset to the income effects of the item being hedged, are recognized currently in the income statement.

 

13



 

 

The majority of the Company’s outstanding derivatives have been transacted directly between the Company and unrelated external counterparties. However, beginning in the first quarter of 2011, for certain derivatives the Company began utilizing a centralized hedging center structure in which John Deere enters into a derivative transaction with an unrelated external counterparty and simultaneously enters into a derivative transaction with the Company. Except for collateral provisions, the terms of the transaction between the Company and John Deere are identical to the terms of the transaction between John Deere and its unrelated external counterparty.

 

 

 

Certain of the Company’s derivative agreements executed directly with unrelated external counterparties contain credit support provisions that require the Company to post collateral based on reductions in credit ratings. The aggregate fair value of all derivatives with credit-risk-related contingent features that were in a liability position at January 31, 2011, October 31, 2010 and January 31, 2010 was $21 million, $16 million and $17 million, respectively. The Company, due to its credit rating, has not posted any collateral. If the credit-risk-related contingent features were triggered, the Company would be required to post full collateral for this liability position, prior to considering applicable netting provisions.

 

 

 

Derivative instruments are subject to significant concentrations of credit risk to the banking sector. The Company manages individual unrelated external counterparties by setting limits that consider the credit rating of the unrelated external counterparty and the size of other financial commitments and exposures between the Company and the unrelated external counterparty banks. All interest rate derivatives are transacted under International Swaps and Derivatives Association (ISDA) documentation. Some of these agreements executed with unrelated external counterparties include collateral support arrangements. Each master agreement executed with an unrelated external counterparty permits the net settlement of amounts owed in the event of early termination. The maximum amount of loss that the Company would incur on derivatives transacted directly with unrelated external counterparties, if the counterparties to those derivative transactions fail to meet their obligations, not considering collateral received or netting arrangements, was $339 million, $461 million and $488 million as of January 31, 2011, October 31, 2010 and January 31, 2010, respectively. The amount of collateral received from unrelated external counterparties at January 31, 2011, October 31, 2010 and January 31, 2010 to offset this potential maximum loss was $60 million, $85 million and $50 million, respectively. The netting provisions of the agreements would reduce the maximum amount of loss the Company would incur if the unrelated external counterparties to derivative instruments fail to meet their obligations by an additional $56 million, $52 million and $67 million as of January 31, 2011, October 31, 2010 and January 31, 2010, respectively. None of the concentrations of risk with any individual unrelated external counterparty was considered significant in any periods presented.

 

 

 

The Company also has ISDA agreements with John Deere that permit the net settlement of amounts owed between counterparties in the event of early termination. In addition, the Company has agreed to absorb any losses and expenses John Deere incurs if an unrelated external counterparty fails to meet its obligations on a derivative transaction that John Deere entered into to manage exposures of the Company. The maximum amount of loss that the Company would incur on derivatives transacted with John Deere if the unrelated external counterparty would fail to meet its obligations, considering both the netting arrangements as well as the loss sharing agreement, was $2 million as of January 31, 2011.

 

 

 

Cash flow hedges

 

 

 

Certain interest rate and cross-currency interest rate contracts (swaps) were designated as hedges of future cash flows from borrowings. The total notional amounts of the receive-variable/pay-fixed interest rate contracts at January 31, 2011, October 31, 2010 and January 31, 2010 were $634 million, $1,060 million and $2,448 million, respectively. The notional amount of cross-currency interest rate contracts at January 31, 2011, October 31, 2010 and January 31, 2010 was $849 million. The effective portions of the fair value gains or losses on these cash flow hedges were recorded in other comprehensive income (OCI) and subsequently reclassified into interest expense or administrative and operating expenses (foreign exchange) in the same periods during which the hedged transactions affect earnings. These amounts offset the effects of interest rate or foreign currency exchange rate changes on the related borrowings. Any ineffective portions of the gains or losses on all interest rate contracts designated as cash flow hedges were recognized currently in interest expense or administrative and operating expenses (foreign exchange) and were not material during any periods presented. The cash flows from these contracts were recorded in operating activities in the statements of consolidated cash flows.

 

14



 

 

The amount of loss recorded in OCI at January 31, 2011 that is expected to be reclassified to interest expense or administrative and operating expenses in the next twelve months if interest rates or exchange rates remain unchanged is approximately $6 million after-tax. These contracts mature in up to 36 months. There were no gains or losses reclassified from OCI to earnings based on the probability that the original forecasted transaction would not occur.

 

 

 

Fair value hedges

 

 

 

Certain interest rate contracts (swaps) were designated as fair value hedges of borrowings. The total notional amounts of these receive-fixed/pay-variable interest rate contracts at January 31, 2011, October 31, 2010 and January 31, 2010 were $6,325 million, $5,979 million and $6,379 million, respectively. The effective portions of the fair value gains or losses on these contracts were offset by fair value gains or losses on the hedged items (fixed-rate borrowings). Any ineffective portions of the gains or losses were recognized currently in interest expense. The ineffective portions totaled a $3 million loss during the first three months of 2011 and were not material during the first three months of 2010. The cash flows from these contracts were recorded in operating activities in the consolidated statements of cash flows.

 

 

 

The gains (losses) on these contracts and the underlying borrowings recorded in interest expense were as follows (in millions of dollars):

 

 

 

 

 

Three Months Ended
January 31,

 

 

 

 

 

2011

 

2010

 

 

 

Interest rate contracts *

 

 

$    (119.8

 )

 

$        (.5

)

 

 

 

Borrowings **

 

 

116.6

 

 

(.4

)

 

 

 

 

 

*                 Includes changes in fair value of interest rate contracts excluding net accrued interest income of $42.9 million and $55.2 million during the first three months of 2011 and 2010, respectively.

 

 

 

**          Includes adjustments for fair values of hedged borrowings excluding accrued interest expense of $62.9 million and $77.8 million during the first three months of 2011 and 2010, respectively.

 

 

 

Derivatives not designated as hedging instruments

 

 

 

The Company has certain interest rate contracts (swaps and caps), foreign exchange contracts (forwards and swaps) and cross-currency interest rate contracts (swaps), which were not formally designated as hedges. These derivatives were held as economic hedges for underlying interest rate or foreign currency exposures primarily for certain borrowings. The total notional amounts of these interest rate swaps at January 31, 2011, October 31, 2010 and January 31, 2010 were $2,075 million, $2,009 million and $2,439 million, the foreign exchange contracts were $975 million, $1,000 million and $1,075 million and the cross-currency interest rate contracts were $52 million, $60 million and $60 million, respectively. At January 31, 2011, October 31, 2010 and January 31, 2010 there were also $946 million, $1,055 million and $1,447 million, respectively, of interest rate caps purchased and the same amounts sold at the same capped interest rate to facilitate borrowings through securitization of retail notes. The fair value gains or losses from the interest rate contracts were recognized currently in interest expense and the gains or losses from foreign exchange contracts in administrative and operating expenses, generally offsetting over time the expenses on the exposures being hedged. The cash flows from these non-designated contracts were recorded in operating activities in the consolidated statements of cash flows.

 

15



 

Fair values of derivative instruments in the consolidated balance sheets were as follows (in millions of dollars):

 

 

 

January 31,
2011

 

October 31,
2010

 

January 31,
2010

 

Receivables from John Deere

 

 

 

 

 

 

 

Designated as hedging instruments:

 

 

 

 

 

 

 

Interest rate contracts

 

$

2.6

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Assets

 

 

 

 

 

 

 

Designated as hedging instruments:

 

 

 

 

 

 

 

Interest rate contracts

 

302.7

 

$

418.0

 

$

418.7

 

 

 

 

 

 

 

 

 

Not designated as hedging instruments:

 

 

 

 

 

 

 

Interest rate contracts

 

32.6

 

36.3

 

45.2

 

Foreign exchange contracts

 

1.6

 

4.0

 

17.5

 

Cross-currency interest rate contracts

 

2.2

 

2.9

 

7.0

 

Total not designated

 

36.4

 

43.2

 

69.7

 

 

 

 

 

 

 

 

 

Total derivatives

 

$

341.7

 

$

461.2

 

$

488.4

 

 

 

 

 

 

 

 

 

Other Payables to John Deere

 

 

 

 

 

 

 

Designated as hedging instruments:

 

 

 

 

 

 

 

Interest rate contracts

 

$

11.2

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts Payable and Accrued Expenses

 

 

 

 

 

 

 

Designated as hedging instruments:

 

 

 

 

 

 

 

Interest rate contracts

 

9.4

 

$

17.5

 

$

61.3

 

Cross-currency interest rate contracts

 

62.3

 

46.9

 

22.6

 

Total designated

 

71.7

 

64.4

 

83.9

 

 

 

 

 

 

 

 

 

Not designated as hedging instruments:

 

 

 

 

 

 

 

Interest rate contracts

 

11.3

 

13.7

 

32.0

 

Foreign exchange contracts

 

5.5

 

4.5

 

.8

 

Cross-currency interest rate contracts

 

1.7

 

1.3

 

.6

 

Total not designated

 

18.5

 

19.5

 

33.4

 

 

 

 

 

 

 

 

 

Total derivatives

 

$

101.4

 

$

83.9

 

$

117.3

 

 

16



 

The classification and gains (losses) including accrued interest expense related to derivative instruments on the statements of consolidated income consisted of the following (in millions of dollars):

 

 

 

Expense or OCI

 

Three Months Ended January 31

 

 

Classification

 

2011

 

2010

Fair Value Hedges:

 

 

 

 

 

 

Interest rate contracts

 

Interest expense

 

$

(76.9

)

 

$

54.7

 

 

 

 

 

 

 

 

 

 

Cash Flow Hedges:

 

 

 

 

 

 

 

 

Recognized in OCI

 

 

 

 

 

 

 

 

(Effective Portion):

 

 

 

 

 

 

 

 

Interest rate contracts

 

OCI (pretax) *

 

(1.4

)

 

(5.5

)

Foreign exchange contracts

 

OCI (pretax) *

 

(18.9

)

 

(22.7

)

 

 

 

 

 

 

 

 

 

Reclassified from OCI

 

 

 

 

 

 

 

 

(Effective Portion):

 

 

 

 

 

 

 

 

Interest rate contracts

 

Interest expense *

 

(8.9

)

 

(21.0

)

Foreign exchange contracts

 

Administrative and operating expenses *

 

(19.1

)

 

(16.9

)

 

 

 

 

 

 

 

 

 

Recognized Directly in Income

 

 

 

 

 

 

 

 

(Ineffective Portion):

 

 

 

 

 

 

 

 

Interest rate contracts

 

Interest expense

 

**  

 

 

**  

 

Foreign exchange contracts

 

Administrative and operating expenses

 

**  

 

 

**  

 

 

 

 

 

 

 

 

 

 

Not Designated as Hedges:

 

 

 

 

 

 

 

 

Interest rate contracts

 

Interest expense *

 

$

(5.3

)

 

$

10.2

 

Foreign exchange contracts

 

Administrative and operating expenses *

 

(19.2

)

 

(19.2

)

Total

 

 

 

$

(24.5

)

 

$

(9.0

)

 

*

Includes interest and foreign exchange gains (losses) from cross-currency interest rate contracts.

**

The amount is not material.

 

Included in the above table are interest expense amounts the Company incurred on derivatives transacted with John Deere. The amount of gain the Company recognized on these affiliate party transactions for the three months ended January 31, 2011 was $7 million. As referenced in the VIE section of Note 1, during the first quarter of 2011 the centralized hedging center VIE that was previously consolidated into the Company’s financial statements was merged into JDFS and thus deconsolidated from the Company. Due to this merger having occurred in January 2011, the affiliate party interest expense amounts referenced above relate only to activity that took place between the merger date and January 31, 2011.

 

(11)                                                                            The Company is a participating employer in certain Deere & Company sponsored defined benefit pension plans for employees in the U.S. and certain defined benefit pension plans outside the U.S. These pension plans provide for benefits that are based primarily on years of service and employee compensation. Pension expense is actuarially determined based on the Company’s employees included in the plan. The Company’s pension expense amounted to $1.2 million in the first three months of 2011. The accumulated benefit obligation and plan net assets for the employees of the Company are not determined separately from Deere & Company. The Company generally provides defined benefit health care and life insurance plans for retired employees in the U.S. as a participating employer in Deere & Company’s sponsored plans. Health care and life insurance benefits expense is actuarially determined based on the Company’s employees included in the plans and amounted to $2.0 million during the first three months of 2011. Further disclosure for these plans is included in Deere & Company’s Form 10-Q for the quarter ended January 31,