**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

WASHINGTON, D.C.  20549

 

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**FORM 10-Q**

 

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

SECURITIES EXCHANGE ACT OF 1934

 

**For the quarterly period endedJuly 31, 2010**

 

Commission file no: 1-6458

** **

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**JOHN DEERE CAPITALCORPORATION**

 

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

 

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

 

Telephone Number:  **(775) 786-5527**

 

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Indicate by check mark whether the registrant:(1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.
| Yes | X | No  |   |   |
|-----|---|----------|--------|--------|

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant toRule 405 of Regulation S-T (§232.405 of this chapter) during the preceding12 months (or for such shorter period that the registrant was required tosubmit and post such files).
| Yes |   | No  |   |   |
|-----|--------|----------|--------|--------|

 

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

 
| Large accelerated filer                        |   |   | Accelerated filer         |   |   |
|------------------------------------------------|--------|--------|---------------------------|--------|--------|
| Non-accelerated filer                          | X      |   | Smaller reporting company |   |   |
| (Do not check if a smaller  reporting company) |

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).
| Yes |   | No  | X |   |
|-----|--------|----------|---|--------|

 

At July 31, 2010, 2,500 shares of common stock,without par value, of the registrant were outstanding, all of which were ownedby John Deere Financial Services, Inc., a wholly-owned subsidiary ofDeere & Company.

 

The registrant meets the conditions set forth inGeneral Instruction H(1)(a) and (b) of Form 10-Q and istherefore filing this Form with certain reduced disclosures as permittedby those instructions.

 

 

 

Index to Exhibits: Page 26

 

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PART I.  FINANCIAL INFORMATION

 

Item1.     Financial Statements.

 

**John Deere Capital Corporation and Subsidiaries**

**Statementsof Consolidated Income**

**(Unaudited)**

(in millions)

 
| ** **                                                 | ** ** | **Three  Months Ended**                                     | ** ** | **Nine Months Ended** | ** **                                                  |
|------------------------------------------------------------|------------|-------------------------------------------------------------|------------|-----------------------|-------------------------------------------------------------|
| ** **                                                 | ** ** | **July 31,**                                           | ** ** | **July 31,**     | ** **                                                  |
| ** **                                                 | ** ** | **2010**                                                    | ** ** | ** **            | **2009**                                                    | ** ** | ** ** | **2010** | ** ** | ** ** | **2009** | ** ** | ** ** |
| **Revenues**                                               |       |                                                        |       |                  |                                                        |   |   |   |   |   |   |   |   |
| Finance income earned on  retail notes                     |       | $       168.9            |       |                  | $       182.2            |   |   | $       518.6 |   |   | $       561.9 |   |   |
| Lease revenues                                             |       | 73.5                                                        |       |                  | 78.8                                                        |   |   | 214.0 |   |   | 237.4 |   |   |
| Revolving charge account  income                           |       | 70.0                                                        |       |                  | 66.4                                                        |   |   | 195.9 |   |   | 175.7 |   |   |
| Finance income earned on  wholesale receivables            |       | 67.3                                                        |       |                  | 81.1                                                        |   |   | 189.0 |   |   | 229.9 |   |   |
| Operating loan income                                      |       | 2.1                                                         |       |                  | 3.4                                                         |   |   | 8.0 |   |   | 11.0 |   |   |
| Crop insurance commissions                                 |       | 38.5                                                        |       |                  | 40.2                                                        |   |   | 74.6 |   |   | 52.3 |   |   |
| Other income - net                                         |       | 25.3                                                        |       |                  | 13.2                                                        |   |   | 72.1 |   |   | 60.6 |   |   |
| Total revenues                                             |       | 445.6                                                       |       |                  | 465.3                                                       |   |   | 1,272.2 |   |   | 1,328.8 |   |   |
| **Expenses**                                               |       |                                                        |       |                  |                                                        |   |   |   |   |   |   |   |   |
| Interest expense                                           |       | 123.7                                                       |       |                  | 195.3                                                       |   |   | 413.6 |   |   | 606.5 |   |   |
| Operating expenses:                                        |       |                                                        |       |                  |                                                        |   |   |   |   |   |   |   |   |
| Administrative and  operating expenses                     |       | 107.7                                                       |       |                  | 78.9                                                        |   |   | 293.2 |   |   | 231.8 |   |   |
| Provision for credit  losses                               |       | 21.3                                                        |       |                  | 36.1                                                        |   |   | 65.6 |   |   | 110.3 |   |   |
| Fees paid to John Deere                                    |       | 8.6                                                         |       |                  | 7.2                                                         |   |   | 25.9 |   |   | 24.5 |   |   |
| Depreciation of equipment  on operating leases             |       | 47.0                                                        |       |                  | 51.1                                                        |   |   | 137.4 |   |   | 155.9 |   |   |
| Total operating expenses                                   |       | 184.6                                                       |       |                  | 173.3                                                       |   |   | 522.1 |   |   | 522.5 |   |   |
| Total expenses                                             |       | 308.3                                                       |       |                  | 368.6                                                       |   |   | 935.7 |   |   | 1,129.0 |   |   |
| **Income of  consolidated group before income taxes**      |       | 137.3                                                       |       |                  | 96.7                                                        |   |   | 336.5 |   |   | 199.8 |   |   |
| Provision  for income taxes                                |       | 48.0                                                        |       |                  | 37.6                                                        |   |   | 114.4 |   |   | 72.0 |   |   |
| **Income of  consolidated group**                          |       | 89.3                                                        |       |                  | 59.1                                                        |   |   | 222.1 |   |   | 127.8 |   |   |
| Equity  in income of unconsolidated affiliates             |       | .1                                                          |       |                  |                                                        |   |   | .6 |   |   | .3 |   |   |
| **Net  income**                                            |       | 89.4                                                        |       |                  | 59.1                                                        |   |   | 222.7 |   |   | 128.1 |   |   |
| Less:  Net income attributable to noncontrolling interests |       |                                                        |       |                  |                                                        |   |   |   |   |   |   |   |   |
| **Net  income attributable to the Company**                |       | $         89.4 |       |                  | $         59.1 |   |   | $       222.7 |   |   | $       128.1 |   |   |

 

 

See Condensed Notes to Interim ConsolidatedFinancial Statements.

 

2

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**John Deere Capital Corporation and Subsidiaries**

**Consolidated Balance Sheets**

**(Unaudited)**

(in millions)

 
| ** **                                                                   | ** ** | **July 31,**                                      | ** ** | **October 31,** | ** **                                                              | **July 31,** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|----------------------|-------------------------------------------------------------------------|-------------------|------------|
| ** **                                                                   | ** ** | **2010**                                               | ** ** | **2009**             | ** **                                                              | **2009**          | ** ** |
| **Assets**                                                                   |       |                                                   |       |                 |                                                                    |              |       |
| Cash and cash equivalents                                                    |       | $        319.1 |       |                 | $        870.6                  |              |       | $       1,972.3 |   |   |
| Receivables:                                                                 |       |                                                   |       |                 |                                                                    |              |       |   |   |   |
| Retail notes                                                                 |       | 8,797.7                                                |       |                 | 8,234.1                                                                 |              |       | 7,276.9 |   |   |
| Restricted securitized retail notes                                          |       | 2,662.6                                                |       |                 | 3,110.1                                                                 |              |       | 3,793.4 |   |   |
| Revolving charge accounts                                                    |       | 2,304.3                                                |       |                 | 2,192.5                                                                 |              |       | 2,074.0 |   |   |
| Operating loans                                                              |       | 204.4                                                  |       |                 | 297.0                                                                   |              |       | 346.4 |   |   |
| Wholesale receivables                                                        |       | 5,049.2                                                |       |                 | 3,873.5                                                                 |              |       | 4,582.3 |   |   |
| Financing leases                                                             |       | 400.4                                                  |       |                 | 392.8                                                                   |              |       | 397.9 |   |   |
| Total receivables                                                            |       | 19,418.6                                               |       |                 | 18,100.0                                                                |              |       | 18,470.9 |   |   |
| Allowance for credit losses                                                  |       | (149.6                                                 | )          |                 | (158.2                                                                  | )                 |       | (129.2 | ) |   |
| Total receivables – net                                                 |       | 19,269.0                                               |       |                 | 17,941.8                                                                |              |       | 18,341.7 |   |   |
| Other receivables                                                            |       | 27.1                                                   |       |                 | 25.9                                                                    |              |       | 30.8 |   |   |
| Equipment on operating leases – net                                     |       | 1,037.7                                                |       |                 | 1,023.2                                                                 |              |       | 994.3 |   |   |
| Notes receivable from John Deere                                             |       | 595.5                                                  |       |                 | 739.2                                                                   |              |       | 714.3 |   |   |
| Investment in unconsolidated affiliates                                      |       | 6.3                                                    |       |                 | 6.6                                                                     |              |       | 6.1 |   |   |
| Other assets                                                                 |       | 900.2                                                  |       |                 | 1,094.2                                                                 |              |       | 1,075.8 |   |   |
| **Total Assets**                                                             |       | $    22,154.9                      |       |                 | $    21,701.5                                       |              |       | $     23,135.3 |   |   |
| **Liabilities and Stockholder’s Equity**                                |       |                                                   |       |                 |                                                                    |              |       |   |   |   |
| Short-term borrowings:                                                       |       |                                                   |       |                 |                                                                    |              |       |   |   |   |
| Commercial paper                                                             |       | $        711.9 |       |                 | $           32.0 |              |       | $          222.0 |   |   |
| Other notes payable                                                          |       | 2,588.2                                                |       |                 | 3,113.0                                                                 |              |       | 3,684.7 |   |   |
| John Deere                                                                   |       | 914.9                                                  |       |                 | 15.3                                                                    |              |       | 13.7 |   |   |
| Current maturities of long-term borrowings                                   |       | 3,256.7                                                |       |                 | 2,550.4                                                                 |              |       | 2,660.1 |   |   |
| Total short-term borrowings                                                  |       | 7,471.7                                                |       |                 | 5,710.7                                                                 |              |       | 6,580.5 |   |   |
| Accounts payable and accrued expenses                                        |       | 805.6                                                  |       |                 | 741.2                                                                   |              |       | 768.9 |   |   |
| Deposits withheld from dealers and merchants                                 |       | 152.4                                                  |       |                 | 164.9                                                                   |              |       | 161.4 |   |   |
| Deferred income taxes                                                        |       | 64.9                                                   |       |                 | 67.1                                                                    |              |       | 73.5 |   |   |
| Long-term borrowings                                                         |       | 11,267.2                                               |       |                 | 12,700.6                                                                |              |       | 13,344.6 |   |   |
| Total liabilities                                                            |       | 19,761.8                                               |       |                 | 19,384.5                                                                |              |       | 20,928.9 |   |   |
| 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.)                           |       | 1,272.8                                                |       |                 | 1,272.8                                                                 |              |       | 1,212.8 |   |   |
| Retained earnings                                                            |       | 1,124.8                                                |       |                 | 1,032.1                                                                 |              |       | 1,011.0 |   |   |
| Accumulated other comprehensive income (loss):                               |       |                                                   |       |                 |                                                                    |              |       |   |   |   |
| Cumulative translation adjustment                                            |       | 25.2                                                   |       |                 | 55.8                                                                    |              |       | 36.6 |   |   |
| Unrealized loss on derivatives                                               |       | (30.1                                                  | )          |                 | (44.1                                                                   | )                 |       | (54.4 | ) |   |
| Total accumulated other comprehensive income (loss)                          |       | (4.9                                                   | )          |                 | 11.7                                                                    |              |       | (17.8 | ) |   |
| Total Company stockholder’s equity                                      |       | 2,392.7                                                |       |                 | 2,316.6                                                                 |              |       | 2,206.0 |   |   |
| Noncontrolling interests                                                     |       | .4                                                     |       |                 | .4                                                                      |              |       | .4 |   |   |
| Total stockholder’s equity                                              |       | 2,393.1                                                |       |                 | 2,317.0                                                                 |              |       | 2,206.4 |   |   |
| **Total Liabilities and Stockholder’s Equity**                          |       | $    22,154.9                      |       |                 | $    21,701.5                                       |              |       | $     23,135.3 |   |   |

 

 

See Condensed Notes to Interim Consolidated Financial Statements.

 

3

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**John Deere CapitalCorporation and Subsidiaries**

**Statements of Consolidated Cash Flows**

**For the Nine Months Ended July 31, 2010 and 2009**

**(Unaudited)**

(inmillions)

 
| ** **                                                                         | ** ** | **2010**                                               | ** ** | **2009** | ** **                                             |
|------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|----------|--------------------------------------------------------|
| **Cash  Flows from Operating Activities:**                                         |       |                                                   |       |     |                                                   |
| Net income                                                                         |       | $        222.7 |       |     | $        128.1 |   |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |       |                                                   |       |     |                                                   |   |   |
| Provision for credit  losses                                                       |       | 65.6                                                   |       |     | 110.3                                                  |   |   |
| Provision for depreciation  and amortization                                       |       | 150.3                                                  |       |     | 161.4                                                  |   |   |
| Provision (credit) for  deferred income taxes                                      |       | (9.5                                                   | )          |     | 13.1                                                   |   |   |
| Undistributed earnings of  unconsolidated affiliates                               |       | (.6                                                    | )          |     | (.3                                                    | ) |   |
| Change in accounts payable  and accrued expenses                                   |       | 15.8                                                   |       |     | 30.0                                                   |   |   |
| Change in accrued income  taxes payable/receivable                                 |       | 27.2                                                   |       |     | 24.3                                                   |   |   |
| Other                                                                              |       | 216.3                                                  |       |     | (56.9                                                  | ) |   |
| Net cash provided by  operating activities                                         |       | 687.8                                                  |       |     | 410.0                                                  |   |   |
|                                                                               |       |                                                   |       |     |                                                   |   |   |
| **Cash  Flows from Investing Activities:**                                         |       |                                                   |       |     |                                                   |   |   |
| Cost of receivables  acquired                                                      |       | (25,006.9                                              | )          |     | (23,598.4                                              | ) |   |
| Collections of receivables                                                         |       | 23,392.8                                               |       |     | 23,113.3                                               |   |   |
| Cost of equipment on  operating leases acquired                                    |       | (431.5                                                 | )          |     | (335.6                                                 | ) |   |
| Proceeds from sales of  equipment on operating leases                              |       | 286.2                                                  |       |     | 220.8                                                  |   |   |
| Cost of notes receivable  with John Deere                                          |       | (97.4                                                  | )          |     | (242.4                                                 | ) |   |
| Collection of notes  receivable with John Deere                                    |       | 241.1                                                  |       |     | 327.4                                                  |   |   |
| Proceeds from sales of  receivables                                                |       | 17.2                                                   |       |     | 33.0                                                   |   |   |
| Change in restricted cash                                                          |       | 1.0                                                    |       |     | (37.5                                                  | ) |   |
| Other                                                                              |       | (19.2                                                  | )          |     | 1.4                                                    |   |   |
| Net cash used for  investing activities                                            |       | (1,616.7                                               | )          |     | (518.0                                                 | ) |   |
|                                                                               |       |                                                   |       |     |                                                   |   |   |
| **Cash  Flows from Financing Activities:**                                         |       |                                                   |       |     |                                                   |   |   |
| Increase (decrease) in  commercial paper - net                                     |       | 713.0                                                  |       |     | (2,649.7                                               | ) |   |
| Increase (decrease) in  other notes payable - net                                  |       | (524.8                                                 | )          |     | 2,062.8                                                |   |   |
| Increase (decrease) in  payable to John Deere - net                                |       | 910.7                                                  |       |     | (306.6                                                 | ) |   |
| Proceeds from issuance of  long-term borrowings                                    |       | 1,122.4                                                |       |     | 4,159.4                                                |   |   |
| Payments of long-term  borrowings                                                  |       | (1,698.0                                               | )          |     | (2,187.2                                               | ) |   |
| Dividends paid                                                                     |       | (130.0                                                 | )          |     |                                                   |   |   |
| Debt issuance costs                                                                |       | (11.1                                                  | )          |     | (111.3                                                 | ) |   |
| Net cash provided by  financing activities                                         |       | 382.2                                                  |       |     | 967.4                                                  |   |   |
|                                                                               |       |                                                   |       |     |                                                   |   |   |
| **Effect of exchange rate changes  on cash and cash equivalents**                  |       | (4.8                                                   | )          |     | 30.3                                                   |   |   |
| **Net  increase (decrease) in cash and cash equivalents**                          |       | (551.5                                                 | )          |     | 889.7                                                  |   |   |
| **Cash and  cash equivalents at beginning of period**                              |       | 870.6                                                  |       |     | 1,082.6                                                |   |   |
| **Cash and  cash equivalents at end of period**                                    |       | $        319.1 |       |     | $     1,972.3                 |   |   |

 

 

See Condensed Notes to Interim ConsolidatedFinancial Statements.

 

4

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**John Deere Capital Corporation and Subsidiaries**

**Statementsof Changes in Consolidated Stockholder’s Equity**

**For the Nine Months Ended July 31, 2009 and 2010**

**(Unaudited)**

(in millions)

 
| ** **                              | ** ** | ** **                            | ** ** | **Total Company Stockholder’s Equity** | ** **                 | ** **             | ** ** |
|-----------------------------------------|------------|---------------------------------------|------------|---------------------------------------------|----------------------------|------------------------|------------|
| ** **                              | ** ** | **Total  Stockholder’s  Equity** | ** ** | **Common  Stock**                           | ** **                 | **Retained  Earnings** | ** ** | **Total  Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Noncontrolling  Interests** | ** ** |
|                                    |       |                                  |       |                                        |                       |                   |       |   |   |   |   |
| **Balance October 31, 2008**       |       | $    2,065.3      |       |                                        | $   1,212.8 |                   |       | $    882.9 |   |   | $  (30.8 | ) |   | $  .4 |   |   |
| Net income                              |       | 128.1                                 |       |                                        |                       |                   |       | 128.1 |   |   |   |   |   |   |   |   |
| Other comprehensive income (loss)       |       |                                  |       |                                        |                       |                   |       |   |   |   |   |   |   |   |   |   |
| Cumulative  translation adjustment      |       | 27.4                                  |       |                                        |                       |                   |       |   |   |   | 27.4 |   |   |   |   |   |
| Unrealized  loss on derivatives         |       | (14.4                                 | )          |                                        |                       |                   |       |   |   |   | (14.4 | ) |   |   |   |   |
| **Total** **comprehensive income** |       | 141.1                                 |       |                                        |                       |                   |       |   |   |   |   |   |   |   |   |   |
| **Balance July 31, 2009**          |       | $    2,206.4      |       |                                        | $   1,212.8 |                   |       | $  1,011.0 |   |   | $  (17.8 | ) |   | $  .4 |   |   |
|                                    |       |                                  |       |                                        |                       |                   |       |   |   |   |   |   |   |   |   |   |
|                                    |       |                                  |       |                                        |                       |                   |       |   |   |   |   |   |   |   |   |   |
| **Balance October 31, 2009**       |       | $  2,317.0                  |       |                                        | $  1,272.8       |                   |       | $  1,032.1 |   |   | $    11.7 |   |   | $  .4 |   |   |
| Net income                              |       | 222.7                                 |       |                                        |                       |                   |       | 222.7 |   |   |   |   |   |   |   |   |
| Other comprehensive income (loss)       |       |                                  |       |                                        |                       |                   |       |   |   |   |   |   |   |   |   |   |
| Cumulative  translation adjustment      |       | (30.6                                 | )          |                                        |                       |                   |       |   |   |   | (30.6 | ) |   |   |   |   |
| Unrealized  gain on derivatives         |       | 14.0                                  |       |                                        |                       |                   |       |   |   |   | 14.0 |   |   |   |   |   |
| **Total** **comprehensive income** |       | 206.1                                 |       |                                        |                       |                   |       |   |   |   |   |   |   |   |   |   |
| Dividends paid                          |       | (130.0                                | )          |                                        |                       |                   |       | (130.0 | ) |   |   |   |   |   |   |   |
| **Balance July 31, 2010**          |       | $    2,393.1      |       |                                        | $   1,272.8 |                   |       | $  1,124.8 |   |   | $  (4.9 | ) |   | $  .4 |   |   |

 

 

See Condensed Notes to Interim Consolidated FinancialStatements.

 

5

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**JohnDeere Capital Corporation and Subsidiaries**

**Condensed Notes to InterimConsolidated 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 andregulations of the U.S. Securities and Exchange Commission (SEC). Certaininformation and footnote disclosures normally included in annual financial statementsprepared in accordance with accounting principles generally accepted in theU.S. have been condensed or omitted as permitted by such rules andregulations. All adjustments, consisting of normal recurring adjustments, havebeen included. Management believes that the disclosures are adequate to presentfairly the financial position, results of operations and cash flows at thedates and for the periods presented. It is suggested that these interimfinancial statements be read in conjunction with the consolidated financialstatements and the notes thereto appearing in the Company’s latest annualreport on Form 10-K. Results for interim periods are not necessarilyindicative of those to be expected for the fiscal year.

 

The preparation of financialstatements in conformity with accounting principles generally accepted in theU.S. requires management to make estimates and assumptions that affect thereported amounts and related disclosures. Actual results could differ fromthose estimates.

 

Certain items previouslyreported in specific financial statement captions in previous periods have beenreclassified to conform to the financial statement presentation as a result ofthe adoption in the first quarter of 2010 of the guidance in FinancialAccounting Standards Board (FASB) Accounting Standards Codification (ASC) 810,Consolidation (FASB Statement No. 160, Noncontrolling Interests inConsolidated Financial Statements) (See Note 3).

 

In July 2010, theparent of the Company, John Deere Credit Company, changed its name to JohnDeere Financial Services, Inc.

 

(2)                                                                               TheCompany provides and administers financing for retail purchases of newequipment manufactured by Deere & Company’s agriculture and turf andconstruction and forestry divisions and used equipment taken in trade for thisequipment. The Company generally purchases retail installment sales and loancontracts (retail notes) from Deere & Company and its wholly-ownedsubsidiaries (collectively called John Deere). John Deere generally acquiresthese 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 agriculture and turf andconstruction and forestry markets (revolving charge accounts). Further, theCompany finances and services operating loans, in most cases offered throughand acquired from farm input providers or through direct relationships withagricultural producers or agribusinesses (operating loans). The Company alsoprovides wholesale financing for inventories of John Deere agriculture and turfand construction and forestry equipment owned by dealers of those products(wholesale receivables). The Company also offers credit enhanced internationalexport financing to select customers and dealers which generally involves JohnDeere products and offers certain crop risk mitigation products in the U.S. Inaddition, the Company makes loans to certain affiliated companies that directlyinvest in wind energy projects. Retail notes, revolving charge accounts,operating loans, financing leases and wholesale receivables are collectivelycalled “Receivables.” Receivables and operating leases are collectively called“Receivables and Leases.”

 

6

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(3)                                                                        New accountingstandards adopted in the first nine months of 2010 were as follows:

 

In the first quarter of2010, the Company adopted FASB ASC 810, Consolidation (FASB Statement No. 160,Noncontrolling Interests in Consolidated Financial Statements). ASC 810requires that noncontrolling interests are reported as a separate line instockholder’s equity. The net income for both the Company and thenoncontrolling interests is included in “Net income.” The “Net incomeattributable to noncontrolling interests” is deducted from “Net income” todetermine the “Net income attributable to the Company.” ASC 810 also requirescertain prospective changes in accounting for noncontrolling interestsprimarily related to increases and decreases in ownership and changes incontrol. As required, the presentation and disclosure requirements were adoptedthrough retrospective application, and the consolidated financial statementprior period information has been adjusted accordingly. The adoption did nothave a material effect on the Company’s consolidated financial statements.

 

In the first quarter of2010, the Company adopted FASB ASC 805, Business Combinations (FASB StatementNo. 141 (revised 2007), Business Combinations). ASC 805 requires anacquirer to measure the identifiable assets acquired, the liabilities assumedand any noncontrolling interest in the acquiree at their fair values on theacquisition date, with goodwill being the excess value over the netidentifiable assets acquired. This standard also requires the fair valuemeasurement of certain other assets and liabilities related to the acquisitionsuch as contingencies and research and development. The adoption did not have amaterial effect on the Company’s consolidated financial statements.

 

In the first quarter of2010, the Company adopted FASB ASC 820, Fair Value Measurements and Disclosures(FASB Statement No. 157, Fair Value Measurements), for nonrecurringmeasurements of nonfinancial assets and liabilities. The standard requires thatthese measurements comply with certain guidance for fair value measurements andthe disclosure of such measurements. The adoption did not have a materialeffect on the Company’s consolidated financial statements.

 

In the first quarter of2010, the Company adopted FASB Accounting Standards Update (ASU) No. 2010-09,Amendments to Certain Recognition and Disclosure Requirements, which amends ASC855, Subsequent Events. This ASU removes the requirement for an SEC filer todisclose a date through which subsequent events have been evaluated. Thischange removes potential conflicts with SEC requirements.  The adoption did not have a material effecton the Company’s consolidated financial statements.

 

In the second quarter of2010, the Company adopted ASU No. 2010-06, Improving Disclosuresabout Fair Value Measurements, which amends ASC 820, Fair Value Measurementsand Disclosures.  This ASU requiresdisclosures of transfers into and out of Levels 1 and 2, more detailed rollforward reconciliations of Level 3 recurring fair value measurements on a grossbasis, fair value information by class of assets and liabilities, anddescriptions of valuation techniques and inputs for Level 2 and 3 measurements.The effective date for the roll forward reconciliations is the first quarter offiscal year 2012. The adoption in the second quarter this year did not have amaterial effect and the future adoption will not have a material effect on theCompany’s consolidated financial statements.

 

New accounting standards to be adopted are as follows:

 

In December 2009, theFASB issued ASU No. 2009-16, Accounting for Transfers of Financial Assets,which amends ASC 860, Transfers and Servicing (FASB Statement No. 166,Accounting for Transfers of Financial Assets an amendment of FASB Statement No. 140).This ASU eliminates the qualifying special purpose entities from theconsolidation guidance and clarifies the requirements for isolation andlimitations on portions of financial assets that are eligible for saleaccounting. It requires additional disclosures about the risks from continuinginvolvement in transferred financial assets accounted for as sales. Theeffective date is the beginning of fiscal year 2011. The adoption is not expectedto have a material effect on the Company’s consolidated financial statements.

 

7

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In December 2009, theFASB issued ASU No. 2009-17, Improvements to Financial Reporting byEnterprises Involved with Variable Interest Entities, which amends ASC 810,Consolidation (FASB Statement No. 167, Amendments to FASB InterpretationNo. 46(R)). This ASU requires a qualitative analysis to determine theprimary beneficiary of a variable interest entity (VIE). The analysis identifiesthe primary beneficiary as the enterprise that has both the power to direct theactivities of a VIE that most significantly impact the VIE’s economicperformance and the obligation to absorb losses or the right to receivebenefits that could be significant to the VIE. The ASU also requires additionaldisclosures about an enterprise’s involvement in a VIE. The effective date isthe beginning of fiscal year 2011. The adoption is not expected to have amaterial effect on the Company’s consolidated financial statements.

 

In July 2010, the FASBissued ASU No. 2010-20, Disclosures about the Credit Quality of FinancingReceivables and the Allowance for Credit Losses, which amends ASC 310,Receivables. This ASU requires disclosures related to financing receivables andthe allowance for credit losses by portfolio segment. The ASU also requiresdisclosures of information regarding the credit quality, aging, nonaccrualstatus and impairments by class of receivable. A portfolio segment is the levelat which a creditor develops a systematic methodology for determining itscredit allowance. A receivable class is a subdivision of a portfolio segmentwith similar measurement attributes, risk characteristics and common methods tomonitor and assess credit risk. Trade accounts receivable with maturities ofone year or less are excluded from the disclosure requirements. The effectivedate for disclosures as of the end of the reporting period is the first quarterof fiscal year 2011. The effective date for disclosures for activity during thereporting period is the second quarter of fiscal year 2011. The adoption willnot have a material effect on the Company’s consolidated financial statements.

 

 

(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 |   | Nine Months Ended |
|------------------------------------------------|--------|--------------------|--------|-------------------|
|                                           |   | July 31,      |   | July 31,     |   |
|                                           |   | 2010               |   | 2009              |   |   |   | 2010 |   | 2009 |   |
|                                           |   |               |   |              |   |   |   |   |   |   |   |
| Net income                                     |   | $                  | 89.4   |              | $ | 59.1 |   |   |   | $ | 222.7 |   | $ | 128.1 |   |
|                                           |   |               |   |              |   |   |   |   |   |   |   |
| Other comprehensive income (loss), net of tax: |   |               |   |              |   |   |   |   |   |   |   |
| Cumulative translation adjustment              |   | (4.0               | )      | 25.5              |   |   |   | (30.6 | ) | 27.4 |   |
| Unrealized gain (loss) on derivatives          |   | (7.9               | )      | 9.9               |   |   |   | 14.0 |   | (14.4 | ) |
| Total comprehensive income                     |   | $                  | 77.5   |              | $ | 94.5 |   |   |   | $ | 206.1 |   | $ | 141.1 |   |

 

(5)                                                                        Securitizationof receivables:

 

The Company, as a part ofits overall funding strategy, periodically transfers certain receivables(retail notes) into variable interest entities (VIEs) that are special purposeentities (SPEs) as part of its asset-backed securities programs(securitizations). The structure of these transactions is such that thetransfer of the retail notes does not meet the criteria of sales ofreceivables, and is, therefore, accounted for as a secured borrowing. SPEsutilized in securitizations of retail notes differ from other entities includedin the Company’s consolidated statements because the assets they hold arelegally isolated. For bankruptcy analysis purposes, the Capital Corporation hassold the receivables to the SPEs in a true sale and the SPEs are separate legalentities. Use of the assets held by the SPEs is restricted by terms of thedocuments governing the securitization transaction.

 

In securitizations of retailnotes related to secured borrowings, the retail notes are transferred tocertain SPEs which in turn issue debt to investors. The resulting securedborrowings are included in short-term borrowings on the balance sheet. Thesecuritized retail notes are recorded as “Restricted securitized retail notes”on the balance sheet. The total restricted assets on the balance sheet relatedto these securitizations include the restricted securitized retail notes lessan allowance for credit losses, and other assets primarily representingrestricted cash. The SPEs supporting the secured borrowings to which the retailnotes are transferred are consolidated unless the Company is not the primarybeneficiary. No additional support to these SPEs beyond what was previouslycontractually required has been provided during the reporting periods.

 

8

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In certain securitizations,the Company is the primary beneficiary of the SPEs and, as such, consolidatesthe entities. The restricted assets (retail notes, allowance for credit lossesand other assets) of the consolidated SPEs totaled $1,850 million,$2,157 million and $1,855 million at July 31, 2010,October 31, 2009 and July 31, 2009, respectively. The liabilities(other notes payable and accounts payable and accrued expenses) of these SPEstotaled $1,765 million, $2,133 million and $1,796 million at July 31,2010, October 31, 2009 and July 31, 2009, respectively. The creditholders of these SPEs do not have legal recourse to the Company’s generalcredit.

 

In other securitizations,the Company transfers retail notes into bank-sponsored, multi-seller,commercial paper conduits, which are SPEs that are not consolidated. TheCompany is not considered to be the primary beneficiary of these conduits,because the Company’s variable interests in the conduits will not absorb amajority of the conduits’ expected losses, residual returns, or both. This isprimarily due to these interests representing significantly less than amajority of the conduits’ total assets and liabilities. These conduits providea 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. TheCompany’s carrying values and variable interests related to these conduits wererestricted assets (retail notes, allowance for credit losses and other assets)of $877 million, $1,036 million and $2,060 million at July 31,2010, October 31, 2009 and July 31, 2009, respectively. Theliabilities (other notes payable and accounts payable and accrued expenses)related to these conduits were $815 million, $982 million and$1,895 million at July 31, 2010, October 31, 2009 and July 31,2009, respectively.

 

The Company’s carryingamount of the liabilities to the unconsolidated conduits, compared to themaximum exposure to loss related to these conduits, which would only beincurred in the event of a complete loss on the restricted assets was asfollows (in millions of dollars):

 
| ** **                    | ** ** | July 31,  2010 |   |   |   |   |   |
|-------------------------------|------------|---------------------|--------|--------|--------|--------|--------|
| Carrying value of liabilities |       | $                   | 814.9  |   |   |   |   |   |
| Maximum exposure to loss      |       | 876.5               |   |   |   |   |   |
|                               |            |                     |        |        |        |        |        |  |

 

The assets of unconsolidatedconduits related to securitizations in which the Company’s variable interestswere considered significant were approximately $21 billion at July 31,2010.

 

The components ofconsolidated restricted assets related to secured borrowings in securitizationtransactions were as follows (in millions of dollars):

 
|                                |   | July 31,  2010 |    | October31,  2009 |   | July 31,  2009 |   |
|-------------------------------------|--------|---------------------|---------|------------------|--------|---------------------|--------|
|                                |   |                |    |             |   |                |   |
| Restricted securitized retail notes |   | $                   | 2,662.6 |             | $      | 3,110.1             |   | $ | 3,793.4 |   |
| Allowance for credit losses         |   | (30.8               | )       | (24.3            | )      | (17.6               | )      |
| Other assets                        |   | 95.1                |    | 107.7            |   | 139.1               |   |
| Total restricted securitized assets |   | $                   | 2,726.9 |             | $      | 3,193.5             |   | $ | 3,914.9 |   |

 

The components ofconsolidated secured borrowings and other liabilities related tosecuritizations were as follows (in millions of dollars):

 
|                                                        |   | July 31,  2010 |    | October 31,  2009 |   | July 31,  2009 |   |
|-------------------------------------------------------------|--------|---------------------|---------|------------------------|--------|---------------------|--------|
| Other notes payable                                         |   | $                   | 2,577.3 |                   | $      | 3,109.1             |   | $ | 3,684.7 |   |
| Accounts payable and accrued expenses                       |   | 2.2                 |    | 5.4                    |   | 6.7                 |   |
| Total liabilities related to restricted  securitized assets |   | $                   | 2,579.5 |                   | $      | 3,114.5             |   | $ | 3,691.4 |   |

 

The secured borrowingsrelated to these restricted securitized retail notes are obligations that arepayable as the retail notes are liquidated. Repayment of the secured borrowingsdepends primarily on cash flows generated by the restricted assets. Due to theCompany’s short-term credit rating, cash collections from these restrictedassets are not required to be placed into a restricted collection account untilimmediately prior to the time payment is required to the secured creditors. AtJuly 31, 2010, the maximum remaining term of all restricted receivableswas approximately seven years.

 

9

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(6)                                                                        Commitments andcontingencies:

 

At July 31, 2010, JohnDeere Credit Inc., the John Deere finance subsidiary in Canada, had$311 million of commercial paper, $1,593 million of medium-term notesoutstanding, and a fair value liability of $8 million for derivatives with anotional amount of $651 million that were guaranteed by the Company.

 

The Company’s subsidiary,John Deere Risk Protection, Inc., offers crop insurance products throughmanaging general agency agreements (Agreements) with insurance companies(Insurance Carriers) rated “Excellent” by A.M. Best Company. As a managinggeneral agent, John Deere Risk Protection, Inc. will receive commissionsfrom the Insurance Carriers for selling crop insurance to producers. TheCompany has guaranteed certain obligations under the Agreements, including theobligation to pay the Insurance Carriers for any uncollected premiums. At July 31,2010, the maximum exposure for uncollected premiums was approximately $159million. Substantially all of the Company’s crop insurance risk under theAgreements has been mitigated by a syndicate of private reinsurance companies.The reinsurance companies are rated “Excellent” or higher by A.M. BestCompany. In the event of a widespread catastrophic crop failure throughout theU.S. and the default of these highly rated private reinsurance companies ontheir reinsurance obligations, the Company would be required to reimburse theInsurance Carriers for exposures under the Agreements of approximately$901 million at July 31, 2010. The Company believes that thelikelihood of the occurrence of events that would give rise to the exposuresunder these Agreements is substantially remote and as a result, at July 31, 2010,the Company’s accrued liability under the Agreements was not material.

 

The Company has commitmentsto extend credit to customers and John Deere dealers through lines of creditand other pre-approved credit arrangements. The Company applies the same creditpolicies and approval process for these commitments to extend credit as it doesfor its Receivables. Collateral is not required for these commitments, but ifcredit is extended, collateral may be required upon funding. The amount ofunused commitments to extend credit to John Deere dealers was $2.8 billion atJuly 31, 2010. The amount of unused commitments to extend credit tocustomers was $40.9 billion at July 31, 2010. A significant portionof these commitments is not expected to be fully drawn upon; therefore, thetotal commitment amounts likely do not represent a future cash requirement. TheCompany generally has the right to unconditionally cancel, alter or amend theterms of these commitments at any time. Over 95 percent of these unusedcommitments to extend credit to customers relate to revolving charge accounts.

 

At July 31, 2010, theCompany had restricted other assets of $3 million. See Note 5 for additionalrestricted assets associated with borrowings related to securitizations.

 

The Company also had othermiscellaneous contingent liabilities totaling approximately $5 million at July 31,2010, for which it believes the probability for payment is substantiallyremote. The accrued liability for these contingencies was not material at July 31,2010.

 

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

 
|                                           |   | July 31, 2010 |   | October 31, 2009 |   | July 31, 2009 |   |
|------------------------------------------------|--------|--------------------|--------|-----------------------|--------|--------------------|--------|
|                                           |   | Carrying  Value    |   | Fair   Value          |   | Carrying   Value   |   | Fair   Value |   | Carrying   Value |   | Fair   Value |   |
| Receivables financed – net                |   | $                  | 16,637 |                  | $      | 16,673             |   | $ | 14,856 |   | $ | 14,954 |   | $ | 14,566 |   | $ | 14,571 |   |
| Restricted securitized retail notes – net |   | 2,632              |   | 2,650                 |   | 3,086              |   | 3,123 |   | 3,776 |   | 3,785 |   |
| Short-term secured borrowings                  |   | 2,577              |   | 2,600                 |   | 3,109              |   | 3,140 |   | 3,685 |   | 3,699 |   |
| Long-term borrowings due within one year       |   | 3,257              |   | 3,284                 |   | 2,550              |   | 2,572 |   | 2,660 |   | 2,674 |   |
| Long-term borrowings                           |   | 11,267             |   | 11,733                |   | 12,701             |   | 13,140 |   | 13,345 |   | 13,690 |   |
|                                                |        |                    |        |                       |        |                    |        |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

10

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Fair values of long-term borrowings andshort-term secured borrowings were based on current market quotes for identicalor similar borrowings or the discounted values of their related cash flows atcurrent market interest rates. Certain long-term borrowings have been swappedto current variable interest rates. The carrying values of these long-termborrowings included adjustments related to fair value hedges.

 

(8)                                                                      Assets andliabilities measured at fair value as Level 2 measurements on a recurring basiswere as follows (in millions of dollars):

 
|                                   |   | July 31, |   | October 31, |   | July 31, |   |
|----------------------------------------|--------|---------------|--------|------------------|--------|---------------|--------|
|                                   |   | 2010          |   | 2009             |   | 2009          |   |
| Other assets                           |   |          |   |             |   |          |   |
| Derivatives:                           |   |          |   |             |   |          |   |
| Interest rate contracts                |   | $             | 501.1  |             | $      | 488.8         |   | $ | 497.7 |   |
| Foreign exchange contracts             |   | .9            |   | 3.4              |   | 1.3           |   |
| Cross-currency interest rate contracts |   | 4.4           |   | 173.5            |   | 128.1         |   |
| Total assets                           |   | $             | 506.4  |             | $      | 665.7         |   | $ | 627.1 |   |
|                                   |   |          |   |             |   |          |   |
| Accounts payable and accrued expenses  |   |          |   |             |   |          |   |
| Derivatives:                           |   |          |   |             |   |          |   |
| Interest rate contracts                |   | $             | 45.4   |             | $      | 115.2         |   | $ | 161.1 |   |
| Foreign exchange contracts             |   | 15.7          |   | 15.0             |   | 14.7          |   |
| Cross-currency interest rate contracts |   | 95.7          |   | .7               |   | .9            |   |
| Total liabilities                      |   | $             | 156.8  |             | $      | 130.9         |   | $ | 176.7 |   |

 

Carrying values for assets as of the end ofthe periods and losses during the related periods for nonrecurring Level 3 fairvalue measurements were as follows (in millions of dollars):

 
|                  |   | July 31, |   | October 31, |   | July 31, |   | Nine Months Ended  July 31, |   |
|-----------------------|--------|---------------|--------|------------------|--------|---------------|--------|----------------------------------|--------|
|                  |   | 2010          |   | 2009             |   | 2009          |   | 2010                             |   | 2009 |   |
| Receivables:          |   |          |   |             |   |          |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Retail notes          |   |          | $      | 1.6              |   |          |   | $                                | 3.1    |   |   |   | $    3.4 |   |   |   | $ | .4 |   |   |   | $   1.5 |   |   |
| Operating loans       |   |          | .7     |             |   |          | 13.3   |                             |   |   | 17.7 |   |   |   |   |   |   |   | 8.6 |   |   |
| Wholesale receivables |   |          | 18.9   |             |   |          | 6.0    |                             |   |   | 3.1 |   |   |   | 3.4 |   |   |   | 3.1 |   |   |
| Financing leases      |   |          | .4     |             |   |          | .7     |                             |   |   |   |   |   |   | .2 |   |   |   |   |   |   |
| Total Receivables     |   |          | $      | 21.6             |   |          |   | $                                | 23.1   |   |   |   | $  24.2 |   |   |   | $ | 4.0 |   |   |   | $ 13.2 |   |   |

 

Level 1 measurements consist of quoted pricesin active markets for identical assets or liabilities.  Level 2 measurements include significantother observable inputs such as quoted prices for similar assets or liabilitiesin active markets; identical assets or liabilities in inactive markets;observable inputs such as interest rates and yield curves; and othermarket-corroborated inputs. Level 3 measurements include significantunobservable inputs. There were no assets or liabilities valued using Level 1measurements at July 31, 2010.

 

Fair value is defined as the price that wouldbe received to sell an asset or paid to transfer a liability in an orderlytransaction between market participants at the measurement date. In determiningfair value, the Company uses various methods including market and income approaches.The Company utilizes valuation models and techniques that maximize the use ofobservable inputs. The models are industry-standard models that considervarious assumptions including time values and yield curves as well as othereconomic measures. These valuation techniques are consistently applied.

 

The following is a description of thevaluation methodologies the Company uses to measure financial instruments atfair value:

 

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

 

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*Receivables —*Specific reserve impairments are based on thefair value of the collateral, which is measured using an income approach(discounted cash flow) or a market approach (appraisal values or realizablevalues).

 

(9)                                                                      It is theCompany’s policy that derivative transactions are executed only to manageexposures arising in the normal course of business and not for the purpose ofcreating speculative positions or trading. The Company manages the relationshipof the types and amounts of its funding sources to its receivable and leaseportfolio in an effort to diminish risk due to interest rate and foreigncurrency fluctuations, while responding to favorable financing opportunities.The Company also has foreign currency exposures at some of its foreign anddomestic operations related to financing in currencies other than the localcurrencies.

 

All derivatives are recordedat fair value on the balance sheet. Each derivative is designated as a cashflow hedge, a fair value hedge, or remains undesignated. All designated hedgesare formally documented as to the relationship with the hedged item as well asthe risk-management strategy. Both at inception and on an ongoing basis thehedging instrument is assessed as to its effectiveness, when applicable. If andwhen a derivative is determined not to be highly effective as a hedge, or theunderlying hedged transaction is no longer likely to occur, or the hedgedesignation is removed, or the derivative is terminated, hedge accounting isdiscontinued. Any past or future changes in the derivative’s fair value, whichwill not be effective as an offset to the income effects of the item beinghedged, are recognized currently in the income statement.

 

Certain of the Company’sderivative agreements contain credit support provisions that require theCompany to post collateral based on reductions in credit ratings. The aggregatefair value of all derivatives with credit-risk-related contingent features thatwere in a liability position at July 31, 2010, October 31, 2009 andJuly 31, 2009 was $34 million, $13 million and $22 million, respectively.The Company, due to its credit rating, has not posted any collateral. If thecredit-risk-related contingent features were triggered, the Company would berequired to post full collateral for this liability position.

 

Derivative instruments aresubject to significant concentrations of credit risk to the banking sector. TheCompany manages individual counterparty exposure by setting limits thatconsider the credit rating of the counterparty and the size of other financialcommitments and exposures between the Company and the counterparty banks. Allinterest rate derivatives are transacted under International Swaps andDerivatives Association (ISDA) documentation. Some of these agreements includecollateral support arrangements or mutual put options at fair value. Eachmaster agreement permits the net settlement of amounts owed in the event ofearly termination. The maximum amount of loss that the Company would incur ifcounterparties to derivative instruments fail to meet their obligations, notconsidering collateral received or netting arrangements, was $506 million, $666million and $627 million as of July 31, 2010, October 31, 2009 andJuly 31, 2009, respectively. The amount of collateral received at July 31,2010, October 31, 2009 and July 31, 2009 to offset this potentialmaximum loss was $78 million, $78 million and $40 million, respectively.The netting provisions of the agreements would reduce the maximum amount ofloss the Company would incur if the counterparties to derivative instrumentsfail to meet their obligations by an additional $88 million, $82 million and$125 million as of July 31, 2010, October 31, 2009 and July 31,2009, respectively. None of the concentrations of risk with any individualcounterparty was considered significant in any periods presented.

 

Cash flow hedges

 

Certain interest rate andcross-currency interest rate contracts (swaps) were designated as hedges offuture cash flows from borrowings. The total notional amounts of thereceive-variable/pay-fixed interest rate contracts at July 31, 2010,October 31, 2009 and July 31, 2009 were $1,430 million,$2,492 million and $3,411 million, respectively. The notional amount ofcross-currency interest rate contracts was $849 million at July 31,2010. The effective portions of the fair value gains or losses on these cashflow hedges were recorded in other comprehensive income (OCI) and subsequentlyreclassified into interest expense or administrative and operating expenses(foreign exchange) in the same periods during which the hedged transactionsaffected earnings. These amounts offset the effects of interest rate or foreigncurrency exchange rate changes on the related borrowings. Any ineffectiveportions of the gains or losses on all interest rate contracts designated ascash flow hedges were recognized currently in interest expense oradministrative and operating expenses and were not material during any periodspresented. The cash flows from these contracts were recorded in operatingactivities in the consolidated statements of cash flows.

 

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The amount of loss recordedin OCI at July 31, 2010 that is expected to be reclassified to interestexpense or administrative and operating expenses in the next twelve months ifinterest rates or exchange rates remain unchanged is approximately $20 millionafter-tax. These contracts mature in up to 42 months. There were no gains orlosses reclassified from OCI to earnings based on the probability that theoriginal forecasted transaction would not occur.

 

Fair value hedges

 

Certain interest ratecontracts (swaps) were designated as fair value hedges of fixed-rate, long-termborrowings. The total notional amounts of these receive-fixed/pay-variableinterest rate contracts at July 31, 2010, October 31, 2009 and July 31,2009 were $6,462 million, $6,120 million and $6,238 million, respectively.The effective portions of the fair value gains or losses on these contractswere offset by fair value gains or losses on the hedged items (fixed-rateborrowings). Any ineffective portions of the gains or losses were recognizedcurrently in interest expense and were not material during any periodspresented. The cash flows from these contracts were recorded in operatingactivities in the consolidated statements of cash flows.

 

The gains (losses) on these contracts and theunderlying borrowings recorded in interest expense were as follows (in millionsof dollars):

 
|                      |   | Three Months Ended  July 31, |   |   | Nine Months Ended  July 31, |
|---------------------------|--------|------------------------------|--------|--------|----------------------------------|
|                      |   | 2010          |   | 2009   |                             |   |   | 2010    |   | 2009 |
| Interest rate contracts * |   | $                            | 114.4  |   | $                                | (46.2 | ) |   |   | $ | 103.6 |   | $ | 174.4 |   |
| Borrowings **             |   | (114.5                       | )      | 44.9   |                             |   |   | (103.4 | ) | (174.3 | ) |
|                           |        |                              |        |        |                                  |  |  |  |  |  |  |  |  |  |  |

 

*    Includes changes in fairvalue of interest rate contracts excluding accrued interest credits of$50.1 million and $48.3 million during the third quarter of 2010 and 2009and $161.4 million and $108.9 million for the first nine months of 2010and 2009, respectively.

 

**  Includes adjustments for fair valuesof hedged borrowings excluding accrued interest expense of $77.2 million and$79.8 million during the third quarter of 2010 and 2009 and $237.1 million and$217.6 million for the first nine months of 2010 and 2009, respectively.

 

Derivatives not designated as hedging instruments

 

The Company has certain interest ratecontracts (swaps and caps), foreign exchange contracts (forwards and swaps) andcross-currency interest rate contracts (swaps), which were not formallydesignated as hedges. These derivatives were held as economic hedges forunderlying interest rate or foreign currency exposures primarily for certainborrowings. The total notional amounts of these interest rate swaps at July 31,2010, October 31, 2009 and July 31, 2009 were $2,348 million,$1,745 million and $990 million, the foreign exchange contracts were$1,034 million, $1,043 million and $1,227 million and the cross-currencyinterest rate contracts were $58 million, $839 million and $847 million,respectively. At July 31, 2010, October 31, 2009 and July 31,2009 there were also $1,135 million, $1,560 million and $2,670 million,respectively, of interest rate caps purchased and the same amounts sold at thesame capped interest rate to facilitate borrowings through securitization ofretail notes. The fair value gains or losses from the interest rate contractswere recognized currently in interest expense and the gains or losses fromforeign exchange contracts in administrative and operating expenses, generallyoffsetting over time the expenses on the exposures being hedged. The cash flowsfrom these non-designated contracts were recorded in operating activities inthe consolidated statements of cash flows.

 

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

 
|                                   |   | July 31,  2010 |   | October 31,  2009 |   | July 31,  2009 |   |
|----------------------------------------|--------|---------------------|--------|------------------------|--------|---------------------|--------|
| Other Assets                           |   |                |   |                   |   |                |   |   |   |
| Designated as hedging instruments:     |   |                |   |                   |   |                |   |   |   |
| Interest rate contracts                |   | $                   | 463.7  |                   | $      | 446.4               |   |   | $ | 436.7 |   |   |
|                                   |   |                |   |                   |   |                |   |   |   |
| Not designated as hedging instruments: |   |                |   |                   |   |                |   |   |   |
| Interest rate contracts                |   | 37.4                |   | 42.4                   |   |                | 61.0   |   |   |
| Foreign exchange contracts             |   | .9                  |   | 3.4                    |   |                | 1.3    |   |   |
| Cross-currency interest rate contracts |   | 4.4                 |   | 173.5                  |   |                | 128.1  |   |   |
| Total not designated                   |   | 42.7                |   | 219.3                  |   |                | 190.4  |   |   |
|                                   |   |                |   |                   |   |                |   |   |   |
| Total derivatives                      |   | $                   | 506.4  |                   | $      | 665.7               |   |   | $ | 627.1 |   |   |
|                                   |   |                |   |                   |   |                |   |   |   |
| Accounts Payable and Accrued Expenses  |   |                |   |                   |   |                |   |   |   |
| Designated as hedging instruments:     |   |                |   |                   |   |                |   |   |   |
| Interest rate contracts                |   | $                   | 26.8   |                   | $      | 76.6                |   |   | $ | 99.2 |   |   |
| Cross-currency interest rate contracts |   | 95.1                |   |                   |   |                |   |   |   |
| Total designated                       |   | 121.9               |   | 76.6                   |   |                | 99.2   |   |   |
|                                   |   |                |   |                   |   |                |   |   |   |
| Not designated as hedging instruments: |   |                |   |                   |   |                |   |   |   |
| Interest rate contracts                |   | 18.6                |   | 38.6                   |   |                | 61.9   |   |   |
| Foreign exchange contracts             |   | 15.7                |   | 15.0                   |   |                | 14.7   |   |   |
| Cross-currency interest rate contracts |   | .6                  |   | .7                     |   |                | .9     |   |   |
| Total not designated                   |   | 34.9                |   | 54.3                   |   |                | 77.5   |   |   |
|                                   |   |                |   |                   |   |                |   |   |   |
| Total derivatives                      |   | $                   | 156.8  |                   | $      | 130.9               |   |   | $ | 176.7 |   |   |

 

14

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

 
|                          |   | Expense  or OCI                          |   | Three Months Ended  July 31 |   |   | Nine Months Ended  July 31 |   |
|-------------------------------|--------|------------------------------------------|--------|--------------------------------------------|--------|--------|-------------------------------------------|--------|
|                          |   | Classification                           |   | 2010                                       |   |   | 2009                                      |   |   | 2010 |   |   | 2009 |   |
| Fair Value Hedges:            |   |                                     |   |                                       |   |   |                                      |   |   |   |   |   |   |   |
| Interest rate contracts       |   | Interest  expense                        |   | $                                          | 164.5  |   |                                      | $      | 2.1 |   |   | $  265.0 |   |   | $ | 283.3 |   |
|                          |   |                                     |   |                                       |   |   |                                      |   |   |   |   |   |   |   |
| Cash Flow Hedges:             |   |                                     |   |                                       |   |   |                                      |   |   |   |   |   |   |   |
| Recognized in OCI             |   |                                     |   |                                       |   |   |                                      |   |   |   |   |   |   |   |
| (Effective Portion):          |   |                                     |   |                                       |   |   |                                      |   |   |   |   |   |   |   |
| Interest rate contracts       |   | OCI  (pretax)**                          |   | (5.9                                       | )      |   | (11.1                                     | )      |   | (12.1 | ) |   | (80.3 | ) |
| Foreign exchange contracts    |   | OCI  (pretax)**                          |   | (38.4                                      | )      |   |                                      |   |   | (90.5 | ) |   |   |   |
|                          |   |                                     |   |                                       |   |   |                                      |   |   |   |   |   |   |   |
| Reclassified from OCI         |   |                                     |   |                                       |   |   |                                      |   |   |   |   |   |   |   |
| (Effective Portion):          |   |                                     |   |                                       |   |   |                                      |   |   |   |   |   |   |   |
| Interest rate contracts       |   | Interest  expense**                      |   | (18.5                                      | )      |   | (26.1                                     | )      |   | (57.8 | ) |   | (58.5 | ) |
| Foreign exchange contracts    |   | Administrative  and operating expenses** |   | (13.6                                      | )      |   |                                      |   |   | (66.1 | ) |   |   |   |
|                          |   |                                     |   |                                       |   |   |                                      |   |   |   |   |   |   |   |
| Recognized Directly in Income |   |                                     |   |                                       |   |   |                                      |   |   |   |   |   |   |   |
| (Ineffective Portion):        |   |                                     |   |                                       |   |   |                                      |   |   |   |   |   |   |   |
| Interest rate contracts       |   | Interest  expense                        |   | *                                |   |   | *                               |   |   | *   |   |   | *   |   |
| Foreign exchange contracts    |   | Administrative  and operating expenses   |   | *                                |   |   | *                               |   |   | *   |   |   | *   |   |
|                          |   |                                     |   |                                       |   |   |                                      |   |   |   |   |   |   |   |
| Not Designated as Hedges:     |   |                                     |   |                                       |   |   |                                      |   |   |   |   |   |   |   |
| Interest rate contracts       |   | Interest  expense**                      |   | $                                          | 11.3   |   |                                      | $      | 5.9 |   |   | $    11.4 |   |   | $ | 6.1 |   |
| Foreign exchange contracts    |   | Administrative  and operating expenses** |   | 22.3                                       |   |   | (53.9                                     | )      |   | (8.0 | ) |   | (1.6 | ) |
| Total                         |   |                                     |   | $                                          | 33.6   |   |                                      | $      | (48.0 | ) |   | $      3.4 |   |   | $ | 4.5 |   |

 

*    The amount isnot material.

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

 

(10)                                                                The Company isa participating employer in certain Deere & Company sponsored definedbenefit pension plans for employees in the U.S. and certain defined benefitpension plans outside the U.S. These pension plans provide for benefits thatare based primarily on years of service and employee compensation. Pensionexpense is actuarially determined based on the Company’s employees included inthe plan. The Company’s pension expense amounted to $6.8 million in thefirst nine months of 2010. The accumulated benefit obligation and plan netassets for the employees of the Company are not determined separately fromDeere & Company. The Company generally provides defined benefithealth care and life insurance plans for retired employees in the U.S. as aparticipating employer in Deere & Company’s sponsored plans. Healthcare and life insurance benefits expense is actuarially determined based on theCompany’s employees included in the plans and amounted to $5.5 million duringthe first nine months of 2010. Further disclosure for these plans is includedin Deere & Company’s Form 10-Q for the quarter ended July 31,2010.

 

15

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Item2.            Management’s Discussionand Analysis of Financial Condition and Results of Operations.

 

Resultsof Operations

 

Overview

 

Organization

 

The Company primarily generates revenues and cash byfinancing John Deere dealers’ sales and leases of new and used agriculture,turf, construction and forestry equipment. In addition, the Company provideswholesale financing to dealers of the foregoing equipment, provides operatingloans, finances retail revolving charge accounts, offers certain crop riskmitigation products and makes loans to certain affiliated companies thatdirectly invest in wind energy projects. 

 

In the first quarter of 2010, the Company adoptedFASB ASC 810, Consolidation (FASB Statement No. 160, NoncontrollingInterests in Consolidated Financial Statements). This guidance requires thatnoncontrolling interests are reported as a separate line in stockholder’sequity. The net income for both the Company and the noncontrolling interestsare included in “Net income” on the consolidated financial statements. The “Netincome attributable to noncontrolling interests” is deducted from “Net income”to determine the “Net income attributable to the Company,” which agrees withthe previous calculation of net income. The following discussions of these net incomeand equity amounts have been adjusted accordingly for all periods presented. 

 

Trends and Economic Conditions

 

The Company’s business is closely related to JohnDeere’s business. Industry farm machinery sales for 2010 are forecast toincrease 5 to 10 percent for the year in the U.S. and Canada with support fromhealthy farm cash receipts, solid commodity prices and low interest rates.Industry sales of farm machinery in Western Europe are forecast to decline 15to 20 percent for the year. Sales in Central Europe and the Commonwealth ofIndependent States are expected to remain under pressure. Industry sales inSouth America are projected to increase by 25 to 30 percent. Industry sales ofturf and utility equipment in the U.S. and Canada are expected to increase 10to 15 percent for the year.  Deere &Company’s agriculture and turf segment sales increased 12 percent for the thirdquarter and 3 percent for the first nine months of 2010. These sales areforecast to increase by about 8 percent for the year with a favorable foreigncurrency translation effect of about 2 percent. Construction equipment marketsare reflecting somewhat improved market conditions and demand from independentrental companies has rebounded sharply. Global forestry markets are being aidedby higher worldwide economic activity. Deere & Company’s constructionand forestry sales increased 59 percent in the third quarter and 29 percent inthe first nine months of 2010. These sales are forecast to increase by about35 percent for the year.  

 

Net income attributable to the Company in fiscalyear 2010 is forecast to increase to approximately $290 million, compared to$149 million in fiscal year 2009. The forecast increase from 2009 is primarilydue to more favorable financing spreads and a lower provision for creditlosses, partially offset by higher administrative and operating expenses.

 

Items of concern for the Company include the recentdecline in global economic activity, the impact of sovereign and state debt,capital market disruptions, the availability of credit for John Deere’scustomers, the effectiveness of governmental policies to promote economicrecovery and financial regulatory reform. Significant fluctuations in foreigncurrency exchange rates and volatility in the price of many commodities couldalso impact the Company’s results.  

 

2010Compared with 2009

 

Net income attributable to the Company was $89.4million for the third quarter and $222.7 million for the first nine months of2010, compared with $59.1 million and $128.1 million for the same periodslast year. Results were higher for both periods primarily due to improvedfinancing spreads and a lower provision for credit losses.

 

16

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Revenues totaled $445.6 million for the thirdquarter and $1,272.2 million for the first nine months of 2010, compared with$465.3 million and $1,328.8 million for the same periods last year. Thedecreases were primarily due to lower financing rates. Finance income earned onretail notes totaled $518.6 million for the first nine months of 2010,compared with $561.9 million for the same period in 2009. This decreasewas primarily due to lower financing rates. Lease revenues totaled$214.0 million in the first nine months of 2010, compared with$237.4 million in the first nine months of 2009. This decrease wasprimarily due to lower financing rates on equipment on operating leases and a 3percent decrease in the average balance of leases. Revenues earned on revolvingcharge accounts amounted to $195.9 million in the first nine months of2010, compared with $175.7 million during the same period last year. Theincrease was primarily due to an increase in the average balance of revolvingcharge accounts in the first nine months of 2010, compared with the same periodlast year, partially offset by lower financing rates. Finance income earned onwholesale receivables totaled $189.0 million for the first nine months of 2010,compared to $229.9 million for the same period in 2009. The decrease wasprimarily due to lower financing rates. Revenues earned from John Deere totaled$116.4 million for the third quarter and $336.7 million for the first ninemonths of 2010, compared to $133.3 million and $403.7 million for the sameperiods last year. The decreases were primarily due to lower financing rates.

 

Crop insurance commissions totaled $38.5 million forthe third quarter and $74.6 million for the first nine months of 2010, comparedwith $40.2 million and $52.3 million for the same periods in 2009. The year-to-dateincrease was primarily due to more favorable underwriting experience thatresulted in higher commissions in the first nine months of 2010, compared withthe same period in 2009.

 

Interest expense totaled $123.7 million for thethird quarter and $413.6 million for the first nine months of 2010, comparedwith $195.3 million and $606.5 million for the same periods in 2009. Thedecreases were due to lower average interest rates and borrowings.

 

Administrative and operating expenses were $107.7million in the third quarter and $293.2 million in the first nine months of2010, compared with $78.9 million and $231.8 million for the same periodsin 2009. The increases were primarily due to foreign exchange losses and higheremployment costs.

 

During the third quarter and first nine months of2010, the provision for credit losses totaled $21.3 million and $65.6 million,respectively, compared with $36.1 million and $110.3 million for the sameperiods in 2009. The decreases were primarily due to a decrease in theallowance for credit losses and lower write-offs of construction and forestryequipment retail notes. The annualized provision for credit losses, as apercentage of the average balance of total Receivables financed, was..45 percent for the third quarter and .48 percent for the first ninemonths of 2010, compared with .79 percent and .82 percent for the same periodsin 2009. See the Company’s most recently filed annual report on Form 10-Kfor further information regarding the Company’s allowance for credit lossespolicies.

 

The Company’s ratio of earnings to fixed charges was2.10 to 1 for the third quarter of 2010, compared with 1.49 to 1 for thethird quarter of 2009. The Company’s ratio of earnings to fixed charges was1.81 to 1 for the first nine months of 2010, compared with 1.33 to 1 forthe first nine months of 2009. “Earnings” consist of income before incometaxes, the cumulative effect of changes in accounting and fixed chargesexcluding unamortized capitalized interest. “Fixed charges” consist of intereston indebtedness, amortization of debt discount and expense, interest related touncertain tax positions, an estimated amount of rental expense that is deemedto be representative of the interest factor, and capitalized interest.

 

17

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Receivable and Lease acquisition volumes were as follows (in millionsof dollars):

 
|                                 |   | Three Months        |   |   |    |
|--------------------------------------|--------|---------------------|--------|--------|---------|
|                                 |   | Ended July 31, |   |   |    |
|                                 |   | 2010                |   |   | 2009    |   | $ Change | % Change   |
| Retail  notes:                       |   |                |   |   |    |   |   |   |   |   |   |   |
| Agriculture  and turf equipment      | $      | 1,440.7             |   | $      | 1,470.8 |   | $ | (30.1 | ) |   | (2) | % |
| Construction  and forestry equipment |   | 151.3               |   |   | 121.8   |   |   | 29.5 |   |   | 24 |   |
| Total  retail notes                  |   | 1,592.0             |   |   | 1,592.6 |   |   | (.6 | ) |   |   |   |
| Revolving  charge accounts           |   | 1,232.7             |   |   | 1,250.8 |   |   | (18.1 | ) |   | (1 | ) |
| Operating  loans                     |   | 67.2                |   |   | 139.4   |   |   | (72.2 | ) |   | (52 | ) |
| Wholesale  receivables               |   | 5,835.3             |   |   | 5,017.8 |   |   | 817.5 |   |   | 16 |   |
| Financing  leases                    |   | 75.4                |   |   | 69.5    |   |   | 5.9 |   |   | 8 |   |
| Equipment  on operating leases       |   | 184.9               |   |   | 135.2   |   |   | 49.7 |   |   | 37 |   |
| Total  Receivables and Leases        | $      | 8,987.5             |   | $      | 8,205.3 |   | $ | 782.2 |   |   | 10 | % |

 
|                                 |   | Nine Months         |   |   |     |
|--------------------------------------|--------|---------------------|--------|--------|----------|
|                                 |   | Ended July 31, |   |   |     |
|                                 |   | 2010                |   |   | 2009     |   | $ Change | % Change   |
| Retail  notes:                       |   |                |   |   |     |   |   |   |   |   |   |   |
| Agriculture  and turf equipment      | $      | 4,502.3             |   | $      | 3,609.0  |   | $ | 893.3 |   |   | 25 | % |
| Construction  and forestry equipment |   | 420.6               |   |   | 351.6    |   |   | 69.0 |   |   | 20 |   |
| Total  retail notes                  |   | 4,922.9             |   |   | 3,960.6  |   |   | 962.3 |   |   | 24 |   |
| Revolving  charge accounts           |   | 3,532.2             |   |   | 3,384.0  |   |   | 148.2 |   |   | 4 |   |
| Operating  loans                     |   | 206.9               |   |   | 939.2    |   |   | (732.3 | ) |   | (78 | ) |
| Wholesale  receivables               |   | 16,187.3            |   |   | 15,169.6 |   |   | 1,017.7 |   |   | 7 |   |
| Financing  leases                    |   | 157.6               |   |   | 144.9    |   |   | 12.7 |   |   | 9 |   |
| Equipment  on operating leases       |   | 431.5               |   |   | 335.6    |   |   | 95.9 |   |   | 29 |   |
| Total  Receivables and Leases        | $      | 25,438.4            |   | $      | 23,933.9 |   | $ | 1,504.5 |   |   | 6 | % |

 

Retail note volumes increased in the first ninemonths of 2010, when compared to last year, primarily due to increases inretail sales of John Deere equipment. Operating loan volumes decreased duringthe third quarter and first nine months of 2010, when compared to last year,primarily due to decreased borrowings by farm input providers. Wholesalereceivable volumes increased during the third quarter and first nine months of2010, when compared to last year, due to increased shipments of John Deereagriculture and turf equipment as a result of increased retail sales activity.

 

TotalReceivables and Leases held were as follows (in millions of dollars):

 
|                                 |   | July 31, |   |   | October 31, |   |   | July 31, |   |
|--------------------------------------|--------|---------------|--------|--------|------------------|--------|--------|---------------|--------|
|                                 |   | 2010          |   |   | 2009             |   |   | 2009          |   |
| Retail  notes:                       |   |          |   |   |             |   |   |          |   |
| Agriculture  and turf equipment      | $      | 10,282.5      |   | $      | 9,952.0          |   | $      | 9,550.8       |   |
| Construction  and forestry equipment |   | 1,172.8       |   |   | 1,386.0          |   |   | 1,512.5       |   |
| Recreational  products               |   | 5.0           |   |   | 6.2              |   |   | 7.0           |   |
| Total  retail notes                  |   | 11,460.3      |   |   | 11,344.2         |   |   | 11,070.3      |   |
| Revolving  charge accounts           |   | 2,304.3       |   |   | 2,192.5          |   |   | 2,074.0       |   |
| Operating  loans                     |   | 204.4         |   |   | 297.0            |   |   | 346.4         |   |
| Wholesale  receivables               |   | 5,049.2       |   |   | 3,873.5          |   |   | 4,582.3       |   |
| Financing  leases                    |   | 400.4         |   |   | 392.8            |   |   | 397.9         |   |
| Equipment  on operating leases       |   | 1,037.7       |   |   | 1,023.2          |   |   | 994.3         |   |
| Total  Receivables and Leases        | $      | 20,456.3      |   | $      | 19,123.2         |   | $      | 19,465.2      |   |

 

18

----

 

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

 
|                                                                              | July 31, | October 31, | July 31, |
|-----------------------------------------------------------------------------------|---------------|------------------|---------------|
|                                                                              |          | 2010             |          |   | 2009 |   |   | 2009 |   |
| Receivables  and Leases administered:                                             |          |             |          |   |   |   |   |   |   |
| Owned  by the Company                                                             | $             | 17,793.7         |          | $ | 16,013.1 |   | $ | 15,671.8 |   |
| Owned  by the Company – restricted due to securitization                     |          | 2,662.6          |          |   | 3,110.1 |   |   | 3,793.4 |   |
|       Total Receivables and Leases owned by  the Company |          | 20,456.3         |          |   | 19,123.2 |   |   | 19,465.2 |   |
| Administered  – with limited recourse*                                       |          | 66.9             |          |   | 95.8 |   |   | 107.2 |   |
| Administered  – without recourse**                                           |          | 22.8             |          |   | 32.6 |   |   | 39.1 |   |
| Total  Receivables and Leases administered                                        | $             | 20,546.0         |          | $ | 19,251.6 |   | $ | 19,611.5 |   |

 

 

*          The Company’smaximum exposure under all Receivable and Lease recourse provisions at July 31, 2010,October 31, 2009 and July 31, 2009 was $6 million, $7 million, and $8million, respectively. The Company does not record the recourse obligations asliabilities as they are contingent liabilities that are remote at this time.However, the probable loss on Receivables and Leases that have been sold wasaccrued at the time of sale, and any subsequent necessary adjustments are madeas part of ongoing reviews. 

 

**        RepresentsReceivables and Leases that the Company has sold but continues to administerfor a fee.

 

Total Receivable amounts 60days or more past due in the table below represent the amount of all customerpayments past due 60 days or more, by product, and as a percent of therespective receivables. They were as follows (in millions of dollars):

 
|                                 | July 31, |   | October 31, |   | July 31, |
|--------------------------------------|---------------|--------|------------------|--------|---------------|
|                                 | 2010          |   | 2009             |   | 2009          |
|                                 | Dollars       |   | Percent          |   | Dollars       |   | Percent |   | Dollars |   | Percent |
| Retail  notes:                       |          |   |             |   |          |   |   |   |   |   |   |   |   |   |   |   |   |
| Agriculture  and turf equipment      | $             | 14.9   |             | .14    | %             |   | $ | 27.3 |   | .27 | % |   | $ | 19.2 |   | .20 | % |
| Construction  and forestry equipment |          | 4.2    |             | .36    |          |   |   | 10.7 |   | .77 |   |   |   | 10.3 |   | .68 |   |
| Recreational  products               |          |   |             |   |          |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  retail notes                  |          | 19.1   |             | .17    |          |   |   | 38.0 |   | .33 |   |   |   | 29.5 |   | .27 |   |
| Revolving  charge accounts*          |          | 21.9   |             | .95    |          |   |   | 19.8 |   | .90 |   |   |   | 26.2 |   | 1.26 |   |
| Operating  loans                     |          |   |             |   |          |   |   |   |   |   |   |   |   | 5.5 |   | 1.59 |   |
| Wholesale  receivables               |          | 1.8    |             | .04    |          |   |   | 1.6 |   | .04 |   |   |   | 6.3 |   | .14 |   |
| Financing  leases                    |          | 6.1    |             | 1.52   |          |   |   | 6.0 |   | 1.53 |   |   |   | 5.9 |   | 1.48 |   |
| Total  Receivables                   | $             | 48.9   |             | .25    | %             |   | $ | 65.4 |   | .36 | % |   | $ | 73.4 |   | .40 | % |

 

*                              Due to the nature ofrevolving charge accounts, the customer payments past due 60 days or more alsorepresent the total balance.

 

The balance of retail notes held (principal plusaccrued interest) with any installment 60 days or more past due represents thetotal retail note balance for a customer who has any portion of their note 60days or more past due. These amounts were $141 million, $301 million and $217million at July 31, 2010, October 31, 2009 and July 31, 2009,respectively. The balances of retail notes held on which any installment was 60days or more past due as a percentage of the ending retail notes receivable was1.23 percent, 2.66 percent and 1.96 percent at July 31, 2010, October 31,2009 and July 31, 2009, respectively.

 

19

----

 

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):

 
|                                 | July 31, |   | October 31, |   | July 31, |
|--------------------------------------|---------------|--------|------------------|--------|---------------|
|                                 | 2010          |   | 2009             |   | 2009          |
|                                 | Dollars       |   | Percent          |   | Dollars       |   | Percent |   | Dollars |   | Percent |
| Retail  notes:                       |          |   |             |   |          |   |   |   |   |   |   |   |   |   |   |   |   |
| Agriculture  and turf equipment      | $             | 57.2   |             | .56    | %             |   | $ | 50.1 |   | .50 | % |   | $ | 33.9 |   | .35 | % |
| Construction  and forestry equipment |          | 31.7   |             | 2.70   |          |   |   | 33.2 |   | 2.40 |   |   |   | 19.5 |   | 1.29 |   |
| Recreational  products               |          | .1     |             | 2.00   |          |   |   | .1 |   | 1.61 |   |   |   | .1 |   | 1.43 |   |
| Total  retail notes                  |          | 89.0   |             | .78    |          |   |   | 83.4 |   | .74 |   |   |   | 53.5 |   | .48 |   |
| Revolving  charge accounts           |          | 1.0    |             | .04    |          |   |   | 1.1 |   | .05 |   |   |   | .9 |   | .04 |   |
| Operating  loans                     |          | 5.2    |             | 2.54   |          |   |   | 35.9 |   | 12.09 |   |   |   | 34.1 |   | 9.84 |   |
| Wholesale  receivables               |          | 20.1   |             | .40    |          |   |   | 9.2 |   | .24 |   |   |   | 5.8 |   | .13 |   |
| Financing  leases                    |          | 16.6   |             | 4.15   |          |   |   | 16.6 |   | 4.23 |   |   |   | 15.0 |   | 3.77 |   |
| Total  Receivables                   | $             | 131.9  |             | .68    | %             |   | $ | 146.2 |   | .81 | % |   | $ | 109.3 |   | .59 | % |

 

The increase innon-performing wholesale receivables at July 31, 2010 was primarily due topayment defaults on wholesale receivables to a construction and forestryequipment dealer. A loan-loss provision was recorded for the estimateduncollectible amount.

 

 Total Receivablewrite-off amounts, net of recoveries, by product, and as an annualizedpercentage of average balances held during the period, were as follows (inmillions of dollars):

 
|                                 | Three Months Ended |   | Three Months Ended |
|--------------------------------------|--------------------|--------|--------------------|
|                                 | July 31,      |   | July 31,      |
|                                 | 2010               |   | 2009               |
|                                 | Dollars            |   | Percent            |   | Dollars |   | Percent |
| Retail  notes:                       |               |   |               |   |   |   |   |   |   |   |   |
| Agriculture  and turf equipment      | $                  | (.4    | )                  | (.02 | )% |   | $ | 1.1 |   | .05 | % |
| Construction  and forestry equipment |               | (.2    | )                  | (.07 | ) |   |   | 10.0 |   | 2.56 |   |
| Recreational  products               |               | .1     |               | 7.71 |   |   |   | .2 |   | 10.99 |   |
| Total  retail notes                  |               | (.5    | )                  | (.02 | ) |   |   | 11.3 |   | .42 |   |
| Revolving  charge accounts           |               | 15.9   |               | 2.87 |   |   |   | 15.4 |   | 3.12 |   |
| Operating  loans                     |               | .9     |               | 1.74 |   |   |   | (.1 | ) | (.11 | ) |
| Wholesale  receivables               |               | (.1    | )                  | (.01 | ) |   |   | .2 |   | .02 |   |
| Financing  leases                    |               | (.4    | )                  | (.41 | ) |   |   | .4 |   | .41 |   |
| Total  Receivables                   | $                  | 15.8   |               | .33 | % |   | $ | 27.2 |   | .59 | % |

 

 
|                                 | Nine Months Ended |   | Nine Months Ended |
|--------------------------------------|-------------------|--------|-------------------|
|                                 | July 31,     |   | July 31,     |
|                                 | 2010              |   | 2009              |
|                                 | Dollars           |   | Percent           |   | Dollars |   | Percent |
| Retail  notes:                       |              |   |              |   |   |   |   |   |   |   |   |
| Agriculture  and turf equipment      | $                 | 2.2    |              | .03 | % |   | $ | 2.9 |   | .04 | % |
| Construction  and forestry equipment |              | 17.1   |              | 1.82 |   |   |   | 40.3 |   | 3.09 |   |
| Recreational  products               |              | .1     |              | 2.34 |   |   |   | .7 |   | 11.47 |   |
| Total  retail notes                  |              | 19.4   |              | .23 |   |   |   | 43.9 |   | .53 |   |
| Revolving  charge accounts           |              | 37.7   |              | 2.48 |   |   |   | 40.1 |   | 3.02 |   |
| Operating  loans                     |              | 16.5   |              | 9.59 |   |   |   | (.5 | ) | (.18 | ) |
| Wholesale  receivables               |              | (1.4   | )                 | (.04 | ) |   |   | .9 |   | .03 |   |
| Financing  leases                    |              | 1.5    |              | .52 |   |   |   | 2.7 |   | .92 |   |
| Total  Receivables                   | $                 | 73.7   |              | .54 | % |   | $ | 87.1 |   | .65 | % |

 

The increase in operating loans write-offs duringthe first nine months of 2010 was primarily due to a turf equipment customerthat had been carried as a non-performing operating loan since the thirdquarter of 2008. Loan-loss provisions for estimated uncollectible amounts wererecorded in prior years. No additional loan-loss provisions were recorded inthe current year.

 

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Deposits withheld from dealers and merchants,representing mainly the aggregate dealer retail note and lease withholdingaccounts from individual John Deere dealers to which losses from retail notesand leases originating from the respective dealers can be charged, amounted to$152 million at July 31, 2010 compared with $165 million atOctober 31, 2009 and $161 million at July 31, 2009.

 

The Company’s allowance for credit losses on allReceivables financed totaled $150 million at July 31, 2010,$158 million at October 31, 2009 and $129 million at July 31,2009. The allowance for credit losses represented .77 percent of the totalReceivables financed at July 31, 2010, .87 percent at October 31,2009 and .70 percent at July 31, 2009. The level of the allowance is basedon many quantitative and qualitative factors, including historical lossexperience by product category, portfolio duration, delinquency trends,economic conditions and credit risk quality. The Company believes its allowanceis sufficient to provide for losses in its existing receivable portfolio.

 

Safe Harbor Statement

 

*Safe Harbor Statement under thePrivate Securities Litigation Reform Act of 1995:*Statementsunder “Overview” and other forward-looking statements herein that relate tofuture events, expectations and operating periods involve certain factors thatare subject to change, and important risks and uncertainties that could causeactual results to differ materially.

 

Factors that could materially affect the Company’sresults include changing worldwide economic conditions, and changes in and theimpact of government trade, banking, monetary and fiscal policies, includingfinancial regulatory reform. Actions by the U.S. Federal Reserve Board, theFDIC and other central banks may affect the costs and expenses of financing theCompany and the rates it is able to offer. The Company’s business is affectedby general economic conditions in and the political stability of the globalmarkets in which the Company operates because deteriorating economic conditionsand political instability can result in decreased customer confidence, lowerdemand for equipment, higher loan losses and greater currency risk. TheCompany’s business is also affected by actions of banks, financing and leasingcompanies and other lenders that compete with the Company for customers;capital market disruptions; significant changes in capital market liquidity andassociated funding costs; and interest rates and foreign currency exchangerates.

 

Significant changes inmarket liquidity conditions could impact access to funding and associatedfunding costs, which could reduce the Company’s earnings and cash flows. Marketconditions could also negatively impact customer access to capital forpurchases of John Deere’s products; borrowings and repayment practices; and thenumber and size of customer loan delinquencies and defaults. A sovereign debtcrisis, in Europe or elsewhere, could continue to negatively impact currencies,global financial markets, social and political stability, funding sources andcosts, customers, and Company operations and results. State debt crises alsocould negatively impact customers, suppliers, demand for equipment, and Companyoperations and results. The Company’s operations could be impaired by changes inthe equity and bond markets, which would negatively affect earnings.

 

The liquidity and ongoingprofitability of the Company depends largely on timely access to capital tomeet future cash flow requirements and fund operations and the costs associatedwith engaging in diversified funding activities. If market volatility andgeneral economic conditions worsen, funding could be unavailable orinsufficient. Additionally, customer confidence levels may result in declinesin credit applications and increases in delinquencies and default rates, whichcould materially impact the Company’s write-offs and provision for creditlosses.

 

In addition, the Company’sbusiness is closely related to John Deere’s business. Further information,including factors that potentially could materially affect the Company’s andJohn Deere’s financial results, is included in the most recent Deere &Company Form 10-K and Form 10-Q (including, but not limited to, thefactors discussed in Item 1A. Risk Factors of the Form 10-K and quarterlyreport on Form 10-Q) and other Deere & Company and CapitalCorporation filings with the U.S. Securities and Exchange Commission.

 

Critical Accounting Policies

 

See the Company’s criticalaccounting policies discussed in the Management’s Discussion and Analysis ofthe most recent annual report filed on Form 10-K. There have been nomaterial changes to these policies.

 

Capital Resources and Liquidity

 

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

 

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During the first nine monthsof 2010, the aggregate net cash provided by the beginning balance of cash andcash equivalents, operating and financing activities was used primarily toincrease Receivables. Net cash provided by operating activities was$688 million in the first nine months of 2010. Net cash provided byfinancing activities totaled $382 million in the first nine months of2010, resulting primarily from an increase in payables to John Deere, partiallyoffset by a net decrease in total external borrowings and dividends paid toJohn Deere Financial Services, Inc., which in turn paid comparabledividends to Deere & Company. Net cash used for investing activitiestotaled $1,617 million in the first nine months of 2010, primarily due tothe cost of Receivables and Leases acquired exceeding collections ofReceivables and proceeds from sales of equipment on operating leases. Cash andcash equivalents decreased $552 million during the first nine months of 2010.

 

During the first nine monthsof 2009, the aggregate net cash provided by operating and financing activitieswas used primarily to increase cash and cash equivalents and to increase Receivables.Net cash provided by operating activities was $410 million in the first ninemonths of 2009. Net cash provided by financing activities totaled$967 million in the first nine months of 2009, resulting primarily from anet increase in total external borrowings, partially offset by a decrease inpayables to John Deere. Net cash used for investing activities totaled$518 million in the first nine months of 2009, primarily due to the costof Receivables and Leases acquired exceeding collections of Receivables andproceeds from sales of equipment on operating leases. Cash and cash equivalentsincreased $890 million during the first nine months of 2009.

 

The financing of retailpurchases and leases of John Deere products and of wholesale receivables owed byJohn Deere dealers represented approximately 85 percent and 80 percent of theCompany’s acquisition volume for the nine months ended July 31, 2010 and2009, respectively. Any extended reduction or suspension of John Deere’s saleor production of products due to a decline in demand or production,governmental actions or other events could have an adverse effect on theCompany’s acquisition volume of Receivables and Leases.

 

The Company relies on itsability to raise substantial amounts of funds to finance its Receivable andLease portfolios. Given the continued volatility in the global economy, therehas been a reduction in liquidity in some global markets that continues toaffect the funding activities of the Company. However, the Company has accessto most global markets at a reasonable cost and expects to have sufficientsources of global funding and liquidity to meet its funding needs. TheCompany’s ability to meet its debt obligations is supported in a number ofways. The assets of the Company are self-liquidating in nature. A solid equityposition is available to absorb unusual losses on these assets and allcommercial paper is backed by unsecured, committed borrowing lines from variousbanks. Liquidity is also provided by the Company’s ability to securitize theseassets and through the issuance of term debt. Additionally, liquidity may beprovided through loans from John Deere. The Company’s commercial paperoutstanding at July 31, 2010, October 31, 2009 and July 31, 2009was approximately $712 million, $32 million and $222 million,respectively, while the total cash and cash equivalents position wasapproximately $319 million, $871 million and $1,972 million,respectively.

 

During November 2009,the Capital Corporation renewed a revolving credit agreement to utilize bankconduit facilities to securitize retail notes (see Note 5). At July 31,2010, this facility had a total capacity, or “financing limit,” of up to$1,500 million of secured financings at any time. After a 364 dayrevolving period, unless the banks and Capital Corporation agree to renew foran additional 364 days, Capital Corporation would liquidate the securedborrowings over time as payments on the retail notes are collected. At July 31,2010, $968 million of secured short-term borrowings was outstanding under theagreement.

 

During the first nine monthsof 2010, the Company issued $1,122 million of medium-term notes, obtained$885 million of secured borrowings and maintained an average commercialpaper balance of $517 million. At July 31, 2010, the Company’s fundingprofile included $712 million of commercial paper, $2,577 million of notespayable related to on-balance sheet securitization funding, $915 million ofintercompany loans from John Deere, $14,524 million of unsecured termdebt, and $2,393 million of equity capital. The Company’s funding profile maybe altered to reflect such factors as relative costs of funding sources, assetsavailable for securitizations and capital market accessibility.

 

In April 2010, the Company completed a $708million retail note securitization transaction, which is included in short-termsecured borrowings. During the first nine months of 2010, the Company alsoissued $1,122 million and retired $1,698 million of long-term borrowingswhich were primarily medium-term notes.

 

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Total interest-bearing indebtedness amounted to$18,739 million at July 31, 2010, compared with $18,411 million atOctober 31, 2009, and $19,925 million at July 31, 2009. Totalexternal borrowings increased during the first nine months of 2010 anddecreased in the past 12 months, generally corresponding with the level of cashand cash equivalents, the level of the Receivable and Lease portfolio and thechange in payable to John Deere. Total short-term indebtedness amounted to$7,472 million at July 31, 2010, compared with $5,711 million at October 31,2009, and $6,581 million at July 31, 2009. Included in short-termindebtedness are secured borrowings of $2,577 million, $3,109 millionand $3,685 million for the same periods (see Note 5). Total long-termindebtedness amounted to $11,267 million at July 31, 2010, compared with$12,701 million at October 31, 2009, and $13,345 million at July 31,2009. The ratio of total interest-bearing debt, including securitizationindebtedness, to stockholder’s equity was 7.8 to 1 at July 31, 2010,compared with 7.9 to 1 at October 31, 2009 and 9.0 to 1 at July 31,2009.

 

Stockholder’s equity was $2,393 million at July 31,2010, compared with $2,317 million at October 31, 2009 and $2,206 millionat July 31, 2009. The increase in the first nine months of 2010 resultedprimarily from net income attributable to the Company of $223 million anda $14 million unrealized gain on derivatives, partially offset by dividendpayments of $130 million and a decrease in the cumulative translationadjustment of $31 million.

 

*Lines of Credit*

 

The Company also has access to bank lines of creditwith various banks throughout the world. Some of the lines are available toboth the Company and Deere & Company. In the second quarter of 2010,the Company added an additional long-term credit facility agreement of $1,500million, expiring in April 2013, which replaced a 364 day agreement of$750 million. Worldwide lines of credit totaled $5,250 million at July 31, 2010,$4,145 million of which was unused. For thepurpose of computing unused credit lines, commercial paper and short-term bankborrowings, excluding secured borrowings and the current portion of long-termborrowings, of the Company and Deere & Company were considered toconstitute utilization. Included in the total credit lines at July 31,2010 was the long-term credit facility agreement of $3,750 million, expiring inFebruary 2012 and the new long-term credit facility agreement of $1,500million, expiring in April 2013. The credit agreements require the Companyto maintain its consolidated ratio of earnings to fixed charges at not lessthan 1.05 to 1 for each fiscal quarter and its ratio of senior debt, excludingsecuritization indebtedness, to capital base (total subordinated debt and totalCompany stockholder’s equity excluding accumulated other comprehensive income(loss)) at not more than 11 to 1 at the end of any fiscal quarter. All ofthese requirements of the credit agreements have been met during the periodsincluded in the consolidated financial statements.

 

*Debt Ratings*

 

The Company’s ability to obtain funding is affectedby its debt ratings, which are closely related to the outlook for and thefinancial condition of John Deere, and the nature and availability of supportfacilities, such as its lines of credit and the support agreement from Deere &Company.

 

To access public debt capital markets, the Companyrelies on credit rating agencies to assign short-term and long-term creditratings to the Company’s securities as an indicator of credit quality for fixedincome investors. A credit rating agency may change or withdraw Company ratingsbased on its assessment of the Company’s current and future ability to meetinterest and principal repayment obligations. Each agency’s rating should beevaluated independently of any other rating. Lower credit ratings generallyresult in higher borrowing costs and reduced access to debt capital markets.Credit ratings also affect the costs of derivative transactions, includinginterest rate and foreign currency derivative transactions. As a result,negative changes in the Company’s credit ratings could adversely impact theCompany’s cost of funding.

 

The senior long-term and short-term debt ratings andoutlook currently assigned to unsecured Company securities by the ratingagencies engaged by the Company are the same as those for John Deere. Thoseratings are as follows:

 
|                                      |   | Senior Long-Term |   | Short-Term |   | Outlook |   |
|-------------------------------------------|--------|------------------|--------|------------|--------|---------|--------|
| Moody’s Investors Service, Inc. |   | A2               |   | Prime-1    |   | Stable  |   |
| Standard & Poor’s           |   | A                |   | A-1        |   | Stable  |   |

 

*Dividends*

 

The Capital Corporation declared and paid cashdividends to John Deere Financial Services, Inc. of $130 million in thefirst nine months of fiscal 2010. John Deere Financial Services, Inc. paidcomparable dividends to Deere & Company.  On August 26,2010, the Capital Corporation declared a $65 million dividend, to be paid toJohn Deere Financial Services, Inc. on October 14, 2010. John DeereFinancial Services, Inc., in turn, declared a $65 million dividend toDeere & Company, also payable on October 14, 2010.

 

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Item 3.                                     Quantitative and QualitativeDisclosures About Market Risk.

 

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

 

Item 4.                                     Controls and Procedures.

 

The Company’s principal executive officer and itsprincipal financial officer have concluded that the Company’s disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) ofthe Securities Exchange Act of 1934, as amended (“the Act”)) were effective asof July 31, 2010, based on the evaluation of these controls and proceduresrequired by Rule 13a-15(b) or 15d-15(b) of the Act. During thethird quarter, there were no changes that have materially affected or arereasonably likely to materially affect the Company’s internal control overfinancial reporting.

 

PART II.  OTHER INFORMATION

 

Item 1.                        LegalProceedings.

 

The Company is subject tovarious unresolved legal actions which arise in the normal course of itsbusiness, the most prevalent of which relate to state and federal laws andregulations concerning retail credit. Although it is not possible to predictwith certainty the outcome of these unresolved legal actions or the range ofpossible loss, the Company believes these unresolved legal actions will nothave a material effect on its consolidated financial statements.

 

Item 1A.              Risk Factors.

 

See the Company’s most recentannual report on Form 10-K (Part I, Item 1A). There has been nomaterial change in this information. The risks described in the annual reporton Form 10-K and the “Safe Harbor Statement” in this report are not theonly risks faced by the Company. Additional risks and uncertainties notcurrently known to us or that we currently judge to be immaterial may alsomaterially affect the Company’s business, financial condition or operatingresults.

 

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

 

Omitted pursuant to instruction H.

 

Item 3.                        Defaults UponSenior Securities.

 

Omitted pursuant to instruction H.

 

Item 5.                        OtherInformation.

 

None.

 

Item 6.                        Exhibits.

 

See the index to exhibitsimmediately preceding the exhibits filed with this report.

 

Certain instruments relatingto 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) ofRegulation S-K.  The registrant will filecopies of such instruments upon request of the Commission.

 

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SIGNATURES

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|   | JOHN  DEERE CAPITAL CORPORATION |
|--------|---------------------------------|
|   |                            |
|   |                            |
| Date:  | August 27,  2010           |   | By: | */s/  J. M. Field* |
|   |                            | J.  M. Field |
|   |                            | 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*)                       |
|    |   |                                                                                                                                                                                               |
| 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, 2010                                                                                             |
|    |   |  (Securities  and Exchange Commission file number 1-4121*)                                                                                                                                    |

 

*                              Incorporated byreference.  Copies of these exhibits areavailable from the Company upon request.

 

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