** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

** **

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** **

# **FORM 10-Q**

 

 

**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**

**SECURITIESEXCHANGE ACT OF 1934**

 

**For the quarterly period ended January 31,2006**

 

**Commission file no: 1-6458**

 

 

## **JOHN DEERE CAPITAL CORPORATION**

 

| **Delaware**             | ** ** | **36-2386361**                    |
|--------------------------|------------|-----------------------------------|
| (State of Incorporation) |       | (IRS Employer Identification No.) |

 

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

 

TelephoneNumber:  **(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 theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter 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  ý     No  o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer. See definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of the ExchangeAct.

 

Largeaccelerated filer  o         Accelerated filer  o         Non-accelerated filer  ý

 

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

Yes  o     No  ý

 

At January 31, 2006, 2,500 shares of common stock, without par value,of the registrant were outstanding, all of which were owned by John DeereCredit Company, a wholly-owned subsidiary of Deere & Company.

 

The registrant meets the conditions set forth in General InstructionH(1)(a) and (b) of Form 10-Q and is therefore filing this Form with certainreduced disclosures as permitted by those instructions.

 

 

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PART I.  FINANCIAL INFORMATION

 

Item 1.     Financial Statements.

 

**John Deere Capital Corporation andSubsidiaries**

**Statements of Consolidated Income andRetained Earnings**

**For the Three Months Ended January 31, 2006and 2005**

**(Unaudited)**

(in millions)

 

 
| ** **                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|
| **Revenues**                                          |       |     |       |     |       |
| Finance income earned on retail notes                 |       | $        | 160.0      |     | $          | 112.7 |   |
| Lease revenues                                        |       | 66.6     |       | 63.6     |       |
| Revolving charge account income                       |       | 45.7     |       | 41.1     |       |
| Finance income earned on wholesale  receivables       |       | 72.7     |       | 60.4     |       |
| Operating loan income                                 |       | 7.1      |       | 5.3      |       |
| Securitization and servicing fee income               |       | 8.2      |       | 11.2     |       |
| Net gain (loss) on receivables sold                   |       | (.1      | )          | 3.9      |       |
| Other income                                          |       | 14.4     |       | 7.5      |       |
| Total revenues                                        |       | 374.6    |       | 305.7    |       |
| **Expenses**                                          |       |     |       |     |       |
| Interest expense                                      |       | 154.3    |       | 92.6     |       |
| Operating expenses:                                   |       |     |       |     |       |
| Administrative and operating expenses                 |       | 56.6     |       | 54.1     |       |
| Provision (credit) for credit losses                  |       | 2.2      |       | (1.8     | )          |
| Fees paid to John Deere                               |       | 9.7      |       | 13.9     |       |
| Depreciation of equipment on operating  leases        |       | 44.4     |       | 42.2     |       |
| Total operating expenses                              |       | 112.9    |       | 108.4    |       |
| Total expenses                                        |       | 267.2    |       | 201.0    |       |
| **Income  of consolidated group before income taxes** |       | 107.4    |       | 104.7    |       |
| **Provision  for income taxes**                       |       | 37.4     |       | 36.7     |       |
| **Income  of consolidated group**                     |       | 70.0     |       | 68.0     |       |
| **Equity  in income of unconsolidated affiliates**    |       | .1       |       | .2       |       |
| **Net  income**                                       |       | 70.1     |       | 68.2     |       |
| **Cash  dividends paid**                              |       |     |       | (85.0    | )     |
| **Retained  earnings at beginning of period**         |       | 1,094.7  |       | 970.0    |       |
| **Retained  earnings at end of period**               |       | $        | 1,164.8    |     | $          | 953.2 |   |

 

See Notes to Interim Financial Statements.

 

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## **John Deere Capital Corporation and Subsidiaries**

**Consolidated Balance Sheets**

**(Unaudited)**

(in millions)

 
| ** **                                                                                                       | ** ** | **January 31,** | ** ** | **October 31,** | ** ** | **January 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|
| ** **                                                                                                       | ** ** | **2006**        | ** ** | **2005**        | ** ** | **2005**        | ** ** |
| **Assets**                                                                                                       |       |            |       |            |       |            |       |
| Cash and cash equivalents                                                                                        |       | $               | 148.1      |            | $          | 250.2           |       | $ | 270.7 |   |
| Receivables:                                                                                                     |       |            |       |            |       |            |       |
| Retail notes                                                                                                     |       | 7,948.6         |       | 7,893.5         |       | 7,361.8         |       |
| Restricted securitized retail notes                                                                              |       | 1,458.6         |       | 1,340.1         |       |            |       |
| Revolving charge accounts                                                                                        |       | 1,193.4         |       | 1,527.5         |       | 1,154.9         |       |
| Operating loans                                                                                                  |       | 364.3           |       | 384.4           |       | 356.9           |       |
| Wholesale receivables                                                                                            |       | 3,730.6         |       | 3,651.2         |       | 3,486.0         |       |
| Financing leases                                                                                                 |       | 397.4           |       | 411.7           |       | 397.1           |       |
| Total receivables                                                                                                |       | 15,092.9        |       | 15,208.4        |       | 12,756.7        |       |
| Allowance for credit losses                                                                                      |       | (94.1           | )          | (96.4           | )          | (107.4          | )          |
| Total receivables — net                                                                                     |       | 14,998.8        |       | 15,112.0        |       | 12,649.3        |       |
| Other receivables                                                                                                |       | 119.6           |       | 118.4           |       | 89.4            |       |
| Equipment on operating leases — net                                                                         |       | 782.3           |       | 793.9           |       | 740.4           |       |
| Investment in unconsolidated affiliates                                                                          |       | 6.0             |       | 4.1             |       | 4.2             |       |
| Other assets                                                                                                     |       | 425.9           |       | 288.8           |       | 273.5           |       |
| **Total  Assets**                                                                                                |       | $               | 16,480.7   |            | $          | 16,567.4        |       | $ | 14,027.5 |   |
| **Liabilities  and Stockholder’s Equity**                                                                   |       |            |       |            |       |            |       |
| Short-term borrowings:                                                                                           |       |            |       |            |       |            |       |
| Commercial paper                                                                                                 |       | $               | 1,675.0    |            | $          | 1,696.0         |       | $ | 1,586.7 |   |
| Other notes payable                                                                                              |       | 1,546.6         |       | 1,364.8         |       | 13.1            |       |
| John Deere                                                                                                       |       | .3              |       | 275.0           |       | 1,156.2         |       |
| Current maturities of long-term borrowings                                                                       |       | 2,098.4         |       | 2,431.6         |       | 1,586.2         |       |
| Total short-term borrowings                                                                                      |       | 5,320.3         |       | 5,767.4         |       | 4,342.2         |       |
| Accounts payable and accrued expenses                                                                            |       | 497.5           |       | 503.3           |       | 423.9           |       |
| Deposits withheld from dealers and  merchants                                                                    |       | 166.7           |       | 166.0           |       | 165.9           |       |
| Long-term borrowings                                                                                             |       | 8,483.4         |       | 8,190.7         |       | 7,293.9         |       |
| Total liabilities                                                                                                |       | 14,467.9        |       | 14,627.4        |       | 12,225.9        |       |
| Stockholder’s equity:                                                                                       |       |            |       |            |       |            |       |
| Common stock, without par value (issued and  outstanding — 2,500 shares owned by John Deere Credit Company) |       | 812.8           |       | 812.8           |       | 812.8           |       |
| Retained earnings                                                                                                |       | 1,164.8         |       | 1,094.7         |       | 953.2           |       |
| Cumulative translation adjustment                                                                                |       | 19.4            |       | 18.4            |       | 28.8            |       |
| Unrealized gain on derivatives                                                                                   |       | 7.4             |       | 7.3             |       | 1.5             |       |
| Unrealized gain on investments                                                                                   |       | 8.4             |       | 6.8             |       | 5.3             |       |
| Total accumulated other comprehensive  income                                                                    |       | 35.2            |       | 32.5            |       | 35.6            |       |
| Total stockholder’s equity                                                                                  |       | 2,012.8         |       | 1,940.0         |       | 1,801.6         |       |
| **Total  Liabilities and Stockholder’s Equity**                                                             |       | $               | 16,480.7   |            | $          | 16,567.4        |       | $ | 14,027.5 |   |

 

See Notes to Interim Financial Statements.

 

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## **John Deere Capital Corporation and Subsidiaries**

**Statements of Consolidated Cash Flows**

**For the Three Months Ended January 31, 2006and 2005**

**(Unaudited)**

(in millions)

 
| ** **                                                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Cash  Flows from Operating Activities:**                                         |       |     |       |     |       |
| Net income                                                                         |       | $        | 70.1       |     | $          | 68.2 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |     |       |     |       |
| Provision (credit) for credit losses                                               |       | 2.2      |       | (1.8     | )          |
| Provision for depreciation and amortization                                        |       | 45.4     |       | 43.6     |       |
| Credit for deferred income taxes                                                   |       | (1.8     | )          | (6.3     | )          |
| Undistributed earnings of unconsolidated  affiliates                               |       | (.1      | )          | (.2      | )          |
| Other                                                                              |       | (44.9    | )          | (27.5    | )          |
| Net cash provided by operating activities                                          |       | 70.9     |       | 76.0     |       |
|                                                                               |       |     |       |     |       |
| **Cash  Flows from Investing Activities:**                                         |       |     |       |     |       |
| Cost of receivables acquired                                                       |       | (6,138.1 | )          | (5,490.2 | )          |
| Collections of receivables                                                         |       | 6,251.3  |       | 5,351.4  |       |
| Cost of operating leases acquired                                                  |       | (82.7    | )          | (78.2    | )          |
| Proceeds from sales of equipment on  operating leases                              |       | 44.7     |       | 56.0     |       |
| Proceeds from sales of receivables                                                 |       | 17.8     |       | 57.9     |       |
| Purchase of property and equipment                                                 |       | (32.3    | )          | (.4      | )          |
| Other                                                                              |       | (70.6    | )          | 9.8      |       |
| Net cash used for investing activities                                             |       | (9.9     | )          | (93.7    | )          |
|                                                                               |       |     |       |     |       |
| **Cash  Flows from Financing Activities:**                                         |       |     |       |     |       |
| Increase (decrease) in commercial paper                                            |       | (28.0    | )          | 15.5     |       |
| Increase in other notes payable                                                    |       | 181.8    |       | 4.0      |       |
| Decrease in payable with John Deere                                                |       | (274.7   | )          | (85.0    | )          |
| Proceeds from issuance of long-term  borrowings                                    |       | 354.7    |       | 253.5    |       |
| Principal payments on long-term borrowings                                         |       | (393.5   | )          | (23.8    | )          |
| Dividends paid                                                                     |       |     |       | (85.0    | )          |
| Net cash provided by (used for) financing  activities                              |       | (159.7   | )          | 79.2     |       |
|                                                                               |       |     |       |     |       |
| **Effect  of exchange rate changes on cash**                                       |       | (3.4     | )          | (.3      | )          |
| **Net  increase (decrease) in cash and cash equivalents**                          |       | (102.1   | )          | 61.2     |       |
| **Cash and  cash equivalents at beginning of period**                              |       | 250.2    |       | 209.5    |       |
| **Cash and  cash equivalents at end of period**                                    |       | $        | 148.1      |     | $          | 270.7 |   |

 

See Notes to Interim Financial Statements.

 

4

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# **JohnDeere Capital Corporation and Subsidiaries**

**Notes toInterim Financial Statements**

**(Unaudited)**

** **

(1)                                                                                  Theconsolidated financial statements of John Deere Capital Corporation (CapitalCorporation) and its subsidiaries (collectively called the Company) have beenprepared by the Company, without audit, pursuant to the rules and regulationsof the U.S. Securities and Exchange Commission. Certain information andfootnote disclosures normally included in annual financial statements preparedin accordance with accounting principles generally accepted in the U.S. havebeen condensed or omitted as permitted by such rules and regulations. Alladjustments, consisting of normal recurring adjustments, have been included.Management believes that the disclosures are adequate to present fairly thefinancial position, results of operations and cash flows at the dates and forthe periods presented. It is suggested that these interim financial statementsbe read in conjunction with the financial statements and the notes theretoincluded in the Company’s latest annual report on Form 10-K. Resultsfor interim periods are not necessarily indicative of those to be expected forthe year.

 

The preparation of financial statements in conformitywith accounting principles generally accepted in the U.S. requires managementto make estimates and assumptions that affect the reported amounts and relateddisclosures. Actual results could differ from those estimates.

 

Certain amounts for prior years have been reclassifiedto conform with 2006 financial statement presentations.  

 

(2)                                                                                  TheCompany provides and administers financing for retail purchases of newequipment manufactured by Deere & Company’s agricultural equipment,commercial and consumer equipment, and construction and forestry divisions andused equipment taken in trade for this equipment. The Company purchases retailinstallment sales and loan contracts (retail notes) from Deere & Companyand its wholly-owned subsidiaries (collectively called John Deere). John Deereacquires these retail notes through John Deere retail dealers. The Company alsopurchases and finances a limited amount of non-Deere retail notes and continuesto service a small portfolio of recreational products and other retail notes.In addition, the Company leases John Deere equipment and a limited amount ofnon-Deere equipment to retail customers (financing and operating leases). TheCompany also finances and services revolving charge accounts, in most casesacquired from and offered through merchants in the agricultural, commercial andconsumer, and construction and forestry markets (revolving charge accounts).Further, the Company finances and services operating loans, in most casesoffered through and acquired from farm input providers or through directrelationships with agricultural producers (operating loans). The Company alsoprovides wholesale financing for inventories of John Deere engines and JohnDeere agricultural, commercial and consumer and construction and forestryequipment owned by dealers of those products (wholesale receivables). TheCompany also offers insured international export financing to select customerswhich generally involves John Deere products and offers certain crop riskmitigation products in the U.S. In addition, the Company invests in wind energydevelopment by making loans to certain affiliated companies that have directlyinvested in wind energy projects. Further, the Company has agreed to purchasecertain wind turbine equipment. This wind turbine equipment will be used inwind energy projects by the Company or by certain affiliated companies. Retailnotes, revolving charge accounts, operating loans, financing leases andwholesale receivables are collectively called “Receivables.” Receivables andoperating leases are collectively called “Receivables and Leases.”

 

(3)                                                                                  TheCompany’s ratio of earnings to fixed charges was 1.69 to 1 for the firstquarter of 2006, compared with 2.11 to 1 for the first quarter of 2005.“Earnings” consist of income before income taxes, the cumulative effect ofchanges in accounting and fixed charges. “Fixed charges” consist of interest onindebtedness, amortization of debt discount and expense, an estimated amount ofrental expense under capitalized leases that is deemed to be representative ofthe interest factor and rental expense under operating leases.

 

5

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(4)                                                                                  Comprehensiveincome, which includes all changes in the Company’s equity during the periodexcept transactions with the stockholder, was as follows in millions ofdollars:

 
| ** **                                      | ** ** | **Three Months Ended January 31,** | ** ** |
|-------------------------------------------------|------------|------------------------------------|------------|
| ** **                                      | ** ** | **2006**                           | ** ** | **2005** | ** ** |
| Net Income                                      |       | $                                  | 70.1       |   | $ | 68.2 |   |
|                                            |       |                               |       |   |   |
| Other  comprehensive income (loss), net of tax: |       |                               |       |   |   |
| Change in cumulative translation adjustment     |       | 1.0                                |       | 5.1 |   |
| Unrealized gain (loss) on investments           |       | 1.6                                |       | (.2 | ) |
| Unrealized gain on derivatives                  |       | .1                                 |       | 6.6 |   |
| Total  comprehensive income                     |       | $                                  | 72.8       |   | $ | 79.7 |   |

 

(5)                                                                                  Beginningin 2005, the Company’s new securitizations of receivables held by specialpurpose entities (SPEs) met the criteria for secured borrowings rather thansales of receivables under Financial Accounting Standards Board (FASB)Statement No. 140, Accounting for Transfers and Servicing of Financial Assetsand Extinguishments of Liabilities. The borrowings related to thesesecuritizations of retail notes are included in short-term borrowings on thebalance sheet as shown in the following table. The securitized retail notes arerecorded as “Restricted securitized retail notes” on the balance sheet. Inaddition to the restricted assets, the creditors of an unconsolidated SPEinvolved in secured borrowings and sales of receivables related to a $2 billionrevolving bank conduit facility have recourse to a reserve fund held by the SPEtotaling approximately $37 million as of January 31, 2006. A portion of theprevious transfers of retail notes to this facility qualified as sales ofreceivables. As a result, this reserve fund is also included in the maximumexposure to losses for receivables that have been sold, discussed below. 

 

The components of consolidated restricted assetsrelated to securitizations were as follows (in millions of dollars): 
| ** **                           | ** ** | **January 31,** | ** ** | **October 31,** | ** ** |
|--------------------------------------|------------|-----------------|------------|-----------------|------------|
| ** **                           | ** ** | **2006**        | ** ** | **2005**        | ** ** |
| Restricted  securitized retail notes |       | $               | 1,458.6    |            | $          | 1,340.1 |   |
| Allowance  for credit losses         |       | (7.2            | )          | (6.3            | )          |
| Other assets                         |       | 135.1           |       | 62.5            |       |
| Total restricted securitized assets  |       | $               | 1,586.5    |            | $          | 1,396.3 |   |

 

The components of consolidated secured liabilitiesrelated to securitizations were as follows (in millions of dollars): 
| ** **                                                  | ** ** | **January 31,** | ** ** | **October 31,** | ** ** |
|-------------------------------------------------------------|------------|-----------------|------------|-----------------|------------|
| ** **                                                  | ** ** | **2006**        | ** ** | **2005**        | ** ** |
| Other notes  payable                                        |       | $               | 1,535.8    |            | $          | 1,353.0 |   |
| Accounts  payable and accrued expenses                      |       | 2.2             |       | 2.1             |       |
| Total liabilities related to restricted  securitized assets |       | $               | 1,538.0    |            | $          | 1,355.1 |   |

 

A portion of the restricted retail notes totaling $880million at January 31, 2006 and $690 million at October 31, 2005 on the balancesheet were transferred to a SPE that is not consolidated since the Company isnot the primary beneficiary, however, the transfer qualified as a securedfinancing rather than a sale. The borrowings related to these restricted retailnotes included above are the obligations to this SPE that are payable as theretail notes are liquidated. The remaining restricted retail notes totaling$579 million at January 31, 2006 and $650 million at October 31, 2005 weretransferred to a SPE that has been consolidated since the Company is theprimary beneficiary. This SPE is not a qualified SPE under FASB Statement No.140 and, therefore, not exempt from consolidation. These restricted retailnotes are the primary assets of this consolidated SPE. The borrowings includedabove for the consolidated SPE are obligations to the creditors of the SPE thatare also payable as the retail notes are liquidated. SPEs utilized in securitizationsof retail notes differ from other entities included in the Company’sconsolidated statements because the assets they hold are legally isolated. Forbankruptcy analysis purposes, the Capital Corporation has sold the receivablesto the SPEs in a true sale and the SPEs are separate legal entities

 

6

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from the CapitalCorporation. Use of the assets held by the SPEs is restricted by terms of thegoverning documents. Repayment of the secured borrowings depends primarily oncash flows generated by the restricted assets and the reserve fund mentionedabove. At January 31, 2006, the maximum remaining term of the restrictedreceivables included in the restricted assets was approximately six years. 

 

The Company has guarantees for certain recourseobligations on Receivables that it has previously sold. If the Receivables soldare not collected, the Company would be required to cover those losses up tothe amount of its recourse obligation. At January 31, 2006, the maximum amountof exposure to losses under these agreements was $138 million. The estimatedrisk associated with the sold receivables totaled $6 million at January31, 2006. This risk of loss is recognized primarily in the retained interestson the Company’s balance sheet. The retained interests are related to assetsheld by unconsolidated SPEs. At January 31, 2006, the assets of these SPEsrelated to the Company’s securitization and sale of retail notes totaledapproximately $1,520 million. The Company may recover a portion of any requiredpayments incurred under these agreements from the repossession of the equipmentcollateralizing the Receivables. At January 31, 2006, the maximum remainingterm of the Receivables sold was approximately five years.

 

At January 31, 2006, John Deere Credit Inc., the JohnDeere finance subsidiary in Canada, had $163 million of commercial paperand $653 million of medium-term notes outstanding that were guaranteed by theCompany. In addition, the Company has provided letters of credit for John DeereCredit Inc. as part of retail note sales. At January 31, 2006, the Company’smaximum exposure under these agreements was approximately $7 million.

 

At January 31, 2006, the Company had guaranteed $30million of residual value related to property being used by the Company underan operating lease. The Company is obligated at the end of the lease term topay to the lessor any reduction in market value of the leased property up tothe guaranteed residual value. The Company recognizes the expense for thisfuture estimated lease payment over the life of the operating lease and hadaccrued expenses of $7 million related to this agreement at January 31, 2006.The lease term expires in 2007.

 

At January 31, 2006, the Company had approximately $7million of guarantees issued primarily to overseas banks related to third-partyreceivables for the retail financing of John Deere equipment. The Company mayrecover a portion of any required payments incurred under these agreements fromrepossession of the equipment collateralizing the receivables. At January 31,2006, the Company had accrued losses of approximately $.2 million under theseagreements. The maximum remaining term of the receivables guaranteed at January31, 2006 was approximately two years.

 

The Company’s subsidiary, John Deere Risk Protection,Inc., offers crop insurance products through a managing general agencyagreement (MGA) with an insurance company (Insurance Carrier) rated “Excellent”by A.M. Best Company. As a managing general agent, John Deere Risk Protection,Inc. will receive commissions from the Insurance Carrier for selling cropinsurance to producers.  The Company hasguaranteed certain obligations under the MGA, including the obligation to paythe Insurance Carrier for any uncollected premiums. At January 31, 2006 themaximum exposure for uncollected premiums was approximately $2.1 million.Substantially all of the Company’s crop insurance risk under the MGA has beenmitigated by public and private reinsurance. All private reinsurance companiesare rated “Excellent” or higher by A.M. Best Company. In the event of acomplete crop failure on every policy written under the MGA in 21 states andthe default of the U.S. Department of Agriculture and a syndicate of highlyrated private reinsurance companies on their reinsurance obligations, theCompany would be required to reimburse the Insurance Carrier for the maximumexposure under the MGA of approximately $21 million at January 31, 2006.The Company believes that the likelihood of the occurrence of substantially allof the events that give rise to the exposure under this MGA is extremely remoteand as a result, at January 31, 2006, the Company has accrued probablelosses of approximately $.1 million under the MGA. 

 

At January 31,2006, the Company had commitments of approximately $175 million for thepurchase of wind turbine equipment.

 

The Company has commitments to extend credit tocustomers and John Deere dealers through lines of credit and other pre-approvedcredit arrangements. A significant portion of these commitments is not expectedto be fully drawn upon, therefore, the total commitment amounts likely do notrepresent a future cash requirement. The Company applies the same creditpolicies and approval process for these

 

7

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commitments toextend credit as it does for its Receivables. Collateral is not required forthese commitments, but if credit is extended, collateral may be required uponfunding. The amount of unused commitments to extend credit to John Deeredealers was $2.1 billion at January 31, 2006. The amount of unused commitmentsto extend credit to customers was $30.7 billion at January 31, 2006. Over95 percent of these unused commitments to customers relate to revolving chargeaccounts and the Company generally has the right to unconditionally cancel,alter or amend the terms of these commitments at any time.  The remainder of the commitments generallyhave fixed expiration dates or other termination clauses.

 

(6)                                                          NewAccounting Standard Adopted

 

Certain employees of the Company participate in Deere& Company share-based compensation plans. Accordingly, in the first quarterof 2006, the Company adopted FASB Statement No. 123 (revised 2004), Share-BasedPayment. The Company adopted the new Statement using the modified prospectivemethod of adoption, which does not require restatement of prior periods. Therevised standard eliminated the intrinsic value method of accounting forshare-based employee compensation under APB Opinion No. 25, Accounting forStock Issued to Employees. The revised standard generally requires therecognition of the cost of employee services for share-based compensation basedon the grant date fair value of the equity or liability instruments issued. Theeffect of adoption of the new standard in the first quarter of 2006 related tostock options was an additional expense of $3 million pretax, or $2 millionafter-tax. Also under the new standard, excess income tax benefits related toshare-based compensation expense that are recognized directly in equity areconsidered financing rather than operating cash flow activities. The effect ofadoption of the new standard on cash flows in the first quarter of 2006 was notmaterial. Further disclosure for theseplans is included in Deere & Company’s Form 10-Q for the quarter endedJanuary 31, 2006.

 

New AccountingStandard to be Adopted

 

In February 2006, the FASB issued Statement No. 155,Accounting for Certain Hybrid Financial Instruments an amendment of FASBStatements No. 133 and 140. This Statement primarily resolves certain issuesaddressed in the implementation of FASB Statement No. 133 concerning beneficialinterests in securitized financial assets. The effective date is the beginningof fiscal year 2007. It will be effective for all financial instrumentsacquired, issued, or subject to a remeasurement (new basis) event occurringafter the beginning of the year of adoption. The adoption of the Statement isnot expected to have a material effect on the Company’s financial position ornet income. 

 

(7)                                                                                  The Company is a participating employer incertain Deere & Company sponsored defined benefit pension plans foremployees in the U.S. and certain defined benefit pension plans outside theU.S. These pension plans provide for benefits that are based primarily on yearsof service and employee compensation. Pension expense is actuarially determinedbased on the Company’s employees included in the plan. The Company’s pensionexpense amounted to $1.2 million in the first three months of 2006. Theaccumulated benefit obligation and plan net assets for the employees of theCompany are not determined separately from Deere & Company. The Companygenerally provides defined benefit health care and life insurance plans forretired employees in the U.S. as a participating employer in Deere &Company’s sponsored plans. Health care and life insurance benefits expense isactuarially determined based on the Company’s employees included in the plansand amounted to $1.1 million during the first three months of 2006.Further disclosure for these plans is included in Deere & Company’sForm 10-Q for the quarter ended January 31, 2006.

 

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

 

 

Results of Operations

 

Overview

 

TheCompany primarily generates revenues and cash by financing sales and leases ofnew and used agricultural, commercial and consumer, and construction andforestry equipment by John Deere dealers. In addition, the Company provides wholesale financing to dealers of theforegoing equipment, provides operating loans, finances retail revolving chargeaccounts, offers certain crop risk mitigation products and invests in windenergy development. 

 

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TheCompany’s business is currently affected by the following key trends andeconomic conditions. The Company’s business is closely related to John Deere’sbusiness.  Global farm fundamentalsremain generally positive due in large part to favorable levels of carryoverstocks of wheat and corn. However, industry sales of agricultural equipment in2006 are expected to be down about 5 percent in the U.S. and Canada, down about5 percent in Western Europe and down about 20 percent in South America. Deere& Company’s agricultural equipment sales were down 6 percent for thefirst quarter of 2006 and are forecast to be flat to down 2 percent for theyear. Deere & Company’s commercial and consumer equipment salesincreased 20 percent in the first quarter of 2006 and are expected to increaseapproximately 10 to 12 percent for the year with support from new products, anassumed return to more normal weather patterns and higher landscapes businesssales. Construction and forestry markets are forecast to experience furthergrowth in 2006 as a result of a positive level of construction spending,especially in the nonresidential sector. Deere & Company’s construction andforestry sales increased 18 percent in the first quarter of 2006 and are forecastto increase 8 to 10 percent in 2006. The Company expects to report netincome of approximately $285 million in 2006. 

 

 

2006 Compared with 2005

 

Netincome was $70.1 million for the first quarter of 2006, compared with $68.2million for the same period a year ago. The increase was primarily due togrowth in the portfolio, partially offset by lower financing spreads and ahigher provision for credit losses. 

 

Revenuestotaled $374.6 million for the first quarter of 2006, compared to $305.7million for the same period in 2005. The increase was primarily due to an 18percent increase in the average balance of Receivables and Leases financedduring the first three months of 2006 compared to the first three months of2005. Finance income earned on retail notes totaled $160.0 million for thefirst three months of 2006, up $47.3 million compared to $112.7 millionfor the same period in 2005. This increase was primarily due to a 30 percentincrease in the average retail note portfolio balances and increasing yields. Leaserevenues totaled $66.6 million in the first three months of 2006, comparedto $63.6 million in the first three months of 2005. This increase wasprimarily due to a 6 percent increase in the average amount of equipmenton operating leases. Revenues earned on revolving charge accounts amounted to$45.7 million in the first three months of 2006, an 11 percent increase overrevenues of $41.1 million during the same period last year. The increasewas primarily due to growth of Farm Planäand PowerPlanâreceivables in the first three months of 2006, compared withthe same period last year. Finance income earned on wholesale receivablestotaled $72.7 million for the first three months of 2006, compared to $60.4million for the same period in 2005. This increase was primarily due toincreasing yields and a 3 percent increase in the average balance of wholesalereceivables. Operating loan income amounted to $7.1 million in the firstthree months of 2006, compared to $5.3 million in the first three months of2005. The increase was due to a higher average balance of operating loanaccounts and increasing yields. Revenues earned from Deere & Companytotaled $99.6 million for the first quarter of 2006, compared to$86.5 million for the same period last year.

 

The net loss on receivables sold, including adjustmentsto prior sales related to cleanup calls and revaluations of retained interestsand the related permanent impairments, totaled $.1 million for the firstquarter of 2006, compared to a net gain of $3.9 million for the same period ayear ago. 

 

Interestexpense totaled $154.3 million for the first quarter of 2006, compared to $92.6million for the same period in 2005. The increase was due to higher averageborrowings and increases in borrowing rates. 

 

Administrativeand operating expenses were $56.6 million in the first quarter of 2006,compared with $54.1 million in 2005. Administrative and operating expensesas a percent of average Receivables and Leases administered were 1.33 percentfor the first quarter of 2006, compared with 1.35 percent for the same periodlast year.

 

Duringthe first quarter of 2006, the provision for credit losses totaled $2.2million, compared with the credit for credit losses of $1.8 million in the sameperiod last year. The annualized provision (credit) for credit losses, as apercentage of the average balance of total Receivables financed, was..06 percent for the first quarter of 2006, compared with (.06) percent forthe same period last year. 

 

Feespaid to John Deere for interest and support were $9.7 million in the firstquarter of 2006, compared with $13.9 million for the same period in 2005.The decrease was primarily due to lower average borrowings from Deere &Company. 

 

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Depreciationof equipment on operating leases was $44.4 million in the first quarter of2006, compared to $42.2 million for the same period in 2005. The increasefor the first three months was primarily the result of higher average amountsof equipment on operating leases. 

 

 

Receivableand Lease acquisition volumes were as follows (in millions of dollars):

 
| ** **                          | ** ** | **Three Months**      | ** ** | ** ** | ** ** | ** **        | ** ** |
|-------------------------------------|------------|-----------------------|------------|------------|------------|-------------------|------------|
| ** **                          | ** ** | **Ended January 31,** | ** ** | ** ** | ** ** | ** **        | ** ** |
| ** **                          | ** ** | **2006**              | ** ** | **2005**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Retail  notes:                      |       |                  |       |       |       |              |       |   |   |
| Agricultural equipment              |       | $                     | 885.2      |       | $          | 922.3             |       | $ | (37.1 | ) | (4 | )% |
| Construction and forestry equipment |       | 406.9                 |       | 302.4      |       | 104.5             |       | 35 |   |
| Commercial and consumer equipment   |       | 75.2                  |       | 85.7       |       | (10.5             | )          | (12 | ) |
| Total retail notes                  |       | 1,367.3               |       | 1,310.4    |       | 56.9              |       | 4 |   |
| Revolving  charge accounts          |       | 645.4                 |       | 606.4      |       | 39.0              |       | 6 |   |
| Operating  loans                    |       | 456.6                 |       | 312.5      |       | 144.1             |       | 46 |   |
| Wholesale  receivables              |       | 3,628.3               |       | 3,222.0    |       | 406.3             |       | 13 |   |
| Financing  leases                   |       | 40.5                  |       | 38.9       |       | 1.6               |       | 4 |   |
| Equipment on  operating leases      |       | 82.7                  |       | 78.2       |       | 4.5               |       | 6 |   |
| Total Receivables and Leases        |       | $                     | 6,220.8    |       | $          | 5,568.4           |       | $ | 652.4 |   | 12 | % |

 

Retail note volumes increased during the first quarter of 2006, whencompared to last year, primarily due to increases in retail sales of John Deereconstruction and forestry equipment. Wholesalereceivable volumes increased during the first quarter of 2006, when compared tolast year, primarily due to increased shipments of John Deere equipment as aresult of strong retail demand in the construction and forestry markets.

 

Total Receivables and Leases held were as follows (in millions ofdollars):

 
| ** **                          | ** ** | **January 31,** | ** ** | **October 31,** | ** ** | **January 31,** | ** ** |
|-------------------------------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|
| ** **                          | ** ** | **2006**        | ** ** | **2005**        | ** ** | **2005**        | ** ** |
| Retail  notes:                      |       |            |       |            |       |            |       |
| Agricultural equipment              |       | $               | 6,282.8    |            | $          | 6,208.8         |       | $ | 4,838.3 |   |
| Construction and forestry equipment |       | 2,132.8         |       | 1,980.4         |       | 1,537.1         |       |
| Commercial and consumer equipment   |       | 970.1           |       | 1,021.7         |       | 956.5           |       |
| Recreational products               |       | 21.5            |       | 22.7            |       | 29.9            |       |
| Total retail notes                  |       | 9,407.2         |       | 9,233.6         |       | 7,361.8         |       |
| Revolving  charge accounts          |       | 1,193.4         |       | 1,527.5         |       | 1,154.9         |       |
| Operating  loans                    |       | 364.3           |       | 384.4           |       | 356.9           |       |
| Wholesale  receivables              |       | 3,730.6         |       | 3,651.2         |       | 3,486.0         |       |
| Financing  leases                   |       | 397.4           |       | 411.7           |       | 397.1           |       |
| Equipment on  operating leases      |       | 782.3           |       | 793.9           |       | 740.4           |       |
| Total Receivables and Leases        |       | $               | 15,875.2   |            | $          | 16,002.3        |       | $ | 13,497.1 |   |

 

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Receivablesand Leases administered by the Company were as follows (in millions ofdollars):

 
| ** **                                                     | ** ** | **January 31,** | ** **     | **October 31,** | ** ** | **January 31,** | ** ** |
|----------------------------------------------------------------|------------|-----------------|----------------|-----------------|------------|-----------------|------------|
| ** **                                                     | ** ** | **2006**        | ** **     | **2005**        | ** ** | **2005**        | ** ** |
| Receivables  and Leases administered:                          |       |            |           |            |       |            |       |
| Owned by the Company                                           |       | $               |  14,416.6 |            | $          |  14,662.2  |       | $ |  13,497.1 |   |
| Owned by the Company — restricted due to  securitization* |       | 1,458.6         |           | 1,340.1         |       |            |       |
| Total Receivables and Leases owned by the  Company             |       | 15,875.2        |           | 16,002.3        |       | 13,497.1        |       |
| Sold and serviced — with limited recourse*                |       | 1,432.9         |           | 1,699.2         |       | 2,529.2         |       |
| Sold and serviced — without recourse**                    |       | 19.3            |           | 20.1            |       | 22.9            |       |
| Total Receivables and Leases administered                      |       | $               |  17,327.4 |            | $          |  17,721.6  |       | $ |  16,049.2 |   |
|                                                           |       |            |           |            |       |            |       |

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| *      | The Company’s maximum  exposure under all Receivable and Lease recourse provisions at January 31,  2006, October 31, 2005 and January 31, 2005 was $138 million, $140 million  and $160 million, respectively. In addition, the Company has provided letters  of credit for John Deere Credit Inc., the John Deere finance subsidiary in  Canada, as part of retail note sales. At January 31, 2006, October 31,  2005 and January 31, 2005, the Company’s maximum exposure under these  agreements was approximately $7 million, $7 million and $8 million,  respectively. The Company does not record the recourse obligations as  liabilities as they are contingent liabilities that are remote at this time.  However, the probable loss on receivables that have been sold was accrued at  the time of sale, and any subsequent necessary adjustments are made as part  of ongoing reviews. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **     | These  receivables represent recreational product retail notes that the Company has  sold but continues to administer for a fee.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

 

 

Total Receivable amounts 60 days or more past due inthe table below represent the amount of all customer payments past due 60 daysor more, by product, and as a percent of the respective receivables.  They were as follows (in millions ofdollars):

 
| ** **                          | ** ** | **January 31,** | ** ** | **October 31,** | ** ** | **January 31,** | ** ** |
|-------------------------------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|
| ** **                          | ** ** | **2006**        | ** ** | **2005**        | ** ** | **2005**        | ** ** |
| ** **                          | ** ** | **Dollars**     | ** ** | **Percent**     | ** ** | **Dollars**     | ** ** | **Percent** | ** ** | **Dollars** | ** ** | **Percent** | ** ** |
| Retail  notes:                      |       |            |       |            |       |            |       |   |   |   |   |   |   |
| Agricultural equipment              |       | $               |  9.8  |            | .16        | %               | $          |  8.1 |   | .13 | % | $ |  10.5 |   | .22 | % |
| Construction and forestry equipment |       | 5.7             |       | .27             |       | 4.6             |       | .23 |   | 4.2 |   | .27 |   |
| Commercial and consumer equipment   |       | 1.3             |       | .13             |       | 1.1             |       | .11 |   | 1.2 |   | .13 |   |
| Recreational products               |       | .1              |       | .47             |       | .1              |       | .44 |   | .1 |   | .33 |   |
| Total retail notes                  |       | 16.9            |       | .18             |       | 13.9            |       | .15 |   | 16.0 |   | .22 |   |
| Revolving  charge accounts*         |       | 16.6            |       | 1.39            |       | 12.5            |       | .82 |   | 13.9 |   | 1.20 |   |
| Operating  loans                    |       | 1.4             |       | .39             |       |            |       |   |   |   |   |   |   |
| Wholesale  receivables              |       | 2.6             |       | .07             |       | 1.7             |       | .05 |   | 8.3 |   | .24 |   |
| Financing  leases                   |       | 4.3             |       | 1.08            |       | 4.5             |       | 1.09 |   | 3.6 |   | .91 |   |
| Total Receivables                   |       | $               |  40.4 |            | .27        | %               | $          |  32.6 |   | .21 | % | $ |  43.2 |   | .34 | % |
|                                |       |            |       |            |       |            |       |   |   |   |   |   |   |

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| * | Due to the nature of  revolving charge accounts, the customer payments past due 60 days or more  also represent the total balance. |
|---|------------------------------------------------------------------------------------------------------------------------------------|

 

Thebalance of retail notes held (principal plus accrued interest) with anyinstallment 60 days or more past due represents the total retail note balancefor a customer who has any portion of his note 60 days or more past due. Theseamounts were $95 million, $78 million and $80 million at January 31, 2006,October 31, 2005 and January 31, 2005, respectively. The balances of retailnotes held on which any installment was 60 days or more past due as apercentage of the ending retail notes receivable was 1.01, .84 and 1.08 percentat January 31, 2006, October 31, 2005 and January 31, 2005, respectively.

 

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Total non-performing Receivables, which representloans the Company has ceased accruing interest for, by product, and as apercent of the respective receivables were as follows (in millions of dollars):

 
| ** **                          | ** ** | **January 31,** | ** ** | **October 31,** | ** ** | **January 31,** | ** ** |
|-------------------------------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|
| ** **                          | ** ** | **2006**        | ** ** | **2005**        | ** ** | **2005**        | ** ** |
| ** **                          | ** ** | **Dollars**     | ** ** | **Percent**     | ** ** | **Dollars**     | ** ** | **Percent** | ** ** | **Dollars** | ** ** | **Percent** | ** ** |
| Retail  notes:                      |       |            |       |            |       |            |       |   |   |   |   |   |   |
| Agricultural equipment              |       | $               | 13.0       |            | .21        | %               | $          | 15.6 |   | .25 | % | $ | 16.7 |   | .35 | % |
| Construction and forestry equipment |       | 10.6            |       | .50             |       | 10.3            |       | .52 |   | 8.2 |   | .53 |   |
| Commercial and consumer equipment   |       | 3.9             |       | .40             |       | 5.2             |       | .51 |   | 2.2 |   | .23 |   |
| Recreational products               |       | .3              |       | 1.40            |       | .4              |       | 1.76 |   | .4 |   | 1.34 |   |
| Total retail notes                  |       | 27.8            |       | .30             |       | 31.5            |       | .34 |   | 27.5 |   | .37 |   |
| Revolving  charge accounts          |       | .6              |       | .05             |       | .5              |       | .03 |   | .2 |   | .02 |   |
| Operating  loans                    |       | 22.8            |       | 6.26            |       | 23.9            |       | 6.22 |   | 24.0 |   | 6.74 |   |
| Wholesale  receivables              |       | 1.4             |       | .04             |       | 1.6             |       | .04 |   | .7 |   | .02 |   |
| Financing  leases                   |       | 10.8            |       | 2.72            |       | 9.6             |       | 2.33 |   | 6.6 |   | 1.66 |   |
| Total Receivables                   |       | $               | 63.4       |            | .42        | %               | $          | 67.1 |   | .44 | % | $ | 59.0 |   | .47 | % |

 

 

TotalReceivable write-off amounts, net of recoveries, by product, and as anannualized percentage of average balances held during the period, were asfollows (in millions of dollars):

 

| ** **                          | ** ** | **Three Months Ended** | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                          | ** ** | **January 31,**        | ** ** | **January 31,**        | ** ** |
| ** **                          | ** ** | **2006**               | ** ** | **2005**               | ** ** |
| ** **                          | ** ** | **Dollars**            | ** ** | **Percent**            | ** ** | **Dollars** | ** ** | **Percent** | ** ** |
| Retail  notes:                      |       |                   |       |                   |       |   |   |   |   |
| Agricultural equipment              |       | $                      | (1.1       | )                      | (.07       | )% | $ | (.5 | ) | (.04 | )% |
| Construction and forestry equipment |       | 1.0                    |       | .20                    |       | .4 |   | .10 |   |
| Commercial and consumer equipment   |       | (.1                    | )          | (.03                   | )          | .1 |   | .04 |   |
| Recreational products               |       |                   |       |                   |       | .2 |   | 2.73 |   |
| Total retail notes                  |       | (.2                    | )          | (.01                   | )          | .2 |   | .01 |   |
| Revolving  charge accounts          |       | 5.5                    |       | 1.69                   |       | 4.6 |   | 1.49 |   |
| Operating  loans                    |       |                   |       |                   |       | (.2 | )  | (.21 | )  |
| Wholesale  receivables              |       | (1.3                   | )          | (.15                   | )          | (.5 | ) | (.06 | ) |
| Financing  leases                   |       | .5                     |       | .50                    |       | .6 |   | .60 |   |
| Total Receivables                   |       | $                      | 4.5        |                   | .12        | % | $ | 4.7 |   | .15 | % |

 

 

Depositswithheld from dealers and merchants, representing mainly the aggregate dealerretail note and lease withholding accounts from individual John Deere dealersto which losses from retail notes and leases originating from the respectivedealers can be charged, amounted to $167 million at January 31, 2006 comparedwith $166 million at October 31, 2005 and January 31, 2005.

 

TheCompany’s allowance for credit losses on all Receivables financed totaled $94million at January 31, 2006, $96 million at October 31, 2005 and $107million at January 31, 2005. The allowance for credit losses represented..62 percent of the total Receivables financed at January 31, 2006, .63percent at October 31, 2005 and .84 percent at January 31, 2005. The level ofthe allowance is based on many quantitative and qualitative factors, includinghistorical loss experience by product category, portfolio duration, delinquencytrends, economic conditions and credit risk quality. The Company believes itsallowance is sufficient to provide for losses in its existing receivableportfolio.

 

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Safe Harbor Statement

 

*Safe Harbor Statement under the Private SecuritiesLitigation Reform Act of 1995:*Statements herein that relateto future operating periods are subject to important risks and uncertaintiesthat could cause actual results to differ materially. Actions by the U.S.Federal Reserve Board and other central banks may affect the costs and expensesof financing the Company and the rates it is able to offer. The Company’s businessis affected by general economic conditions in and the political instability ofthe global markets in which the Company operates because deteriorating economicconditions and political instability can result in higher loan losses. TheCompany’s business is also affected by actions of banks, financing and leasingcompanies and other lenders that compete with the Company for customers. Inaddition, the Company’s business is closely related to John Deere’s business.Further information, including factors that potentially could materially affectthe Company’s and John Deere’s financial results, is included in the mostrecent Deere & Company Form 10-K and other Deere & Company and CapitalCorporation filings with the Securities and Exchange Commission.

 

Critical AccountingPolicies

 

Seethe Company’s critical accounting policies discussed in the Management’sDiscussion and Analysis of the most recent annual report filed on Form10-K.  There have been no materialchanges to these policies.

 

Capital Resources andLiquidity

 

The Company relies on its ability to raise substantialamounts of funds to finance its Receivable and Lease portfolios. During thefirst three months of 2006, the Company issued $350 million of medium-termnotes, obtained $344 million of secured borrowings, maintained an averagecommercial paper balance of $1,613 million and received proceeds of$18 million from sales of Receivables. At January 31, 2006, the Company’sfunding profile included $1,675 million of commercial paper, $1,536 million ofnotes payable related to on-balance sheet securitization funding, $.3 millionof intercompany loans from Deere & Company, $10,582 million ofunsecured term debt, $1,357 million of off-balance sheet securitization fundingand $2,013 million of equity capital. The Company’s funding profile may bealtered to reflect such factors as relative costs of funding sources, assetsavailable for securitizations and capital market accessibility. 

 

Duringthe first three months of 2006, the aggregate net cash provided by operatingactivities was used primarily to decrease borrowings. Net cash provided byoperating activities was $71 million in the first three months of 2006. Cashused for financing activities totaled $160 million in the first three months of2006, resulting primarily from a decrease in payables to Deere & Company,partially offset by a net increase in total external borrowings. Net cash usedfor investing activities totaled $10 million in the first three months of 2006.Cash and cash equivalents decreased $102 million during the first threemonths of 2006.

 

Duringthe first quarter of 2005, the aggregate net cash provided by operating andfinancing activities was used primarily to increase Receivables and Leases. Netcash provided by operating activities was $76 million in the first three monthsof 2005. Cash provided by financing activities totaled $79 million in the firstthree months of 2005, resulting primarily from a net increase in total externalborrowings, partially offset by a decrease in payables to Deere & Companyand dividends paid to John Deere Credit Company, which in turn paid comparabledividends to Deere & Company. Net cash used for investing activitiestotaled $94 million in the first three months of 2005, primarily due to the costof Receivables and Leases acquired exceeding the collections of Receivables andLeases, partially offset by proceeds from sales of Receivables. Cash and cashequivalents increased $61 million during the first three months of 2005.

 

Becauseof the multiple funding sources that have been and continue to be available tothe Company, the Company expects to have sufficient sources of liquidity tomeet its ongoing funding needs.  TheCompany’s commercial paper outstanding at January 31, 2006, October 31, 2005and January 31, 2005 was approximately $1,675 million, $1,696 million and$1,587 million, respectively, while the total cash and cash equivalentsposition was approximately $148 million, $250 million and $271 million,respectively. Additionally, the Company had access to approximately $3,118million, $4,103 million and $2,541 million, respectively, of cash and cashequivalents and marketable securities held by its parent,Deere & Company (if Deere & Company would have chosen to makethese funds available to the Company). In addition, the Company has for manyyears accessed diverse funding sources, including short-term and long-termunsecured debt capital markets in the U.S., Europe and Australia, as well aspublic and private securitization markets in the U.S. The Company also hasaccess to unsecured bank lines of credit. 

 

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The Company’s ability to obtain funding is affected byits debt ratings, which are closely related to the outlook for and thefinancial condition of Deere & Company, and the nature and availability ofsupport facilities, such as its lines of credit and the support agreement fromDeere & Company. For information regarding Deere & Company and itsbusiness, see the Company’s most recently filed annual report on Form 10-Kand quarterly report on Form 10-Q.

 

Toaccess public debt capital markets, the Company relies on credit ratingagencies to assign short-term and long-term credit ratings to the Company’ssecurities as an indicator of credit quality for fixed income investors.  A security rating is not a recommendation bythe rating agency to buy, sell or hold Company securities.  A credit rating agency may change or withdrawCompany ratings based on its assessment of the Company’s current and futureability to meet interest and principal repayment obligations.  Lower credit ratings generally result inhigher borrowing costs and reduced access to debt capital markets.

 

Thesenior long-term and short-term debt ratings and outlook currently assigned tounsecured Company securities by the rating agencies engaged by the Company arethe same as those for Deere & Company. Those ratings are as follows:

 
| ** **                            | ** ** | **Senior Long-Term** | ** ** | **Short-Term** | ** ** | **Outlook** |
|---------------------------------------|------------|----------------------|------------|----------------|------------|-------------|
| Moody’s Investors  Service, Inc. |       | A3                   |       | Prime-2        |       | Positive    |
| Standard & Poor’s            |       | A-                   |       | A-2            |       | Positive    |

 

Totalinterest-bearing indebtedness amounted to $13,804 million at January 31, 2006,compared with $13,958 million at October 31, 2005, and$11,636 million at January 31, 2005. Included in this debt are securedborrowings of $1,536 million at January 31, 2006 and $1,353 million at October31, 2005 (see Note 5). Total external borrowings have increased generallycorresponding with the level of the Receivable and Lease portfolios, the levelof cash and cash equivalents and the change in payable to Deere & Company.Total short-term indebtedness amounted to $5,320 million at January 31, 2006,which included $1,536 million of secured borrowings, compared with $5,767million at October 31, 2005, which included $1,353 million of secured borrowingsand $4,342 million at January 31, 2005, while total long-term indebtednessamounted to $8,483 million, $8,191 million and $7,294 million at these dates,respectively. The ratio of total interest-bearing debt to stockholder’s equitywas 6.9 to 1, 7.2 to 1 and 6.5 to 1 at January 31, 2006, October 31, 2005and January 31, 2005, respectively. The ratio of total interest-bearing debt,excluding secured borrowings, to stockholder’s equity was 6.1 to 1 and 6.5 to 1at January 31, 2006 and October 31, 2005, respectively. 

 

TheCompany issued $355 million and retired $394 million of other borrowings duringthe first three months of 2006, which were primarily medium-term notes. 

 

Capitalexpenditures for the Company in 2006 are estimated to be approximately $285million, primarily related to the wind energy entities.

 

TheCompany’s ability to meet its debt obligations is supported in a number ofways. All commercial paper issued is backed by unsecured, committed creditlines from various banks. The assets of the Company are self-liquidating innature. A strong equity position is available to absorb unusual losses on theseassets. Liquidity is also provided by the Company’s ability to securitize theseassets. The Company also maintains uncommitted, unsecured lines of credit withvarious banks.

 

AtJanuary 31, 2006, the Capital Corporation and Deere & Company jointlymaintained $2,511 million of lines of credit with various banks throughout theworld, $412 million of which were unused. Forthe purpose of computing unused credit lines, commercial paper and short-termbank borrowings, excluding secured borrowings and the current portion oflong-term borrowings, of the Company and John Deere, were considered toconstitute utilization.  Included inthe total credit lines at January31, 2006 were long-term creditfacility agreements of $1,250 million, expiring in February 2009, and $625million, expiring in February 2010, for a total of $1,875 million long-term. Thefacility fees payable under these lines of credit are divided between Deere& Company and the Capital Corporation based on the proportion of theirrespective commercial paper outstanding.

 

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InFebruary 2006, the Company replaced its existing long-term credit facilityagreements totaling $1,875 million and its $625 million short-term agreementwith one $3 billion five-year credit agreement, which will expire in February2011. As with the replaced agreements, the new credit agreement has variousrequirements of the Company, including the maintenance of its consolidatedratio of earnings to fixed charges at not less than 1.05 to 1 for each fiscalquarter.  The new agreement requiresmaintenance of the Company’s ratio of senior debt, excluding securitizationindebtedness, to total stockholder’s equity (excluding accumulated othercomprehensive income (loss)) at not more than 8.5 to 1 (replacing 8.0 to 1in the previous agreements) at the end of any fiscal quarter. For the first quarter of 2006, the Company’sratio of earnings to fixed charges was 1.69 to 1. The Company’s ratio ofsenior debt, excluding securitization indebtedness, to total stockholder’sequity at the end of the first quarter of 2006 was 6.1 to 1, and 6.2 to 1excluding accumulated other comprehensive income from total stockholder’sequity. 

 

TheCompany utilizes a revolving multi-bank conduit facility to securitize floatingrate retail notes. This facility has the capacity, or “purchase limit,” of upto $2 billion in secured financing or sales outstanding at any time. Thisfacility has no final maturity date. Instead, upon the Company’s request, eachbank conduit may elect to renew its commitment on an annual basis. If thisfacility is not renewed, the Company would liquidate the securitizations as thepayments on these retail notes are collected. At January 31, 2006, $1,855million was outstanding under the facility of which $937 million was recordedon the balance sheet (see Note 5). 

 

Stockholder’sequity was $2,013 million at January 31, 2006, compared with $1,940 million atOctober 31, 2005 and $1,802 million at January 31, 2005. The increase in thefirst three months of 2006 resulted primarily from net income of$70 million and a $3 million increase in accumulated other comprehensiveincome.

 

Thefinancing of retail purchases and leases of John Deere products and ofwholesale receivables owed by John Deere dealers represented approximately 82percent of the Company’s acquisition volume for the three months ended January31, 2006, compared with approximately 83 percent for the same period in 2005.Any extended reduction or suspension of John Deere’s sale or production ofproducts due to a decline in demand or production, technological difficulties,governmental actions or other events could have an adverse effect on theCompany’s acquisition volume of Receivables and Leases.  For additional information on the Company’sdependence on and relationships with Deere & Company, see the Company’smost recently filed annual report on Form 10-K.

 

Item 3                Quantitativeand Qualitative Disclosures About Market Risk.

 

Seethe Company’s most recent annual report filed on Form 10-K (Item 7A). There hasbeen no material change in this information.

 

Item 4                Controlsand Procedures.

 

TheCompany’s principal executive officer and its principal financial officer haveconcluded that the Company’s disclosure controls and procedures (as defined inRules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, asamended (“the Act”)) were effective as of January 31, 2006, based on theevaluation of these controls and procedures required by Rule 13a-15(b) or15d-15(b) of the Act.

 

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PARTII.  OTHER INFORMATION

 

Item 1.                            LegalProceedings.

 

The Company is subject to various unresolved legal actions which arisein the normal course of its business, the most prevalent of which relate tostate and federal laws and regulations concerning retail credit. Although it isnot possible to predict with certainty the outcome of these unresolved legalactions or the range of possible loss, the Company believes these unresolvedlegal actions will not have a material effect on its financial statements.

 

Item 2.                            UnregisteredSales of Equity Securities and Use of Proceeds.

 

Omitted pursuant to instruction H.

 

Item 3.                            DefaultsUpon Senior Securities.

 

Omitted pursuant to instruction H.

 

Item 4.                            Submissionof Matters to a Vote of Security Holders.

 

Omitted pursuant to instruction H.

 

Item 5.                            OtherInformation.

 

None.

 

Item 6.                            Exhibits.

 

See the index to exhibits immediatelypreceding the exhibits filed with this report.

 

Certain instruments relating to long-termdebt, constituting less than 10% of the registrant’s total assets, are notfiled as exhibits herewith pursuant to Item 601(b)(4)(iii)(A) of RegulationS-K.  The registrant will file copies ofsuch instruments upon request of the Commission.

 

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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 theundersigned thereunto duly authorized.

 

 
|   |              | JOHN DEERE CAPITAL  CORPORATION |
|--------|-------------------|---------------------------------|
|   |              |                            |
|   |              |                            |
|   |              |                            |
| Date:  | February 24, 2006 | By:                             | */s/ M.  J. Mack, Jr.* |
|   |              |                            | Michael J. Mack, Jr.  Senior Vice President,  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*)                                                                                                                                                                                                                                                                                                                                                                                            |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.1         |       | Five-Year Credit Agreement among Deere & Company, registrant,  various financial institutions, JPMorgan Chase Bank N.A. as administrative  agent, Citibank N.A. and Credit Suisse as documentation agents, Merrill Lynch  Bank USA as co-documentation agent, and Bank of America, N.A. and Deutsche  Bank AG, New York Branch as syndication agents, et al, dated as of February  14, 2006 (Exhibit 4.1 to Form 10-Q of Deere & Company for the quarter  ended January 31, 2006, Securities and Exchange Commission file number  1- 4121*) |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 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 January  31, 2006                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|        |       | (Securities and Exchange Commission file number 1-4121*)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |

 

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*                                Incorporatedby reference.  Copies of these exhibitsare available from the Company upon request.

 

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