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EX-32 - EX-32 - DEERE JOHN CAPITAL CORPjdcc-20160731xex32.htm
EX-31.2 - EX-31.2 - DEERE JOHN CAPITAL CORPjdcc-20160731ex31252f1b1.htm
EX-31.1 - EX-31.1 - DEERE JOHN CAPITAL CORPjdcc-20160731ex3114067ad.htm
EX-12 - EX-12 - DEERE JOHN CAPITAL CORPjdcc-20160731ex123e45735.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 July 31, 2016

 

Commission file no: 1-6458


 

JOHN DEERE CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware
(State of Incorporation)

 

36-2386361
(IRS Employer Identification No.)

 

 

 

10587 Double R Boulevard, Suite 100
Reno, Nevada  89521
(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 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  

 

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

 

At July 31, 2016, 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 42

 


 

PART I.  FINANCIAL INFORMATION

 

Item 1.     Financial Statements.

 

John Deere Capital Corporation and Subsidiaries

Statement of Consolidated Income

(Unaudited) 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended 

 

Nine Months Ended 

 

 

 

July 31

 

July 31

 

 

    

2016

    

2015

    

2016

    

2015

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance income earned on retail notes

 

$

171.8

 

$

174.5

 

$

521.4

 

$

544.6

 

Revolving charge account income

 

 

73.0

 

 

66.2

 

 

184.7

 

 

171.6

 

Finance income earned on wholesale receivables

 

 

94.0

 

 

97.5

 

 

271.2

 

 

287.0

 

Lease revenues

 

 

189.6

 

 

149.2

 

 

544.0

 

 

414.3

 

Other income – net

 

 

10.2

 

 

6.0

 

 

31.4

 

 

27.7

 

Total revenues

 

 

538.6

 

 

493.4

 

 

1,552.7

 

 

1,445.2

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

109.8

 

 

78.8

 

 

305.0

 

 

231.1

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Administrative and operating expenses

 

 

102.1

 

 

84.4

 

 

347.0

 

 

266.4

 

Fees paid to John Deere

 

 

10.3

 

 

7.8

 

 

35.6

 

 

39.0

 

Provision for credit losses

 

 

29.8

 

 

17.4

 

 

57.4

 

 

29.5

 

Depreciation of equipment on operating leases

 

 

145.2

 

 

107.1

 

 

409.7

 

 

298.2

 

Total operating expenses

 

 

287.4

 

 

216.7

 

 

849.7

 

 

633.1

 

Total expenses

 

 

397.2

 

 

295.5

 

 

1,154.7

 

 

864.2

 

Income of consolidated group before income taxes

 

 

141.4

 

 

197.9

 

 

398.0

 

 

581.0

 

Provision for income taxes

 

 

51.2

 

 

71.1

 

 

139.4

 

 

205.5

 

Income of consolidated group

 

 

90.2

 

 

126.8

 

 

258.6

 

 

375.5

 

Equity in income of unconsolidated affiliate

 

 

.2

 

 

.1

 

 

1.2

 

 

.9

 

Net income

 

 

90.4

 

 

126.9

 

 

259.8

 

 

376.4

 

Less: Net loss attributable to noncontrolling interests

 

 

 

 

 

 

 

 

(.1)

 

 

 

 

Net income attributable to the Company

 

$

90.4

 

$

126.9

 

$

259.9

 

$

376.4

 

 

 


See Condensed Notes to Interim Consolidated Financial Statements.

2


 

John Deere Capital Corporation and Subsidiaries

Statement of Consolidated Comprehensive Income

(Unaudited)

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended 

 

Nine Months Ended 

 

 

 

July 31

 

July 31

 

 

    

2016

    

2015

    

2016

    

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

90.4

 

$

126.9

 

$

259.8

 

$

376.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

 

(22.3)

 

 

(14.9)

 

 

(15.3)

 

 

(60.7)

 

Unrealized gain (loss) on derivatives

 

 

 

 

 

(.7)

 

 

1.0

 

 

(.7)

 

Other comprehensive income (loss), net of income taxes

 

 

(22.3)

 

 

(15.6)

 

 

(14.3)

 

 

(61.4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income of consolidated group

 

 

68.1

 

 

111.3

 

 

245.5

 

 

315.0

 

Less: Comprehensive loss attributable to noncontrolling interests

 

 

 

 

 

 

 

 

(.1)

 

 

 

 

Comprehensive income attributable to the Company

 

$

68.1

 

$

111.3

 

$

245.6

 

$

315.0

 

 

 


See Condensed Notes to Interim Consolidated Financial Statements.

 

3


 

John Deere Capital Corporation and Subsidiaries

Consolidated Balance Sheet

(Unaudited)

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

July 31

 

October 31

 

July 31

 

 

 

2016

 

2015

 

2015

 

Assets

    

 

 

    

 

 

    

 

 

 

Cash and cash equivalents

 

$

1,083.7

 

$

1,163.7

 

$

1,090.3

 

Receivables:

 

 

 

 

 

 

 

 

 

 

Retail notes

 

 

11,530.2

 

 

13,810.6

 

 

13,803.9

 

Retail notes securitized

 

 

5,961.4

 

 

4,848.4

 

 

4,751.0

 

Revolving charge accounts

 

 

2,937.3

 

 

2,680.8

 

 

2,618.4

 

Wholesale receivables

 

 

7,866.9

 

 

7,185.5

 

 

8,660.5

 

Financing leases

 

 

577.6

 

 

567.1

 

 

538.9

 

Total receivables

 

 

28,873.4

 

 

29,092.4

 

 

30,372.7

 

Allowance for credit losses

 

 

(113.3)

 

 

(109.8)

 

 

(109.8)

 

Total receivables – net

 

 

28,760.1

 

 

28,982.6

 

 

30,262.9

 

Other receivables

 

 

65.8

 

 

49.2

 

 

51.4

 

Receivables from John Deere

 

 

407.3

 

 

253.1

 

 

225.1

 

Equipment on operating leases – net

 

 

4,167.7

 

 

3,609.8

 

 

3,136.9

 

Investment in unconsolidated affiliate

 

 

11.6

 

 

10.5

 

 

10.2

 

Deferred income taxes

 

 

25.6

 

 

25.8

 

 

21.0

 

Other assets

 

 

661.2

 

 

558.1

 

 

536.1

 

Total Assets

 

$

35,183.0

 

$

34,652.8

 

$

35,333.9

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholder’s Equity

 

 

 

 

 

 

 

 

 

 

Short-term borrowings:

 

 

 

 

 

 

 

 

 

 

Commercial paper and other notes payable

 

$

798.2

 

$

2,343.6

 

$

3,587.0

 

Securitization borrowings

 

 

5,728.9

 

 

4,590.0

 

 

4,595.4

 

John Deere

 

 

1,679.1

 

 

1,123.5

 

 

1,655.0

 

Current maturities of long-term borrowings

 

 

4,765.2

 

 

4,465.4

 

 

3,730.3

 

Total short-term borrowings

 

 

12,971.4

 

 

12,522.5

 

 

13,567.7

 

Other payables to John Deere

 

 

19.3

 

 

22.5

 

 

38.4

 

Accounts payable and accrued expenses

 

 

707.0

 

 

793.6

 

 

667.8

 

Deposits withheld from dealers and merchants

 

 

203.9

 

 

151.9

 

 

148.7

 

Deferred income taxes

 

 

673.9

 

 

432.0

 

 

417.2

 

Long-term borrowings

 

 

16,947.2

 

 

16,980.5

 

 

16,659.0

 

Total liabilities

 

 

31,522.7

 

 

30,903.0

 

 

31,498.8

 

Commitments and contingencies (Note 6)

 

 

 

 

 

 

 

 

 

 

Stockholder’s equity:

 

 

 

 

 

 

 

 

 

 

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

 

 

1,482.8

 

 

1,482.8

 

 

1,482.8

 

Retained earnings

 

 

2,254.6

 

 

2,329.7

 

 

2,407.9

 

Accumulated other comprehensive income (loss)

 

 

(77.4)

 

 

(63.1)

 

 

(56.0)

 

Total Company stockholder’s equity

 

 

3,660.0

 

 

3,749.4

 

 

3,834.7

 

Noncontrolling interests

 

 

.3

 

 

.4

 

 

.4

 

Total stockholder’s equity

 

 

3,660.3

 

 

3,749.8

 

 

3,835.1

 

Total Liabilities and Stockholder’s Equity

 

$

35,183.0

 

$

34,652.8

 

$

35,333.9

 

 

 


See Condensed Notes to Interim Consolidated Financial Statements.

4


 

John Deere Capital Corporation and Subsidiaries

Statement of Consolidated Cash Flows

For the Nine Months Ended July 31, 2016 and 2015

(Unaudited)

(in millions)

 

 

 

 

 

 

 

 

 

 

    

    

2016

    

2015

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

Net income

 

$

259.8

 

$

376.4

 

Adjustments to reconcile net income to net cash

 

 

 

 

 

 

 

provided by operating activities:

 

 

 

 

 

 

 

Provision for credit losses

 

 

57.4

 

 

29.5

 

Provision for depreciation and amortization

 

 

417.9

 

 

306.5

 

Provision for deferred income taxes

 

 

241.5

 

 

114.5

 

Impairment charges

 

 

49.7

 

 

 

 

Undistributed earnings of unconsolidated affiliate

 

 

(1.0)

 

 

(.8)

 

Change in accounts payable and accrued expenses

 

 

4.5

 

 

30.8

 

Change in accrued income taxes payable/receivable

 

 

(2.6)

 

 

25.7

 

Other

 

 

92.8

 

 

48.2

 

Net cash provided by operating activities

 

 

1,120.0

 

 

930.8

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

Cost of receivables acquired (excluding wholesale)

 

 

(10,185.9)

 

 

(10,721.4)

 

Collections of receivables (excluding wholesale)

 

 

10,987.0

 

 

11,233.0

 

Increase in wholesale receivables – net

 

 

(695.4)

 

 

(987.9)

 

Cost of equipment on operating leases acquired

 

 

(1,894.5)

 

 

(1,547.6)

 

Proceeds from sales of equipment on operating leases

 

 

651.8

 

 

533.5

 

Change in restricted cash

 

 

(5.5)

 

 

16.6

 

Other

 

 

35.4

 

 

(32.1)

 

Net cash used for investing activities

 

 

(1,107.1)

 

 

(1,505.9)

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

Increase (decrease) in commercial paper and other notes payable – net

 

 

(1,568.2)

 

 

1,615.1

 

Increase in securitization borrowings – net

 

 

1,138.7

 

 

36.8

 

Increase (decrease) in payable to John Deere – net

 

 

567.1

 

 

(325.7)

 

Proceeds from issuance of long-term borrowings

 

 

3,326.2

 

 

2,964.5

 

Payments of long-term borrowings

 

 

(3,201.2)

 

 

(3,375.7)

 

Dividends paid

 

 

(335.0)

 

 

(285.0)

 

Debt issuance costs

 

 

(23.2)

 

 

(16.7)

 

Net cash provided by (used for) financing activities

 

 

(95.6)

 

 

613.3

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

2.7

 

 

(7.3)

 

Net increase (decrease) in cash and cash equivalents

 

 

(80.0)

 

 

30.9

 

Cash and cash equivalents at beginning of period

 

 

1,163.7

 

 

1,059.4

 

Cash and cash equivalents at end of period

 

$

1,083.7

 

$

1,090.3

 

 

 


See Condensed Notes to Interim Consolidated Financial Statements.

 

 

5


 

John Deere Capital Corporation and Subsidiaries

Statement of Changes in Consolidated Stockholder’s Equity

For the Nine Months Ended July 31, 2015 and 2016

(Unaudited)

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company Stockholder

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

Other

 

Non-

 

 

 

Stockholder’s

 

Common

 

Retained

 

Comprehensive

 

controlling

 

 

 

Equity

 

Stock

 

Earnings

 

Income (Loss)

 

Interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance October 31, 2014

    

$

3,805.1

    

$

1,482.8

    

$

2,316.5

    

$

5.4

    

$

.4

 

Net income

 

 

376.4

 

 

 

 

 

376.4

 

 

 

 

 

 

 

Other comprehensive loss

 

 

(61.4)

 

 

 

 

 

 

 

 

(61.4)

 

 

 

 

Dividends declared

 

 

(285.0)

 

 

 

 

 

(285.0)

 

 

 

 

 

 

 

Balance July 31, 2015

 

$

3,835.1

 

$

1,482.8

 

$

2,407.9

 

$

(56.0)

 

$

.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance October 31, 2015

 

$

3,749.8

 

$

1,482.8

 

$

2,329.7

 

$

(63.1)

 

$

.4

 

Net income (loss)

 

 

259.8

 

 

 

 

 

259.9

 

 

 

 

 

(.1)

 

Other comprehensive loss

 

 

(14.3)

 

 

 

 

 

 

 

 

(14.3)

 

 

 

 

Dividends declared

 

 

(335.0)

 

 

 

 

 

(335.0)

 

 

 

 

 

 

 

Balance July 31, 2016

 

$

3,660.3

 

$

1,482.8

 

$

2,254.6

 

$

(77.4)

 

$

.3

 

 

 


See Condensed Notes to Interim Consolidated Financial Statements.

 

 

6


 

John Deere Capital Corporation and Subsidiaries

Condensed Notes to Interim Consolidated Financial Statements

(Unaudited)

(1)The interim 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 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 consolidated 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.

The Company uses a 52/53 week fiscal year with quarters ending on the last Sunday in the reporting period. The third quarter ends for fiscal year 2016 and 2015 were July 31, 2016 and August 2, 2015, respectively. Both periods contained 13 weeks. For ease of presentation, the consolidated financial statements and notes continue to be dated July 31.

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

 

7


 

(2)New accounting standards to be adopted are as follows:

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in Accounting Standards Codification (ASC) 605, Revenue Recognition. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU No. 2015-14, Deferral of the Effective Date, which amends ASU No. 2014-09. As a result, the effective date will be the first quarter of fiscal year 2019 with early adoption permitted in the first quarter of fiscal year 2018. In March 2016, the FASB issued ASU No. 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which amends ASU 2014-09. ASU No. 2016-08 provides additional guidance for revenue transactions that involve a third party in providing goods or services to a customer. The reporting entity must determine if the obligation to the customer is to provide the goods or services, i.e., as the principal, or to arrange for a third party to provide the goods or services, i.e., as the agent. In April 2016, the FASB issued ASU No. 2016-10, Identifying Performance Obligations and Licensing, which amends ASU 2014‑09. ASU No. 2016-10 clarifies that goods or services that are immaterial in the context of the contract are not required to be identified as separate performance obligations. In addition, the ASU provides an accounting policy election to treat shipping and handling activities as a fulfillment cost and not part of the revenue transaction. The ASU also provides guidance regarding licensing arrangements to determine whether the license grants the right to use functional or symbolic intellectual property. Revenue for licenses of functional intellectual property, such as software, is generally recognized at a point in time, while revenue for licenses of symbolic intellectual property, such as tradenames, is generally recognized over time. In May 2016, the FASB issued ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients, which amends ASU 2014-09. This ASU clarifies the requirement to assess collectability of contract consideration, clarifies the treatment of noncash consideration and provides a policy election to exclude from revenue amounts collected from customers for sales and similar taxes. The adoption will use one of two retrospective application methods. The Company plans to adopt the ASU effective the first quarter of fiscal year 2019 and is evaluating the potential effects on the consolidated financial statements.

In June 2014, the FASB issued ASU No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period, which amends ASC 718, Compensation – Stock Compensation. This ASU requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. Therefore, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The total compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The effective date will be the first quarter of fiscal year 2017. The adoption will not have a material effect on the Company’s consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which amends ASC 835-30, Interest Imputation of Interest. This ASU requires that debt issuance costs related to borrowings be presented in the balance sheet as a direct deduction from the carrying amount of the borrowing. This treatment is consistent with debt discounts. The ASU does not affect the amount or timing of expenses for debt issuance costs. The effective date will be the first quarter of fiscal year 2017 and will be applied retrospectively. The adoption will not have a material effect on the Company’s consolidated financial statements.

8


 

In April 2015, the FASB issued ASU No. 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, which amends ASC 350-40, Intangibles-Goodwill and Other-Internal-Use Software. This ASU provides guidance to customers about whether a cloud computing arrangement includes a software license. If an arrangement includes a software license, the accounting for the license will be consistent with licenses of other intangible assets. If the arrangement does not include a license, the arrangement will be accounted for as a service contract. The effective date will be the first quarter of fiscal year 2017 and will be adopted prospectively. The adoption will not have a material effect on the Company’s consolidated financial statements.

In August 2015, the FASB issued ASU No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, which amends ASC 835-30, Interest – Imputation of Interest. This ASU clarifies the presentation and subsequent measurement of debt issuance costs associated with lines of credit. These costs may be presented as an asset and amortized ratably over the term of the line of credit arrangement, regardless of whether there are outstanding borrowings on the arrangement. The effective date will be the first quarter of fiscal year 2017 and will be applied retrospectively. The adoption will not have a material effect on the Company’s consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which amends ASC 825-10, Financial Instruments – Overall. This ASU changes the treatment for available for sale equity investments by recognizing unrealized fair value changes directly in net income, and no longer in other comprehensive income. In addition, the impairment assessment of equity securities without readily determinable fair values is simplified by allowing a qualitative assessment. The ASU eliminates the disclosure requirement of methods and assumptions used to estimate fair value for financial instruments measured at amortized cost on the balance sheet. Additional disclosure of financial assets and financial liabilities by measurement category and form is also required. The effective date will be the first quarter of fiscal year 2019. Early adoption of the provisions affecting the Company is not permitted. The amendment will be adopted with a cumulative-effect adjustment to the balance sheet in the year of adoption. The Company is evaluating the potential effects on the consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes ASC 840, Leases. The ASU does not significantly change the lessees’ recognition, measurement and presentation of expenses and cash flows from the previous accounting standard. The ASU’s primary change is the requirement for lessee entities to recognize a lease liability for payments and a right of use asset representing the right to use the leased asset during the term on operating lease arrangements. Lessees are permitted to make an accounting policy election to not recognize the asset and liability for leases with a term of twelve months or less. Lessors’ accounting under the ASU is largely unchanged from the previous accounting standard. In addition, the ASU expands the disclosure requirements of lease arrangements. Lessees and lessors will use a modified retrospective transition approach. The effective date will be the first quarter of fiscal year 2020 with early adoption permitted. The Company is evaluating the potential effects on the consolidated financial statements. 

In March 2016, the FASB issued ASU No. 2016-07, Simplifying the Transition to the Equity Method of Accounting, which amends ASC 323 Investments - Equity Method and Joint Ventures. This ASU eliminates the requirement to retroactively restate the investment, results of operations and retained earnings on a step by step basis when an investment qualifies for use of the equity method as a result of an increase in ownership or degree of influence. The ASU requires that the equity method investor add the cost of acquiring the additional ownership interest to the current basis of the entity’s previously held interest and adopt the equity method of accounting as of that date. The effective date will be the first quarter of fiscal year 2018, with early adoption permitted, and will be adopted prospectively. The adoption will not have a material effect on the Company’s consolidated financial statements.

9


 

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC 718, Compensation - Stock Compensation. This ASU simplifies the treatment of share based payment transactions by recognizing the impact of excess tax benefits or deficiencies related to exercised or vested awards in income tax expense in the period of exercise or vesting. The ASU also modifies the diluted earnings per share calculation using the treasury stock method by eliminating the excess tax benefits or deficiencies from the calculation. These changes will be recognized prospectively. The presentation of excess tax benefits in the statement of consolidated cash flows is also modified to be included with other income tax cash flows as an operating activity. The change can be adopted using a prospective or retrospective transition method. The ASU also provides an accounting policy election to account for award forfeitures in compensation cost when the forfeitures occur. The requirement for an award to qualify for equity classification was also modified by the ASU to permit withholding up to maximum statutory tax rates in the applicable jurisdictions. The modification regarding award forfeitures and withholding rates are adopted by a cumulative effect adjustment to equity at the beginning of the period adopted. The ASU clarifies that cash paid by an employer when directly withholding shares for tax withholding purposes should be presented as a financing activity in the statement of consolidated cash flows and should be applied retrospectively. The effective date will be the first quarter of fiscal year 2018, with early adoption permitted. The Company is evaluating the potential effects on the consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, which establishes ASC 326, Financial Instruments – Credit Losses. This ASU requires that financial assets measured at amortized cost be presented at the net amount to be collected. To determine this amount, the ASU revises the measurement of credit losses from an incurred loss methodology to an expected loss methodology that requires consideration of historical information and supportable forecasts to determine credit loss estimates. The ASU affects financing receivables, debt securities, net investment in leases and most other financial assets that represent a right to receive cash. The treatment for available for sale debt securities is also modified by presenting credit losses as an allowance rather than as a write-down. Additional disclosures about significant estimates and credit quality are also required. The effective date will be the first quarter of fiscal year 2021, with early adoption permitted beginning in fiscal year 2020. The ASU will be adopted using a modified-retrospective approach. The Company is evaluating the potential effects on the consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments, which amends ASC 230, Statement of Cash Flows. This ASU provides guidance on the statement of cash flows presentation of certain transactions where diversity in practice exists. The effective date will be the first quarter of fiscal year 2019, with early adoption permitted. The ASU should be adopted using a retrospective transition approach. The adoption will not have a material effect on the Company’s consolidated financial statements.

10


 

(3)The after-tax changes in accumulated other comprehensive income (loss) were as follows (in millions of dollars):

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Unrealized

    

Accumulated

 

 

 

Cumulative

 

Gain (Loss)

 

Other

 

 

 

Translation

 

on

 

Comprehensive

 

 

 

Adjustment

 

Derivatives

 

Income (Loss)

 

Balance October 31, 2014

 

$

6.0

 

$

(.6)

 

$

5.4

 

Other comprehensive income (loss) items before reclassification

 

 

(60.7)

 

 

(4.8)

 

 

(65.5)

 

Amounts reclassified from accumulated other comprehensive income

 

 

 

 

 

4.1

 

 

4.1

 

Net current period other comprehensive income (loss)

 

 

(60.7)

 

 

(.7)

 

 

(61.4)

 

Balance July 31, 2015

 

$

(54.7)

 

$

(1.3)

 

$

(56.0)

 

 

 

 

 

 

 

 

 

 

 

 

Balance October 31, 2015

 

$

(60.4)

 

$

(2.7)

 

$

(63.1)

 

Other comprehensive income (loss) items before reclassification

 

 

(15.3)

 

 

(1.8)

 

 

(17.1)

 

Amounts reclassified from accumulated other comprehensive income

 

 

 

 

 

2.8

 

 

2.8

 

Net current period other comprehensive income (loss)

 

 

(15.3)

 

 

1.0

 

 

(14.3)

 

Balance July 31, 2016

 

$

(75.7)

 

$

(1.7)

 

$

(77.4)

 

11


 

 

Following are amounts recorded in and reclassifications out of other comprehensive income (loss), and the income tax effects, (in millions of dollars):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Before

 

Tax

 

After

 

 

 

Tax

 

(Expense)

 

Tax

 

Three Months Ended July 31, 2016

 

Amount

 

Credit

 

Amount

 

Cumulative translation adjustment

    

$

(22.3)

    

 

 

    

$

(22.3)

 

Unrealized gain (loss) on derivatives:

 

 

 

 

 

 

 

 

 

 

Unrealized hedging gain (loss)

 

 

(1.1)

 

$

.4

 

 

(.7)

 

Reclassification of realized (gain) loss to:

 

 

 

 

 

 

 

 

 

 

Interest rate contracts – Interest expense

 

 

1.1

 

 

(.4)

 

 

.7

 

Net unrealized gain (loss) on derivatives

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income (loss)

 

$

(22.3)

 

 

 

 

$

(22.3)

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended July 31, 2016

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

$

(15.3)

 

 

 

 

$

(15.3)

 

Unrealized gain (loss) on derivatives:

 

 

 

 

 

 

 

 

 

 

Unrealized hedging gain (loss)

 

 

(2.8)

 

$

1.0

 

 

(1.8)

 

Reclassification of realized (gain) loss to:

 

 

 

 

 

 

 

 

 

 

Interest rate contracts – Interest expense

 

 

4.3

 

 

(1.5)

 

 

2.8

 

Net unrealized gain (loss) on derivatives

 

 

1.5

 

 

(.5)

 

 

1.0

 

Total other comprehensive income (loss)

 

$

(13.8)

 

$

(.5)

 

$

(14.3)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended July 31, 2015

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

$

(14.9)

 

 

 

 

$

(14.9)

 

Unrealized gain (loss) on derivatives:

 

 

 

 

 

 

 

 

 

 

Unrealized hedging gain (loss)

 

 

(3.5)

 

$

1.2

 

 

(2.3)

 

Reclassification of realized (gain) loss to:

 

 

 

 

 

 

 

 

 

 

Interest rate contracts – Interest expense

 

 

2.4

 

 

(.8)

 

 

1.6

 

Net unrealized gain (loss) on derivatives

 

 

(1.1)

 

 

.4

 

 

(.7)

 

Total other comprehensive income (loss)

 

$

(16.0)

 

$

.4

 

$

(15.6)

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended July 31, 2015

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

$

(60.7)

 

 

 

 

$

(60.7)

 

Unrealized gain (loss) on derivatives:

 

 

 

 

 

 

 

 

 

 

Unrealized hedging gain (loss)

 

 

(7.4)

 

$

2.6

 

 

(4.8)

 

Reclassification of realized (gain) loss to:

 

 

 

 

 

 

 

 

 

 

Interest rate contracts – Interest expense

 

 

6.3

 

 

(2.2)

 

 

4.1

 

Net unrealized gain (loss) on derivatives

 

 

(1.1)

 

 

.4

 

 

(.7)

 

Total other comprehensive income (loss)

 

$

(61.8)

 

$

.4

 

$

(61.4)

 

 

12


 

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

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. 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. Revolving charge accounts are generally deemed to be uncollectible and written off to the allowance for credit losses when delinquency reaches 120 days. Generally, when a wholesale receivable becomes 60 days delinquent, the Company determines whether the accrual of finance income on 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. Generally, 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. Finance income for non-performing Receivables is recognized on a cash basis. Accrual of finance income is generally resumed when the receivable becomes contractually current and collections are reasonably assured.

13


 

An age analysis of past due Receivables that are still accruing interest and non-performing Receivables was as follows (in millions of dollars):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

July 31, 2016

 

 

    

 

 

    

 

 

    

90 Days

    

 

 

 

 

 

30-59 Days

 

60-89 Days

 

or Greater

 

Total

 

 

 

Past Due

 

Past Due

 

Past Due

 

Past Due

 

Retail notes:

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture and turf

 

$

114.9

 

$

54.1

 

$

71.4

 

$

240.4

 

Construction and forestry

 

 

71.8

 

 

36.0

 

 

26.0

 

 

133.8

 

Revolving charge accounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture and turf

 

 

14.5

 

 

3.4

 

 

6.3

 

 

24.2

 

Construction and forestry

 

 

2.3

 

 

1.0

 

 

.4

 

 

3.7

 

Wholesale receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture and turf

 

 

7.9

 

 

3.0

 

 

.7

 

 

11.6

 

Construction and forestry

 

 

.1

 

 

.1

 

 

3.1

 

 

3.3

 

Financing leases:

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture and turf

 

 

9.0

 

 

3.0

 

 

3.1

 

 

15.1

 

Construction and forestry

 

 

2.7

 

 

.4

 

 

.4

 

 

3.5

 

Total Receivables

 

$

223.2

 

$

101.0

 

$

111.4

 

$

435.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Total

    

Total Non-

    

 

    

Total

 

 

 

Past Due

 

Performing

 

Current

 

Receivables

 

Retail notes:

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture and turf

 

$

240.4

 

$

77.6

 

$

14,684.0

 

$

15,002.0

 

Construction and forestry

 

 

133.8

 

 

21.9

 

 

2,333.9

 

 

2,489.6

 

Revolving charge accounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture and turf

 

 

24.2

 

 

.9

 

 

2,833.6

 

 

2,858.7

 

Construction and forestry

 

 

3.7

 

 

 

 

 

74.9

 

 

78.6

 

Wholesale receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture and turf

 

 

11.6

 

 

10.4

 

 

6,777.9

 

 

6,799.9

 

Construction and forestry

 

 

3.3

 

 

 

 

 

1,063.7

 

 

1,067.0

 

Financing leases:

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture and turf

 

 

15.1

 

 

6.8

 

 

376.6

 

 

398.5

 

Construction and forestry

 

 

3.5

 

 

2.6

 

 

173.0

 

 

179.1

 

Total Receivables

 

$

435.6

 

$

120.2

 

$

28,317.6

 

$

28,873.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

October 31, 2015

 

 

    

 

 

    

 

 

    

90 Days

    

 

 

 

 

 

30-59 Days

 

60-89 Days

 

or Greater

 

Total

 

 

 

Past Due

 

Past Due

 

Past Due

 

Past Due

 

Retail notes:

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture and turf

 

$

100.2

 

$

48.8

 

$

43.3

 

$

192.3

 

Construction and forestry

 

 

61.7

 

 

28.5

 

 

12.1

 

 

102.3

 

Revolving charge accounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture and turf

 

 

11.4

 

 

5.1

 

 

.8

 

 

17.3

 

Construction and forestry

 

 

2.1

 

 

.8

 

 

.3

 

 

3.2

 

Wholesale receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture and turf

 

 

2.0

 

 

2.1

 

 

.6

 

 

4.7

 

Construction and forestry

 

 

.8

 

 

 

 

 

1.4

 

 

2.2

 

Financing leases:

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture and turf

 

 

12.3

 

 

5.7

 

 

2.2

 

 

20.2

 

Construction and forestry

 

 

2.8

 

 

.7

 

 

.4

 

 

3.9

 

Total Receivables

 

$

193.3

 

$

91.7

 

$

61.1

 

$

346.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

Total Non-

 

 

 

 

Total

 

 

 

Past Due

 

Performing

 

Current

 

Receivables

 

Retail notes:

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture and turf

 

$

192.3

 

$

45.8

 

$

15,956.8

 

$

16,194.9

 

Construction and forestry

 

 

102.3

 

 

17.0

 

 

2,344.8

 

 

2,464.1

 

Revolving charge accounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture and turf

 

 

17.3

 

 

1.8

 

 

2,579.5

 

 

2,598.6

 

Construction and forestry

 

 

3.2

 

 

.1

 

 

78.9

 

 

82.2

 

Wholesale receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture and turf

 

 

4.7

 

 

10.3

 

 

5,981.2

 

 

5,996.2

 

Construction and forestry

 

 

2.2

 

 

 

 

 

1,187.1

 

 

1,189.3

 

Financing leases:

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture and turf

 

 

20.2

 

 

8.2

 

 

360.8

 

 

389.2

 

Construction and forestry

 

 

3.9

 

 

3.3

 

 

170.7

 

 

177.9

 

Total Receivables

 

$

346.1

 

$

86.5

 

$

28,659.8

 

$

29,092.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

July 31, 2015

 

 

    

 

 

    

 

 

    

90 Days

    

 

 

 

 

 

30-59 Days

 

60-89 Days

 

or Greater

 

Total

 

 

 

Past Due

 

Past Due

 

Past Due

 

Past Due

 

Retail notes:

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture and turf

 

$

82.2

 

$

38.3

 

$

47.7

 

$

168.2

 

Construction and forestry

 

 

63.0

 

 

19.9

 

 

13.6

 

 

96.5

 

Revolving charge accounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture and turf

 

 

9.7

 

 

2.9

 

 

3.3

 

 

15.9

 

Construction and forestry

 

 

1.7

 

 

.8

 

 

.6

 

 

3.1

 

Wholesale receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture and turf

 

 

3.5

 

 

.3

 

 

1.6

 

 

5.4

 

Construction and forestry

 

 

1.3

 

 

 

 

 

1.4

 

 

2.7

 

Financing leases:

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture and turf

 

 

5.8

 

 

7.3

 

 

2.3

 

 

15.4

 

Construction and forestry

 

 

2.3

 

 

1.4

 

 

1.0

 

 

4.7

 

Total Receivables

 

$

169.5

 

$

70.9

 

$

71.5

 

$

311.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Total

    

Total Non-

    

 

 

    

Total

 

 

 

Past Due

 

Performing

 

Current

 

Receivables

 

Retail notes:

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture and turf

 

$

168.2

 

$

48.8

 

$

15,911.9

 

$

16,128.9

 

Construction and forestry

 

 

96.5

 

 

15.9

 

 

2,313.6

 

 

2,426.0

 

Revolving charge accounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture and turf

 

 

15.9

 

 

1.2

 

 

2,518.0

 

 

2,535.1

 

Construction and forestry

 

 

3.1

 

 

 

 

 

80.2

 

 

83.3

 

Wholesale receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture and turf

 

 

5.4

 

 

.4

 

 

7,173.6

 

 

7,179.4

 

Construction and forestry

 

 

2.7

 

 

 

 

 

1,478.4

 

 

1,481.1

 

Financing leases:

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture and turf

 

 

15.4

 

 

8.2

 

 

342.3

 

 

365.9

 

Construction and forestry

 

 

4.7

 

 

5.5

 

 

162.8

 

 

173.0

 

Total Receivables

 

$

311.9

 

$

80.0

 

$

29,980.8

 

$

30,372.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16


 

Allowances for credit losses on Receivables are maintained in amounts considered to be appropriate in relation to the Receivables outstanding based on historical loss experience by product category, portfolio duration, delinquency trends, economic conditions and credit risk quality.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

July 31, 2016

 

 

 

 

 

 

Revolving

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

Charge

 

Wholesale

 

Financing

 

Total

 

 

 

Notes

 

Accounts

 

Receivables

 

Leases

 

Receivables

 

Allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning of period balance

 

$

55.5

 

$

39.7

 

$

8.4

 

$

8.8

 

$

112.4

 

Provision for credit losses

 

 

7.2

  

 

22.0

   

 

.1

   

 

.5

   

 

29.8

 

Write-offs

 

 

(7.2)

 

 

(27.4)

 

 

(.1)

 

 

(.8)

 

 

(35.5)

 

Recoveries

 

 

1.4

 

 

5.4

 

 

.1

 

 

.1

 

 

7.0

 

Other changes (primarily translation adjustments)

 

 

(.2)

 

 

 

 

 

(.1)

 

 

(.1)

 

 

(.4)

 

End of period balance

 

$

56.7

 

$

39.7

 

$

8.4

 

$

8.5

 

$

113.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

July 31, 2016

 

Allowance:

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Beginning of period balance

 

$

53.3

 

$

39.7

 

$

8.1

 

$

8.7

 

$

109.8

 

Provision for credit losses

 

 

21.5

 

 

34.0

 

 

.2

 

 

1.7

 

 

57.4

 

Write-offs

 

 

(22.3)

 

 

(48.4)

 

 

(.1)

 

 

(1.9)

 

 

(72.7)

 

Recoveries

 

 

4.4

 

 

14.4

 

 

.1

 

 

.3

 

 

19.2

 

Other changes (primarily translation adjustments)

 

 

(.2)

 

 

 

 

 

.1

 

 

(.3)

 

 

(.4)

 

End of period balance

 

$

56.7

 

$

39.7

 

$

8.4

 

$

8.5

 

$

113.3

 

Balance individually evaluated *

 

$

2.9

 

 

 

 

$

1.3

 

 

 

 

$

4.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

End of period balance

 

$

17,491.6

 

$

2,937.3

 

$

7,866.9

 

$

577.6

 

$

28,873.4

 

Balance individually evaluated *

 

$

39.9

 

$

2.3

 

$

13.0

 

$

.9

 

$

56.1

 

 

*    Remainder is collectively evaluated.

 

17


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

July 31, 2015

 

 

    

 

 

    

Revolving

    

 

 

    

 

 

    

 

 

 

 

 

Retail

 

Charge

 

Wholesale

 

Financing

 

Total

 

 

 

Notes

 

Accounts

 

Receivables

 

Leases

 

Receivables

 

Allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning of period balance

 

$

55.7

 

$

39.9

 

$

7.2

 

$

8.4

 

$

111.2

 

Provision for credit losses

 

 

3.2

 

 

13.4

 

 

.3

 

 

.5

 

 

17.4

 

Write-offs

 

 

(6.4)

 

 

(18.2)

 

 

(.1)

 

 

(.6)

 

 

(25.3)

 

Recoveries

 

 

2.1

 

 

4.6

 

 

.1

 

 

 

 

 

6.8

 

Other changes (primarily translation adjustments)

 

 

(.2)

 

 

 

 

 

(.1)

 

 

 

 

 

(.3)

 

End of period balance

 

$

54.4

 

$

39.7

 

$

7.4

 

$

8.3

 

$

109.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

July 31, 2015

 

Allowance:

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Beginning of period balance

 

$

56.1

 

$

39.9

 

$

7.6

 

$

8.8

 

$

112.4

 

Provision (credit) for credit losses

 

 

7.8

 

 

20.9

 

 

(.1)

 

 

.9

 

 

29.5

 

Write-offs

 

 

(13.8)

 

 

(33.0)

 

 

(.3)

 

 

(1.1)

 

 

(48.2)

 

Recoveries

 

 

5.1

 

 

11.9

 

 

.5

 

 

 

 

 

17.5

 

Other changes (primarily translation adjustments)

 

 

(.8)

 

 

 

 

 

(.3)

 

 

(.3)

 

 

(1.4)

 

End of period balance

 

$

54.4

 

$

39.7

 

$

7.4

 

$

8.3

 

$

109.8

 

Balance individually evaluated *

 

$

.8

 

 

 

 

 

 

 

 

 

 

$

.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

End of period balance

 

$

18,554.9

 

$

2,618.4

 

$

8,660.5

 

$

538.9

 

$

30,372.7

 

Balance individually evaluated *

 

$

19.5

 

$

3.0

 

$

1.2

 

 

 

 

$

23.7

 

 

*    Remainder is collectively evaluated.

Receivables are considered impaired when it is probable the Company will be unable to collect all amounts due according to the contractual terms. Receivables reviewed for impairment generally include those that are either past due, or have provided bankruptcy notification, or require significant collection efforts. Receivables that are impaired are generally classified as non-performing.

18


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Unpaid

    

 

 

    

Average

 

 

 

Recorded

 

Principal

 

Specific

 

Recorded

 

 

 

Investment

 

Balance

 

Allowance

 

Investment

 

July 31, 2016 *

 

 

 

 

 

 

 

 

 

 

 

 

 

Receivables with specific allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail notes

 

$

13.0

 

$

12.3

 

$

2.9

 

$

13.2

 

Wholesale receivables

 

 

10.4

 

 

10.4

 

 

1.3

 

 

11.0

 

Total with specific allowance

 

 

23.4

 

 

22.7

 

 

4.2

 

 

24.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Receivables without specific allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail notes

 

 

6.5

 

 

6.4

 

 

 

 

 

7.8

 

Wholesale receivables

 

 

.3

 

 

.3

 

 

 

 

 

.5

 

Total without specific allowance

 

 

6.8

 

 

6.7

 

 

 

 

 

8.3

 

Total

 

$

30.2

 

$

29.4

 

$

4.2

 

$

32.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture and turf

 

$

24.5

 

$

23.8

 

$

3.8

 

$

26.4

 

Construction and forestry

 

 

5.7

 

 

5.6

 

 

.4

 

 

6.1

 

Total

 

$

30.2

 

$

29.4

 

$

4.2

 

$

32.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

October 31, 2015 *

 

 

 

 

 

 

 

 

 

 

 

 

 

Receivables with specific allowance: 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholesale receivables

 

$

9.7

 

$

9.7

 

$

1.0

 

$

9.7

 

Financing leases

 

 

.8

 

 

.7

 

 

.2

 

 

.7

 

Total with specific allowance

 

 

10.5

 

 

10.4

 

 

1.2

 

 

10.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Receivables without specific allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail notes

 

 

9.5

 

 

9.5

 

 

 

 

 

11.8

 

Wholesale receivables

 

 

.6

 

 

.6

 

 

 

 

 

.7

 

Total without specific allowance

 

 

10.1

 

 

10.1

 

 

 

 

 

12.5

 

Total

 

$

20.6

 

$

20.5

 

$

1.2

 

$

22.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture and turf

 

$

16.9

 

$

16.8

 

$

1.0

 

$

18.0

 

Construction and forestry

 

 

3.7

 

 

3.7

 

 

.2

 

 

4.9

 

Total

 

$

20.6

 

$

20.5

 

$

1.2

 

$

22.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

July 31, 2015 *

 

 

 

 

 

 

 

 

 

 

 

 

 

Receivables with specific allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail notes

 

$

4.6

 

$

4.4

 

$

.8

 

$

7.8

 

Total with specific allowance

 

 

4.6

 

 

4.4

 

 

.8

 

 

7.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Receivables without specific allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail notes

 

 

10.9

 

 

10.7

 

 

 

 

 

12.1

 

Wholesale receivables

 

 

.6

 

 

.6

 

 

 

 

 

.6

 

Total without specific allowance

 

 

11.5

 

 

11.3

 

 

 

 

 

12.7

 

Total

 

$

16.1

 

$

15.7

 

$

.8

 

$

20.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agriculture and turf

 

$

11.7

 

$

11.3

 

$

.8

 

$

15.9

 

Construction and forestry

 

 

4.4

 

 

4.4

 

 

 

 

 

4.6

 

Total

 

$

16.1

 

$

15.7

 

$

.8

 

$

20.5

 

*    Finance income recognized was not material.

19


 

A troubled debt restructuring is generally the modification of debt in which a creditor grants a concession it would not otherwise consider to a debtor that is experiencing financial difficulties. These modifications may include a reduction of the stated interest rate, an extension of the maturity dates, a reduction of the face amount or maturity amount of the debt, or a reduction of accrued interest. During the first nine months of 2016, the Company identified 65 Receivable contracts, primarily retail notes, as troubled debt restructurings with aggregate balances of $2.1 million pre-modification and $1.5 million post-modification. During the first nine months of 2015, there were 76 Receivable contracts, primarily retail notes, with aggregate balances of $2.2 million pre-modification and $1.7 million post-modification. During these same periods, there were no significant troubled debt restructurings that subsequently defaulted and were written off. At July 31, 2016, the Company had no commitments to lend additional funds to borrowers whose accounts were modified in troubled debt restructurings.

(5)Securitization of receivables:

The Company, as a part of its overall funding strategy, periodically transfers certain Receivables (retail notes) into variable interest entities (VIEs) that are special purpose entities (SPEs), or non-VIE banking operations, as part of its asset-backed securities programs (securitizations).  The structure of these transactions is such that the transfer of the retail notes does 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-VIEs 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 non-VIE banking operations, which in turn issue debt to investors. The resulting secured borrowings are recorded as “Securitization borrowings” on the balance sheet. The securitized retail notes are recorded as “Retail notes securitized” on the balance sheet. The total restricted assets on the balance sheet related to these securitizations include the retail notes securitized 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 securitized, allowance for credit losses and other assets) of the consolidated SPEs totaled $3,210.5 million, $3,005.4 million and $2,638.8 million at July 31, 2016, October 31, 2015 and July 31, 2015, respectively. The liabilities (securitization borrowings and accrued interest) of these SPEs totaled $3,099.4 million, $2,743.2 million and $2,533.9 million at July 31, 2016, October 31, 2015 and July 31, 2015, respectively. In the fourth quarter of 2015, as part of a receivable transfer, the Company retained $228.0 million of securitization borrowings, with no balance at July 31, 2016 and $189.3 million at October 31, 2015. This amount is not shown as a liability above as the borrowing is not outstanding to a third party. 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 non-VIE banking operations, which are not consolidated since the Company does not have a controlling interest in the entities. The Company’s carrying values and interests related to these securitizations with the unconsolidated non-VIEs were restricted assets (retail notes securitized, allowance for credit losses and other assets) of $753.4 million, $249.2 million and $283.8 million at July 31, 2016, October 31, 2015 and July 31, 2015, respectively. The liabilities (securitization borrowings and accrued interest) were $692.0 million, $237.7 million and $265.3 million at July 31, 2016, October 31, 2015 and July 31, 2015, respectively.

20


 

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 securitized, allowance for credit losses and other assets) of $2,112.7 million, $1,689.4 million and $1,923.2 million at July 31, 2016, October 31, 2015 and July 31, 2015, respectively. The liabilities (securitization borrowings and accrued interest) related to these conduits were $1,940.2 million, $1,611.2 million and $1,798.3 million at July 31, 2016, October 31, 2015 and July 31, 2015, 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):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

July 31

 

 

 

 

 

 

 

 

 

2016

 

 

 

 

 

 

 

Carrying value of liabilities

 

$

1,940.2

 

 

 

 

 

 

 

Maximum exposure to loss

 

 

2,112.7

 

 

 

 

 

 

 

The total assets of unconsolidated VIEs related to securitizations were approximately $45.5 billion at July 31, 2016.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

    

July 31

    

October 31

    

July 31

 

 

 

2016

 

2015

 

2015

 

Retail notes securitized

 

$

5,961.4

 

$

4,848.4

 

$

4,751.0

 

Allowance for credit losses

 

 

(14.0)

 

 

(13.8)

 

 

(13.2)

 

Other assets

 

 

129.2

 

 

109.4

 

 

108.0

 

Total restricted securitized assets

 

$

6,076.6

 

$

4,944.0

 

$

4,845.8

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

    

July 31

    

October 31

    

July 31

 

 

 

2016

 

2015

 

2015

 

Securitization borrowings

 

$

5,728.9

 

$

4,590.0

 

$

4,595.4

 

Accrued interest on borrowings

 

 

2.7

 

 

2.1

 

 

2.1

 

Total liabilities related to restricted securitized assets

 

$

5,731.6

 

$

4,592.1

 

$

4,597.5

 

The secured borrowings related to these restricted 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 July 31, 2016, the maximum remaining term of all restricted securitized retail notes was approximately seven years.

 

(6)Commitments and contingencies:

At July 31, 2016, John Deere Financial Inc., the John Deere finance subsidiary in Canada, had $211.0 million of commercial paper and a fair value liability of $15.1 million for derivatives, prior to considering applicable netting provisions, with a notional amount of $1,897.9 million that were guaranteed by Capital Corporation.

21


 

The Company has a variable interest in John Deere Canada Funding Inc. (JDCFI), a wholly-owned subsidiary of John Deere Financial Inc., which was created as a VIE to issue debt in public markets to fund the operations of affiliated companies in Canada. The Company has a variable interest in JDCFI because it provides guarantees for all debt issued by JDCFI, however it does not consolidate JDCFI because it does not have the power to direct the activities that most significantly impact JDCFI’s economic performance. The Company has no carrying value of assets or liabilities related to JDCFI. Its maximum exposure to loss is the amount of the debt issued by JDCFI and guaranteed by the Company, which was $1,710.5 million at July 31, 2016. The weighted average interest rate on the debt at July 31, 2016 was 2.1 percent with a maximum remaining maturity of approximately six years. No additional support beyond what was previously contractually required has been provided to JDCFI during the reporting periods.

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 $8.4 billion at July 31, 2016. The amount of unused commitments to extend credit to customers was $27.8 billion at July 31, 2016. 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 the unused commitments to extend credit to customers relate to revolving charge accounts.

At July 31, 2016, the Company had restricted other assets of approximately $21.2 million. See Note 5 for additional restricted assets associated with borrowings related to securitizations.

The Company is subject to various unresolved legal actions which arise in the normal course of its business, the most prevalent of which relate to retail credit. The Company believes the reasonably possible range of losses for these unresolved legal actions in addition to amounts accrued would not have a material effect on its consolidated financial statements.

(7)The Company’s unrecognized tax benefits at July 31, 2016 were $34.0 million, compared to $36.0 million at October 31, 2015. The liability at July 31, 2016 consisted of approximately $17.6 million, which would affect the effective tax rate if it was recognized. The remaining liability was related to tax positions for which there are offsetting tax receivables, or the uncertainty was only related to timing. The changes in the unrecognized tax benefits for the first nine months of 2016 were not significant. The Company expects that any reasonably possible change in the amounts of unrecognized tax benefits in the next 12 months would not be significant.

(8) To determine fair value, the Company uses various methods including market and income approaches. 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. 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.

22


 

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.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

July 31, 2016

 

October 31, 2015

 

July 31, 2015

 

 

 

Carrying

 

Fair

 

Carrying

 

Fair

 

Carrying

 

Fair

 

 

 

Value

 

Value *

 

Value

 

Value *

 

Value

 

Value *

 

Receivables financed – net

   

$

22,812.7

   

$

22,778.8

   

$

24,148.0

   

$

24,126.5

   

$

25,525.1

   

$

25,455.9

 

Retail notes securitized – net

 

 

5,947.4

 

 

5,939.1

 

 

4,834.6

 

 

4,820.5

 

 

4,737.8

 

 

4,709.1

 

Securitization borrowings

 

 

5,728.9

 

 

5,733.3

 

 

4,590.0

 

 

4,590.2

 

 

4,595.4

 

 

4,596.0

 

Current maturities of longterm borrowings

 

 

4,765.2

 

 

4,781.6

 

 

4,465.4

 

 

4,478.7

 

 

3,730.3

 

 

3,736.7

 

Longterm borrowings

 

 

16,947.2

 

 

17,178.6

 

 

16,980.5

 

 

17,007.6

 

 

16,659.0

 

 

16,756.8

 

*    Fair value measurements above were Level 3 for all Receivables and Level 2 for all borrowings.

Fair values of Receivables that were issued long-term were based on the discounted values of their related cash flows at interest rates currently being offered by the Company for similar Receivables. The fair values of the remaining Receivables approximated the carrying amounts.

Fair values of long-term borrowings and short-term securitization borrowings were based on current market quotes for identical or similar borrowings and credit risk, or on 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.

23


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

    

July 31

    

October 31

    

July 31

 

 

 

2016

 

2015

 

2015

 

Receivables from John Deere

 

 

 

 

 

 

 

 

 

 

Derivatives:

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

$

395.5

 

$

241.6

 

$

212.4

 

Cross-currency interest rate contracts

 

 

11.8

 

 

11.5

 

 

12.7

 

Other assets

 

 

 

 

 

 

 

 

 

 

Derivatives:

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

 

72.0

 

 

83.7

 

 

102.5

 

Foreign exchange contracts

 

 

8.7

 

 

11.3

 

 

8.2

 

Total assets *

 

$

488.0

 

$

348.1

 

$

335.8

 

 

 

 

 

 

 

 

 

 

 

 

Other payables to John Deere

 

 

 

 

 

 

 

 

 

 

Derivatives:

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

$

19.3

 

$

22.4

 

$

38.4

 

Cross-currency interest rate contracts

 

 

 

 

 

.1

 

 

 

 

Accounts payable and accrued expenses

 

 

 

 

 

 

 

 

 

 

Derivatives:

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

 

18.4

 

 

19.8

 

 

23.1

 

Foreign exchange contracts

 

 

5.3

 

 

5.6

 

 

2.6

 

Total liabilities

 

$

43.0

 

$

47.9

 

$

64.1

 

*    Excluded from this table are the Company’s cash equivalents, which were carried at cost that approximates fair value. The cash equivalents consist primarily of money market funds that were Level 1 measurements.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value

 

(Gains) / Losses

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

July 31

 

October 31

 

July 31

 

July 31

 

July 31

 

 

 

2016

 

2015

 

2015

 

2016

 

2015

 

2016

 

2015

 

Receivables:

   

 

    

   

 

    

   

 

    

   

 

    

   

 

    

   

 

    

   

 

    

 

Retail notes

 

$

10.1

 

 

 

 

$

3.8

 

$

1.3

 

$

(1.0)

 

$

2.9

 

$

(1.0)

 

Revolving charge accounts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(.2)

 

 

 

 

 

(.2)

 

Wholesale receivables

 

 

9.1

 

$

8.7

 

 

 

 

 

 

 

 

 

 

 

.3

 

 

 

 

Financing leases

 

 

 

 

 

.6

 

 

 

 

 

 

 

 

 

 

 

(.1)

 

 

 

 

Equipment on operating leases – net

 

 

 

 

 

478.7

 

 

 

 

 

 

 

 

 

 

 

29.6

 

 

 

 

Other assets

 

 

 

 

 

96.2

 

 

 

 

 

 

 

 

 

 

 

20.1

 

 

 

 

Total

 

$

19.2

 

$

584.2

 

$

3.8

 

$

1.3

 

$

(1.2)

 

$

52.8

 

$

(1.2)

 

24


 

The following is a description of the valuation methodologies the Company uses to measure certain financial instruments on the balance sheet 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 a market approach (appraisal values or realizable values). Inputs include a selection of realizable values.

Equipment on operating leases - net – The impairments are based on an income approach (discounted cash flow), using the contractual payments, plus an estimate of equipment sale price at lease maturity. Inputs include realized sales values.

Other assets – Impairments are based on the fair value of the inventory, which is measured using a market approach. Inputs include realized sales values.

 

(9)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. Cash collateral received or paid is not offset against the derivative fair values 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. 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.

Cash flow hedges

Certain 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 July 31, 2016, October 31, 2015 and July 31, 2015 were $1,850.0 million, $2,800.0 million and $2,800.0 million, respectively. 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 in the same periods during which the hedged transactions affected earnings. These amounts offset the effects of interest rate changes on the related borrowings. Any ineffective portions of the gains or losses on all cash flow interest rate contracts designated as hedges were recognized currently in interest expense and were not material during any periods presented. The cash flows from these contracts were recorded in operating activities in the statement of consolidated cash flows.

The amount of loss recorded in OCI at July 31, 2016 that is expected to be reclassified to interest expense in the next twelve months if interest rates remain unchanged is approximately $1.4 million after-tax. These contracts mature in up to 29 months. There were no gains or losses reclassified from OCI to earnings based on the probability that the original forecasted transaction would not occur.

25


 

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 July 31, 2016, October 31, 2015 and July 31, 2015 were $8,981.3 million, $8,048.6 million and $8,203.4 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 were a gain of $2.5 million and a loss of $.3 million during the third quarter of 2016 and 2015, respectively, and gains of $1.3 million and $1.1 million during the first nine months of 2016 and 2015, respectively. The cash flows from these contracts were recorded in operating activities in the statement of consolidated 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

 

Nine Months Ended

 

 

 

July 31

 

July 31

 

 

 

2016

 

2015

 

2016

   

2015

 

Interest rate contracts *

 

$

79.7

 

$

(11.7)

 

$

148.0

 

$

40.4

 

Borrowings **

 

 

(77.2)

 

 

11.4

 

 

(146.7)

 

 

(39.3)

 

*    Includes changes in fair value of interest rate contracts excluding net accrued interest income of $35.0 million and $40.7 million during the third quarter of 2016 and 2015, respectively, and $110.8 million and $126.2 million during the first nine months of 2016 and 2015, respectively.

** Includes adjustments for fair values of hedged borrowings excluding accrued interest expense of $72.2 million and $63.2 million during the third quarter of 2016 and 2015, respectively, and $207.5 million and $193.4 million during the first nine months of 2016 and 2015, 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 July 31, 2016, October 31, 2015 and July 31, 2015 were $2,448.3 million, $2,679.5 million and $2,651.3 million, the foreign exchange contracts were $1,325.7 million, $966.6 million and $853.6 million and the cross-currency interest rate contracts were $63.7 million, $75.6 million and $79.7 million, respectively. At July 31, 2016, October 31, 2015 and July 31, 2015 there were also $2,667.1 million, $1,902.1 million and $2,086.8 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 statement of consolidated cash flows.

 

26


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

    

July 31

    

October 31

    

July 31

 

 

 

2016

 

2015

 

2015

 

Receivables from John Deere

 

 

 

 

 

 

 

 

 

 

Designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

$

362.9

 

$

207.2

 

$

173.6

 

 

 

 

 

 

 

 

 

 

 

 

Not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

 

32.6

 

 

34.4

 

 

38.8

 

Cross-currency interest rate contracts

 

 

11.8

 

 

11.5

 

 

12.7

 

Total not designated

 

 

44.4

 

 

45.9

 

 

51.5

 

 

 

 

 

 

 

 

 

 

 

 

Other Assets

 

 

 

 

 

 

 

 

 

 

Designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

 

71.4

 

 

80.9

 

 

97.7

 

 

 

 

 

 

 

 

 

 

 

 

Not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

 

.6

 

 

2.8

 

 

4.8

 

Foreign exchange contracts

 

 

8.7

 

 

11.3

 

 

8.2

 

Total not designated

 

 

9.3

 

 

14.1

 

 

13.0

 

 

 

 

 

 

 

 

 

 

 

 

Total derivatives

 

$

488.0

 

$

348.1

 

$

335.8

 

 

 

 

 

 

 

 

 

 

 

 

Other Payables to John Deere

 

 

 

 

 

 

 

 

 

 

Designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

$

4.3

 

$

7.1

 

$

19.4

 

 

 

 

 

 

 

 

 

 

 

 

Not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

 

15.0

 

 

15.3

 

 

19.0

 

Cross-currency interest rate contracts

 

 

 

 

 

.1

 

 

 

 

Total not designated

 

 

15.0

 

 

15.4

 

 

19.0

 

 

 

 

 

 

 

 

 

 

 

 

Accounts Payable and Accrued Expenses

 

 

 

 

 

 

 

 

 

 

Not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

 

18.4

 

 

19.8

 

 

23.1

 

Foreign exchange contracts

 

 

5.3

 

 

5.6

 

 

2.6

 

Total not designated

 

 

23.7

 

 

25.4

 

 

25.7

 

 

 

 

 

 

 

 

 

 

 

 

Total derivatives

 

$

43.0

 

$

47.9

 

$

64.1

 

 

27


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

Expense or OCI

 

July 31

 

July 31

 

 

   

Classification

  

2016

   

2015

  

2016

   

2015

 

Fair Value Hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

Interest expense

 

$

114.7

 

$

29.0

 

$

258.8

 

$

166.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Flow Hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recognized in OCI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Effective Portion):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

OCI (pretax)

 

 

(1.1)

 

 

(3.5)

 

 

(2.8)

 

 

(7.4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassified from OCI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Effective Portion):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

Interest expense

 

 

(1.1)

 

 

(2.4)

 

 

(4.3)

 

 

(6.3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recognized Directly in Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Ineffective Portion)

 

 

 

 

**

 

 

**

 

 

**

 

 

**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Not Designated as Hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

Interest expense *

 

$

(2.7)

 

$

(3.2)

 

$

(3.3)

 

$

(6.6)

 

Foreign exchange contracts

 

Administrative and operating expenses *

 

 

52.3

 

 

33.9

   

 

35.2

 

 

146.1

 

Total not designated

 

 

 

$

49.6

 

$

30.7

 

$

31.9

 

$

139.5

 

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

**  The amount is not significant.

Included in the above table are interest expense and administrative and operating expense amounts the Company incurred on derivatives transacted with John Deere. The amount the Company recognized on these affiliate party transactions for the three months ended July 31, 2016 and 2015 were gains of $115.9 million and $26.5 million, respectively. The amount the Company recognized on these affiliate party transactions for the nine months ended July 31, 2016 and 2015 were gains of $257.1 million and $165.4 million, respectively.

Counterparty Risk and Collateral

The Company’s outstanding derivatives have been transacted with both unrelated external counterparties and with John Deere. For derivatives transacted with John Deere, the Company utilizes 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 the unrelated external counterparties contain credit support provisions that may require the Company to post collateral based on the size of the net liability positions and credit ratings. At July 31, 2016, October 31, 2015 and July 31, 2015, there were no aggregate liability positions for derivatives with credit risk related contingent features. If the credit risk related contingent features were triggered, the Company would be required to post collateral up to an amount equal to any liability position, prior to considering applicable netting provisions.

28


 

Derivative instruments are subject to significant concentrations of credit risk to the banking sector. The Company manages individual unrelated external counterparty exposure by setting limits that consider the credit rating of the unrelated external counterparty, the credit default swap spread of the counterparty and 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 credit support provisions. Each master agreement executed with an unrelated external counterparty permits the net settlement of amounts owed in the event of default or termination.

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 a loss sharing agreement with John Deere in which it 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 loss sharing agreement increases the maximum amount of loss that the Company would incur, after considering collateral received and netting arrangements, by $.5 million, $2.2 million and $5.6 million as of July 31, 2016, October 31, 2015 and July 31, 2015, respectively.

Derivatives are recorded without offsetting for netting arrangements or collateral. The impact on the derivative assets and liabilities for external derivatives and those with John Deere related to netting arrangements and any collateral received or paid were as follows (in millions of dollars):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

July 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives:

 

Gross Amounts
Recognized

 

Netting
Arrangements

 

Collateral
Received

 

Net
Amount

 

Assets

    

 

    

    

 

 

    

    

    

 

    

 

External

 

$

80.7

 

$

(19.8)

 

 

 

$

60.9

 

John Deere

 

 

407.3

 

 

(19.3)

 

 

 

 

388.0

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

External

 

 

23.7

 

 

(19.8)

 

 

 

 

3.9

 

John Deere

 

 

19.3

 

 

(19.3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

October 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives:

 

Gross Amounts
Recognized

 

Netting
Arrangements

 

Collateral
Received

 

Net
Amount

 

Assets

    

 

    

    

 

 

    

    

    

 

    

 

External

 

$

95.0

 

$

(20.3)

 

 

 

$

74.7

 

John Deere

 

 

253.1

 

 

(22.5)

 

 

 

 

230.6

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

External

 

 

25.4

 

 

(20.3)

 

 

 

 

5.1

 

John Deere

 

 

22.5

 

 

(22.5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

July 31, 2015

    

 

 

    

 

 

    

    

    

 

 

 

Derivatives:

 

Gross Amounts
Recognized

 

Netting
Arrangements

 

Collateral
Received

 

Net
Amount

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

External

 

$

110.7

 

$

(23.5)

 

 

 

$

87.2

 

John Deere

 

 

225.1

 

 

(37.6)

 

 

 

 

187.5

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

External

 

 

25.7

 

 

(23.5)

 

 

 

 

2.2

 

John Deere

 

 

38.4

 

 

(37.6)

 

 

 

 

.8

 

 

 

 

 

29


 

(10)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 for the third quarter and $4.4 million for the first nine months of 2016, compared with $2.6 million and $7.6 million for the same periods last year. 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 $.6 million for the third quarter and $1.8 million for the first nine months of 2016, compared with $.9 million and $2.8 million for the same periods last year. Further disclosure for these plans is included in Deere & Company’s Form 10-Q for the quarter ended July 31, 2016.

30


 

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Results of Operations

Overview

Organization

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

Trends and Economic Conditions

The Company’s business is closely related to John Deere’s business. Industry sales of agricultural machinery in the U.S. and Canada are forecast to decrease 15 to 20 percent for 2016. Industry sales in the European Union (EU)28 nations are forecast to be about the same to 5 percent lower. In South America, industry sales of tractors and combines are projected to decrease 15 to 20 percent. Asian sales are projected to be about the same to slightly lower. Industry sales of turf and utility equipment in the U.S. and Canada are expected to be about the same to up 5 percent in 2016.  John Deere’s agriculture and turf segment sales decreased 11 percent in the third quarter and 7 percent for the first nine months and are forecast to decrease by about 8 percent for fiscal year 2016. Construction equipment markets reflect the impact of weak conditions in North America. In forestry, global industry sales are expected to be down 5 to 10 percent from last year’s strong levels. John Deere’s construction and forestry segment sales decreased 24 percent in the third quarter and 21 percent for the first nine months, and are forecast to be down about 18 percent for fiscal year 2016.

Net income attributable to the Company in fiscal year 2016 is expected to be approximately $360 million, compared to $498 million in fiscal year 2015. The forecast decline from 2015 reflects less favorable financing spreads, higher losses on lease residual values and an increased provision for credit losses.

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

John Deere’s third quarter results reflected the continuing impact of the global farm recession and difficult conditions in the construction equipment market. All of the business segments remained profitable, with the agriculture and turf segment posting higher operating profit in the third quarter of 2016 than the same period last year. This illustrates John Deere’s durable business model and wider range of revenue sources. At the same time, John Deere is focusing on making its operations more efficient and achieving further structural cost reductions.

2016 Compared with 2015

Net income attributable to the Company was $90.4 million in the third quarter of 2016 and $259.9 million for the first nine months of 2016, compared with $126.9 million and $376.4 million for the same periods last year. The decline for the quarter was primarily due to less favorable financing spreads, higher losses on lease residual values and a higher provision for credit losses. The decline in year-to-date results was primarily due to higher losses on lease residual values, less favorable financing spreads and a higher provision for credit losses.

31


 

Revenues totaled $538.6 million in the third quarter and $1,552.7 million for the first nine months of 2016, compared with $493.4 million and $1,445.2 million for the same periods last year. Finance income earned on retail notes totaled $521.4 million for the first nine months of 2016, compared with $544.6 million for the same period in 2015. The decrease was primarily due to a decline in the average balance of retail notes, partially offset by higher average financing rates. Revenues earned on revolving charge accounts amounted to $184.7 million for the first nine months of 2016, compared with $171.6 million during the same period last year. The increase was primarily due to an increase in the average balance of revolving charge accounts, partially offset by lower average financing rates. Finance income earned on wholesale receivables totaled $271.2 million for the first nine months of 2016, compared with $287.0 million for the same period in 2015. The decrease was primarily due to a decline in the average balance of wholesale receivables. Lease revenues totaled $544.0 million for the first nine months of 2016, compared with $414.3 million in the first nine months of 2015. The increase was primarily due to an increase in the average balance of leases. Revenues earned from John Deere totaled $125.9 million in the third quarter and $352.7 million for the first nine months of 2016, compared with $111.7 million and $324.9 million for the same periods last year. The increase for the quarter was primarily due to increased incentive compensation paid by John Deere. The year-to-date increase was primarily the result of increased incentive compensation paid by John Deere, partially offset by lower service fee income. Revenues earned from John Deere are included in the revenue amounts discussed above, and in “Other income – net” on the statement of consolidated income.

Interest expense totaled $109.8 million in the third quarter and $305.0 million for the first nine months of 2016, compared with $78.8 million and $231.1 million for the same periods in 2015. The increases were primarily due to higher average borrowing rates.

Administrative and operating expenses were $102.1 million in the third quarter and $347.0 million for the first nine months of 2016, compared with $84.4 million and $266.4 million for the same periods in 2015. The increases were primarily due to higher losses on lease residual values. 

During the third quarter and first nine months of 2016, the provision for credit losses totaled $29.8 million and $57.4 million, respectively, compared with $17.4 million and $29.5 million for the same periods in 2015. The increases were primarily due to higher net write-offs. The annualized provision for credit losses, as a percentage of the average balance of total Receivables financed, was .41 percent in the third quarter and .27 percent for the first nine months of 2016, compared with .23 percent and .13 percent for the same periods in 2015. See the Company's most recently filed annual report on Form 10-K for further information regarding the Company's allowance for credit losses policies. 

Depreciation of equipment on operating leases was $145.2 million in the third quarter and $409.7 million for the first nine months of 2016, compared with $107.1 million and $298.2 million for the same periods in 2015. The increases were primarily the result of higher average balances of equipment on operating leases.

Provision for income taxes was $51.2 million in the third quarter and $139.4 million for the first nine months of 2016, compared with $71.1 million and $205.5 million for the same periods in 2015. The decreases were primarily due to lower pretax income.

The Company’s ratio of earnings to fixed charges was 2.27 to 1 for the third quarter of 2016, compared with 3.46 to 1 for the third quarter of 2015. The Company’s ratio of earnings to fixed charges was 2.29 to 1 for the first nine months of 2016, compared with 3.47 to 1 for the first nine months of 2015. “Earnings” consist of income before income taxes, the cumulative effect of changes in accounting and fixed charges excluding unamortized capitalized interest. “Fixed charges” consist of interest on indebtedness, amortization of debt discount and expense, interest related to uncertain tax positions, an estimated amount of rental expense that is deemed to be representative of the interest factor, and capitalized interest.

32


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

July 31

 

 

 

 

 

 

 

 

2016

 

2015

 

$ Change

 

% Change

 

Retail notes:

    

 

    

    

 

    

    

 

    

    

    

 

Agriculture and turf

 

$

1,601.3

 

$

1,684.4

 

$

(83.1)

 

(5)

Construction and forestry

 

 

315.2

 

 

360.7

 

 

(45.5)

 

(13)

 

Total retail notes

 

 

1,916.5

 

 

2,045.1

 

 

(128.6)

 

(6)

 

Revolving charge accounts

 

 

1,398.8

 

 

1,399.9

 

 

(1.1)

 

 

 

Financing leases

 

 

122.4

 

 

81.4

 

 

41.0

 

50

 

Equipment on operating leases

 

 

553.8

 

 

580.7

 

 

(26.9)

 

(5)

 

Total Receivables and Leases (excluding wholesale)

 

$

3,991.5

 

$

4,107.1

 

$

(115.6)

 

(3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

 

July 31

 

 

 

 

 

 

 

 

2016

 

2015

 

$ Change

 

% Change

 

Retail notes:

    

 

    

    

 

    

    

 

    

    

    

 

Agriculture and turf

 

$

4,510.9

 

$

5,162.2

 

$

(651.3)

 

(13)

Construction and forestry

 

 

994.4

 

 

1,074.7

 

 

(80.3)

 

(7)

 

Total retail notes

 

 

5,505.3

 

 

6,236.9

 

 

(731.6)

 

(12)

 

Revolving charge accounts

 

 

4,424.2

 

 

4,269.2

 

 

155.0

 

4

 

Financing leases

 

 

241.5

 

 

203.7

 

 

37.8

 

19

 

Equipment on operating leases

 

 

1,821.3

 

 

1,468.7

 

 

352.6

 

24

 

Total Receivables and Leases (excluding wholesale)

 

$

11,992.3

 

$

12,178.5

 

$

(186.2)

 

(2)

%  

Retail note volumes decreased in the third quarter and first nine months of 2016, compared to last year, primarily due to decreases in retail sales of John Deere equipment. Equipment on operating lease volumes increased during the first nine months of 2016, compared to last year, primarily due to increased rentals of John Deere equipment.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

    

July 31

    

October 31

    

July 31

 

 

 

2016

 

2015

 

2015

 

Retail notes:

 

 

 

 

 

 

 

 

 

 

Agriculture and turf

 

$

15,002.0

 

$

16,194.9

 

$

16,128.9

 

Construction and forestry

 

 

2,489.6

 

 

2,464.1

 

 

2,426.0

 

Total retail notes

 

 

17,491.6

 

 

18,659.0

 

 

18,554.9

 

Revolving charge accounts

 

 

2,937.3

 

 

2,680.8

 

 

2,618.4

 

Wholesale receivables

 

 

7,866.9

 

 

7,185.5

 

 

8,660.5

 

Financing leases

 

 

577.6

 

 

567.1

 

 

538.9

 

Equipment on operating leases

 

 

4,167.7

 

 

3,609.8

 

 

3,136.9

 

Total Receivables and Leases

 

$

33,041.1

 

$

32,702.2

 

$

33,509.6

 

 

33


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

    

July 31

    

October 31

    

July 31

 

 

 

2016

 

2015

 

2015

 

Receivables and Leases administered:

 

 

 

 

 

 

 

 

 

 

Owned by the Company

 

$

27,079.7

 

$

27,853.8

 

$

28,758.6

 

Owned by the Company – restricted due to securitization

 

 

5,961.4

 

 

4,848.4

 

 

4,751.0

 

Total Receivables and Leases owned by the Company

 

 

33,041.1

 

 

32,702.2

 

 

33,509.6

 

Administered – with limited recourse *

 

 

 

 

 

 

 

 

.6

 

Administered – without recourse **

 

 

 

 

 

.2

 

 

.3

 

Total Receivables and Leases administered

 

$

33,041.1

 

$

32,702.4

 

$

33,510.5

 

*    The Company’s maximum exposure under all Receivable and Lease recourse provisions at July 31, 2016 and October 31, 2015 was none and at July 31, 2015 was not material.

**  Represents Receivables and Leases that the Company has sold but continues to administer for a fee.

Total Receivable amounts 30 days or more past due and still accruing finance income were $435.6 million, $346.1 million and $311.9 million at July 31, 2016, October 31, 2015 and July 31, 2015, respectively. These past due amounts represented 1.51 percent, 1.19 percent and 1.03 percent of the Receivables financed at July 31, 2016, October 31, 2015 and July 31, 2015, respectively. Total non-performing Receivables, which represent loans for which the Company has ceased accruing finance income, were $120.2 million, $86.5 million and $80.0 million at July 31, 2016, October 31, 2015 and July 31, 2015, respectively. The total non-performing Receivables as a percentage of the ending Receivables balance was .42 percent, .30 percent and .26 percent at July 31, 2016, October 31, 2015 and July 31, 2015, respectively. An allowance for credit losses was recorded for the estimated uncollectible amount. See Note 4 to the interim consolidated financial statements for additional information.

Total Receivable write-offs and recoveries, by product, and as an annualized percentage of average balances held during the period, were as follows (in millions of dollars):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

July 31, 2016

 

July 31, 2015

 

 

 

Dollars

 

Percent

 

Dollars

 

Percent

 

Write-offs:

    

 

    

    

    

    

 

    

    

    

 

Retail notes:

 

 

 

 

 

 

 

 

 

 

 

Agriculture and turf

 

$

(1.9)

 

(.04)

%  

$

(3.4)

 

(.08)

%  

Construction and forestry

 

 

(5.3)

 

(.86)

 

 

(3.0)

 

(.50)

 

Total retail notes

 

 

(7.2)

 

(.16)

 

 

(6.4)

 

(.14)

 

Revolving charge accounts

 

 

(27.4)

 

(3.94)

 

 

(18.2)

 

(2.91)

 

Wholesale receivables

 

 

(.1)

 

(.01)

 

 

(.1)

 

 

 

Financing leases

 

 

(.8)

 

(.57)

 

 

(.6)

 

(.45)

 

Total write-offs

 

 

(35.5)

 

(.49)

 

 

(25.3)

 

(.34)

 

Recoveries:

 

 

 

 

 

 

 

 

 

 

 

Retail notes:

 

 

 

 

 

 

 

 

 

 

 

Agriculture and turf

 

 

.9

 

.02

 

 

1.7

 

.04

 

Construction and forestry

 

 

.5

 

.07

 

 

.4

 

.06

 

Total retail notes

 

 

1.4

 

.03

 

 

2.1

 

.04

 

Revolving charge accounts

 

 

5.4

 

.77

 

 

4.6

 

.74

 

Wholesale receivables

 

 

.1

 

.01

 

 

.1

 

 

 

Financing leases

 

 

.1

 

.07

 

 

 

 

 

 

Total recoveries

 

 

7.0

 

.09

 

 

6.8

 

.09

 

Total net write-offs

 

$

(28.5)

 

(.40)

%  

$

(18.5)

 

(.25)

%  

34


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

Nine Months Ended

 

 

 

July 31, 2016

 

July 31, 2015

 

 

 

Dollars

 

Percent

 

Dollars

 

Percent

 

Write-offs:

    

 

    

    

    

    

 

    

    

    

 

Retail notes:

 

 

 

 

 

 

 

 

 

 

 

Agriculture and turf

 

$

(6.9)

 

(.06)

%  

$

(7.1)

 

(.06)

Construction and forestry

 

 

(15.4)

 

(.83)

 

 

(6.7)

 

(.38)

 

Total retail notes

 

 

(22.3)

 

(.16)

 

 

(13.8)

 

(.10)

 

Revolving charge accounts

 

 

(48.4)

 

(2.66)

 

 

(33.0)

 

(2.02)

 

Wholesale receivables

 

 

(.1)

 

 

 

 

(.3)

 

 

 

Financing leases

 

 

(1.9)

 

(.47)

 

 

(1.1)

 

(.27)

 

Total write-offs

 

 

(72.7)

 

(.34)

 

 

(48.2)

 

(.22)

 

Recoveries:

 

 

 

 

 

 

 

 

 

 

 

Retail notes:

 

 

 

 

 

 

 

 

 

 

 

Agriculture and turf

 

 

3.0

 

.03

 

 

3.7

 

.03

 

Construction and forestry

 

 

1.4

 

.07

 

 

1.4

 

.08

 

Total retail notes

 

 

4.4

 

.03

 

 

5.1

 

.04

 

Revolving charge accounts

 

 

14.4

 

.79

 

 

11.9

 

.73

 

Wholesale receivables

 

 

.1

 

 

 

 

.5

 

.01

 

Financing leases

 

 

.3

 

.08

 

 

 

 

 

 

Total recoveries

 

 

19.2

 

.09

 

 

17.5

 

.08

 

Total net write-offs

 

$

(53.5)

 

(.25)

%  

$

(30.7)

 

(.14)

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 $203.9 million at July 31, 2016, compared with $151.9 million at October 31, 2015 and $148.7 million at July 31, 2015.

The Company’s allowance for credit losses on all Receivables financed totaled $113.3 million at July 31, 2016, $109.8 million at October 31, 2015 and $109.8 million at July 31, 2015. The allowance for credit losses represented .39 percent of the total Receivables financed at July 31, 2016, .38 percent at October 31, 2015 and .36 percent at July 31, 2015. The allowance is subject to an ongoing evaluation based on many quantitative and qualitative factors, including historical loss experience by product category, portfolio duration, delinquency trends, economic conditions and credit risk quality. The Company believes its allowance is sufficient to provide for losses in its existing Receivable portfolio.

Safe Harbor Statement

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: Statements under “Overview” and other forward-looking statements herein that relate to future events, expectations, trends and operating periods involve certain factors that are subject to change, and important risks and uncertainties that could cause actual results to differ materially.

35


 

Factors that could materially affect the Company’s operations, access to capital, expenses and results include changes in and the impact of governmental trade, banking, monetary and fiscal policies, including financial regulatory reform and its effects on the consumer finance industry, derivatives, funding costs and other areas; actions by the U.S. Federal Reserve Board and other central banks; actions by the U.S. Securities and Exchange Commission (SEC) and other financial regulators; changes to accounting standards; changes in tax rates, estimates, and regulations and Company actions related thereto; compliance with U.S. and foreign laws when expanding to new markets and otherwise; and actions by other regulatory bodies including changes in laws and regulations affecting the sectors in which the Company operates. The Company’s business is affected by general economic conditions in the global markets in which the Company operates because deteriorating economic conditions and political instability can result in decreased customer confidence, lower demand for equipment, higher credit losses and greater currency risk. The Company’s business is also affected by actions of banks, financing and leasing companies and other lenders that compete with the Company for customers; capital market disruptions; significant changes in capital market liquidity and associated funding costs; interest rates and foreign currency exchange rates and their volatility. Trade, financial and other sanctions imposed by the U.S., the European Union, Russia and other countries could negatively impact Company assets, operations, revenues, forecasts and results.

Customer and Company operations and results could be affected by changes in weather patterns; the political and social stability of the global markets in which the Company operates; the effects of, or response to, terrorism and security threats; wars and other conflicts and the threat thereof and the response thereto; natural disasters; and the spread of major epidemics.

Significant changes in market liquidity conditions and any failure to comply with financial covenants in credit agreements could impact access to funding and funding costs, which could reduce the Company’s earnings and cash flows. Financial market conditions could also negatively impact customer access to capital for purchases of John Deere’s products and customer confidence and purchase decisions; borrowing and repayment practices; and the number and size of customer loan delinquencies and defaults. A debt crisis, in Europe or elsewhere, could negatively impact currencies, global financial markets, social and political stability, funding sources and costs, asset and obligation values, customers, and Company operations and results. Security breaches and other disruptions to the Company’s information technology infrastructure also could materially affect results. The Company’s operations could be impaired by changes in the equity, bond and other financial markets, which would negatively affect earnings.

 The potential withdrawal of the United Kingdom from the European Union and the perceptions as to the impact of the withdrawal may adversely affect business activity, political stability and economic conditions in the United Kingdom, the European Union and elsewhere. The economic conditions and outlook could be further adversely affected by (i) the uncertainty concerning the timing and terms of the exit, (ii) new or modified trading arrangements between the United Kingdom and other countries, (iii) the risk that one or more other European Union countries could come under increasing pressure to leave the European Union, or (iv) the risk that the euro as the single currency of the Eurozone could cease to exist. Any of these developments, or the perception that any of these developments are likely to occur, could affect economic growth or business activity in the United Kingdom or the European Union, and could result in the relocation of businesses, cause business interruptions, lead to economic recession or depression, and impact the stability of the financial markets, availability of credit, currency exchange rates, interest rates, financial institutions, and political, financial and monetary systems. Any of these developments could affect our businesses, liquidity, results of operations and financial position.

The liquidity and ongoing profitability of the Company depend largely on timely access to capital in order to meet future cash flow requirements, to fund operations and costs associated with engaging in diversified funding activities, and to fund purchases of John Deere’s products. If general economic conditions deteriorate or capital markets become more volatile, funding could be unavailable or insufficient. Additionally, customer confidence levels may result in declines in credit applications and increases in delinquencies and default rates, which could materially impact the Company’s write-offs and provision for credit losses.

36


 

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-K and Form 10-Q (including, but not limited to, the factors discussed in Item 1A. Risk Factors of the Form 10-K and quarterly report on Form 10-Q) and other Deere & Company and Capital Corporation filings with the SEC.  

Critical Accounting Policies

See the Company’s critical accounting policies discussed in the Management’s Discussion and Analysis of the most recent annual report filed on Form 10-K. There have been no material changes to these policies.

Capital Resources and Liquidity

For additional information on the Company's dependence on and relationships with Deere & Company, see the Company's most recently filed annual report on Form 10-K.

During the first nine months of 2016, the aggregate net cash provided by operating activities was used primarily to fund Receivables and Leases. Net cash provided by operating activities was $1,120.0 million in the first nine months of 2016. Net cash used for investing activities totaled $1,107.1 million in the first nine months of 2016, primarily due to an increase in wholesale receivables of $695.4 million and the cost of equipment on operating leases exceeding proceeds from sales of equipment on operating leases by $1,242.7 million, partially offset by the collections of Receivables (excluding wholesale) exceeding the cost of Receivables (excluding wholesale) by $801.1 million. Net cash used for financing activities totaled $95.6 million in the first nine months of 2016, resulting primarily from dividends paid of $335.0 million and a net decrease in total external borrowings of $304.5 million, partially offset by an increase in payables to John Deere of $567.1 million. Cash and cash equivalents decreased $80.0 million during the first nine months of 2016.

During the first nine months of 2015, the aggregate net cash provided by operating and financing activities was used primarily to increase wholesale receivables and leases. Net cash provided by operating activities was $930.8 million in the first nine months of 2015. Net cash provided by financing activities totaled $613.3 million in the first nine months of 2015, resulting primarily from a net increase in total external borrowings of $1,240.7 million, partially offset by a decrease in payables to John Deere of $325.7 million and dividends paid of $285.0 million. Net cash used for investing activities totaled $1,505.9 million in the first nine months of 2015, primarily due to an increase in wholesale receivables of $987.9 million and the cost of equipment on operating leases exceeding the proceeds from sales of equipment on operating leases by $1,014.1 million. These factors were partially offset by the collections of Receivables (excluding wholesale) exceeding the cost of Receivables (excluding wholesale) by $511.6 million. Cash and cash equivalents increased $30.9 million during the first nine months of 2015.

The Company relies on its ability to raise substantial amounts of funds to finance its Receivable and Lease portfolios. The Company has access to most global markets at a reasonable cost and expects to have sufficient sources of global funding and liquidity to meet its funding needs. The Company’s ability to meet its debt obligations is supported in a number of ways. The assets of the Company are self-liquidating in nature. A solid equity position is available to absorb unusual losses on these assets and all commercial paper is backed by unsecured, committed borrowing lines from various banks. Liquidity is also provided by the Company’s ability to securitize these assets and through the issuance of term debt. Additionally, liquidity may be provided through loans from John Deere. The Company’s commercial paper outstanding at July 31, 2016, October 31, 2015 and July 31, 2015 was $749.9 million, $2,335.7 million and $3,567.7 million, respectively, while the total cash and cash equivalents position was $1,083.7 million, $1,163.7 million and $1,090.3 million, respectively. The amount of this total cash and cash equivalents held by foreign subsidiaries, in which earnings are considered indefinitely reinvested, was approximately $80.7 million, $110.1 million and $39.6 million at July 31, 2016, October 31, 2015 and July 31, 2015, respectively.

37


 

Capital Corporation has a revolving credit agreement to utilize bank conduit facilities to securitize retail notes (see Note 5). At July 31, 2016, this facility had a total capacity, or “financing limit,” of $3,880.0 million of secured financings at any time. After a three-year revolving period, unless the banks and Capital Corporation agree to renew, Capital Corporation would liquidate the secured borrowings over time as payments on the retail notes are collected. At July 31, 2016, $2,630.8 million of short-term securitization borrowings was outstanding under the agreement. 

During the first nine months of 2016, the Company issued $3,326.2 million and retired $3,201.2 million of long-term borrowings, which were primarily medium-term notes. During the first nine months of 2016, the Company also issued $3,186.5 million and retired $2,047.8 million of retail note securitization borrowings and maintained an average commercial paper balance of $1,839.9 million. At July 31, 2016, the Company’s funding profile included $798.2 million of commercial paper and other notes payable, $5,728.9 million of securitization borrowings, $1,679.1 million of loans from John Deere, $21,712.4 million of unsecured term debt, and $3,660.3 million of equity capital. The Company’s funding profile may be altered to reflect such factors as relative costs of funding sources, assets available for securitizations and capital market accessibility.

Total interest-bearing indebtedness amounted to $29,918.6 million at July 31, 2016, compared with $29,503.0 million at October 31, 2015, and $30,226.7 million at July 31, 2015. Total short-term indebtedness amounted to $12,971.4 million at July 31, 2016, compared with $12,522.5 million at October 31, 2015, and $13,567.7 million at July 31, 2015. Total long-term indebtedness amounted to $16,947.2 million at July 31, 2016, compared with $16,980.5 million at October 31, 2015, and $16,659.0 million at July 31, 2015. The ratio of total interest-bearing debt, including securitization indebtedness, to stockholder’s equity was 8.2 to 1 at July 31, 2016, compared with 7.9 to 1 at October 31, 2015 and 7.9 to 1 at July 31, 2015.

Stockholder’s equity was $3,660.3 million at July 31, 2016, compared with $3,749.8 million at October 31, 2015 and $3,835.1 million at July 31, 2015. The decrease in the first nine months of 2016 was primarily due to dividend payments of $335.0 million and a change in the cumulative translation adjustment of $15.3 million, partially offset by net income attributable to the Company of $259.9 million.

Lines of Credit

The Company has access to bank lines of credit with various banks throughout the world. Some of the lines are available to both the Company and Deere & Company. Worldwide lines of credit totaled $7,048.3 million at July 31, 2016, $5,350.3 million of which were unused. For the purpose of computing unused credit lines, commercial paper and short-term bank borrowings, excluding secured borrowings and the current portion of long-term borrowings, of the Company and Deere & Company were primarily considered to constitute utilization. Included in the credit lines at July 31, 2016 were long-term credit facility agreements of $2,900.0 million expiring in April 2020, and $2,900.0 million expiring in April 2021. These credit agreements require the Company to maintain its consolidated ratio of earnings to fixed charges at not less than 1.05 to 1 for each fiscal quarter and its ratio of senior debt, excluding securitization indebtedness, to capital base (total subordinated debt and stockholder’s equity excluding accumulated other comprehensive income (loss)) at not more than 11 to 1 at the end of any fiscal quarter. All of these requirements of the credit agreements have been met during the periods included in the consolidated financial statements.

Debt Ratings

The Company's ability to obtain funding is affected by its debt ratings, which are closely related to the outlook for and the financial condition of John Deere, and the nature and availability of support facilities, such as its lines of credit and the support agreement from Deere & Company.

To access public debt capital markets, the Company relies on credit rating agencies to assign short-term and long-term credit ratings to the Company’s securities as an indicator of credit quality for fixed income investors. A credit rating agency may change or withdraw Company ratings based on its assessment of the Company’s current and future ability to meet interest and principal repayment obligations. Each agency’s rating should be evaluated independently of any other rating. Lower credit ratings generally result in higher borrowing costs, including costs of derivative transactions, and reduced access to debt capital markets.

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On August 15, 2016, Moody's Investors Service, Inc. changed the outlook of Deere & Company and Capital Corporation and their supported subsidiaries to negative from stable, but affirmed their A2 long-term and Prime-1 short-term ratings. The senior long-term and short-term debt ratings and outlook currently assigned to unsecured Company debt securities by the rating agencies engaged by the Company are the same as those for John Deere. Those ratings are as follows:

 

 

 

 

 

 

 

 

 

 

    

Senior Long-Term

    

Short-Term

    

Outlook

 

Moody’s Investors Service, Inc.

 

A2

 

Prime-1

 

Negative

 

Standard & Poor’s

 

A

 

A-1

 

Stable

 

Dividends and Other Events

Capital Corporation declared and paid cash dividends to John Deere Financial Services, Inc. (JDFS) of $335.0 million and $285.0 million in the first nine months of 2016 and 2015, respectively. In each case, JDFS paid comparable dividends to Deere & Company.

On September 1, 2016, Capital Corporation declared a $150.0 million dividend to be paid to JDFS on September 13, 2016. JDFS, in turn, declared a $150.0 million dividend to Deere & Company, also payable on September 13, 2016.

Item 3.     Quantitative and Qualitative Disclosures About Market Risk.

See the Company’s most recent annual report filed on Form 10-K (Part II, Item 7A). There has been no material change in this information.

Item 4.     Controls and Procedures.

The Company’s principal executive officer and its principal financial officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (Act)) were effective as of July 31, 2016, based on the evaluation of these controls and procedures required by Rule 13a-15(b) or 15d-15(b) of the Act. During the third quarter, there were no changes that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

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PART II.  OTHER INFORMATION

Item 1.     Legal Proceedings.

See Note 6 to the Interim Financial Statements.

Item 1A.  Risk Factors.

See the Company's most recent annual report on Form 10-K (Part I, Item 1A). There has been no material change in this information. The risks described in the annual report on Form 10-K and the “Safe Harbor Statement” in this report are not the only risks faced by the Company.

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds.

Omitted pursuant to instruction H.

Item 3.     Defaults Upon Senior Securities.

Omitted pursuant to instruction H.

Item 4.     Mine Safety Disclosures.

Not applicable.

Item 5.     Other Information.

None.

Item 6.     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 SEC.

 

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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:

September 1, 2016

 

By:

/s/ Rajesh Kalathur

 

 

Rajesh Kalathur

 

 

Senior Vice President and

 

 

Principal Financial Officer

 

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INDEX TO EXHIBITS

Exhibit

 

 

 

 

 

3.1

Certificate of Incorporation, as amended (Exhibit 3.1 to Form 10-K of the registrant for the year ended October 31, 1999, Securities and Exchange Commission file number 1-6458*)

 

 

3.2

Bylaws, as amended (Exhibit 3.2 to Form 10-K of the registrant for the year ended October 31, 1999, Securities and Exchange Commission file number 1-6458*)

 

 

12

Computation of Ratio of Earnings to Fixed Charges

 

 

31.1

Rule 13a-14(a)/15d-14(a) Certification

 

 

31.2

Rule 13a-14(a)/15d-14(a) Certification

 

 

32

Section 1350 Certifications

 

 

99

Part I of Deere & Company Form 10-Q for the quarter ended July 31, 2016  (Securities and Exchange Commission file number 1-4121*)

 

 

101

Interactive Data File

*     Incorporated by reference.  Copies of these exhibits are available from the Company upon request. 

42