**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-K**

 

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**ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

**FOR THE FISCAL YEAR ENDED OCTOBER 31, 2010**

 

**Commission file number 1-6458**

 

**JOHN DEERE CAPITAL CORPORATION**

(Exact name of registrant as specified in its charter)

 

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

 

| **1 East First Street, Suite 600 Reno, Nevada**(Address of principal executive offices) | ** ** | **89501**(Zip Code) | ** ** | **(775) 786-5527**(Telephone number) |
|----------------------------------------------------------------------------------------------|------------|---------------------|------------|--------------------------------------|

 

**SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:**

 

| **Title of each class** | ** ** | **Name of each exchange on which registered** |
|----------------------------------------|------------|-----------------------------------------------------------------------------|
| 5.10% Global Debentures Due 2013       |       | New York Stock Exchange                                                     |

 

**SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE**

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. 

Yes o   No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. 

Yes o   No x

 

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

Yes x   No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 

Yes o   No o

 

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

 

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

 

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

Yes o   No x

 

At November 30, 2010, 2,500 shares of common stock, without par value, of the registrant were outstanding, all of which were owned by John Deere Financial Services, Inc.

 

The registrant meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this Form with certain reduced disclosures as permitted by Instruction I(2).

 

 

 

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**PART I**

 

**Item 1****.  Business.**

 

The Company

 

John Deere Capital Corporation and its subsidiaries (Capital Corporation), and its other consolidated entities are collectively called the Company.  John Deere Financial Services, Inc., a wholly-owned finance holding subsidiary of Deere & Company, owns all of the outstanding common stock of John Deere Capital Corporation. In July 2010, John Deere Credit Company changed its name to John Deere Financial Services, Inc. See “Relationships of the Company with John Deere” for additional information regarding agreements between the Company and Deere & Company. The Company conducts business in Australia, New Zealand, the U.S., and in several countries in Asia, Europe and Latin America.

 

The Company provides and administers financing for retail purchases of new equipment manufactured by Deere & Company’s agriculture and turf and construction and forestry divisions and used equipment taken in trade for this equipment. The Company generally purchases retail installment sales and loan contracts (retail notes) from Deere & Company and its wholly-owned subsidiaries (collectively called John Deere). John Deere generally acquires these retail notes through John Deere retail dealers. The Company also purchases and finances a limited amount of non-Deere retail notes and continues to service a small portfolio of recreational products and other retail notes. In addition, the Company leases John Deere equipment and a limited amount of non-Deere equipment to retail customers (financing and operating leases). The Company also finances and services revolving charge accounts, in most cases acquired from and offered through merchants in the agriculture and turf and construction and forestry markets (revolving charge accounts). Further, the Company finances and services operating loans, in most cases offered through and acquired from farm input providers or through direct relationships with agricultural producers or agribusinesses (operating loans). The Company also provides wholesale financing for inventories of John Deere agriculture and turf, and construction and forestry equipment owned by dealers of those products (wholesale receivables). The Company also offers credit enhanced international export financing to select customers and dealers which generally involves John Deere products. In August 2010, the Company sold John Deere Risk Protection, the crop insurance managing general agency that offered certain crop risk mitigation products in the U.S., to John Deere Financial Services, Inc. In addition, the Company made loans to certain affiliated companies that had investments in wind energy projects. Retail notes, revolving charge accounts, operating loans, financing leases and wholesale receivables are collectively called “Receivables.” Receivables and operating leases are collectively called “Receivables and Leases.”

 

The Capital Corporation was incorporated under the laws of Delaware and commenced operations in 1958. At November 30, 2010, the Company had 1,612 full-time and part-time employees.

 

Business of John Deere

 

John Deere’s operations are categorized into three major business segments:

 

The *agriculture and turf*segment manufactures and distributes a full line of farm and turf care equipment and related service parts — including large, medium and utility tractors; loaders; combines, cotton and sugarcane harvesters and related front-end equipment and sugarcane loaders; tillage, seeding and application equipment, including sprayers, nutrient management and soil preparation machinery; hay and forage equipment, including self-propelled forage harvesters and attachments, balers and mowers; turf and utility equipment, including riding lawn equipment and walk-behind mowers, golf course equipment, utility vehicles, and commercial mowing equipment, along with a broad line of associated implements; integrated agricultural management systems technology; precision agricultural irrigation equipment and supplies; landscape and nursery products; and other outdoor power products.

 

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The *construction and forestry*segment manufactures, distributes to dealers and sells at retail a broad range of machines and service parts used in construction, earthmoving, material handling and timber harvesting — including backhoe loaders; crawler dozers and loaders; four-wheel-drive loaders; excavators; motor graders; articulated dump trucks; landscape loaders; skid-steer loaders; and log skidders, feller bunchers, log loaders, log forwarders, log harvesters and related attachments.

 

John Deere’s worldwide agriculture and turf and construction and forestry operations are sometimes referred to as the Equipment Operations. The products and services produced by the segments above are marketed primarily through independent retail dealer networks and major retail outlets.

 

The *credit*segment includes the operations of the Company (described herein), John Deere Financial Services, Inc., John Deere Credit Inc. (Canada), Banco John Deere, S.A. (Brazil), John Deere Credit Oy (Finland) and John Deere Renewables, LLC, and primarily finances sales and leases by John Deere dealers of new and used agriculture and turf, and construction and forestry equipment. In addition, it provides wholesale financing to dealers of the foregoing equipment, provides operating loans, finances retail revolving charge accounts, offers crop risk mitigation products and held residual wind energy generation investments until December 2010.

 

Worldwide net income attributable to Deere & Company in 2010 was $1,865 million, or $4.35 per share diluted ($4.40 basic), compared with $873 million, or $2.06 per share diluted ($2.07 basic), in 2009.  Included in net income for 2009 were charges of $381 million pretax ($332 million after-tax), or $.78 per share diluted and basic, related to impairment of goodwill and voluntary employee separation expenses.

 

John Deere’s net sales and revenues increased 13 percent to $26,005 million in 2010, compared with $23,112 million in 2009. Net sales of the Equipment Operations increased 14 percent in 2010 to $23,573 million from $20,756 million last year. The sales increase was primarily due to higher shipment volumes. The increase also included a favorable effect for foreign currency translation of 3 percent and a price increase of 2 percent.  Net sales in the U.S. and Canada increased 14 percent in 2010. Net sales outside the U.S. and Canada increased by 14 percent, which included a favorable effect of 5 percent for foreign currency translation.

 

The agriculture and turf segment had net sales of $19,868 million in 2010, compared with $18,122 million in 2009. The construction and forestry segment had net sales of $3,705 million in 2010, compared with $2,634 million in 2009. The credit segment had revenues of $1,977 million in 2010, compared with $1,930 million in 2009.

 

Outlook for John Deere

 

Deere & Company’s equipment sales are projected to increase 10 to 12 percent for fiscal year 2011 and increase about 34 percent for the first quarter, compared with the same periods in 2010. Included is an unfavorable currency translation impact of about 1 percent for the year and about 2 percent for the first quarter of 2011. Net income attributable to Deere & Company is anticipated to be approximately $2,100 million for 2011.

 

Fiscal year 2011 will be a record year for new model introductions for Deere & Company, due in large part to the implementation of more rigorous global engine emissions standards. Deere & Company’s earnings forecast reflects the complexity of transitioning to these new equipment models as well as increased product costs to comply with the regulations. In addition, Deere & Company projects higher raw material costs in 2011 and a less favorable sales mix in the agriculture and turf segment.

 

*Agriculture and Turf.*  Worldwide sales of Deere & Company’s agriculture and turf segment are forecast to increase by 7 to 9 percent for fiscal year 2011, benefiting from generally favorable global farm conditions. Farmers in most of Deere & Company’s key markets are experiencing solid levels of income due to strong global demand for agricultural commodities, low grain stockpiles in relation to use, and high prices for crops such as corn, wheat, soybeans, sugar and cotton.

 

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After increasing in 2010, industry farm machinery sales in the U.S. and Canada are forecast to be about the same in 2011 as a result of production limits and transitional issues associated with the broad launch of Interim Tier 4 compliant equipment.

 

Industry sales in Western Europe are forecast to increase 5 to 10 percent, while sales in Central Europe and the Commonwealth of Independent States are expected to see moderate gains from the depressed level in 2010. Industry sales in Asia also are forecast to grow moderately.

 

In South America, industry sales are projected to be about the same in 2011 relative to the strong levels of 2010, although Deere & Company’s sales in the region are expected to benefit from a broader lineup of recently introduced products.

 

Industry sales of turf and utility equipment in the U.S. and Canada are expected to be approximately the same after experiencing some recovery in 2010.

 

*Construction and Forestry.*  Deere & Company’s worldwide sales of construction and forestry equipment are forecast to rise by 25 to 30 percent for fiscal year 2011. The increase reflects market conditions that are somewhat improved in relation to the relatively low level in 2010. In addition, sales to independent rental companies are expected to see further growth. World forestry markets are expected to move significantly higher as a result of improved wood and pulp prices.

 

*Credit*.  Net income for the credit operations in fiscal year 2011, which includes the Company, is forecast to be approximately $360 million. The forecast increase from 2010 is primarily due to growth in the portfolio. Net income attributable to the Company for 2011, which does not include the credit operations in Canada, Brazil and Finland or the wind energy and crop insurance operations in the U.S., is projected to be approximately $275 million for 2011. The forecast decrease from 2010 is primarily due to lower financing spreads and higher administrative and operating expenses, partially offset by growth in the portfolio.

 

Relationships of the Company with John Deere

 

The results of operations of the Company are affected by its relationships with John Deere, including among other items, the terms on which the Company acquires Receivables and Leases and borrows funds from John Deere, the reimbursement for interest waiver and low-rate finance programs from John Deere, the compensation paid by John Deere in connection with the Company’s purchase of trade receivables from John Deere and the payment to John Deere for various expenses applicable to the Company’s operations. The Company also made loans to certain affiliated companies that had investments in wind energy projects. In December 2010, John Deere sold its wind energy business. In addition, the Company and John Deere have joint access to certain lines of credit of the Company.

 

The Company’s acquisition volume of Receivables and Leases is largely dependent upon the level of retail sales and leases of John Deere products. The level of John Deere retail sales and leases is responsive to a variety of economic, financial, climatic, legislative and other factors that influence demand for its products. The majority of the Company’s businesses are affected by changes in interest rates, demand for credit and competition.

 

The Company bears substantially all of the credit risk (net of recovery from withholdings from certain John Deere dealers, and Farm Planä and PowerPlanâ merchants) associated with its holding of Receivables and Leases. A small portion of the Receivables and Leases held (less than 5 percent) is guaranteed by certain subsidiaries of Deere & Company. The Company also performs substantially all servicing and collection functions. Servicing and collection functions for a small portion of the Receivables and Leases held (less than 5 percent) are provided by John Deere. John Deere is reimbursed for staff and other administrative services at estimated cost and for credit lines provided to the Company based on utilization of those lines.

 

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The terms and the basis on which the Company acquires retail notes and certain wholesale receivables from John Deere are governed by agreements with John Deere, generally terminable by either John Deere or the Company on 30 days notice. As provided in these agreements, the Company agrees to the terms and conditions for purchasing the retail notes and wholesale receivables from John Deere. Under these agreements, John Deere is not obligated to sell notes to the Company, and the Company is obligated to purchase notes from John Deere only if the notes comply with the terms and conditions set by the Company.

 

The basis on which John Deere acquires retail notes and wholesale receivables from the dealers is governed by agreements with the John Deere dealers, terminable at will by either the dealers or John Deere. In acquiring these notes from dealers, the terms and conditions, as set forth in agreements with the dealers, conform with the terms and conditions adopted by the Company in determining the acceptability of retail and certain wholesale notes to be purchased from John Deere. The dealers are not obligated to sell these notes to John Deere and John Deere is not obligated to accept these notes from the dealers. In practice, retail and wholesale notes are acquired from dealers only if the terms of these notes and the creditworthiness of the customers are acceptable to the Company. The Company acts on behalf of both itself and John Deere in determining the acceptability of the notes and in acquiring acceptable notes from dealers.

 

The basis on which the Company enters into leases with retail customers through John Deere dealers is governed by agreements between dealers and the Company. Leases are accepted based on the terms and conditions, the lessees’ creditworthiness, the anticipated residual values of the equipment and the intended uses of the equipment.

 

Deere & Company has an agreement with the Capital Corporation pursuant to which it has agreed to continue to own at least 51 percent of the voting shares of capital stock of the Capital Corporation and to maintain the Capital Corporation’s consolidated tangible net worth at not less than $50 million. This agreement also obligates Deere & Company to make income maintenance payments to the Capital Corporation such that its consolidated ratio of earnings to fixed charges is not less than 1.05 to 1 for each fiscal quarter. For 2010 and 2009, the Capital Corporation’s ratios were 1.89 to 1 and 1.28 to 1, respectively, and never less than 1.61 to 1 and 1.12 to 1 for any fiscal quarter of 2010 and 2009, respectively. Deere & Company’s obligations to make payments to the Capital Corporation under the agreement are independent of whether the Capital Corporation is in default on its indebtedness, obligations or other liabilities. Further, Deere & Company’s obligations under the agreement are not measured by the amount of the Capital Corporation’s indebtedness, obligations or other liabilities. Deere & Company’s obligations to make payments under this agreement are expressly stated not to be a guaranty of any specific indebtedness, obligation or liability of the Capital Corporation and are enforceable only by or in the name of the Capital Corporation. No payments were required under this agreement during the periods included in the consolidated financial statements.

 

The Company purchases certain wholesale receivables (trade receivables) from John Deere. These trade receivables arise from John Deere’s sales of goods to dealers. Under the terms of the sales to dealers, interest is charged to dealers on outstanding balances, from the earlier of the date when goods are sold to retail customers by the dealer or the expiration of certain interest-free periods granted to the dealer at the time of the sale, until payment is received by the Company. Dealers cannot cancel purchases after goods are shipped and are responsible for payment even if the equipment is not sold to retail customers. The interest-free periods are determined based on the type of equipment sold and the time of year of the sale. These periods range from one to twelve months for most equipment. Interest-free periods may not be extended. Interest charged may not be forgiven and the past due interest rates exceed market rates. The Company receives compensation from John Deere at competitive market interest rates for these interest-free periods. The Company computes the compensation from John Deere for interest-free periods based on the Company’s estimated funding costs, administrative and operating expenses, credit losses, and required return on equity.

 

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Description of Receivables and Leases

 

Receivables and Leases arise mainly from retail and wholesale sales and leases of John Deere products and used equipment accepted in trade for them, and from retail sales of equipment of unrelated manufacturers. Receivables and Leases also include revolving charge accounts receivable and operating loans. At October 31, 2010 and 2009, approximately 90 percent of the Receivables and Leases administered by the Company were for financing John Deere products.

 

FPC Financial, f.s.b. (Thrift), a wholly-owned subsidiary of the Company, holds a federal charter issued by the Office of Thrift Supervision. The Thrift is headquartered in Madison, Wisconsin and offers revolving charge products such as John Deere Financial Revolving Plan, Farm Planä and PowerPlanâ on a nationwide basis. John Deere Financial Revolving Plan is used primarily by retail customers of John Deere dealers to finance purchases of turf and utility equipment. Through its Farm Planä product, the Thrift finances revolving charge accounts offered by approximately 8,000 participating agribusinesses to their retail customers for the purchase of goods and services. Farm Planä account holders purchase equipment parts and service at implement dealerships and farm inputs such as feed, seed, fertilizer, bulk fuel and building supplies from other agribusinesses. The PowerPlanâ revolving charge account is used by construction and forestry customers to finance the purchase of equipment parts and service work performed at John Deere construction and forestry dealers. See Note 4 to the consolidated financial statements under “Revolving Charge Accounts Receivable.”

 

The Company also works with several leading farm input providers to offer crop input production loans for materials such as seeds and fertilizer. Additionally, the Company provides production loans directly to farmers for their total operating needs. Generally, these loans are secured by crops and equipment.

 

The Company finances wholesale inventories of John Deere agriculture and turf and construction and forestry equipment. A large portion of the wholesale financing provided by the Company is with dealers from whom it also purchases agriculture and turf and construction and forestry retail notes. See Note 4 to the consolidated financial statements under “Wholesale Receivables.”

 

The Company requires that theft and physical damage insurance be carried on all goods leased or securing retail notes and wholesale receivables. The customer may, at the customer’s own expense, have the Company or the seller of the goods purchase this insurance or obtain it from other sources. Insurance is not required for goods purchased under revolving charge accounts.

 

Receivables and Leases are eligible for acceptance if they conform to prescribed finance and lease plan terms. Guidelines relating to down payments and contract terms on retail notes and leases are described in Note 4 and Note 7 to the consolidated financial statements.

 

In limited circumstances, Receivables and Leases may be accepted and acquired even though they do not conform in all respects to the established guidelines. The Company determines whether Receivables and Leases should be accepted and how they should be serviced. Acceptance of these Receivables and Leases is dependent on having one or more risk mitigation enhancements that may include the pledge of additional collateral as security, the assignment of specific earnings to the Company or the acceptance of accelerated payment schedules. Officers of the Company are responsible for establishing policies and reviewing the performance of the Company in accepting and collecting Receivables and Leases. The Company normally makes all of its own routine collections, settlements and repossessions on Receivables and Leases.

 

John Deere retail notes and wholesale receivables are supported by perfected security interests in goods financed under laws such as the Uniform Commercial Code (UCC), certain federal statutes and state motor vehicle laws in the U.S. and certain international statutes. UCC financing statements are also prepared and filed on leases; however, filings for operating leases are made for informational purposes only.

 

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Finance Rates on Retail Notes

 

As of October 31, 2010 and 2009, approximately 95 percent of the retail notes held by the Company bore a fixed finance rate. A portion of the finance income earned by the Company arises from reimbursements from John Deere in connection with financing the retail sales of John Deere equipment on which finance charges are waived or reduced by John Deere for a period from the date of sale to a specified subsequent date. See Note 4 to the consolidated financial statements for additional information.

 

Average Original Term and Average Actual Life of Retail Notes and Leases

 

Due to prepayments (often from trade-ins and refinancing), the average actual life of retail notes and financing leases is considerably shorter than the average original term. The following table shows the average original term for retail notes and leases acquired and the average actual life for retail notes and leases liquidated (in months):

 
| ** **                          | ** ** | **Average Original Term** | ** ** | **Average Actual Life** | ** ** |
|-------------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|
| ** **                          | ** ** | **2010**                            | ** ** | **2009**                          | ** ** | **2010** | ** ** | **2009** | ** ** |
| Retail notes                        |       | 55                                  |       | 54                                |       | 36 |   | 36 |   |
| New equipment:                      |       |                                |       |                              |       |   |   |   |   |
| Agriculture and turf equipment      |       | 55                                  |       | 55                                |       | 34 |   | 34 |   |
| Construction and forestry equipment |       | 43                                  |       | 44                                |       | 41 |   | 38 |   |
| Used equipment:                     |       |                                |       |                              |       |   |   |   |   |
| Agriculture and turf equipment      |       | 56                                  |       | 56                                |       | 36 |   | 37 |   |
| Construction and forestry equipment |       | 44                                  |       | 44                                |       | 35 |   | 35 |   |
| Financing leases                    |       | 42                                  |       | 40                                |       | 39 |   | 34 |   |
| Equipment on operating leases       |       | 33                                  |       | 36                                |       | 33 |   | 32 |   |

 

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Maturities

 

The following table presents the contractual maturities of net Receivables and Leases owned by the Company at October 31, 2010 (in millions of dollars), and a summary of net Receivables and Leases owned by the Company at the end of the last five years (in millions of dollars):

 
| ** **                          | ** ** | ** **                     | ** ** | **One to five years** | ** ** | **Over five years** | ** ** | ** **     | ** ** | ** **        | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|--------------------------------|------------|--------------------------------------|------------|-------------------------------|------------|----------------|------------|-------------------|------------|----------------|------------|------------|------------|------------|------------|
| ** **                          | ** ** | **One year or less** | ** ** | **Fixed rate**                       | ** ** | **Variable rate**             | ** ** | **Fixed rate** | ** ** | **Variable rate** | ** ** | **2010 Total** | ** ** | **2009**   | ** ** | **2008**   | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                |       |                           |       |                                 |       |                          |       |           |       |              |       |           |       |       |       |       |       |   |   |   |   |
| Retail notes:                       |       |                           |       |                                 |       |                          |       |           |       |              |       |           |       |       |       |       |       |   |   |   |   |
| Agriculture and turf equipment      |       | $                              | 3,694      |                                 | $          | 6,881                         |       | $              | 333        |              | $          | 190            |       | $          | 13         |       | $          | 11,111 |   | $ | 9,952 |   | $ | 9,734 |   | $ | 9,540 |   | $ | 8,353 |   |
| Construction and forestry equipment |       | 561                            |       | 577                                  |       |                          |       |           |       |              |       | 1,138          |       | 1,386      |       | 1,986      |       | 2,409 |   | 2,388 |   |
| Recreational products               |       | 1                              |       | 2                                    |       |                          |       | 2              |       |              |       | 5              |       | 6          |       | 9          |       | 12 |   | 17 |   |
| Total retail notes                  |       | $                              | 4,256      |                                 | $          | 7,460                         |       | $              | 333        |              | $          | 192            |       | $          | 13         |       | 12,254     |   | 11,344 |   | 11,729 |   | 11,961 |   | 10,758 |   |
| Revolving charge accounts           |       |                           |       |                                 |       |                          |       |           |       |              |       | 2,288          |       | 2,192      |       | 1,825      |       | 1,553 |   | 1,512 |   |
| Operating loans                     |       |                           |       |                                 |       |                          |       |           |       |              |       | 239            |       | 297        |       | 358        |       | 287 |   | 379 |   |
| Wholesale receivables               |       |                           |       |                                 |       |                          |       |           |       |              |       | 4,659          |       | 3,874      |       | 3,571      |       | 3,521 |   | 3,699 |   |
| Financing leases                    |       |                           |       |                                 |       |                          |       |           |       |              |       | 420            |       | 393        |       | 418        |       | 430 |   | 421 |   |
| Equipment on operating leases       |       |                           |       |                                 |       |                          |       |           |       |              |       | 1,142          |       | 1,023      |       | 1,053      |       | 995 |   | 900 |   |
| Total Receivables and Leases        |       |                           |       |                                 |       |                          |       |           |       |              |       | $              | 21,002     |       | $          | 19,123     |       | $ | 18,954 |   | $ | 18,747 |   | $ | 17,669 |   |

 

Total Receivables and Leases by geographic area are as follows (in millions of dollars):

 
| ** **                   | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| U.S.                         |       | $        | 18,038     |     | $          | 16,228   |       | $        | 16,562     |     | $          | 16,199 |   | $ | 15,378 |   |
| Outside the U.S.             |       | 2,964    |       | 2,895    |       | 2,392    |       | 2,548    |       | 2,291    |       |
| Total Receivables and Leases |       | $        | 21,002     |     | $          | 19,123   |       | $        | 18,954     |     | $          | 18,747 |   | $ | 17,669 |   |

 

Delinquencies

 

Total Receivable amounts 60 days or more past due representing the amount of all customer payments past due 60 days or more are as follows (in millions of dollars):

 
| ** **       | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| U.S.             |       | $        | 27.7       |     | $          | 46.7     |       | $        | 38.9       |     | $          | 39.7 |   | $ | 39.5 |   |
| Outside the U.S. |       | 11.2     |       | 18.7     |       | 5.9      |       | 4.0      |       | 3.8      |       |
| Total            |       | $        | 38.9       |     | $          | 65.4     |       | $        | 44.8       |     | $          | 43.7 |   | $ | 43.3 |   |

 

Total non-performing Receivables, which represent loans the Company has ceased accruing interest for are as follows (in millions of dollars):

 
| ** **       | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| U.S.             |       | $        | 96.4       |     | $          | 126.1    |       | $        | 63.2       |     | $          | 31.1 |   | $ | 22.7 |   |
| Outside the U.S. |       | 24.0     |       | 20.1     |       | 16.4     |       | 17.1     |       | 9.6      |       |
| Total            |       | $        | 120.4      |     | $          | 146.2    |       | $        | 79.6       |     | $          | 48.2 |   | $ | 32.3 |   |

 

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Write-offs and Recoveries

 

Total Receivable write-offs and recoveries, by product, were as follows (in millions of dollars):

 
| ** **                                                  | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
|                                                        |       |     |       |     |       |     |       |     |       |     |       |
| **Allowance for credit losses, beginning of year**          |       | $        | 158.2      |     | $          | 105.2    |       | $        | 99.2       |     | $          | 92.8 |   | $ | 96.4 |   |
|                                                        |       |     |       |     |       |     |       |     |       |     |       |
| Provision for credit losses                                 |       | 79.7     |       | 177.5    |       | 66.8     |       | 53.7     |       | 30.5     |       |
|                                                        |       |     |       |     |       |     |       |     |       |     |       |
| Write-offs:                                                 |       |     |       |     |       |     |       |     |       |     |       |
| Retail notes:                                               |       |     |       |     |       |     |       |     |       |     |       |
| Agriculture and turf equipment                              |       | (6.6     | )          | (8.0     | )          | (5.6     | )          | (2.8     | )          | (1.9     | )          |
| Construction and forestry equipment                         |       | (23.1    | )          | (62.4    | )          | (30.9    | )          | (18.9    | )          | (11.2    | )          |
| Recreational products                                       |       | (.4      | )          | (1.2     | )          | (.8      | )          | (.9      | )          | (.6      | )          |
| Total retail notes                                          |       | (30.1    | )          | (71.6    | )          | (37.3    | )          | (22.6    | )          | (13.7    | )          |
| Revolving charge accounts                                   |       | (70.9    | )          | (68.6    | )          | (39.8    | )          | (36.0    | )          | (33.3    | )          |
| Operating loans                                             |       | (17.5    | )          |     |       | (.3      | )          | (3.7     | )          | (2.9     | )          |
| Wholesale receivables                                       |       | .7       |       | (3.0     | )          | (1.0     | )          | (2.8     | )          | (1.9     | )          |
| Financing leases                                            |       | (2.4     | )          | (4.4     | )          | (2.3     | )          | (3.2     | )          | (2.5     | )          |
| Total write-offs                                            |       | (120.2   | )          | (147.6   | )          | (80.7    | )          | (68.3    | )          | (54.3    | )          |
|                                                        |       |     |       |     |       |     |       |     |       |     |       |
| Recoveries:                                                 |       |     |       |     |       |     |       |     |       |     |       |
| Retail notes:                                               |       |     |       |     |       |     |       |     |       |     |       |
| Agriculture and turf equipment                              |       | 3.8      |       | 3.9      |       | 3.4      |       | 3.3      |       | 3.7      |       |
| Construction and forestry equipment                         |       | 3.2      |       | 2.6      |       | 3.3      |       | 1.5      |       | 2.1      |       |
| Recreational products                                       |       | .2       |       | .2       |       | .3       |       | .3       |       | .6       |       |
| Total retail notes                                          |       | 7.2      |       | 6.7      |       | 7.0      |       | 5.1      |       | 6.4      |       |
| Revolving charge accounts                                   |       | 22.7     |       | 13.8     |       | 12.4     |       | 11.8     |       | 10.4     |       |
| Operating loans                                             |       | .2       |       | .5       |       | 1.0      |       | 1.1      |       | .5       |       |
| Wholesale receivables                                       |       | .4       |       | .3       |       | .6       |       | 1.4      |       | 2.5      |       |
| Financing leases                                            |       | .4       |       | .4       |       | .1       |       | .2       |       | .2       |       |
| Total recoveries                                            |       | 30.9     |       | 21.7     |       | 21.1     |       | 19.6     |       | 20.0     |       |
| Total net write-offs                                        |       | (89.3    | )          | (125.9   | )          | (59.6    | )          | (48.7    | )          | (34.3    | )          |
|                                                        |       |     |       |     |       |     |       |     |       |     |       |
| Other changes (primarily translation adjustments)           |       |     |       | 1.4      |       | (1.2     | )          | 1.4      |       | .2       |       |
|                                                        |       |     |       |     |       |     |       |     |       |     |       |
| **Allowance for credit losses, end of year**                |       | $        | 148.6      |     | $          | 158.2    |       | $        | 105.2      |     | $          | 99.2 |   | $ | 92.8 |   |
|                                                        |       |     |       |     |       |     |       |     |       |     |       |
| Total net write-offs as a percentage of average Receivables |       | .48      | %          | .70      | %          | .33      | %          | .29      | %          | .22      | %          |
|                                                        |       |     |       |     |       |     |       |     |       |     |       |
| Allowance as a percentage of total Receivables, end of year |       | .75      | %          | .87      | %          | .59      | %          | .56      | %          | .55      | %          |

 

8

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Total Receivable write-offs and recoveries from outside the U.S. were as follows (in millions of dollars):

 
| ** **                                                                        | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
|                                                                              |       |     |       |     |       |     |       |     |       |     |       |
| **Allowance for credit losses, beginning of year**                                |       | $        | 9.9        |     | $          | 8.2      |       | $        | 9.6        |     | $          | 9.2 |   | $ | 9.6 |   |
|                                                                              |       |     |       |     |       |     |       |     |       |     |       |
| Provision for credit losses                                                       |       | 1.5      |       | 2.7      |       | 1.3      |       | .5       |       | (.2      | )          |
|                                                                              |       |     |       |     |       |     |       |     |       |     |       |
| Write-offs                                                                        |       | (1.0     | )          | (3.1     | )          | (1.6     | )          | (1.5     | )          | (1.1     | )          |
| Recoveries                                                                        |       | .8       |       | .7       |       | .4       |       | .4       |       | .7       |       |
| Total net write-offs                                                              |       | (.2      | )          | (2.4     | )          | (1.2     | )          | (1.1     | )          | (.4      | )          |
|                                                                              |       |     |       |     |       |     |       |     |       |     |       |
| Other changes (primarily translation adjustments)                                 |       |     |       | 1.4      |       | (1.5     | )          | 1.0      |       | .2       |       |
|                                                                              |       |     |       |     |       |     |       |     |       |     |       |
| **Allowance for credit losses, end of year**                                      |       | $        | 11.2       |     | $          | 9.9      |       | $        | 8.2        |     | $          | 9.6 |   | $ | 9.2 |   |
|                                                                              |       |     |       |     |       |     |       |     |       |     |       |
| Total net write-offs as a percentage of average Receivables from outside the U.S. |       | .01      | %          | .09      | %          | .05      | %          | .05      | %          | .02      | %          |
|                                                                              |       |     |       |     |       |     |       |     |       |     |       |
| Allowance as a percentage of total Receivables from outside the U.S., end of year |       | .38      | %          | .34      | %          | .35      | %          | .38      | %          | .41      | %          |

 

Allowance for Credit Losses

 

The total Receivable allowance for credit losses, by product, at October 31, and the Receivable portfolio, by product, as a percent of total portfolio is presented below (in millions of dollars):

 
| ** **                          | ** ** | **2010**    | ** ** | **2009**    | ** ** | **2008**    | ** ** | **2007**    | ** ** | **2006**    | ** ** |
|-------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                          | ** ** | **Dollars** | ** ** | **Percent** | ** ** | **Dollars** | ** ** | **Percent** | ** ** | **Dollars** | ** ** | **Percent** | ** ** | **Dollars** | ** ** | **Percent** | ** ** | **Dollars** | ** ** | **Percent** | ** ** |
| Retail notes:                       |       |        |       |        |       |        |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |
| Agriculture and turf equipment      |       | $           | 23.3       |        | 56         | %           | $          | 18.5        |       | 55          | %          | $ | 18.3 |   | 55 | % | $ | 20.4 |   | 54 | % | $ | 20.3 |   | 50 | % |
| Construction and forestry equipment |       | 58.4        |       | 6           |       | 57.9        |       | 8           |       | 43.3        |       | 11 |   | 40.9 |   | 13 |   | 34.9 |   | 14 |   |
| Recreational products               |       | .4          |       |        |       | .7          |       |        |       | 1.8         |       |   |   | 2.2 |   |   |   | 1.1 |   |   |   |
| Total retail notes                  |       | 82.1        |       | 62          |       | 77.1        |       | 63          |       | 63.4        |       | 66 |   | 63.5 |   | 67 |   | 56.3 |   | 64 |   |
| Revolving charge accounts           |       | 43.3        |       | 12          |       | 41.8        |       | 12          |       | 21.2        |       | 10 |   | 19.1 |   | 9 |   | 17.3 |   | 9 |   |
| Operating loans                     |       | 6.3         |       | 1           |       | 22.8        |       | 2           |       | 8.1         |       | 2 |   | 3.7 |   | 2 |   | 3.8 |   | 2 |   |
| Wholesale receivables               |       | 7.4         |       | 23          |       | 7.1         |       | 21          |       | 7.0         |       | 20 |   | 7.7 |   | 20 |   | 7.5 |   | 22 |   |
| Financing leases                    |       | 9.5         |       | 2           |       | 9.4         |       | 2           |       | 5.5         |       | 2 |   | 5.2 |   | 2 |   | 7.9 |   | 3 |   |
| Total                               |       | $           | 148.6      |        | 100        | %           | $          | 158.2       |       | 100         | %          | $ | 105.2 |   | 100 | % | $ | 99.2 |   | 100 | % | $ | 92.8 |   | 100 | % |

 

The total Receivable allowance for credit losses, by geographic area, at October 31, and the Receivable portfolio, by geographic area, as a percent of total portfolio is presented below (in millions of dollars):

 
| ** **       | ** ** | **2010**    | ** ** | **2009**    | ** ** | **2008**    | ** ** | **2007**    | ** ** | **2006**    | ** ** |
|------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **       | ** ** | **Dollars** | ** ** | **Percent** | ** ** | **Dollars** | ** ** | **Percent** | ** ** | **Dollars** | ** ** | **Percent** | ** ** | **Dollars** | ** ** | **Percent** | ** ** | **Dollars** | ** ** | **Percent** | ** ** |
| U.S.             |       | $           | 137.4      |        | 85         | %           | $          | 148.3       |       | 84          | %          | $ | 97.0 |   | 87 | % | $ | 89.6 |   | 86 | % | $ | 83.6 |   | 87 | % |
| Outside the U.S. |       | 11.2        |       | 15          |       | 9.9         |       | 16          |       | 8.2         |       | 13 |   | 9.6 |   | 14 |   | 9.2 |   | 13 |   |
| Total            |       | $           | 148.6      |        | 100        | %           | $          | 158.2       |       | 100         | %          | $ | 105.2 |   | 100 | % | $ | 99.2 |   | 100 | % | $ | 92.8 |   | 100 | % |

 

9

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The allowance for credit losses is an estimate of the losses inherent in the Company’s Receivable portfolio.  The level of the allowance is based on many quantitative and qualitative factors, including historical loss experience by product category, portfolio duration, delinquency trends, economic conditions and credit risk quality. The Company has an established process to calculate a range of possible outcomes and determine the adequacy of the allowance. No single statistic or measurement determines the adequacy of the allowance. Historical receivable recoveries and charge-offs are considered as part of the loss experience by product category.  The adequacy of the allowance is assessed quarterly. Different assumptions or changes in economic conditions would result in changes to the allowance for credit losses and provision for credit losses.

 

The allowance is determined at an aggregate level by product category for all Receivables that are performing in accordance with payment terms and are not materially past due. The Company assigns loss factors to each aggregation and loss factors are applied to the applicable Receivable balance to determine the allowance level for each product category. The loss factors are determined based on quantitative and qualitative factors, including historical loss experience by product category, portfolio duration, delinquency trends, economic conditions and credit risk quality.

 

The Company also reviews Receivables for impairment based on delinquencies and changes in cash flows or collateral. These Receivables consist of materially past due Receivables, customers that have provided bankruptcy notification and other Receivables requiring significant collection efforts including litigation. The Company identifies these Receivables during reviews of portfolio credit quality. The Company includes the impairment on non-performing Receivables as a separate component included in the allowance unless it has already been recognized as a loss.

 

In addition to the calculations discussed above, other qualitative factors are taken into account to arrive at the allowance balance. The total allowance reflects management’s estimate of credit losses inherent in the Receivables portfolio at the balance sheet date. See further discussion of the allowance for credit losses in the Critical Accounting Policies.

 

Competition

 

The businesses in which the Company is engaged are highly competitive. The Company competes for customers with commercial banks and finance and leasing companies based upon its service, finance rates charged and other finance terms. The proportion of John Deere equipment retail sales and leases financed by the Company is influenced by conditions prevailing in the agriculture and turf equipment and construction and forestry equipment industries, in the financial markets, and in business generally. The Company financed a significant portion of John Deere equipment retail sales and leases in the U.S. during 2010 and 2009.

 

The Company emphasizes convenient service to customers and endeavors to offer terms desired in its specialized markets such as seasonal schedules of repayment and rentals. The Company’s retail note finance rates and lease rental rates are generally believed to be in the range offered by other sales finance and leasing companies, although not as low as those of some banks and other lenders and lessors.

 

Regulation

 

In a number of states, state law limits the maximum finance rate on receivables. The present state limitations have not, thus far, significantly limited variable-rate finance charges or the fixed-rate finance charges established by the Company. However, if interest rate levels should increase significantly, maximum state rates could affect the Company by preventing the variable rates on outstanding variable-rate retail notes from increasing above the maximum state rate, and by limiting the fixed rates on new notes. In some states, the Company may be able to qualify new retail notes for a higher maximum rate limit by using retail installment sales contracts (rather than loan contracts) or by using fixed-rate rather than variable-rate contracts.

 

10

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In addition to rate regulation, various state and federal laws and regulations apply to some Receivables and Leases, principally retail notes for goods sold for personal, family or household use and Farm Planä, PowerPlanâ and John Deere Financial Revolving Plan accounts receivable for such goods. To date, these laws and regulations have not had a significant adverse effect on the Company.

 

The Thrift holds a federal charter issued by the Office of Thrift Supervision (OTS) and is subject to federal regulation and examination by the OTS. The Thrift is headquartered in Madison, Wisconsin and offers revolving charge products such as John Deere Financial Revolving Plan, Farm Planä and PowerPlanâ on a nationwide basis.

 

Financing outside the U.S. is affected by a variety of laws, customs and regulations.

 

**Item 1A****.  Risk Factors.**

 

The Company is a subsidiary of John Deere Financial Services, Inc., a wholly-owned finance holding subsidiary of Deere & Company. The results of operations of the Company are affected by its relationships with Deere & Company. See “Relationships of the Company with John Deere” on page 3 for additional information regarding the relationship between the Company and Deere & Company.

 

The following risks are considered the most significant to the Company’s business based upon current knowledge, information and assumptions. This discussion of risk factors should be considered closely in conjunction with “Management’s Discussion and Analysis” beginning on page 15, and, specifically, the risks and uncertainties described in the “Safe Harbor Statement” on page 22.

 

*International, regional and national trade laws, regulations and policies (particularly those related to or restricting global trade) and government farm programs and policies, could significantly impact John Deere’s profitability and growth prospects.*

 

International, regional and national laws, regulations and policies directly or indirectly related to or restricting trade, including protectionist policies in particular jurisdictions or for the benefit of favored industries or sectors, could harm John Deere’s multinational business. John Deere’s profitability and growth prospects are tied directly to the global marketplace. Open access to global markets improves John Deere’s ability to export goods and services from its various manufacturing locations around the world, and affects the ability to access raw materials, and high quality parts and components at competitive prices on a timely basis. Trade restrictions could limit John Deere’s ability to capitalize on current and future growth opportunities in international markets and impair John Deere’s ability to expand the business by offering new technologies, products and services. Furthermore, the ability to export commodities is critical to John Deere’s agricultural and forestry customers. Policies impacting exchange rates and commodity prices or those limiting the export or import of commodities, including the outcome of the global negotiations under the auspices of the World Trade Organization, could have a material effect on the international flow of agricultural and other commodities which may result in a corresponding negative effect on the demand for agricultural and forestry equipment in many areas of the world. John Deere’s agricultural equipment sales could be especially affected because farm income strongly influences sales of agricultural equipment around the world.

 

Trade restrictions could also impede those in developing countries from achieving a higher standard of living, which could negatively impact John Deere’s future growth opportunities arising from increasing global demand for food, fuel and infrastructure.

 

11

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*Changes in government banking, monetary and fiscal policies could have a material negative effect on John Deere.*

 

Changes in policies of the U.S. and other governments regarding banking, monetary and fiscal policies to promote liquidity and increase the availability of credit may not be effective and could have a material impact on the Company’s customers and markets. The Company’s operations and results could also be materially impacted by financial regulatory reform which could have an adverse affect on the Company’s and John Deere’s customers by limiting their ability to finance purchase of John Deere products. Governmental policies on taxes and spending can also affect the Company, especially John Deere’s construction and forestry business due to the impact of government spending on infrastructure development.

 

*Changing worldwide demand for food and for different forms of bio-energy could have an effect on the price of farm commodities and consequently the demand for certain John Deere equipment and could also result in higher research and development costs related to changing machine fuel requirements.*

 

Changing worldwide demand for farm outputs to meet the world’s growing food and bio-energy demands, driven in part by government policies and a growing world population, are likely to result in fluctuating agricultural commodity prices, which directly affect sales of agricultural equipment. While higher commodity prices may benefit John Deere’s crop producing agricultural equipment customers, higher commodity prices also result in greater feed costs for livestock and poultry producers which in turn may result in lower levels of equipment purchased by those customers. Furthermore, changing bio-fuel demands may cause farmers to change the types or quantities of the crops they raise, with corresponding changes in equipment demands. Finally, changes in governmental policies regulating bio-fuel utilization could affect demand for John Deere’s gasoline- or diesel-fueled equipment and result in higher research and development costs related to equipment fuel standards.

 

*Negative economic conditions and outlook can materially weaken demand for John Deere’s equipment and services, limit access to funding and result in higher funding costs.*

 

The demand for the Company’s products and services can be significantly reduced in an economic environment characterized by higher unemployment, lower consumer spending, lower corporate earnings, and lower business investment. Significant changes in market liquidity conditions could impact access to funding and associated funding costs, which could reduce the Company’s earnings and cash flows. The Company’s activities could be adversely affected by changes in the equity and bond markets, which would negatively affect earnings. General economic conditions can affect the demand for John Deere’s equipment. Sustained or severe negative economic conditions and outlook result in decreased housing starts and other construction and dampen demand for certain construction equipment. John Deere’s turf operations and its construction and forestry business are dependent on construction activity and general economic conditions. Significant or prolonged declines in construction activity and housing starts could have a material adverse effect on John Deere’s results of operations. If negative economic conditions extend to the overall farm economy, there could be a similar effect on John Deere’s agricultural equipment sales.

 

*The Company’s consolidated financial results are reported in U.S. dollars while certain assets and other reported items are denominated in the currencies of other countries, creating currency translation risk.*

 

The reporting currency for the Company’s consolidated financial statements is the U.S. dollar. Certain of the Company’s assets, liabilities, expenses and revenues are denominated in other countries’ currencies. Those assets, liabilities, expenses and revenues are translated into U.S. dollars at the applicable exchange rates to prepare the Company’s consolidated financial statements. Therefore, increases or decreases in exchange rates between the U.S. dollar and those other currencies affect the value of those items as reflected in the Company’s consolidated financial statements, even if their value remains unchanged in their original currency. Substantial fluctuations in the value of the U.S. dollar could have a continuing and significant impact on the Company’s results.

 

12

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*Because the Company is a financing company, the Company’s operations and financial results could be impacted materially should negative economic conditions affect the financial industry.*

 

In recent years, negative economic conditions have frequently had an adverse effect on the financial industry in which the Company operates. The Company provides financing to a significant portion of John Deere sales worldwide. The Company’s inability to access funds to support its financing activities to the Company’s customers could have a material adverse effect on the Company’s business. The Company’s liquidity and ongoing profitability depend largely on timely access to capital to meet future cash flow requirements and fund operations and the costs associated with engaging in diversified funding activities. Additionally, sustained negative market conditions could further reduce customer confidence levels, resulting in declines in credit applications and increases in delinquencies and default rates, which could materially impact the Company’s write-offs and provisions for credit losses.

 

*If John Deere’s customers lack confidence in the general economic outlook, they are less likely to purchase John Deere’s products.*

 

The attitudes of consumers about general economic conditions and outlook can significantly affect their propensity to purchase John Deere equipment. Continuing or worsening negative economic conditions could significantly impair customer confidence and result in reduced equipment sales.

 

*John Deere’s business results depend largely on its ability to develop, manufacture and market products that meet customer demand.*

 

John Deere’s ability to match its new product offerings to its customers’ anticipated preferences for enhanced technologies and different types and sizes of equipment is critical to its success. This requires a thorough understanding of John Deere’s existing and potential customers on a global basis. Failure to deliver quality products at competitive prices to meet customer demands before competitors could have a significant adverse effect on John Deere’s business.

 

*John Deere’s business may be directly and indirectly affected by unfavorable weather conditions or natural disasters that reduce agricultural production and demand for agricultural and turf equipment.*

 

Poor or unusual weather conditions, particularly during the planting and early growing season, can significantly affect the purchasing decisions of the Company’s customers, particularly the customers of agriculture and turf equipment. The timing and quantity of rainfall are two of the most important factors in agricultural production. Insufficient levels of rain prevent farmers from planting new crops and may cause growing crops to die or result in lower yields. Excessive rain or flooding can also prevent planting from occurring at optimal times, and may cause crop loss through increased disease or mold growth. Temperatures outside normal ranges can also cause crop failure or decreased yields, and may also affect disease incidence. Temperature affects the rate of growth, crop maturity and crop quality. Natural calamities such as regional floods, hurricanes, or other storms, and droughts can have significant negative effects on agricultural production. The resulting negative impact on farm income can strongly affect demand for agricultural equipment. Sales of turf care equipment, particularly during the important spring selling season, can be dramatically impacted by weather. Adverse weather conditions in a particular geographic region may adversely affect sales of some turf equipment. Drought conditions can adversely affect sales of certain mowing equipment and unusually rainy weather can similarly cause lower sales volumes.

 

13

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*The Company is subject to interest rate risks. Changes in interest rates can reduce demand for equipment, adversely affect interest margins and limit the ability to access capital markets while increasing borrowing costs.*

 

Rising interest rates could have a dampening effect on overall economic activity and/or the financial condition of the Company’s customers, either or both of which could negatively affect customer demand for John Deere equipment and/or customers’ ability to repay obligations to the Company. In addition, credit market dislocations could have an impact on funding costs which are very important to the Company because such costs affect the ability to offer customers competitive financing rates. In addition, changing interest rates could have an adverse effect on the Company’s net interest rate margin—the difference between the yield the Company earns on its assets and the interest rates the Company pays for funding, which could in turn affect the Company’s net interest income and earnings. Actions by credit rating agencies, such as downgrades or negative changes to rating outlooks, can affect the availability and cost of funding for the Company and can increase the Company’s cost of capital and hurt its competitive position.

 

**Item 1B****.  Unresolved Staff Comments.**

 

None.

 

**Item 2****.  Properties.**

 

The Company’s properties principally consist of office equipment, Company-owned office buildings in Johnston, Iowa and Madison, Wisconsin; and leased office space in Reno, Nevada; Rosario, Argentina; Brisbane, Australia; Gloucester, England; Langar, England; Bruchsal, Germany; Vignate, Italy; Luxembourg City, Luxembourg; Monterrey, Mexico; and Parla, Spain.

 

**Item 3****.  Legal Proceedings.**

 

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

 

**PART II**

 

**Item 5****.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.**

 

(a)         All of John Deere Capital Corporation’s common stock is owned by John Deere Financial Services, Inc., a finance holding company that is wholly-owned by Deere & Company. In 2010, the Capital Corporation declared and paid cash dividends of $195 million to John Deere Financial Services, Inc. In turn, John Deere Financial Services, Inc. declared and paid $195 million in cash dividends to Deere & Company. The Capital Corporation did not declare or pay cash dividends to John Deere Financial Services, Inc. in 2009. In 2009, Deere & Company increased its investment in John Deere Financial Services, Inc. by $60 million. In turn, John Deere Financial Services, Inc. increased its investment in the Capital Corporation by $60 million.

 

(b)          Not applicable.

 

(c)           Not applicable.

 

**Item 6****.  Selected Financial Data.**

 

Omitted pursuant to instruction I(2).

 

14

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**Item 7****.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.**

 

Results of Operations

 

Overview

 

Organization

 

The Company primarily generates revenues and cash by financing John Deere dealers’ sales and leases of new and used agriculture, turf, construction and forestry equipment. In addition, the Company also provides wholesale financing to dealers of the foregoing equipment, provides operating loans, finances retail revolving charge accounts and made loans to certain affiliated companies that have investments in wind energy projects. In August 2010, the Company sold John Deere Risk Protection, the crop insurance managing general agency that offered certain crop risk mitigation products in the U.S., to John Deere Financial Services, Inc.

 

Trends and Economic Conditions

 

The Company’s business is currently affected by the following key trends and economic conditions. The Company’s business is closely related to John Deere’s business. Industry farm machinery sales in the U.S. and Canada for 2011 are forecast to be approximately the same as 2010. Industry sales in Western Europe are forecast to increase 5 to 10 percent, while South American industry sales are projected to be approximately the same. Industry sales in Central Europe and the Commonwealth of Independent States are expected to have moderate gains. Industry sales of turf and utility equipment in the U.S. and Canada are expected to be approximately the same. John Deere’s agriculture and turf equipment sales increased 10 percent in 2010 and are forecast to increase by 7 to 9 percent for 2011. Construction equipment markets are forecast to be somewhat improved, while global forestry markets are expected to move significantly higher in 2011. John Deere’s construction and forestry sales increased 41 percent in 2010 and are forecast to increase by 25 to 30 percent in 2011. Net income attributable to the Company in 2011 is expected to decrease to approximately $275 million. The forecast decrease from 2010 is primarily due to lower financing spreads and higher administrative and operating expenses, partially offset by growth in the portfolio.

 

Items of concern for the Company include the uncertainty of the global economic recovery, the impact of sovereign and state debt, capital market disruptions, the availability of credit for the Company’s customers, the effectiveness of governmental actions in respect to monetary policies, trade and general economic conditions, and financial regulatory reform. Significant fluctuations in foreign currency exchange rates and volatility in the price of many commodities could also impact the Company’s results.

 

Deere & Company’s strong performance for the year reflects a disciplined approach to executing Deere & Company’s business plans and was achieved despite continuing weakness in certain regions and business sectors. Although conditions continued to be positive in the U.S. farm sector, European agricultural markets remained soft. Deere & Company’s construction equipment sales benefited from somewhat stronger overall demand, but remained far below normal levels. With Deere & Company’s performance in 2010, it remains well positioned to capitalize on positive global economic trends.

 

2010 Compared with 2009

 

Consolidated net income was $319.4 million for the year, compared with $149.2 million last year. Results were higher mainly due to improved financing spreads and a lower provision for credit losses. The ratio of earnings to fixed charges was 1.89 to 1 for 2010, compared with 1.28 to 1 for 2009.

 

15

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Revenues totaled $1,682 million in 2010, compared with $1,756 million in 2009. The decrease was primarily due to lower financing rates. Finance income earned on retail notes totaled $692 million in 2010, compared with $744 million in 2009. The decrease was primarily due to lower financing rates, partially offset by a 2 percent increase in the average retail note portfolio balances. Lease revenues totaled $290 million in 2010, compared with $313 million in 2009. The decrease was primarily due to lower financing rates on equipment on operating leases. Revenues earned on revolving charge accounts amounted to $268 million in 2010, compared with $242 million earned during 2009. The increase was primarily due to an increase in the average balance of revolving charge accounts, partially offset by lower financing rates. Finance income earned on wholesale receivables decreased $42 million, to $256 million in 2010, from $298 million in 2009. The decrease was primarily due to lower financing rates, partially offset by a 5 percent increase in the average balance of wholesale receivables. Revenues earned from Deere & Company totaled $441 million in 2010, compared with $507 million in 2009. The decrease was primarily due to lower financing rates.

 

Crop insurance commissions totaled $75 million in 2010, compared with $83 million in 2009. In August 2010, the Company sold John Deere Risk Protection, the crop insurance managing general agency, to John Deere Financial Services, Inc.

 

Other income totaled $92 million in 2010, compared with $63 million in 2009. The increase was primarily due to higher late fee income and lower losses from construction equipment operating lease residual values.

 

Interest expense totaled $534 million in 2010, compared with $789 million in 2009. The decrease was primarily due to a decrease in the weighted-average annual interest rate incurred on all borrowings from 4.0 percent in 2009 to 3.0 percent in 2010 and lower average borrowings.

 

Administrative and operating expenses totaled $370 million in 2010, compared with $333 million in 2009. The increase was primarily due to foreign exchange losses and higher incentive compensation expenses.

 

The provision for credit losses was $80 million in 2010, compared with $178 million in 2009. The decrease was primarily due to a decrease in the allowance for credit losses and lower write-offs of construction and forestry equipment retail notes. Total net write-offs of Receivables financed were $89 million during 2010, compared with $126 million in 2009. The provision for credit losses, as a percentage of the total average balance of Receivables financed, was .43 percent for 2010 and .99 percent for 2009.

 

16

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Receivables and Leases Acquired and Held

 

Receivables and Leases acquired by the Company during 2010 totaled $34,938 million, compared with volumes of $31,254 million during 2009. Receivables and Leases held by the Company at October 31, 2010 totaled $21,002 million, compared with $19,123 million at October 31, 2009. For the 2010 and 2009 fiscal years, Receivable and Lease acquisition volumes and balances held were as follows (in millions of dollars):

 
| ** **                          | ** ** | **Fiscal Year Volumes** | ** ** | **Balance at October 31,** | ** ** |
|-------------------------------------|------------|-----------------------------------|------------|-------------------------------------------|------------|
| ** **                          | ** ** | **2010**                          | ** ** | **2009**                                  | ** ** | **% Change** | ** ** | **2010** | ** ** | **2009** | ** ** | **% Change** | ** ** |
| Retail notes:                       |       |                              |       |                                      |       |   |   |   |   |   |   |   |   |
| Agriculture and turf equipment      |       | $                                 | 6,442.3    |                                      | $          | 5,013.4 |   | 29 | % | $ | 11,111.3 |   | $ | 9,952.0 |   | 12 | % |
| Construction and forestry equipment |       | 577.4                             |       | 472.9                                     |       | 22 |   | 1,138.3 |   | 1,386.0 |   | (18 | ) |
| Recreational products               |       |                              |       |                                      |       |   |   | 4.6 |   | 6.2 |   | (26 | ) |
| Total retail notes                  |       | 7,019.7                           |       | 5,486.3                                   |       | 28 |   | 12,254.2 |   | 11,344.2 |   | 8 |   |
| Revolving charge accounts           |       | 4,629.9                           |       | 4,458.2                                   |       | 4 |   | 2,287.9 |   | 2,192.5 |   | 4 |   |
| Operating loans                     |       | 333.1                             |       | 1,014.3                                   |       | (67 | ) | 239.1 |   | 297.0 |   | (19 | ) |
| Wholesale receivables               |       | 22,068.6                          |       | 19,610.9                                  |       | 13 |   | 4,658.7 |   | 3,873.5 |   | 20 |   |
| Financing leases                    |       | 225.0                             |       | 189.5                                     |       | 19 |   | 420.4 |   | 392.8 |   | 7 |   |
| Equipment on operating leases       |       | 662.1                             |       | 494.9                                     |       | 34 |   | 1,141.8 |   | 1,023.2 |   | 12 |   |
| Total Receivables and Leases        |       | $                                 | 34,938.4   |                                      | $          | 31,254.1 |   | 12 | % | $ | 21,002.1 |   | $ | 19,123.2 |   | 10 | % |

 

Retail note volumes increased primarily due to increases in retail sales of John Deere equipment and increased market coverage. Operating loan volumes decreased primarily due to decreased borrowings by farm input providers. Wholesale receivable volumes increased primarily due to increased shipments of John Deere equipment as a result of increased retail sales activity.

 

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

 
| ** **                                                   | ** ** | **October 31,********2010** | ** ** | **October 31,********2009** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| **Receivables and Leases administered:**                     |       |                             |       |                             |       |
| Owned by the Company                                         |       | $                                | 18,737.2   |                             | $          | 16,013.1 |   |
| Owned by the Company — restricted due to securitization |       | 2,264.9                          |       | 3,110.1                          |       |
| Total Receivables and Leases owned by the Company            |       | 21,002.1                         |       | 19,123.2                         |       |
| Administered - with limited recourse*                        |       | 59.6                             |       | 95.8                             |       |
| Administered - without recourse**                            |       | 20.6                             |       | 32.6                             |       |
| Total Receivables and Leases administered                    |       | $                                | 21,082.3   |                             | $          | 19,251.6 |   |

 

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*              The Company’s maximum exposure under all Receivable and Lease recourse provisions at October 31, 2010 and 2009 was $5 million and $7 million, respectively. The Company does not record the recourse obligations as liabilities as they are contingent liabilities that are remote at this time. However, the probable loss on Receivables and Leases that have been sold was accrued at the time of sale, and any subsequent necessary adjustments are made as part of ongoing reviews.

 

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

 

Retail notes bearing fixed finance rates totaled 95 percent of the total retail note portfolio at October 31, 2010 and 2009.

 

17

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Total Receivable amounts 60 days or more past due represent the amount of all customer payments past due 60 days or more. These amounts were $39 million at October 31, 2010, compared with $65 million at October 31, 2009. In addition, these past due amounts represented .20 percent and .36 percent of the total Receivables held at those respective dates. The balance of retail notes held (principal plus accrued interest) with any installment 60 days or more past due represents the total retail note balance for a customer that has any portion of his note 60 days or more past due. These amounts were $120 million and $301 million at October 31, 2010 and 2009, respectively. The balances of retail notes held on which any installment was 60 days or more past due as a percentage of the ending retail notes receivable was .98 percent at October 31, 2010 and 2.66 percent at October 31, 2009. See Note 5 to the consolidated financial statements for additional past due information.

 

Deposits withheld from dealers and merchants, representing mainly the aggregate dealer retail note and lease withholding accounts from individual John Deere dealers to which losses from retail notes and leases originating from the respective dealers can be charged, amounted to $165 million at October 31, 2010 and 2009. The Company’s allowance for credit losses on all Receivables financed at October 31, 2010 totaled $149 million and represented .75 percent of the total Receivables financed, compared with $158 million and .87 percent, respectively, at October 31, 2009. The allowance is subject to an ongoing evaluation based on many quantitative and qualitative factors, including historical loss experience by product category, portfolio duration, delinquency trends, economic conditions and credit risk quality. The Company believes its allowance is sufficient to provide for losses in its existing receivable portfolio.

 

2009 Compared with 2008

 

Consolidated net income was $149.2 million for the fiscal year ended October 31, 2009, compared with $282.4 million in 2008. The lower results for 2009 were primarily due to a higher provision for credit losses, narrower financing spreads, lower commissions from crop insurance and higher losses from construction equipment operating lease residual values, partially offset by lower administrative and operating expenses. The ratio of earnings to fixed charges was 1.28 to 1 for 2009, compared with 1.52 to 1 for 2008.

 

Revenues totaled $1,756 million in 2009, compared with $1,967 million in 2008. The decrease was primarily due to lower financing rates and lower commissions from crop insurance. Finance income earned on retail notes totaled $744 million in 2009, compared with $861 million in 2008. The decrease was primarily due to lower financing rates and a 5 percent decrease in the average retail note portfolio balances. Lease revenues decreased $19 million to $313 million in 2009, primarily due to lower financing rates and a 2 percent decrease in the average balance of leases. Revenues earned on revolving charge accounts amounted to $242 million in 2009, a 7 percent increase over revenues of $227 million earned during 2008. The increase was primarily due to an increase in the average balance of revolving charge accounts, partially offset by lower financing rates. Finance income earned on wholesale receivables decreased $5 million, to $298 million in 2009, from $303 million in 2008. The decrease was primarily due to lower financing rates, partially offset by a 13 percent increase in the average balance of wholesale receivables. Revenues earned on operating loans amounted to $14 million in 2009, compared with $23 million in 2008. The decrease was primarily due to lower financing rates and an 11 percent decrease in the average balance of operating loans. Revenues earned from Deere & Company totaled $507 million in 2009, compared with $542 million in 2008.

 

Crop insurance commissions totaled $83 million in 2009, compared with $139 million in 2008. The decrease was primarily due to less favorable underwriting experience that resulted in lower commissions in the first and second quarters of 2009, compared to the same periods in 2008.

 

Other income totaled $63 million in 2009, compared with $84 million in 2008. The decrease was primarily due to higher losses from construction equipment operating lease residual values.

 

Interest expense totaled $789 million in 2009, compared with $839 million in 2008. The decrease was primarily due to a decrease in the weighted-average annual interest rate incurred on all borrowings from 4.7 percent in 2008 to 4.0 percent in 2009, partially offset by higher average borrowings.

 

18

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Administrative and operating expenses totaled $333 million in 2009, compared with $373 million in 2008. The decrease was primarily due to lower incentive compensation expenses and foreign exchange gains.

 

The provision for credit losses was $178 million in 2009, compared with $67 million in 2008. The increase was primarily due to higher write-offs of construction and forestry retail notes and revolving charge accounts and an increase in the allowance for credit losses. Total net write-offs of Receivables financed were $126 million during 2009, compared with $60 million in 2008. The provision for credit losses, as a percentage of the total average balance of Receivables financed, was .99 percent for 2009 and .37 percent for 2008.

 

Receivables and Leases Acquired and Held

 

Receivables and Leases acquired by the Company during 2009 totaled $31,254 million, compared with volumes of $33,404 million during 2008. Receivables and Leases held by the Company at October 31, 2009 totaled $19,123 million, compared with $18,954 million at October 31, 2008. For the 2009 and 2008 fiscal years, Receivable and Lease acquisition volumes and balances held were as follows (in millions of dollars):

 
| ** **                          | ** ** | **Fiscal Year Volumes** | ** ** | **Balance at October 31,** | ** ** |
|-------------------------------------|------------|-----------------------------------|------------|-------------------------------------------|------------|
| ** **                          | ** ** | **2009**                          | ** ** | **2008**                                  | ** ** | **% Change** | ** ** | **2009** | ** ** | **2008** | ** ** | **% Change** | ** ** |
| Retail notes:                       |       |                              |       |                                      |       |   |   |   |   |   |   |   |   |
| Agriculture and turf equipment      |       | $                                 | 5,013.4    |                                      | $          | 5,489.1 |   | (9 | )% | $ | 9,952.0 |   | $ | 9,733.4 |   | 2 | % |
| Construction and forestry equipment |       | 472.9                             |       | 953.6                                     |       | (50 | ) | 1,386.0 |   | 1,986.5 |   | (30 | ) |
| Recreational products               |       |                              |       |                                      |       |   |   | 6.2 |   | 9.2 |   | (33 | ) |
| Total retail notes                  |       | 5,486.3                           |       | 6,442.7                                   |       | (15 | ) | 11,344.2 |   | 11,729.1 |   | (3 | ) |
| Revolving charge accounts           |       | 4,458.2                           |       | 4,352.8                                   |       | 2 |   | 2,192.5 |   | 1,825.1 |   | 20 |   |
| Operating loans                     |       | 1,014.3                           |       | 2,187.2                                   |       | (54 | ) | 297.0 |   | 357.9 |   | (17 | ) |
| Wholesale receivables               |       | 19,610.9                          |       | 19,610.9                                  |       |   |   | 3,873.5 |   | 3,570.6 |   | 8 |   |
| Financing leases                    |       | 189.5                             |       | 254.0                                     |       | (25 | ) | 392.8 |   | 417.9 |   | (6 | ) |
| Equipment on operating leases       |       | 494.9                             |       | 556.3                                     |       | (11 | ) | 1,023.2 |   | 1,053.4 |   | (3 | ) |
| Total Receivables and Leases        |       | $                                 | 31,254.1   |                                      | $          | 33,403.9 |   | (6 | )% | $ | 19,123.2 |   | $ | 18,954.0 |   | 1 | % |

 

Retail note volumes decreased primarily due to decreases in retail sales of John Deere agriculture and turf equipment and construction and forestry equipment. Revolving charge account volumes increased primarily as a result of increased market coverage. Operating loan volumes decreased primarily due to decreased borrowings by farm input providers.

 

19

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

 
| ** **                                                   | ** ** | **October 31,********2009** | ** ** | **October 31,********2008** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| **Receivables and Leases administered:**                     |       |                             |       |                             |       |
| Owned by the Company                                         |       | $                                | 16,013.1   |                             | $          | 17,361.5 |   |
| Owned by the Company — restricted due to securitization |       | 3,110.1                          |       | 1,592.5                          |       |
| Total Receivables and Leases owned by the Company            |       | 19,123.2                         |       | 18,954.0                         |       |
| Administered - with limited recourse*                        |       | 95.8                             |       | 118.7                            |       |
| Administered - without recourse**                            |       | 32.6                             |       | 44.0                             |       |
| Total Receivables and Leases administered                    |       | $                                | 19,251.6   |                             | $          | 19,116.7 |   |

 

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*              The Company’s maximum exposure under all Receivable and Lease recourse provisions at October 31, 2009 and 2008 was $7 million and $8 million, respectively. The Company does not record the recourse obligations as liabilities as they are contingent liabilities that are remote at this time. However, the probable loss on Receivables and Leases that have been sold was accrued at the time of sale, and any subsequent necessary adjustments are made as part of ongoing reviews.

 

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

 

Retail notes bearing fixed finance rates totaled 95 percent of the total retail note portfolio at October 31, 2009, compared with 90 percent at October 31, 2008.

 

Total Receivable amounts 60 days or more past due represent the amount of all customer payments past due 60 days or more. These amounts were $65 million at October 31, 2009, compared with $45 million at October 31, 2008. In addition, these past due amounts represented .36 percent and .25 percent of the total Receivables held at those respective dates. The balance of retail notes held (principal plus accrued interest) with any installment 60 days or more past due represents the total retail note balance for a customer that has any portion of the customer’s note 60 days or more past due. These amounts were $301 million and $163 million at October 31, 2009 and 2008, respectively. The balances of retail notes held on which any installment was 60 days or more past due as a percentage of the ending retail notes receivable was 2.66 percent at October 31, 2009 and 1.39 percent at October 31, 2008. See Note 5 to the consolidated financial statements for additional past due information.

 

Deposits withheld from dealers and merchants, representing mainly the aggregate dealer retail note and lease withholding accounts from individual John Deere dealers to which losses from retail notes and leases originating from the respective dealers can be charged, amounted to $165 million at October 31, 2009 compared with $174 million at October 31, 2008. The Company’s allowance for credit losses on all Receivables financed at October 31, 2009 totaled $158 million and represented .87 percent of the total Receivables financed, compared with $105 million and .59 percent, respectively, at October 31, 2008. The allowance is subject to an ongoing evaluation based on many quantitative and qualitative factors, including historical loss experience by product category, portfolio duration, delinquency trends, economic conditions and credit risk quality. The Company believes its allowance is sufficient to provide for losses in its existing receivable portfolio.

 

Capital Resources and Liquidity

 

The aggregate net cash provided by operating activities, financing activities and the beginning balance of cash and cash equivalents was used primarily to increase Receivables. Net cash provided by operating activities was $967 million in 2010. Net cash provided by financing activities totaled $527 million resulting from an increase in payables to John Deere, partially offset by a net decrease in external borrowings and dividends paid to John Deere Financial Services, Inc., which in turn paid comparable dividends to Deere & Company. Net cash used for investing activities totaled $2,003 million in 2010, primarily due to the cost of Receivables and Leases acquired exceeding collections of Receivables and the proceeds from sales of equipment on operating leases. Cash and cash equivalents decreased $515 million during 2010.

 

20

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Over the last three years, operating activities have provided $2,107 million in cash. In addition, the sale of Receivables and Leases provided $141 million, an increase in total net borrowings provided $1,637 million and capital investments from Deere & Company provided $460 million. These amounts have been used mainly to fund Receivable and Lease acquisitions, which exceeded collections of Receivables and proceeds from sales of equipment on operating leases by $3,384 million, and to pay $660 million in dividends. Cash and cash equivalents also increased $165 million over the three-year period.

 

The Company relies on its ability to raise substantial amounts of funds to finance its Receivable and Lease portfolios. Given the continued volatility in the global economy, there has been a reduction in liquidity in some global markets that continues to affect the funding activities of the Company. However, the Company has access to most global markets at a reasonable cost and expects to have sufficient sources of liquidity to meet its funding needs. The Company’s ability to meet its debt obligations is supported in a number of ways. The assets of the Company are self-liquidating in nature. A solid equity position is available to absorb unusual losses on these assets and all commercial paper is backed by unsecured, committed borrowing lines from various banks. Liquidity is also provided by the Company’s ability to securitize these assets and through the issuance of term debt. Additionally, liquidity may be provided through loans from John Deere. The Company’s commercial paper outstanding at October 31, 2010 and 2009 was approximately $1,349 million and $32 million, respectively, while the total cash and cash equivalents position was $356 million and $871 million, respectively.

 

In November 2009, the Capital Corporation renewed a revolving credit agreement to utilize bank conduit facilities to securitize retail notes (see Note 6). At October 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 day revolving period, unless the banks and Capital Corporation agree to renew, Capital Corporation would liquidate the secured borrowings over time as payments on the retail notes are collected. At October 31, 2010, $835 million of secured short-term borrowings was outstanding under the agreement. In November 2010, the Capital Corporation increased the capacity under this revolving credit agreement to $2,000 million and renewed it for an additional three years.

 

During 2010, the Company issued $1,637 million of medium-term notes, obtained $885 million of secured borrowings and maintained an average commercial paper balance of $674 million. At October 31, 2010, the Company’s funding profile included $1,349 million of commercial paper, $2,209 million of notes payable related to on-balance sheet securitization funding, $1,256 million of intercompany loans from John Deere, $14,341 million of unsecured term debt, and $2,449 million of equity capital. The Company’s funding profile may be altered to reflect such factors as relative costs of funding sources, assets available for securitizations and capital market accessibility.

 

In April 2010, the Company completed a $708 million retail note securitization transaction, which is included in short-term secured borrowings. The Company also issued $1,654 million and retired $2,536 million of long-term borrowings during the year, which were primarily medium-term notes.

 

Total interest-bearing indebtedness amounted to $19,155 million at October 31, 2010, compared with $18,411 million at October 31, 2009. Total short-term indebtedness amounted to $7,703 million at October 31, 2010, compared with $5,711 million at October 31, 2009. Included in short-term indebtedness are secured borrowings of $2,209 million and $3,109 million for the same periods. Total long-term indebtedness amounted to $11,452 million at October 31, 2010, compared with $12,701 million at October 31, 2009. The ratio of total interest-bearing debt, including securitization indebtedness, to stockholder’s equity was 7.8 to 1 and 7.9 to 1 at October 31, 2010 and 2009, respectively.

 

Stockholder’s equity was $2,449 million at October 31, 2010, compared with $2,317 million and $2,065 million at October 31, 2009 and 2008, respectively. The increase in 2010 was primarily due to net income attributable to the Company of $319 million and unrealized gains on derivatives of $15 million, partially offset by dividend payments of $195 million and a decrease in the cumulative translation adjustment of $7 million.

 

21

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The Capital Corporation declared and paid cash dividends of $195 million to John Deere Financial Services, Inc. in 2010. In turn, John Deere Financial Services, Inc. paid comparable dividends to Deere & Company. The Capital Corporation did not declare or pay cash dividends to John Deere Financial Services, Inc. in 2009.

 

*Lines of Credit*

 

John Deere Capital Corporation also has access to bank lines of credit with various banks throughout the world. Some of the lines are available to both John Deere Capital Corporation and Deere & Company. Worldwide lines of credit totaled $5,286 million at October 31, 2010, $3,222 million of which was unused. For the purpose of computing unused credit lines, commercial paper and short-term bank borrowings, excluding secured borrowings and the current portion of long-term borrowings, of the Capital Corporation and Deere & Company were considered to constitute utilization. Included in the total credit lines at October 31, 2010 was a long-term credit facility agreement of $3,750 million, expiring in February 2012 and a long-term credit facility agreement of $1,500 million, expiring in April 2013. These credit agreements require the Capital Corporation to maintain its consolidated ratio of earnings to fixed charges at not less than 1.05 to 1 for each fiscal quarter and its ratio of senior debt, excluding securitization indebtedness, to capital base (total subordinated debt and total Capital Corporation stockholder’s equity excluding accumulated other comprehensive income (loss)) at not more than 11 to 1 at the end of any fiscal quarter. All of these requirements of the credit agreements have been met during the periods included in the consolidated financial statements.

 

Debt Ratings

 

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

 

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

 

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

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

 

Safe Harbor Statement

 

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

 

22

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Factors that could materially affect the Company’s results include changing worldwide economic conditions, and changes in and the impact of governmental trade, banking, monetary and fiscal policies, including financial regulatory reform. Actions by the U.S. Federal Reserve Board, the FDIC and other central banks may affect the costs and expenses of financing the Company and the interest rates it is able to offer. The Company’s business is affected by general economic conditions in and the political instability of the global markets in which the Company operates because deteriorating economic conditions and political instability can result in decreased customer confidence, lower demand for equipment, higher loan losses and greater currency risk. The Company’s business is also affected by actions of banks, financing and leasing companies and other lenders that compete with the Company for customers; capital market disruptions; significant changes in capital market liquidity and associated funding costs; and interest rates and foreign currency exchange rates.

 

Significant changes in market liquidity conditions could impact access to funding and associated funding costs, which could reduce the Company’s earnings and cash flows. Market conditions could also negatively impact customer access to capital for purchases of John Deere’s products; borrowing and repayment practices; and the number and size of customer loan delinquencies and defaults. A sovereign debt crisis, in Europe or elsewhere, could negatively impact currencies, global financial markets, social and political stability, funding sources and costs, customers, and Company operations and results. State debt crises also could negatively impact customers, demand for equipment, and Company operations and results. The Company’s operations could be impaired by changes in the equity and bond markets, which could negatively affect earnings.

 

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

 

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

 

Off-Balance Sheet Arrangements

 

The Company had other miscellaneous contingencies totaling approximately $5 million at October 31, 2010, for which it believes the probability for payment is substantially remote. The Company’s accrued liability at October 31, 2010 related to these contingencies was not material.

 

23

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Aggregate Contractual Obligations

 

The payment schedule for the Company’s contractual obligations at October 31, 2010 in millions of dollars is as follows:

 
| ** **                                   | ** ** | **Total** | ** ** | **Less than 1 year** | ** ** | **2 & 3 years** | ** ** | **4 & 5 years** | ** ** | **More than 5 years** | ** ** |
|----------------------------------------------|------------|-----------|------------|--------------------------------|------------|-------------------------------|------------|-------------------------------|------------|---------------------------------|------------|
| **On-balance-sheet**                         |       |      |       |                           |       |                          |       |                          |       |                            |       |
| Total debt*                                  |       | $         | 18,678     | **                             | $          | 6,796                         |       | $                             | 8,284      |                            | $          | 1,537 |   | $ | 2,061 |   |
| Interest on debt                             |       | 1,544     |       | 505                            |       | 539                           |       | 261                           |       | 239                             |       |
| Accounts payable                             |       | 208       |       | 208                            |       |                          |       |                          |       |                            |       |
| Deposits withheld from dealers and merchants |       | 165       |       | 59                             |       | 73                            |       | 31                            |       | 2                               |       |
| **Off-balance-sheet**                        |       |      |       |                           |       |                          |       |                          |       |                            |       |
| Purchase obligations                         |       | 10        |       | 4                              |       | 4                             |       | 2                             |       |                            |       |
| Operating leases                             |       | 6         |       | 3                              |       | 2                             |       | 1                             |       |                            |       |
| **Total**                                    |       | $         | 20,611     |                           | $          | 7,575                         |       | $                             | 8,902      |                            | $          | 1,832 |   | $ | 2,302 |   |

 

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*                                         Principal payments.

 

**                                  Notes payable of $2,209 million classified as short-term on the balance sheet related to securitization of retail notes are included in this table based on the expected payment schedule (see Note 9).

 

The previous table does not include unrecognized tax benefit liabilities of approximately $30 million at October 31, 2010 since the timing of future payments is not reasonably estimable at this time (see Note 16). It also does not include unused commitments to extend credit to customers and John Deere dealers as discussed in Note 19 to the consolidated financial statements. For additional information regarding short-term borrowings, long-term borrowings and lease obligations, see Notes 9, 10 and 11, respectively, to the consolidated financial statements.

 

Critical Accounting Policies

 

The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect reported amounts of assets, liabilities, revenues and expenses. Changes in these estimates and assumptions could have a significant effect on the financial statements. The accounting policies below are those management believes are the most critical to the preparation of the Company’s financial statements and require the most difficult, subjective or complex judgments. The Company’s other accounting policies are described in the Notes to the consolidated financial statements.

 

Allowance for Credit Losses

 

The allowance for credit losses represents an estimate of the losses expected from the Company’s Receivable portfolio. The level of the allowance is based on many quantitative and qualitative factors, including historical loss experience by product category, portfolio duration, delinquency trends, economic conditions and credit risk quality. The adequacy of the allowance is assessed quarterly.  Different assumptions or changes in economic conditions would result in changes to the allowance for credit losses and the provision for credit losses.

 

The total allowance for credit losses at October 31, 2010, 2009, and 2008 was $149 million, $158 million, and $105 million, respectively. The decrease in 2010 was primarily due to a decrease in loss experience. The increase in 2009 was primarily due to an increase in loss experience and delinquencies in construction and forestry equipment retail notes, revolving charge accounts and operating loans.

 

24

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The assumptions used in evaluating the Company’s exposure to creditlosses involve estimates and significant judgment. The historical lossexperience on the Receivable portfolios represents one of the key assumptionsinvolved in determining the allowance for credit losses. Over the last fivefiscal years, this percent has varied by an average of approximately plus orminus .15 percent, compared to the average loss experience percent during thatperiod. Holding other assumptions constant, if this estimated loss experienceon the Receivable portfolio were to increase or decrease .15 percent, theallowance for credit losses at October 31, 2010 would increase or decreaseby approximately $30 million.

 

Operating Lease Residual Values

 

The carrying value of the equipment on operating leases is affected bythe estimated fair values of the equipment at the end of the lease (residualvalues).  Upon termination of the lease,the equipment is either purchased by the lessee or sold to a third party, inwhich case the Company may record a gain or a loss for the difference betweenthe estimated residual value and the sales price.  The residual values are dependent on currenteconomic conditions and are reviewed quarterly. Changes in residual valueassumptions would affect the amount of depreciation expense and the amount ofinvestment in equipment on operating leases.

 

The total operating lease residual values at October 31, 2010,2009 and 2008 were $788 million, $691 million and $663 million,respectively. The increases in 2010 and 2009 were primarily due to the higherlevels of agriculture and turf equipment operating leases.

 

Estimates used in determining end of lease market values for equipmenton operating leases significantly impact the amount and timing of depreciationexpense.  If future market values forthis equipment were to decrease 10 percent from the Company’s presentestimates, the total impact would be to increase the Company’s annualdepreciation for equipment on operating leases by approximately $28 million.

 

**Item 7A****.  Quantitativeand Qualitative Disclosures About Market Risk.**

 

FinancialInstrument Risk Information

 

The Company is naturally exposed to various interest rate and foreigncurrency risks. As a result, the Company enters into derivative transactions tomanage certain of these exposures that arise in the normal course of businessand not for the purpose of creating speculative positions or trading. TheCompany manages the relationships of the types and amounts of its fundingsources to its Receivable and Lease portfolios in an effort to diminish riskdue to interest rate and foreign currency fluctuations, while responding tofavorable financing opportunities. Accordingly, from time to time, the Companyenters into interest rate swap agreements to manage its interest rate exposure.The Company also has foreign currency exposures at some of its foreign anddomestic operations related to financing in currencies other than the localcurrencies. The Company has entered into agreements related to the managementof these foreign currency transaction risks. The credit risk under theseinterest rate and foreign currency agreements is not considered to besignificant.

 

Interest Rate Risk

 

Quarterly, the Company uses a combination of cash flow models to assessthe sensitivity of its financial instruments with interest rate exposure tochanges in market interest rates. The models calculate the effect of adjustinginterest rates as follows. Cash flows for Receivables are discounted at thecurrent prevailing rate for each Receivable portfolio. Cash flows for unsecuredborrowings are discounted at the applicable benchmark yield curve plus marketcredit spreads for similarly rated borrowers. Cash flows for securitizedborrowings are discounted at the swap yield curve plus a market credit spreadfor similarly rated borrowers. Cash flows for interest rate swaps are projectedand discounted using forward rates from the swap yield curve at the repricingdates. The net loss in these financial instruments’ fair value which would becaused by increasing the interest rates by 10 percent from the market rates at October 31,2010 and 2009 would have been approximately $80 million and $41 million,respectively.

 

25

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Foreign Currency Risk

 

The Company’s policy is to hedge the foreign currency risk if thecurrency of the borrowings does not match the currency of the Receivableportfolio.  As a result, a hypothetical10 percent adverse change in the value of the U.S. dollar relative to all otherforeign currencies would not have a material effect on the Company’s cashflows.

 

**Item 8****.  FinancialStatements and Supplementary Data.**

 

See accompanying table of contents of financial statements.

 

**Item 9****.  Changesin and Disagreements with Accountants on Accounting and Financial Disclosure.**

 

Not applicable.

 

**Item 9A****.  Controlsand Procedures.**

 

**Disclosure Controls and Procedures**

 

The Company’s principal executive officer and its principal financialofficer have concluded that the Company’s disclosure controls and procedures(as defined in Rules 13a-15(e) and 15d-15(e) of the SecuritiesExchange Act of 1934, as amended (“the Act”)) were effective as of October 31,2010, based on the evaluation of these controls and procedures required by Rule 13a-15(b) or15d-15(b) of the Act.****During thefourth quarter, there were no changes that have materially affected or arereasonably likely to materially affect the Company’s internal controls overfinancial reporting.

 

**Management’s Report on Internal Control Over Financial Reporting**

 

The Company’s management is responsible for establishing andmaintaining adequate internal control over financial reporting. John DeereCapital Corporation’s internal control system was designed to providereasonable assurance regarding the preparation and fair presentation ofpublished financial statements in accordance with generally accepted accountingprinciples.

 

All internal control systems, no matter how well designed, haveinherent limitations. Therefore, even those systems determined to be effectivecan provide only reasonable assurance with respect to financial statementpreparation and presentation in accordance with generally accepted accountingprinciples.

 

Management assessed the effectiveness of the Company’s internal controlover financial reporting as of October 31, 2010, using the criteria setforth in Internal Control — Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission. Based on that assessment,management believes that, as of October 31, 2010, the Company’s internalcontrol over financial reporting was effective.

 

This annual report does not include an attestation report of theCompany’s independent registered public accounting firm regarding internalcontrol over financial reporting. Management’s report was not subject toattestation by the Company’s independent registered public accounting firmpursuant to rules of the Securities and Exchange Commission that permitthe Company to provide only management’s report in this annual report.

 

**Item 9B****.  OtherInformation.**

 

Not applicable.

 

26

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**PART III**

 

**Item 10****.  Directors,Executive Officers and Corporate Governance.**

 

Omitted pursuant to instruction I(2).

 

**Item 11****.  ExecutiveCompensation.**

 

Omitted pursuant to instruction I(2).

 

**Item 12****.  SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters.**

 

Omitted pursuant to instruction I(2).

 

**Item 13****.  CertainRelationships and Related Transactions, and Director Independence.**

 

Omitted pursuant to instruction I(2).

 

**Item 14****.  Principal Accountant Fees and Services.**

 

For the years ended October 31, 2010 and 2009, professionalservices were performed by Deloitte & Touche LLP, the member firms ofDeloitte Touche Tohmatsu, and their respective affiliates (collectively, “Deloitte &Touche”).

 

Audit Fees

 

The aggregate fees billed include amounts for the audit of the Company’sannual financial statements, the reviews of the financial statements includedin the Company’s Quarterly Reports on Form 10-Q, including servicesrelated thereto such as comfort letters, statutory audits, attest services,consents, and assistance with and review of documents filed with the SEC andother regulatory bodies. Audit fees for the fiscal years ended October 31,2010 and 2009, were $2,717 thousand and $2,477 thousand, respectively.

 

Audit-Related Fees

 

During the last two fiscal years, Deloitte & Touche hasprovided the Company with assurance and related services that are reasonablyrelated to the performance of the audit of the Company’s financial statements.The aggregate fees billed for such audit-related services for the fiscal yearsended October 31, 2010 and 2009, were $104 thousand and$410 thousand, respectively. These services included various attestservices.

 

Tax Fees

 

There were no aggregate fees billed for professional services providedby Deloitte & Touche in connection with tax advice and tax planningservices for the fiscal years ended October 31, 2010 and 2009.

 

All Other Fees

 

There were no aggregate feesbilled for services not included above for the fiscal years ended October 31,2010 and 2009.

 

27

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Pre-approval of Services by the External Auditor

 

As a wholly-owned subsidiary of Deere & Company, audit andnon-audit services provided by the Company’s external auditor are subject toDeere & Company’s Audit Review Committee pre-approval policies andprocedures as described in the Deere & Company 2010 proxy statement.  During the fiscal year ended October 31,2010, all services provided by the external auditor were pre-approved by Deere &Company’s Audit Review Committee in accordance with such policy.

 

**PART IV**

 

**Item 15****.  Exhibitsand Financial Statement Schedules.**

 

(1)           FinancialStatements

 

(2)           FinancialStatement Schedules

 

See the table of contents to financial statements and schedulesimmediately preceding the financial statements and schedules to consolidatedfinancial statements.

 

(3)           Exhibits

 

See the index to exhibits immediately preceding the exhibits filed withthis report.

 

28

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 

 
|   | JOHN  DEERE CAPITAL CORPORATION |
|--------|---------------------------------|
|   |                            |   |
|   | By:                             | */s/ S. R. Allen* |
|   |                            | S. R. Allen |
|   |                            | Chairman and Principal Executive Officer |

 

 

Date:      December 17,2010

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the date indicated.

 

Each person signing below also hereby appoints Samuel R. Allen, JamesA. Israel and Gregory R. Noe, and each of them singly, his or her lawfulattorney-in-fact with full power to execute and file any and all amendments tothis report together with exhibits thereto and generally to do all such thingsas such attorney-in-fact may deem appropriate to enable John Deere CapitalCorporation to comply with the provisions of the Securities Exchange Act of1934 and all requirements of the Securities and Exchange Commission.

 

 

| **Signature**          | ** ** | **Title**                           | ** ** | **Date**                |
|------------------------|------------|-------------------------------------|------------|-------------------------|
|                   |       |                                |       |                    |
| * *               |       |                                |       |                    |
| */s/ S. R. Allen*      |       | Director,  Chairman and             | )          |                    |
| S. R. Allen            |       | Principal  Executive Officer        | )          |                    |
|                   |       |                                | )          |                    |
|                   |       |                                | )          |                    |
| */s/ David C. Everitt* |       | Director                            | )          |                    |
| David C. Everitt       |       |                                | )          |                    |
|                   |       |                                | )          | December 17,  2010 |
|                   |       |                                | )          |                    |
| */s/ James M. Field*   |       | Director,  Senior Vice President    | )          |                    |
| James M. Field         |       | and  Principal Financial Officer    | )          |                    |
|                   |       | (and  Principal Accounting Officer) | )          |                    |
|                   |       |                                | )          |                    |
| */s/ James A. Israel*  |       | Director  and President             | )          |                    |
| James A. Israel        |       |                                | )          |                    |

 

29

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| **Signature**              | ** ** | **Title** | ** ** | **Date**                |
|----------------------------|------------|-----------|------------|-------------------------|
|                       |       |      |       |                    |
| * *                   |       |      |       |                    |
| */s/ M. J. Mack, Jr.* |       | Director  | )          |                    |
| M. J. Mack, Jr.       |       |      | )          |                    |
|                       |       |      | )          |                    |
|                       |       |      | )          |                    |
| */s/ Daniel C. McCabe*     |       | Director  | )          |                    |
| Daniel C. McCabe           |       |      | )          |                    |
|                       |       |      | )          |                    |
|                       |       |      | )          |                    |
| */s/ Stephen Pullin*       |       | Director  | )          | December 17,  2010 |
| Stephen Pullin             |       |      | )          |                    |
|                       |       |      | )          |                    |
|                       |       |      | )          |                    |
| */s/ Lawrence W. Sidwell*  |       | Director  | )          |                    |
| Lawrence W. Sidwell        |       |      | )          |                    |
|                       |       |      | )          |                    |
|                       |       |      | )          |                    |
| */s/ Markwart von Pentz*   |       | Director  | )          |                    |
| Markwart von Pentz         |       |      | )          |                    |

 

30

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**Table of Contents**

 
| ** **                                                                                                              | **Page** |
|-------------------------------------------------------------------------------------------------------------------------|----------|
|                                                                                                                    |     |
| **Financial Statements:**                                                                                               |     |
|                                                                                                                    |     |
| John Deere Capital Corporation and Subsidiaries:                                                                        |     |
|                                                                                                                    |     |
| Report of Independent Registered Public Accounting Firm                                                                 | 32       |
|                                                                                                                    |     |
| Statements of Consolidated Income and Retained Earnings For the Years Ended October 31, 2010, 2009 and 2008        | 33       |
|                                                                                                                    |     |
| Consolidated Balance Sheets, as of October 31, 2010 and 2009                                                       | 34       |
|                                                                                                                    |     |
| Statements of Consolidated Cash Flows For the Years Ended October 31, 2010, 2009 and 2008                          | 35       |
|                                                                                                                    |     |
| Statement of Changes in Consolidated Stockholder’s Equity For the Years Ended October 31, 2008, 2009 and 2010 | 36       |
|                                                                                                                    |     |
| Notes to Consolidated Financial Statements                                                                              | 37       |

 

**SCHEDULES OMITTED**

 

The following schedules are omitted because of the absence of conditions under which they are required or because the required information is included in the Notes to the Consolidated Financial Statements:

 

I, II, III, IV, and V.

 

31

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Deloitte & Touche LLP

111 S. Wacker Drive

Chicago, Illinois  60606

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

John Deere Capital Corporation:

 

We have audited the accompanying consolidated balance sheets of John Deere Capital Corporation and subsidiaries (the “Company”) as of October 31, 2010 and 2009, and the related statements of consolidated income and retained earnings, of changes in consolidated stockholder’s equity, and of consolidated cash flows for each of the three years in the period ended October 31, 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements assessing; the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at October 31, 2010 and 2009 and the results of its operations and its cash flows for each of the three years in the period ended October 31, 2010 in conformity with accounting principles generally accepted in the United States of America.

 

/s/ DELOITTE & TOUCHE LLP

Chicago, Illinois

 

December 17, 2010

 

32

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**John Deere Capital Corporation and Subsidiaries**

**Statements of Consolidated Income**

**For the Years Ended October 31, 2010, 2009 and 2008**

(in millions)

 
| ** **                                               | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Revenues**                                             |       |     |       |     |       |     |       |
| Finance income earned on retail notes                    |       | $        | 691.7      |     | $          | 743.6    |       | $ | 860.5 |   |
| Lease revenues                                           |       | 290.3    |       | 312.9    |       | 331.7    |       |
| Revolving charge account income                          |       | 267.8    |       | 242.1    |       | 227.2    |       |
| Finance income earned on wholesale receivables           |       | 256.0    |       | 297.7    |       | 302.5    |       |
| Operating loan income                                    |       | 10.3     |       | 14.0     |       | 22.9     |       |
| Crop insurance commissions                               |       | 74.6     |       | 83.3     |       | 139.1    |       |
| Other income - net                                       |       | 91.6     |       | 62.6     |       | 83.5     |       |
| Total revenues                                           |       | 1,682.3  |       | 1,756.2  |       | 1,967.4  |       |
| **Expenses**                                             |       |     |       |     |       |     |       |
| Interest expense                                         |       | 533.6    |       | 788.5    |       | 838.7    |       |
| Operating expenses:                                      |       |     |       |     |       |     |       |
| Administrative and operating expenses                    |       | 369.9    |       | 333.2    |       | 373.0    |       |
| Provision for credit losses                              |       | 79.7     |       | 177.5    |       | 66.8     |       |
| Fees paid to John Deere                                  |       | 34.1     |       | 30.6     |       | 35.8     |       |
| Depreciation of equipment on operating leases            |       | 187.1    |       | 204.5    |       | 216.0    |       |
| Total operating expenses                                 |       | 670.8    |       | 745.8    |       | 691.6    |       |
| Total expenses                                           |       | 1,204.4  |       | 1,534.3  |       | 1,530.3  |       |
| **Income of consolidated group before income taxes**     |       | 477.9    |       | 221.9    |       | 437.1    |       |
| Provision for income taxes                               |       | 159.4    |       | 73.2     |       | 155.7    |       |
| **Income of consolidated group**                         |       | 318.5    |       | 148.7    |       | 281.4    |       |
| Equity in income of unconsolidated affiliates            |       | .9       |       | .5       |       | 1.0      |       |
| **Net income**                                           |       | 319.4    |       | 149.2    |       | 282.4    |       |
| Less: Net income attributable to noncontrolling interest |       |     |       |     |       |     |       |
| **Net income attributable to the Company**               |       | $        | 319.4      |     | $          | 149.2    |       | $ | 282.4 |   |

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

 

33

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**John Deere Capital Corporation and Subsidiaries**

**Consolidated Balance Sheets**

**As of October 31, 2010 and 2009**

(in millions)

 
| ** **                                                                                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Assets**                                                                                                                |       |     |       |     |       |
| Cash and cash equivalents                                                                                                 |       | $        | 355.7      |     | $          | 870.6 |   |
| Receivables:                                                                                                              |       |     |       |     |       |
| Retail notes                                                                                                              |       | 9,989.3  |       | 8,234.1  |       |
| Restricted securitized retail notes                                                                                       |       | 2,264.9  |       | 3,110.1  |       |
| Revolving charge accounts                                                                                                 |       | 2,287.9  |       | 2,192.5  |       |
| Operating loans                                                                                                           |       | 239.1    |       | 297.0    |       |
| Wholesale receivables                                                                                                     |       | 4,658.7  |       | 3,873.5  |       |
| Financing leases                                                                                                          |       | 420.4    |       | 392.8    |       |
| Total receivables                                                                                                         |       | 19,860.3 |       | 18,100.0 |       |
| Allowance for credit losses                                                                                               |       | (148.6   | )          | (158.2   | )          |
| Total receivables — net                                                                                              |       | 19,711.7 |       | 17,941.8 |       |
| Other receivables                                                                                                         |       | 22.3     |       | 25.9     |       |
| Equipment on operating leases — net                                                                                  |       | 1,141.8  |       | 1,023.2  |       |
| Notes receivable from John Deere                                                                                          |       | 575.5    |       | 739.2    |       |
| Investments in unconsolidated affiliates                                                                                  |       | 7.0      |       | 6.6      |       |
| Other assets                                                                                                              |       | 810.5    |       | 1,094.2  |       |
| **Total Assets**                                                                                                          |       | $        | 22,624.5   |     | $          | 21,701.5 |   |
| ** **                                                                                                                |       |     |       |     |       |
| **Liabilities and Stockholder’s Equity**                                                                             |       |     |       |     |       |
| Short-term borrowings:                                                                                                    |       |     |       |     |       |
| Commercial paper                                                                                                          |       | $        | 1,349.3    |     | $          | 32.0 |   |
| Other notes payable                                                                                                       |       | 2,209.0  |       | 3,113.0  |       |
| John Deere                                                                                                                |       | 1,255.6  |       | 15.3     |       |
| Current maturities of long-term borrowings                                                                                |       | 2,888.8  |       | 2,550.4  |       |
| Total short-term borrowings                                                                                               |       | 7,702.7  |       | 5,710.7  |       |
| Accounts payable and accrued expenses                                                                                     |       | 694.2    |       | 741.2    |       |
| Deposits withheld from dealers and merchants                                                                              |       | 164.8    |       | 164.9    |       |
| Deferred income taxes                                                                                                     |       | 161.7    |       | 67.1     |       |
| Long-term borrowings                                                                                                      |       | 11,452.0 |       | 12,700.6 |       |
| Total liabilities                                                                                                         |       | 20,175.4 |       | 19,384.5 |       |
| Commitments and contingencies (Note 19)                                                                                   |       |     |       |     |       |
| 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  |       |
| Retained earnings                                                                                                         |       | 1,156.5  |       | 1,032.1  |       |
| Accumulated other comprehensive income (loss):                                                                            |       |     |       |     |       |
| Cumulative translation adjustment                                                                                         |       | 48.6     |       | 55.8     |       |
| Unrealized loss on derivatives                                                                                            |       | (29.2    | )          | (44.1    | )          |
| Total accumulated other comprehensive income (loss)                                                                       |       | 19.4     |       | 11.7     |       |
| Total Company stockholder’s equity                                                                                   |       | 2,448.7  |       | 2,316.6  |       |
| Noncontrolling interests                                                                                                  |       | .4       |       | .4       |       |
| Total stockholder’s equity                                                                                           |       | 2,449.1  |       | 2,317.0  |       |
| **Total Liabilities and Stockholder’s Equity**                                                                       |       | $        | 22,624.5   |     | $          | 21,701.5 |   |

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

 

34

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**John Deere Capital Corporation and Subsidiaries**

**Statements of Consolidated Cash Flows**

**For the Years Ended October 31, 2010, 2009 and 2008**

(in millions)

 
| ** **                                                                        | ** ** | **2010**  | ** ** | **2009**  | ** ** | **2008**  | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| **Cash Flows from Operating Activities:**                                         |       |      |       |      |       |      |       |
| Net income                                                                        |       | $         | 319.4      |      | $          | 149.2     |       | $ | 282.4 |   |
| Adjustments to reconcile net income to net cash provided by operating activities: |       |      |       |      |       |      |       |
| Provision for credit losses                                                       |       | 79.7      |       | 177.5     |       | 66.8      |       |
| Provision for depreciation and amortization                                       |       | 204.4     |       | 215.2     |       | 224.0     |       |
| Provision for deferred income taxes                                               |       | 86.9      |       | 1.3       |       | 36.3      |       |
| Undistributed earnings of unconsolidated affiliates                               |       | (.9       | )          | (.5       | )          | (1.0      | )          |
| Change in accounts payable and accrued expenses                                   |       | (27.4     | )          | 26.5      |       | 54.4      |       |
| Change in accrued income taxes payable/receivable                                 |       | 12.5      |       | 7.7       |       | 9.9       |       |
| Other                                                                             |       | 292.8     |       | (35.2     | )          | (74.9     | )          |
| Net cash provided by operating activities                                         |       | 967.4     |       | 541.7     |       | 597.9     |       |
|                                                                              |       |      |       |      |       |      |       |
| **Cash Flows from Investing Activities:**                                         |       |      |       |      |       |      |       |
| Cost of receivables acquired                                                      |       | (34,276.3 | )          | (30,759.2 | )          | (32,847.6 | )          |
| Collections of receivables                                                        |       | 32,383.3  |       | 30,749.3  |       | 32,119.3  |       |
| Cost of equipment on operating leases acquired                                    |       | (662.1    | )          | (494.9    | )          | (556.3    | )          |
| Proceeds from sales of equipment on operating leases                              |       | 371.3     |       | 303.3     |       | 286.2     |       |
| Purchases of property and equipment                                               |       | (2.3      | )          | (30.1     | )          | (9.2      | )          |
| Cost of notes receivable with John Deere                                          |       | (123.3    | )          | (288.7    | )          | (398.1    | )          |
| Collection of notes receivable with John Deere                                    |       | 287.0     |       | 348.8     |       | 185.3     |       |
| Proceeds from sales of receivables                                                |       | 18.3      |       | 34.0      |       | 88.9      |       |
| Change in restricted cash                                                         |       | (6.4      | )          | (34.5     | )          | (7.2      | )          |
| Collateral on derivatives received - net                                          |       | 6.9       |       | 78.4      |       |      |       |
| Other                                                                             |       | .4        |       | (22.0     | )          | (24.7     | )          |
| Net cash used for investing activities                                            |       | (2,003.2  | )          | (115.6    | )          | (1,163.4  | )          |
|                                                                              |       |      |       |      |       |      |       |
| **Cash Flows from Financing Activities:**                                         |       |      |       |      |       |      |       |
| Increase (decrease) in commercial paper — net                                |       | 1,296.2   |       | (2,878.3  | )          | 219.0     |       |
| Increase (decrease) in other notes payable — net                             |       | (904.2    | )          | 1,490.9   |       | (576.3    | )          |
| Increase (decrease) in payable to John Deere — net                           |       | 1,229.2   |       | (306.3    | )          | 188.9     |       |
| Proceeds from issuance of long-term borrowings                                    |       | 1,653.8   |       | 4,246.6   |       | 5,558.6   |       |
| Payments of long-term borrowings                                                  |       | (2,535.6  | )          | (3,169.6  | )          | (3,876.2  | )          |
| Dividends paid                                                                    |       | (195.0    | )          |      |       | (465.1    | )          |
| Capital investment                                                                |       |      |       | 60.0      |       | 400.0     |       |
| Debt issuance costs                                                               |       | (17.9     | )          | (113.4    | )          | (22.3     | )          |
| Net cash provided by (used for) financing activities                              |       | 526.5     |       | (670.1    | )          | 1,426.6   |       |
|                                                                              |       |      |       |      |       |      |       |
| **Effect of exchange rate changes on cash and cash equivalents**                  |       | (5.6      | )          | 32.0      |       | 30.7      |       |
| **Net increase (decrease) in cash and cash equivalents**                          |       | (514.9    | )          | (212.0    | )          | 891.8     |       |
| **Cash and cash equivalents at the beginning of year**                            |       | 870.6     |       | 1,082.6   |       | 190.8     |       |
| **Cash and cash equivalents at the end of year**                                  |       | $         | 355.7      |      | $          | 870.6     |       | $ | 1,082.6 |   |

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

 

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**John Deere Capital Corporation and Subsidiaries**

**Statements of Changes in Consolidated Stockholder’s Equity**

**For the Years Ended October 31, 2008, 2009 and 2010**

(in millions)

 
| ** **                          | ** ** | ** **                          | ** ** | **Company Stockholder** | ** ** | ** **            | ** ** |
|-------------------------------------|------------|-------------------------------------|------------|------------------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **Total Stockholder’s Equity** | ** ** | **Common Stock**             | ** ** | **Retained Earnings** | ** ** | **Total Accumulated Other Comprehensive Income (Loss)** | ** ** | **Non- Controlling Interests** | ** ** |
|                                |       |                                |       |                         |       |                  |       |   |   |   |   |
| **Balance October 31, 2007**   |       | $                                   | 1,954.9    |                         | $          | 812.8                 |       | $ | 1,087.1 |   | $ | 54.6 |   | $ | .4 |   |
| Comprehensive income                |       |                                |       |                         |       |                  |       |   |   |   |   |
| Net income                          |       | 282.4                               |       |                         |       | 282.4                 |       |   |   |   |   |
| Other comprehensive income (loss)   |       |                                |       |                         |       |                  |       |   |   |   |   |
| Cumulative translation adjustment   |       | (52.5                               | )          |                         |       |                  |       | (52.5 | ) |   |   |
| Unrealized loss on investments      |       | (1.2                                | )          |                         |       |                  |       | (1.2 | ) |   |   |
| Unrealized loss on derivatives      |       | (31.7                               | )          |                         |       |                  |       | (31.7 | ) |   |   |
| **Total comprehensive income**      |       | 197.0                               |       |                         |       |                  |       |   |   |   |   |
| Adjustment to adopt FIN No. 48 |       | (21.5                               | )          |                         |       | (21.5                 | )          |   |   |   |   |
| Dividends paid                      |       | (465.1                              | )          |                         |       | (465.1                | )          |   |   |   |   |
| Capital investment                  |       | 400.0                               |       | 400.0                        |       |                  |       |   |   |   |   |
| **Balance October 31, 2008**   |       | 2,065.3                             |       | 1,212.8                      |       | 882.9                 |       | (30.8 | ) | .4 |   |
| Comprehensive income                |       |                                |       |                         |       |                  |       |   |   |   |   |
| Net income                          |       | 149.2                               |       |                         |       | 149.2                 |       |   |   |   |   |
| Other comprehensive income (loss)   |       |                                |       |                         |       |                  |       |   |   |   |   |
| Cumulative translation adjustment   |       | 46.6                                |       |                         |       |                  |       | 46.6 |   |   |   |
| Unrealized loss on derivatives      |       | (4.1                                | )          |                         |       |                  |       | (4.1 | ) |   |   |
| **Total comprehensive income**      |       | 191.7                               |       |                         |       |                  |       |   |   |   |   |
| Capital investment                  |       | 60.0                                |       | 60.0                         |       |                  |       |   |   |   |   |
| **Balance October 31, 2009**   |       | 2,317.0                             |       | 1,272.8                      |       | 1,032.1               |       | 11.7 |   | .4 |   |
| Comprehensive income                |       |                                |       |                         |       |                  |       |   |   |   |   |
| Net income                          |       | 319.4                               |       |                         |       | 319.4                 |       |   |   |   |   |
| Other comprehensive income (loss)   |       |                                |       |                         |       |                  |       |   |   |   |   |
| Cumulative translation adjustment   |       | (7.2                                | )          |                         |       |                  |       | (7.2 | ) |   |   |
| Unrealized gain on derivatives      |       | 14.9                                |       |                         |       |                  |       | 14.9 |   |   |   |
| **Total comprehensive income**      |       | 327.1                               |       |                         |       |                  |       |   |   |   |   |
| Dividends paid                      |       | (195.0                              | )          |                         |       | (195.0                | )          |   |   |   |   |
| **Balance October 31, 2010**   |       | $                                   | 2,449.1    |                         | $          | 1,272.8               |       | $ | 1,156.5 |   | $ | 19.4 |   | $ | .4 |   |

 

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

 

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**John Deere Capital Corporationand Subsidiaries**

**Notesto Consolidated Financial Statements**

 

**Note 1****. Organization and Consolidation**

 

Corporate Organization

 

John Deere Capital Corporation and its subsidiaries (CapitalCorporation), and its other consolidated entities are collectively called theCompany. John Deere Financial Services, Inc., a wholly-owned financeholding subsidiary of Deere & Company, owns all of theoutstanding common stock of John Deere Capital Corporation. In July 2010,John Deere Credit Company changed its name to John Deere Financial Services, Inc.  The Company conducts business in Australia,New Zealand, the U.S., and in several countries in Asia, Europe and LatinAmerica. Deere & Company and its wholly-owned subsidiaries arecollectively called John Deere.

 

InAugust 2010, the Company sold John Deere Risk Protection, the cropinsurance managing general agency, to John Deere Financial Services, Inc.at its carrying value of $.3 million.

 

Retail notes, revolving charge accounts, operating loans, financingleases and wholesale receivables are collectively called “Receivables.”Receivables and operating leases are collectively called “Receivables andLeases.”

 

The Company bears substantially all of the credit risk (net of recoveryfrom withholdings from certain John Deere dealers, and customer guarantees fromcertain John Deere dealers and Farm Planä and PowerPlanâ merchants)associated with its holding of Receivables and Leases. A small portion of theReceivables and Leases held (less than 5 percent) is guaranteed by certainsubsidiaries of Deere & Company. The Company also performssubstantially all servicing and collection functions. Servicing and collectionfunctions for a small portion of the Receivables and Leases held (less than 5percent) are provided by John Deere. John Deere is reimbursed for staff andother administrative services at estimated cost, and for credit lines providedto the Company based on utilization of those lines.

 

Principles of Consolidation

 

The consolidated financial statements include the financial statementsof John Deere Capital Corporation and its subsidiaries. The consolidatedfinancial statements represent the consolidation of all companies in which JohnDeere Capital Corporation has a controlling interest. In addition, certainvariable interest entities (VIEs) are consolidated since the CapitalCorporation is the primary beneficiary. John Deere Capital Corporation recordsits investment in each unconsolidated affiliate company and its related equityin the net assets of such affiliate.

 

Reclassification

 

Certain items previously reported in specific financial statementcaptions have been reclassified to conform to the 2010 financial statementpresentation. In particular, “Income on receivables sold” previously presentedseparately has been combined with “Other income — net” on the consolidatedincome statement.

 

Variable Interest Entities

 

The Capital Corporation is the primary beneficiary of and consolidatescertain VIEs that are special purpose entities (SPEs) related to thesecuritization of receivables. These restricted retail notes are included inthe restricted securitized retail notes related to securitizations shown in thetable in Note 6.

 

During the fourth quarter of 2010, the Capital Corporation began utilizinga legal entity that serves as a centralized hedging center. This entity wascreated by the parent of the Capital Corporation, John Deere Financial Services, Inc.,to more efficiently manage counterparty credit risk to the banking sector andto better facilitate collateral posting requirements. The Capital Corporationis the primary beneficiary of and consolidates this entity as a 

 

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VIE. The Capital Corporation would absorb a majority of the VIE’sexpected losses based on the external and internally matched derivativestructure described below. From time to time, the VIE will enter intoderivative agreements with external counterparties to more efficiently manageexposures of the Capital Corporation arising in the normal course of business.When the VIE enters into the derivative transactions with the externalcounterparty, the VIE simultaneously enters into a derivative transaction withthe Capital Corporation. Except for collateral provisions, the terms of thederivative transaction between the VIE and Capital Corporation are structuredto offset the terms of the transaction between the VIE and the externalcounterparty. In addition to this derivative structure, the Capital Corporationwould also absorb credit losses of the VIE through a loss sharing agreement.This agreement requires the Capital Corporation to absorb any credit losses theVIE incurs on derivative transactions the VIE enters into to manage exposuresof the Capital Corporation. No additional support of the VIE beyond what waspreviously contractually required has been provided during 2010. The assets ofthe VIE that were consolidated at October 31, 2010 totaled $7.3 millionand consisted primarily of other assets related to derivative agreementstransacted with external counterparties. The liabilities of the VIE totaled$7.3 million and consisted primarily of accounts payable and accruedexpenses related to derivative agreements transacted between the VIE and theCapital Corporation. Upon consolidation of the VIE the $7.3 million accountspayable and accrued expenses were eliminated against $7.3 million of theCapital Corporation’s other assets. The gains and losses the VIE experiences onexternal derivative agreements are financed by the related gains and losses onthe internally matched derivative agreements transacted with the CapitalCorporation. The external counterparties of the VIE do not have recourse to thegeneral credit of the Capital Corporation. Payment obligations of the VIE onderivative transactions with external counterparties are guaranteed by Deere &Company, the parent of John Deere Financial Services, Inc.

 

**Note 2****. Summary of Significant AccountingPolicies**

 

The following are significant accounting policies in addition to thoseincluded in other notes to the consolidated financial statements.

 

Use of Estimates in Financial Statements

 

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

 

Revenue Recognition

 

Financing revenue is recorded over the lives of the related receivablesusing the interest method. Deferred costs on the origination of receivables arerecognized as a reduction in finance revenue over the expected lives of thereceivables using the interest method. Income and deferred costs on theorigination of operating leases are recognized on a straight-line basis overthe scheduled lease terms in finance revenue. Crop insurance commissions wererecorded on a straight-line basis over the coverage period of the cropinsurance policy.

 

Securitization of Receivables

 

Certainfinancing receivables are periodically transferred to SPEs in securitizationtransactions (see Note 6). These securitizations qualify as collateral forsecured borrowings and no gains or losses are recognized at the time ofsecuritization. The receivables remain on the balance sheet and are classifiedas “Restricted securitized retail notes.” The Company recognizes finance income over the lives of these retailnotes using the interest method.

 

Depreciation

 

Equipmenton operating leases is depreciated over the terms of the leases using thestraight-line method (see Note 7).

 

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DerivativeFinancial Instruments

 

It is the Company’s policy that derivative transactions are executedonly to manage exposures arising in the normal course of business and not forthe purpose of creating speculative positions or trading. The Company managesthe relationship of the types and amounts of funding sources to its receivableand lease portfolio in an effort to diminish risk due to interest rate andforeign currency fluctuations, while responding to favorable financingopportunities. The Company also has foreign currency exposures at some of itsforeign and domestic operations related to financing in currencies other thanthe local currencies.

 

Allderivatives are recorded at fair value on the balance sheet. Cash collateralreceived or paid is not offset against the derivative fair values on thebalance sheet. Each derivative is designated as either a cash flow hedge, afair value hedge, or remains undesignated. Changes in the fair value ofderivatives that are designated and effective as cash flow hedges are recordedin other comprehensive income and reclassified to the income statement when theeffects of the item being hedged are recognized in the income statement.Changes in the fair value of derivatives that are designated and effective asfair value hedges are recognized currently in net income. These changes areoffset in net income to the extent the hedge was effective by fair valuechanges related to the risk being hedged on the hedged item. Changes in thefair value of undesignated hedges are recognized currently in the incomestatement. All ineffective changes in derivative fair values are recognizedcurrently in net income.

 

Alldesignated hedges are formally documented as to the relationship with thehedged item as well as the risk-management strategy. Both at inception and onan ongoing basis the hedging instrument is assessed as to its effectiveness,when applicable. If and when a derivative is determined not to be highlyeffective as a hedge, or the underlying hedged transaction is no longer likelyto occur, or the hedge designation is removed, or the derivative is terminated,the hedge accounting discussed above is discontinued (see Note 22).

 

Foreign Currency Translation

 

The functional currencies for most of the Company’s foreign operationsare their respective local currencies. The assets and liabilities of theseoperations are translated into U.S. dollars at the end of the period exchangerates. The revenues and expenses are translated at weighted-average rates forthe period. The gains or losses from these translations are recorded in othercomprehensive income. Gains or losses from transactions denominated in acurrency other than the functional currency of the subsidiary involved andforeign exchange forward contracts are included in net income. The pretax netgain (loss) for foreign exchange in 2010, 2009 and 2008 was ($32.1) million,$7.0 million and ($13.3) million, respectively.

 

**Note 3****. New Accounting Standards**

 

New Accounting Standards Adopted

 

In the first quarter of 2010, the Company adopted Financial AccountingStandard Board (FASB) Accounting Standards Codification (ASC) 810,Consolidation (FASB Statement No. 160, Noncontrolling Interests inConsolidated Financial Statements). ASC 810 requires that noncontrollinginterests are reported as a separate line in stockholder’s equity. The netincome for both the Company and the noncontrolling interests is included in “Netincome.” The “Net income attributable to noncontrolling interests” is deductedfrom “Net income” to determine the “Net income attributable to the Company.”ASC 810 also requires certain prospective changes in accounting fornoncontrolling interests primarily related to increases and decreases inownership and changes in control. As required, the presentation and disclosurerequirements were adopted through retrospective application, and theconsolidated financial statement prior period information has been adjustedaccordingly. The adoption did not have a material effect on the Company’sconsolidated financial statements.

 

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In the first quarter of 2010, the Company adopted FASB ASC 805,Business Combinations (FASB Statement No. 141 (revised 2007), BusinessCombinations). ASC 805 requires an acquirer to measure the identifiable assetsacquired, the liabilities assumed and any noncontrolling interest in theacquiree at their fair values on the acquisition date, with goodwill being theexcess value over the net identifiable assets acquired. This standard alsorequires the fair value measurement of certain other assets and liabilitiesrelated to the acquisition such as contingencies and research and development.The adoption did not have a material effect on the Company’s consolidatedfinancial statements.

 

In the first quarter of 2010, the Company adopted FASB ASC 820, FairValue Measurements and Disclosures (FASB Statement No. 157, Fair ValueMeasurements), for nonrecurring measurements of nonfinancial assets andliabilities. The standard requires that these measurements comply with certainguidance for fair value measurements and the disclosure of such measurements.The adoption did not have a material effect on the Company’s consolidatedfinancial statements.

 

In the first quarter of 2010, the Company adopted FASB AccountingStandards Update (ASU) No. 2010-09, Amendments to Certain Recognition andDisclosure Requirements, which amends ASC 855, Subsequent Events. This ASUremoves the requirement for an SEC filer to disclose a date through whichsubsequent events have been evaluated. This change removes potential conflictswith SEC requirements.  The adoption didnot have a material effect on the Company’s consolidated financial statements.

 

In the second quarter of 2010, the Company adopted ASU No. 2010-06, ImprovingDisclosures about Fair Value Measurements, which amends ASC 820, Fair ValueMeasurements and Disclosures.  This ASUrequires disclosures of transfers into and out of Levels 1 and 2, more detailedroll forward reconciliations of Level 3 recurring fair value measurements on agross basis, 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

 

In December 2009, the FASB issued ASU No. 2009-16, Accountingfor Transfers of Financial Assets, which amends ASC 860, Transfers andServicing (FASB Statement No. 166, Accounting for Transfers of FinancialAssets an amendment of FASB Statement No. 140). This ASU eliminates thequalifying special purpose entities from the consolidation guidance andclarifies the requirements for isolation and limitations on portions of financialassets that are eligible for sale accounting. It requires additionaldisclosures about the risks from continuing involvement in transferredfinancial assets accounted for as sales. The effective date is the beginning offiscal year 2011. The adoption will not have a material effect on the Company’sconsolidated financial statements.

 

In December 2009, the FASB issued ASU No. 2009-17, Improvementsto Financial Reporting by Enterprises Involved with Variable Interest Entities,which amends ASC 810, Consolidation (FASB Statement No. 167, Amendments toFASB Interpretation No. 46(R)). This ASU requires a qualitative analysisto determine the primary beneficiary of a VIE. The analysis identifies theprimary 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 will not have a material effecton 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 its 

 

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credit allowance. Areceivable class is a subdivision of a portfolio segment with similarmeasurement attributes, risk characteristics and common methods to monitor andassess credit risk. Trade accounts receivable with maturities of one year orless are excluded from the disclosure requirements. The effective date fordisclosures as of the end of the reporting period is the first quarter offiscal 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.

 

**Note 4. Receivables**

 

Retail Notes Receivable

 

The Company provides and administers financing for retail purchases ofnew equipment manufactured by John Deere’s agriculture and turf andconstruction and forestry divisions and used equipment taken in trade for thisequipment. The Company purchases retail installment sales and loan contracts(retail notes) from John Deere. These retail notes are acquired by John Deerethrough John Deere equipment retail dealers. The Company also purchases andfinances a limited amount of retail notes unrelated to John Deere.

 

Retail notes receivable by product category at October 31 are asfollows (in millions of dollars):

 
| ** **                                      | ** ** | **2010**         | ** ** | **2009**       | ** ** |
|-------------------------------------------------|------------|------------------|------------|----------------|------------|
| ** **                                      | ** ** | **Unrestricted** | ** ** | **Restricted** | ** ** | **Unrestricted** | ** ** | **Restricted** | ** ** |
| Agriculture and turf equipment – new       |       | $                | 5,725.7    |           | $          | 818.5 |   | $ | 5,332.2 |   | $ | 1,318.7 |   |
| Agriculture and turf equipment – used      |       | 3,818.2          |       | 1,046.0        |       | 2,483.7 |   | 1,593.6 |   |
| Construction and forestry equipment – new  |       | 556.0            |       | 356.8          |       | 680.9 |   | 564.4 |   |
| Construction and forestry equipment – used |       | 179.5            |       | 70.4           |       | 178.0 |   | 56.8 |   |
| Recreational products                           |       | 4.6              |       |           |       | 6.2 |   |   |   |
| Total                                           |       | 10,284.0         |       | 2,291.7        |       | 8,681.0 |   | 3,533.5 |   |
| Unearned finance income                         |       | (294.7           | )          | (26.8          | )          | (446.9 | ) | (423.4 | ) |
| Retail notes receivable                         |       | $                | 9,989.3    |           | $          | 2,264.9 |   | $ | 8,234.1 |   | $ | 3,110.1 |   |

 

Retail notes acquired by the Company during the years ended October 31,2010, 2009 and 2008 had an average original term (based on dollar amounts) of55 months, 54 months and 54 months, respectively. Historically, because ofprepayments, the average actual life of retail notes has been considerablyshorter than the average original term. The average actual life for retailnotes liquidated in 2010, 2009 and 2008 was 36 months, 36 months and34 months, respectively.

 

Gross retail note installments at October 31 are scheduled to bereceived as follows (in millions of dollars):

 
| ** **     | ** ** | **2010**         | ** ** | **2009**       | ** ** |
|----------------|------------|------------------|------------|----------------|------------|
| ** **     | ** ** | **Unrestricted** | ** ** | **Restricted** | ** ** | **Unrestricted** | ** ** | **Restricted** | ** ** |
| Due in:        | ** ** | ** **       |       |           | ** ** |   |   |   |   |
| 0-12 months    |       | $                | 3,333.1    |           | $          | 1,043.3 |   | $ | 3,048.6 |   | $ | 1,271.4 |   |
| 13-24 months   |       | 2,542.0          |       | 662.4          |       | 2,184.4 |   | 1,036.5 |   |
| 25-36 months   |       | 1,971.9          |       | 390.8          |       | 1,600.9 |   | 698.0 |   |
| 37-48 months   |       | 1,387.0          |       | 158.9          |       | 1,013.6 |   | 394.5 |   |
| 49-60 months   |       | 842.4            |       | 34.6           |       | 653.3 |   | 124.8 |   |
| Over 60 months |       | 207.6            |       | 1.7            |       | 180.2 |   | 8.3 |   |
| Total          |       | $                | 10,284.0   |           | $          | 2,291.7 |   | $ | 8,681.0 |   | $ | 3,533.5 |   |

 

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Company guidelines relating to down payment requirements and contractterms on retail notes are generally as follows:

 
| ** **                                      | ** ** | **Down  Payment** | ** ** | **Contract  Terms** |
|-------------------------------------------------|------------|-------------------|------------|---------------------|
| Agriculture  and turf equipment (new and used): |       |              |       |                |
| Seasonal payments                               |       | 10% - 30%         |       | 3-7 years           |
| Monthly payments                                |       | 10% - 20%         |       | 36-84 months        |
| Construction  and forestry equipment:           |       |              |       |                |
| New                                             |       | 10%               |       | 48-60 months        |
| Used                                            |       | 15%               |       | 36-48 months        |

 

During 2010, 2009 and 2008, the Company received proceeds from the saleof Receivables of $18 million, $34 million and $89 million, respectively.The Company acts as agent for the buyers in collection and administration forvirtually all of the Receivables it has sold. All Receivables sold arecollateralized by security agreements on the related equipment. The Company’smaximum exposure under all Receivable and Lease recourse provisions at October 31,2010, 2009 and 2008 was $5 million, $7 million and $8 million, respectively.The Company does not record the recourse obligations as liabilities as they arecontingent liabilities that are remote at this time. However, the probable losson Receivables and Leases that have been sold was accrued at the time of sale,and any subsequent necessary adjustments are made as part of ongoing reviews.At October 31, 2010, 2009 and 2008, the balance of all Receivables andLeases administered, but not owned by the Company, was $80 million, $128million and $163 million, respectively.

 

Finance income is recognized over the lives of the retail notes usingthe interest method. During 2010, the average effective yield on retail notesheld by the Company was approximately 6.1 percent, compared with6.8 percent in 2009 and 7.4 percent in 2008. Unearned finance income onvariable-rate retail notes is adjusted monthly based on fluctuations in thebase rate of a specified bank. Costs incurred in the acquisition of retailnotes are deferred and recognized over the expected lives of the retail notesusing the interest method.

 

A portion of the finance income earned by the Company arises fromfinancing of retail sales of John Deere equipment on which finance charges arewaived or reduced by John Deere for a period from the date of sale to aspecified subsequent date. The Company receives compensation from John Deereequal to competitive market interest rates for periods during which financecharges have been waived or reduced on retail notes and leases. The Company computesthe compensation from John Deere for waived or reduced finance charges based onthe Company’s estimated funding costs, administrative and operating expenses,credit losses, and required return on equity. The financing rate following thewaiver or interest reduction period is not significantly different from thecompensation rate from John Deere. The portions of the Company’s finance incomeearned that were received from John Deere on retail notes containing waiver offinance charges or reduced rates were 24 percent, 25 percent and 25percent in 2010, 2009 and 2008, respectively. During 2010, 2009 and 2008, thefinance income earned from Deere & Company on retail notes containingwaiver of finance charges or reduced rates was $164 million,$187 million and $215 million, respectively.

 

A deposit equal to one percent of the face amount of certain John Deereagriculture and turf equipment retail notes originating from each dealer iswithheld by the Company from that dealer. Any subsequent retail note losses arecharged against the withheld deposits. At the end of each calendar quarter, thebalance of each dealer’s withholding account in excess of a specified percent(ranging from one-half to three percent based on dealer qualifications) of thetotal balance outstanding on retail notes originating with that dealer isremitted to the dealer. To the extent that these deposits withheld from thedealer from whom the retail note was acquired cannot absorb a loss on a retailnote, it is charged against the Company’s allowance for credit losses. There isno withholding of dealer deposits on John Deere construction and forestryequipment retail notes or recreational product retail notes.

 

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The Company requires that theft and physical damage insurance becarried on all goods leased or securing retail notes and wholesale receivables.The customer may, at the customer’s own expense, have the Company or the sellerof the goods purchase this insurance or obtain it from other sources.

 

Revolving Charge Accounts Receivable

 

Revolving charge account income is generated primarily by threerevolving credit products: Farm Planä, PowerPlanâ and the JohnDeere Financial Revolving Plan. Farm Planä is primarily used byfarmers and ranchers to finance day-to-day operating expenses, such as partsand services. Merchants offer Farm Planä as an alternative tocarrying in-house accounts receivable, and can initially sell existing balancesto the Company under a recourse arrangement. Farm Planä incomeincludes a discount paid by merchants for transaction processing and support,and finance charges paid by customers on their outstanding account balances.PowerPlanâ is primarilyused by construction companies to finance day-to-day operating expenses, suchas parts and service, and is otherwise similar to Farm Planä.  Merchants offer PowerPlanâ as analternative to carrying in-house accounts receivable, and can initially sellexisting balances to the Company under a recourse arrangement. PowerPlanâ incomeincludes a discount paid by merchants for transaction processing and supportand finance charges paid by customers on their outstanding accountbalances.  The John Deere FinancialRevolving Plan is used primarily by retail customers of John Deere dealers tofinance turf and utility equipment. Income includes a discount paid by dealerson most transactions and finance charges paid by customers on their outstandingaccount balances. Revolving charge accounts receivable at October 31, 2010and 2009 totaled $2,288 million and $2,193 million, respectively. Generally,account holders may pay the account balance in full at any time, or makepayments over a number of months according to a payment schedule.

 

Operating Loans

 

Operating loan income is generated primarily by operating loans thatare offered through several leading farm input providers, through directrelationships with agricultural producers to finance the acquisition ofmaterials such as seeds and fertilizers or through agribusinesses. Income onthis product is generated from finance charges paid by customers on theiroutstanding account balances. Operating loan receivables totaled$239 million and $297 million at October 31, 2010 and 2009,respectively.

 

Financing Leases

 

The Company leases agriculture and turf equipment and construction andforestry equipment directly to retail customers. At the time of accepting alease that qualifies as a financing lease, the Company records the gross amountof lease payments receivable, estimated residual value of the leased equipmentand unearned finance income. The unearned finance income is equal to the excessof the gross lease receivable plus the estimated residual value over the costof the equipment. The unearned finance income is recognized as revenue over thelease term using the interest method. Lease acquisition costs are accounted forin a manner similar to the procedures for retail notes.

 

Financing leases receivable by product category at October 31 areas follows (in millions of dollars):

 
| ** **                          | ** ** | **2010** | ** ** | **2009** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|
| Agriculture and turf equipment      |       | $        | 298.2      |     | $          | 283.1 |   |
| Construction and forestry equipment |       | 144.8    |       | 132.7    |       |
| Total                               |       | 443.0    |       | 415.8    |       |
| Estimated residual values           |       | 39.1     |       | 38.8     |       |
| Unearned finance income             |       | (61.7    | )          | (61.8    | )          |
| Financing leases receivable         |       | $        | 420.4      |     | $          | 392.8 |   |

 

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Initial lease terms for financing leases generally range from 4 monthsto 60 months. Payments on financing leases receivable at October 31 arescheduled as follows (in millions of dollars):

 
| ** **     | ** ** | **2010** | ** ** | **2009** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| Due in:        |       |     |       |     |       |
| 0-12 months    |       | $        | 175.3      |     | $          | 165.4 |   |
| 13-24 months   |       | 120.5    |       | 116.9    |       |
| 25-36 months   |       | 80.7     |       | 77.4     |       |
| 37-48 months   |       | 42.1     |       | 40.9     |       |
| Over 48 months |       | 24.4     |       | 15.2     |       |
| Total          |       | $        | 443.0      |     | $          | 415.8 |   |

 

Deposits withheld from John Deere dealers and related losses onfinancing leases are handled in a manner similar to the procedures for retailnotes. As with retail notes, there are no deposits withheld from dealers onfinancing leases related to construction and forestry equipment. In addition, alease payment discount program, allowing reduced payments over the term of thelease, is administered in a manner similar to finance waiver on retail notes.

 

Equipment returned to the Company upon termination of leases and heldfor subsequent sale or lease is recorded at the lower of net book value orestimated fair value of the equipment less cost to sell and is not depreciated.

 

Wholesale Receivables

 

The Company also finances wholesale inventories of John Deereagriculture and turf equipment and construction and forestry equipment owned bydealers of those products in the form of wholesale receivables. Wholesalefinance income related to these notes is generally recognized monthly based onthe daily balance of wholesale receivables outstanding and the applicableeffective interest rate. Interest rates vary with a bank base rate, the type ofequipment financed and the balance outstanding. Substantially all of wholesalereceivables are secured by equipment financed. The average actual life forwholesale receivables is less than 12 months.

 

The Company purchases certain wholesale receivables (trade receivables)from John Deere. These trade receivables arise from John Deere’s sales of goodsto independent dealers. Under the terms of the sales to dealers, interest ischarged to dealers on outstanding balances, from the earlier of the date whengoods are sold to retail customers by the dealer or the expiration of certaininterest-free periods granted at the time of the sale to the dealer, untilpayment is received by the Company. Dealers cannot cancel purchases after theequipment is shipped and are responsible for payment even if the equipment isnot sold to retail customers. The interest-free periods are determined based onthe type of equipment sold and the time of year of the sale. These periodsrange from one to twelve months for most equipment. Interest-free periods maynot be extended. Interest charged may not be forgiven and the past due interestrates exceed market rates. The Company receives compensation from John Deere atcompetitive market interest rates for these interest-free periods. The Companycomputes the compensation from John Deere for interest-free periods based onthe Company’s estimated funding costs, administrative and operating expenses,credit losses, and required return on equity. During 2010, 2009 and 2008, thecompensation earned from John Deere was $161 million, $214 million and$222 million, respectively.

 

Concentration of Credit Risk

 

Receivables have significant concentrations of credit risk in the agricultureand turf and construction and forestry business sectors as shown in theprevious tables. On a geographic basis, there is not a disproportionateconcentration of credit risk in any area in which the Company operates. TheCompany retains as collateral a security interest in the goods associated withReceivables other than certain revolving charge accounts.

 

44

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**Note 5****. Allowance for Credit Losses,Delinquencies and Write-offs**

 

Allowance for Credit Losses

 

Allowances for credit losses on Receivables are maintained in amountsconsidered to be appropriate in relation to the Receivables outstanding basedon collection experience, economic conditions and credit risk quality.

 

An analysis of the allowance for credit losses on total Receivablesfollows (in millions of dollars):

 
| ** **                                        | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Balance, beginning of the year                    |       | $        | 158.2      |     | $          | 105.2    |       | $ | 99.2 |   |
| Provision for credit losses                       |       | 79.7     |       | 177.5    |       | 66.8     |       |
| Total net write-offs                              |       | (89.3    | )          | (125.9   | )          | (59.6    | )          |
| Other changes (primarily translation adjustments) |       |     |       | 1.4      |       | (1.2     | )          |
| Balance, end of the year                          |       | $        | 148.6      |     | $          | 158.2    |       | $ | 105.2 |   |

 

The allowance for credit losses represented .75 percent, .87 percentand .59 percent of Receivables financed at October 31, 2010, 2009 and2008, respectively. In addition, the Company had $165 million,$165 million and $174 million at October 31, 2010, 2009 and2008, respectively, of deposits primarily withheld from John Deere dealersavailable for certain potential credit losses originating from those dealers.

 

Impaired Receivables

 

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

 

An analysis of impaired Receivables at October 31 was as follows(in millions of dollars):

 
| ** **                                                 | ** ** | **2010** | ** ** | **2009** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|
| Impaired Receivables with a specific related  allowance*   |       | $        | 29.8       |     | $          | 49.6 |   |
| Impaired Receivables without a specific related  allowance |       | 8.6      |       | 7.0      |       |
| Total impaired Receivables                                 |       | $        | 38.4       |     | $          | 56.6 |   |
|                                                       |       |     |       |     |       |
| Average balance of impaired Receivables during the  year   |       | $        | 37.6       |     | $          | 44.8 |   |

 

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*                                         Relatedallowance of $9.9 million and $26.5 million as of October 31, 2010 and2009, respectively.

 

Delinquencies

 

Generally, when retail notes are approximately 120 days delinquent,accrual of finance income is suspended, the collateral is repossessed or theaccount is designated for litigation and the estimated uncollectible amount,after charging the dealer’s withholding account, if any, is written off to theallowance for credit losses. Accrual of revolving charge account income issuspended generally when the account becomes 120 days delinquent. Accounts aredeemed to be uncollectible and written off to the allowance for credit losseswhen delinquency reaches 120 days for a Farm Planä, PowerPlanâ or John DeereFinancial Revolving Plan account. When a financing lease account becomes120 days delinquent, the accrual of lease revenue is suspended, theequipment is repossessed or the account is designated for litigation, and theestimated uncollectible amount, after charging the dealer’s withholdingaccount, if any, is written off to the allowance for credit losses. Generally,when a wholesale receivable becomes 60 days delinquent, the Company determineswhether the accrual of finance income on interest-bearing wholesale receivablesshould be suspended, the collateral should be repossessed or the account shouldbe designated for litigation and the 

 

45

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estimated uncollectible amount written off to the allowance for creditlosses. For Receivables that the accrual of finance income is suspended,finance income is recognized only to the extent it is received in cash. Accrualof finance income is resumed when the receivable becomes contractually currentand collection doubts are removed.

 

Total Receivable amounts 60 days or more past due in the table belowrepresent the amount of all customer payments past due 60 days or more, byproduct, and as a percent of the respective receivables. They are as follows(in millions of dollars):

 
| ** **                          | ** ** | **October 31,  2010** | ** ** | **October 31,  2009** | ** ** | **October 31,  2008** | ** ** |
|-------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **Dollars**           | ** ** | **Percent**           | ** ** | **Dollars**           | ** ** | **Percent** | ** ** | **Dollars** | ** ** | **Percent** | ** ** |
| Retail notes:                       |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |
| Agriculture and turf equipment      |       | $                     | 11.3       |                  | .10        | %                     | $          | 27.3 |   | .27 | % | $ | 13.7 |   | .14 | % |
| Construction and forestry equipment |       | 4.2                   |       | .37                   |       | 10.7                  |       | .77 |   | 8.3 |   | .42 |   |
| Recreational products               |       |                  |       |                  |       |                  |       |   |   |   |   |   |   |
| Total retail notes                  |       | 15.5                  |       | .13                   |       | 38.0                  |       | .33 |   | 22.0 |   | .19 |   |
| Revolving charge accounts*          |       | 12.7                  |       | .56                   |       | 19.8                  |       | .90 |   | 14.6 |   | .80 |   |
| Operating loans                     |       |                  |       |                  |       |                  |       |   |   | .5 |   | .14 |   |
| Wholesale receivables               |       | 3.8                   |       | .08                   |       | 1.6                   |       | .04 |   | 2.3 |   | .06 |   |
| Financing leases                    |       | 6.9                   |       | 1.64                  |       | 6.0                   |       | 1.53 |   | 5.4 |   | 1.29 |   |
| Total Receivables                   |       | $                     | 38.9       |                  | .20        |                  | $          | 65.4 |   | .36 |   | $ | 44.8 |   | .25 |   |

 

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*                                         Due to thenature of revolving charge accounts, the customer payments past due 60 days ormore also represent the total balance.

 

Total non-performing Receivables, which represent loans the Company hasceased accruing interest for, by product, and as a percent of the respectivereceivables were as follows (in millions of dollars):

 
| ** **                          | ** ** | **2010**    | ** ** | **2009**    | ** ** | **2008**    | ** ** |
|-------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                          | ** ** | **Dollars** | ** ** | **Percent** | ** ** | **Dollars** | ** ** | **Percent** | ** ** | **Dollars** | ** ** | **Percent** | ** ** |
| Retail notes:                       |       |        |       |        |       |        |       |   |   |   |   |   |   |
| Agriculture and turf equipment      |       | $           | 51.4       |        | .46        | %           | $          | 50.1 |   | .50 | % | $ | 22.5 |   | .23 | % |
| Construction and forestry equipment |       | 28.8        |       | 2.53        |       | 33.2        |       | 2.40 |   | 15.4 |   | .78 |   |
| Recreational products               |       | .1          |       | 2.17        |       | .1          |       | 1.61 |   | .2 |   | 2.17 |   |
| Total retail notes                  |       | 80.3        |       | .66         |       | 83.4        |       | .74 |   | 38.1 |   | .32 |   |
| Revolving charge accounts           |       | 1.1         |       | .05         |       | 1.1         |       | .05 |   | .7 |   | .04 |   |
| Operating loans                     |       | 4.6         |       | 1.92        |       | 35.9        |       | 12.09 |   | 27.6 |   | 7.71 |   |
| Wholesale receivables               |       | 18.8        |       | .40         |       | 9.2         |       | .24 |   |   |   |   |   |
| Financing leases                    |       | 15.6        |       | 3.71        |       | 16.6        |       | 4.23 |   | 13.2 |   | 3.16 |   |
| Total Receivables                   |       | $           | 120.4      |        | .61        |        | $          | 146.2 |   | .81 |   | $ | 79.6 |   | .44 |   |

 

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Write-offs

 

Total Receivable write-off amounts, net of recoveries, by product, and as a percentage of average balances held during the year, were as follows (in millions of dollars):

 
| ** **                          | ** ** | **2010**    | ** ** | **2009**    | ** ** | **2008**    | ** ** |
|-------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                          | ** ** | **Dollars** | ** ** | **Percent** | ** ** | **Dollars** | ** ** | **Percent** | ** ** | **Dollars** | ** ** | **Percent** | ** ** |
| Retail notes:                       |       |        |       |        |       |        |       |   |   |   |   |   |   |
| Agriculture and turf equipment      |       | $           | 2.8        |        | .03        | %           | $          | 4.1 |   | .04 | % | $ | 2.2 |   | .02 | % |
| Construction and forestry equipment |       | 19.9        |       | 1.62        |       | 59.8        |       | 3.61 |   | 27.6 |   | 1.27 |   |
| Recreational products               |       | .2          |       | 3.67        |       | 1.0         |       | 12.99 |   | .5 |   | 4.72 |   |
| Total retail notes                  |       | 22.9        |       | .20         |       | 64.9        |       | .59 |   | 30.3 |   | .26 |   |
| Revolving charge accounts           |       | 48.2        |       | 2.30        |       | 54.8        |       | 2.97 |   | 27.4 |   | 1.75 |   |
| Operating loans                     |       | 17.3        |       | 7.70        |       | (.5         | )          | (.14 | ) | (.7 | ) | (.17 | ) |
| Wholesale receivables               |       | (1.1        | )          | (.02        | )          | 2.7         |       | .06 |   | .4 |   | .01 |   |
| Financing leases                    |       | 2.0         |       | .52         |       | 4.0         |       | 1.03 |   | 2.2 |   | .51 |   |
| Total Receivables                   |       | $           | 89.3       |        | .48        |        | $          | 125.9 |   | .70 |   | $ | 59.6 |   | .33 |   |

 

**Note 6****. Retail Note Securitizations**

 

The Company, as a part of its overall funding strategy, periodically transfers certain receivables (retail notes) into VIEs that are SPEs as part of its asset-backed securities programs (securitizations).  The structure of these transactions is such that the transfer of the retail notes did not meet the criteria of sales of receivables, and is, therefore, accounted for as a secured borrowing. SPEs utilized in securitizations of retail notes differ from other entities included in the Company’s consolidated statements because the assets they hold are legally isolated. For bankruptcy analysis purposes, the Capital Corporation has sold the receivables to the SPEs in a true sale and the SPEs are separate legal entities. Use of the assets held by the SPEs is restricted by terms of the documents governing the securitization transactions.

 

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

 

In certain securitizations, the Company is the primary beneficiary of the SPEs and, as such, consolidates the entities. The restricted assets (retail notes, allowance for credit losses and other assets) of the consolidated SPEs totaled $1,739 million and $2,157 million at October 31, 2010 and 2009, respectively. The liabilities (other notes payable and accounts payable and accrued expenses) of these SPEs totaled $1,654 million and $2,133 million at October 31, 2010 and 2009, respectively. The credit holders of these SPEs do not have legal recourse to the Company’s general credit.

 

In other securitizations, the Company transfers retail notes into bank-sponsored, multi-seller, commercial paper conduits, which are SPEs that are not consolidated. The Company is not considered to be the primary beneficiary of these conduits, because the Company’s variable interests in the conduits will not absorb a majority of the conduits’ expected losses, residual returns, or both. This is primarily due to these interests representing 

 

47

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significantly less than a majority of the conduits’ total assets and liabilities. These conduits provide a funding source to the Company (as well as other transferors into the conduit) as they fund the retail notes through the issuance of commercial paper. The Company’s carrying values and variable interests related to these conduits were restricted assets (retail notes, allowance for credit losses and other assets) of $589 million and $1,036 million at October 31, 2010 and 2009, respectively. The liabilities (other notes payable and accounts payable and accrued expenses) related to these conduits were $557 million and $982 million at October 31, 2010 and 2009, respectively.

 

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

 
| ** **                    | ** ** | **2010** | ** ** |
|-------------------------------|------------|----------|------------|
| Carrying value of liabilities |       | $        | 556.9      |   |
| Maximum exposure to loss      |       | 589.4    |       |
|                               |            |          |            |  |

 

The assets of unconsolidated conduits related to securitizations in which the Company’s variable interests were considered significant were approximately $17 billion at October 31, 2010.

 

The components of consolidated restricted assets related to secured borrowings in securitization transactions at October 31 were as follows (in millions of dollars):

 
| ** **                          | ** ** | **2010** | ** **    | **2009** | ** ** |
|-------------------------------------|------------|----------|---------------|----------|------------|
| Restricted securitized retail notes |       | $        |  2,264.9 |     | $          |  3,110.1 |   |
| Allowance for credit losses         |       | (26.6    | )             | (24.3    | )          |
| Other assets                        |       | 90.0     |          | 107.7    |       |
| Total restricted securitized assets |       | $        |  2,328.3 |     | $          |  3,193.5 |   |

 

The components of consolidated secured borrowings and other liabilities related to securitizations at October 31 were as follows (in millions of dollars):

 
| ** **                                                 | ** ** | **2010** | ** ** | **2009** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|
| Other notes payable                                        |       | $        | 2,208.8    |     | $          | 3,109.1 |   |
| Accounts payable and accrued expenses                      |       | 1.8      |       | 5.4      |       |
| Total liabilities related to restricted securitized assets |       | $        | 2,210.6    |     | $          | 3,114.5 |   |

 

The secured borrowings related to these restricted securitized retail notes are obligations that are payable as the retail notes are liquidated. Repayment of the secured borrowings depends primarily on cash flows generated by the restricted assets. Due to the Company’s short-term credit rating, cash collections from these restricted assets are not required to be placed into a segregated collection account until immediately prior to the time payment is required to the secured creditors. At October 31, 2010, the maximum remaining term of all restricted receivables was approximately six years.

 

**Note 7****. Equipment on Operating Leases**

 

Rental payments applicable to equipment on operating leases are recorded as income on a straight-line method over the lease terms. Operating lease assets are recorded at cost and depreciated to their estimated residual value generally on a straight-line method over the terms of the leases. Residual values represent estimates of the value of the leased assets at the end of the contract terms and are initially determined based upon appraisals and estimates. The Company evaluates the carrying value of its operating lease assets and tests for impairment when events or circumstances necessitate the evaluation. Generally, impairment is determined to exist if the undiscounted expected future cash flows from the operating leases are lower than the carrying value of the leased asset. During 2010 and 2009, the Company recorded impairment losses on operating leases of $1.3 million and $7.7 million, respectively.

 

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The cost of equipment on operating leases by product category at October 31 is as follows (in millions of dollars):

 
| ** **                               | ** ** | **2010** | ** ** | **2009** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
| Agriculture and turf equipment           |       | $        | 971.2      |     | $          | 780.7 |   |
| Construction and forestry equipment      |       | 521.4    |       | 617.5    |       |
| Total                                    |       | 1,492.6  |       | 1,398.2  |       |
| Accumulated depreciation                 |       | (350.8   | )          | (375.0   | )          |
| Equipment on operating leases — net |       | $        | 1,141.8    |     | $          | 1,023.2 |   |

 

Initial lease terms for equipment on operating leases generally range from 4 months to 60 months. Rental payments for equipment on operating leases at October 31 are scheduled as follows (in millions of dollars):

 
| ** **     | ** ** | **2010** | ** ** | **2009** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| Due in:        |       |     |       |     |       |
| 0-12 months    |       | $        | 213.2      |     | $          | 211.6 |   |
| 13-24 months   |       | 123.4    |       | 118.8    |       |
| 25-36 months   |       | 64.1     |       | 57.3     |       |
| 37-48 months   |       | 30.8     |       | 27.1     |       |
| Over 48 months |       | 5.8      |       | 7.0      |       |
| Total          |       | $        | 437.3      |     | $          | 421.8 |   |

 

As with construction and forestry retail notes, there are no deposits withheld from dealers on operating leases related to construction and forestry equipment. In addition, a lease payment discount program, allowing reduced payments over the term of the lease, is administered in a manner similar to finance waiver on retail notes.

 

Equipment returned to the Company upon termination of leases and held for subsequent sale or lease is recorded at the lower of net book value or estimated fair value of the equipment less costs to sell and is not depreciated.

 

Total operating lease amounts 60 days or more past due represent the amount of all customer payments past due 60 days or more. These amounts were $.5 million, $3.8 million and $1.7 million at October 31, 2010, 2009 and 2008, respectively.

 

**Note 8****.   Notes Receivable from John Deere**

 

The Company makes loans to John Deere Renewables, LLC, an affiliated company that has investments in wind energy projects. Notes receivable from John Deere related to wind energy loans at October 31, 2010 and 2009 were $576 million and $739 million, respectively. The Company receives interest from John Deere at competitive market interest rates. The Company has received security interests in the assets of John Deere Renewables, LLC as collateral on these loans. During 2010, 2009 and 2008, the interest earned from John Deere was $43 million, $41 million and $37 million, respectively.

 

In December 2010, John Deere sold its wind energy business and, as a result, John Deere Renewables, LLC repaid all outstanding loans to the Company.

 

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**Note 9****.   Short-Term Borrowings**

 

Short-term borrowings of the Company at October 31 consisted of the following (in millions of dollars):

 
| ** **                                                 | ** ** | **2010** | ** ** | **2009** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|
| Commercial paper                                           |       | $        | 1,349      |     | $          | 32 |   |
| Other notes payable to banks                               |       |     |       | 4        |       |
| Other notes payable related to securitizations (see below) |       | 2,209    |       | 3,109    |       |
| John Deere                                                 |       | 1,256    |       | 15       |       |
| Current maturities of long-term borrowings                 |       | 2,889    |       | 2,551    |       |
| Total                                                      |       | $        | 7,703      |     | $          | 5,711 |   |

 

The other notes payable related to securitizations are secured by restricted securitized retail notes on the balance sheet (see Note 6). Although these notes payable are classified as short-term since payment is required if the retail notes are liquidated early, the payment schedule for these borrowings of $2,209 million at October 31, 2010 based on the expected liquidations of the retail notes in millions of dollars is as follows: 2011 - $1,324, 2012 - $659, 2013 - $207 and 2014 - $19. The Company’s short-term debt also includes amounts borrowed from John Deere. The Company pays interest on a monthly basis to John Deere for these borrowings based on a current market rate. The weighted-average interest rate on total short-term borrowings, excluding current maturities of long-term borrowings, at October 31, 2010 and 2009, was .9 percent and 1.7 percent, respectively.

 

Lines of credit available from U.S. and foreign banks were $5,286 million at October 31, 2010. Some of these credit lines are available to both John Deere Capital Corporation and Deere & Company. At October 31, 2010, $3,222 million of these worldwide lines of credit were unused. For the purpose of computing unused credit lines, commercial paper and short-term bank borrowings, excluding secured borrowings and the current portion of long-term borrowings, of the Capital Corporation and John Deere were primarily considered to constitute utilization.

 

Included in the above lines of credit was a long-term credit facility agreement for $3,750 million, expiring in February 2012 and a long-term credit facility agreement for $1,500 million, expiring in April 2013. The agreements are mutually extendable and the annual facility fees are not significant. These credit agreements require the Capital Corporation to maintain its consolidated ratio of earnings to fixed charges at not less than 1.05 to 1 for each fiscal quarter and the ratio of senior debt, excluding securitization indebtedness, to capital base (total subordinated debt and Capital Corporation stockholder’s equity excluding accumulated other comprehensive income (loss)) at not more than 11 to 1 at the end of any fiscal quarter. “Senior debt” consists of the Capital Corporation’s total interest-bearing obligations, excluding subordinated debt and certain securitization indebtedness, but including borrowings from John Deere. All of these requirements of the credit agreements have been met during the periods included in the consolidated financial statements. The facility fees on these lines of credit are divided between Deere & Company and the Capital Corporation based on the proportion of their respective forecasted liquidity requirements.

 

Deere & Company has an agreement with John Deere Capital Corporation pursuant to which it has agreed to continue to own at least 51 percent of the voting shares of capital stock of John Deere Capital Corporation and to maintain the Capital Corporation’s consolidated tangible net worth at not less than $50 million. This agreement also obligates Deere & Company to make income maintenance payments to the Capital Corporation such that its consolidated ratio of earnings to fixed charges is not less than 1.05 to 1 for each fiscal quarter. Deere & Company’s obligations to make payments to the Capital Corporation under the agreement are independent of whether the Capital Corporation is in default on its indebtedness, obligations or other liabilities. Further, Deere & Company’s obligations under the agreement are not measured by the amount of the Capital Corporation’s indebtedness, obligations or other liabilities. Deere & Company’s obligations to make payments under this agreement are expressly stated not to be a guaranty of any specific indebtedness, obligation or liability of the Capital Corporation and are enforceable only by or in the name of John Deere Capital Corporation. No payments were required under this agreement during the periods included in the consolidated financial statements.

 

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**Note 10****. Long-Term Borrowings**

 

Long-term borrowings of the Company at October 31 consisted of the following (in millions of dollars):

 
| ** **                                                                                                                                     | ** ** | **2010** | ** ** | **2009** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Senior Debt:                                                                                                                                   |       |     |       |     |       |
| Medium-term notes due 2011-2018 (principal $8,822- 2010, $10,132 - 2009):                                                                      |       |     |       |     |       |   |   |
| Average interest rate of 3.2% - 2010, 3.5% - 2009                                                                                              |       | $        | 9,145      | *        | $          | 10,362 | * |
| 7% Notes due 2012 ($1,500 principal):                                                                                                          |       |     |       |     |       |
| Swapped $500 million in 2010 to variable interest rate of 1.3% - 2010  Swapped $1,225 million in 2009 to variable interest rate of 1.3% - 2009 |       | 1,594    | *          | 1,640    | *          |
| 5.10% Debentures due 2013 ($650 principal):                                                                                                    |       |     |       |     |       |
| Swapped to variable interest rate of 1.0% - 2010 and 2009                                                                                      |       | 703      | *          | 699      | *          |
| Other Notes                                                                                                                                    |       | 26       |       | 21       |       |
| Total senior debt                                                                                                                              |       | 11,468   |       | 12,722   |       |
| Unamortized debt discount                                                                                                                      |       | (16      | )          | (21      | )          |
| Total **                                                                                                                                       |       | $        | 11,452     |     | $          | 12,701 |   |

 

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*               Includes unamortized fair value adjustments related to interest rate swaps.

 

**           All interest rates are as of year-end.

 

The approximate principal amounts of long-term borrowings maturing in each of the next five years, in millions of dollars, are as follows: 2011 - $2,867, 2012 - $4,570, 2013 - $2,848, 2014 - $950, and 2015 - $568.

 

**Note 11****. Leases**

 

Total rental expense for operating leases was $3 million for 2010, 2009 and 2008, respectively. At October 31, 2010, future minimum lease payments under operating leases amounted to $6 million as follows (in millions of dollars): 2011 - $3, 2012 - $1, 2013 - $1 and 2014 - $1.

 

**Note 12****. Common Stock**

 

All of John Deere Capital Corporation’s common stock is owned by John Deere Financial Services, Inc., a wholly-owned finance holding subsidiary of Deere & Company. No shares of common stock of John Deere Capital Corporation were reserved for officers or employees or for options, warrants, conversions or other rights at October 31, 2010 or 2009. At October 31, 2010, John Deere Capital Corporation had authorized, but not issued, 10,000 shares of $1 par value preferred stock.  In addition, in 2009, Deere & Company increased its investment in John Deere Financial Services, Inc. by $60 million. In turn, John Deere Financial Services, Inc. increased its investment in John Deere Capital Corporation by the same amount.

 

**Note 13****. Dividends**

 

The Capital Corporation declared and paid cash dividends of $195 million to John Deere Financial Services, Inc. in 2010. In turn, John Deere Financial Services, Inc. paid comparable dividends to Deere & Company. The Capital Corporation did not declare or pay cash dividends to John Deere Financial Services, Inc. in 2009.

 

**Note 14****. Pension and Other Retirement Benefits**

 

The Company is a participating employer in certain Deere & Company sponsored defined benefit pension plans for 

 

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employees in the U.S. and certain defined benefit pension plans outside the U.S. These pension plans provide for benefits that are based primarily on years of service and employee compensation. Pension expense is actuarially determined based on the Company’s employees included in the plan. The Company’s pension expense amounted to $9.0 million in 2010, $3.9 million in 2009 and $4.7 million in 2008. The accumulated benefit obligation and plan net assets for the employees of the Company are not determined separately from Deere & Company.  The Company generally provides defined benefit health care and life insurance plans for retired employees in the U.S. as a participating employer in Deere & Company’s sponsored plans. Health care and life insurance benefits expense is actuarially determined based on the Company’s employees included in the plans and amounted to $7.4 million in 2010, $3.5 million in 2009 and $4.1 million in 2008. Further disclosure for these plans is included in the notes to the Deere & Company 2010 Annual Report on Form 10-K.

 

**Note 15****. Stock Option Awards**

 

Certain employees of the Company participate in Deere & Company share-based compensation plans. During 2010 and 2009, the total share-based compensation expense was $6.0 million and $5.1 million, respectively, with an income tax benefit recognized in net income of $2.2 million and $1.9 million, respectively. Further disclosure for these plans is included in Deere & Company’s Form 10-K for the year ended October 31, 2010.

 

**Note 16****. Income Taxes**

 

The taxable income of the Company is included in the consolidated U.S. income tax return of Deere & Company. Provisions for income taxes are made generally as if John Deere Capital Corporation and each of its subsidiaries filed separate income tax returns.

 

The provision for income taxes by taxing jurisdiction and by significant component consisted of the following (in millions of dollars):

 
| ** **                 | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|----------|------------|
| Current:                   |       |     |       |     |       |     |       |
| U.S.:                      |       |     |       |     |       |     |       |
| Federal                    |       | $        | 50.3       |     | $          | 52.6     |       | $ | 105.5 |   |
| State                      |       | 1.0      |       | 3.3      |       | 7.4      |       |
| Foreign                    |       | 21.2     |       | 16.0     |       | 6.5      |       |
| Total current              |       | 72.5     |       | 71.9     |       | 119.4    |       |
|                       |       |     |       |     |       |     |       |
| Deferred:                  |       |     |       |     |       |     |       |
| U.S.:                      |       |     |       |     |       |     |       |
| Federal                    |       | 88.6     |       | 4.6      |       | 31.2     |       |
| State                      |       | (1.4     | )          | (2.7     | )          | .6       |       |
| Foreign                    |       | (.3      | )          | (.6      | )          | 4.5      |       |
| Total deferred             |       | 86.9     |       | 1.3      |       | 36.3     |       |
| Provision for income taxes |       | $        | 159.4      |     | $          | 73.2     |       | $ | 155.7 |   |

 

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A comparison of the statutory and effective income tax provisions and reasons for related differences follows (in millions of dollars):

 
| ** **                                                          | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| U.S. federal income tax provision at a statutory rate of 35 percent |       | $        | 167.3      |     | $          | 77.7     |       | $ | 153.0 |   |
| Increase (decrease) resulting from:                                 |       |     |       |     |       |     |       |
| Municipal lease income not taxable                                  |       | (1.6     | )          | (1.7     | )          | (1.4     | )          |
| Taxes on foreign activities                                         |       | (4.7     | )          | (6.2     | )          | (5.7     | )          |
| Other – net                                                    |       | (1.6     | )          | 3.4      |       | 9.8      |       |
| Provision for income taxes                                          |       | $        | 159.4      |     | $          | 73.2     |       | $ | 155.7 |   |

 

Deferred income taxes arise because there are certain items that are treated differently for financial accounting than for income tax reporting purposes. An analysis of deferred income tax assets and liabilities at October 31 is as follows (in millions of dollars):

 
| ** **                                     | ** ** | **2010**                | ** ** | **2009**                     | ** ** |
|------------------------------------------------|------------|-------------------------|------------|------------------------------|------------|
| ** **                                     | ** ** | **Deferred Tax Assets** | ** ** | **Deferred Tax Liabilities** | ** ** | **Deferred Tax Assets** | ** ** | **Deferred Tax Liabilities** | ** ** |
| Lease transactions                             |       |                    |       | $                            | 248.9      |   |   |   | $ | 207.1 |   |
| Tax over book depreciation                     |       |                    |       | 7.6                          |       |   |   | 8.1 |   |
| Deferred retail note finance income            |       |                    |       | 6.2                          |       |   |   | 4.7 |   |
| Allowance for credit losses                    |       | $                       | 77.5       |                         |       |   | $ | 80.3 |   |   |   |
| Unrealized gain/loss on derivatives            |       | 15.7                    |       |                         |       | 23.4 |   |   |   |
| Accrual for retirement and other benefits      |       | 10.9                    |       |                         |       | 20.9 |   |   |   |
| Federal taxes on deferred state tax deductions |       | 4.9                     |       |                         |       | 7.8 |   |   |   |
| Tax loss and tax credit carryforwards          |       | 3.2                     |       |                         |       | 3.4 |   |   |   |
| Miscellaneous accruals and other               |       |                    |       | 11.2                         |       | 17.0 |   |   |   |
| Deferred income tax assets and liabilities     |       | $                       | 112.2      |                         | $          | 273.9 |   | $ | 152.8 |   | $ | 219.9 |   |

 

At October 31, 2010, certain tax loss and tax credit carryforwards for $3.2 million were available, expiring from 2011 through 2030.

 

A reconciliation of the total amounts of unrecognized tax benefits at October 31 is as follows (in millions of dollars):

 
| ** **                                               | ** ** | **2010** | ** ** | **2009** | ** ** |
|----------------------------------------------------------|------------|----------|------------|----------|------------|
| Beginning of year balance                                |       | $        | 38.5       |     | $          | 35.0 |   |
| Increases to tax positions taken during the current year |       | 8.9      |       | 13.2     |       |
| Increases to tax positions taken during prior years      |       | .4       |       | 1.7      |       |
| Decreases to tax positions taken during prior years      |       | (14.4    | )          | (10.9    | )          |
| Decreases due to lapse of statute of limitations         |       | (1.4     | )          | (1.0     | )          |
| Settlements                                              |       | (1.5     | )          |     |       |
| Foreign exchange                                         |       | (.2      | )          | .5       |       |
| End of year balance                                      |       | $        | 30.3       |     | $          | 38.5 |   |

 

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The amount of unrecognized tax benefits at October 31, 2010 that would affect the effective tax rate if the tax benefits were recognized was $7.2 million. The remaining liability was related to tax positions for which there are offsetting tax receivables, or the uncertainty was only related to timing. The Company expects that any reasonably possible change in the amounts of unrecognized tax benefits in the next twelve months would not be significant.

 

The Company files its tax returns according to the tax laws of the jurisdictions in which it operates, which includes the U.S. federal jurisdiction, and various state and foreign jurisdictions. The Company is included in the consolidated U.S. income tax return and various state returns of Deere & Company. The U.S. Internal Revenue Service has completed the examination of the Company’s federal income tax returns for periods prior to 2007. The years 2007, 2008 and 2009 federal income tax returns are either currently under examination or remain subject to examination. Various state and foreign income tax returns also remain subject to examination by taxing authorities.

 

The Company’s policy is to recognize interest related to income taxes in interest expense and other income, and recognize penalties in administrative and operating expenses. During 2010, 2009 and 2008, the total amount of expense (credit) from interest and penalties was ($1.6) million, ($1.0) million and $2.3 million and the interest income was not material, $.3 million and $.1 million, respectively. During 2010 and 2009, the expense from interest and penalties includes reversals of interest and penalties of $2.3 million and $1.6 million, respectively, due to audit settlements. At October 31, 2010 and 2009, the liability for accrued interest and penalties totaled $8.8 million and $11.6 million, respectively.

 

**Note 17****.  Administrative and Operating Expenses**

 

The major components of administrative and operating expenses are as follows (in millions of dollars):

 
| ** **                         | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Compensation and benefits          |       | $        | 207.2      |     | $          | 171.6    |       | $ | 207.2 |   |
| Crop insurance commission expenses |       | 52.0     |       | 72.5     |       | 71.6     |       |
| Other                              |       | 110.7    |       | 89.1     |       | 94.2     |       |
| Total                              |       | $        | 369.9      |     | $          | 333.2    |       | $ | 373.0 |   |

 

**Note 18****.  Cash Flow Information**

 

For purposes of the statements of consolidated cash flows, the Company considers investments with purchased maturities of three months or less to be cash equivalents. Substantially all of the Company’s short-term borrowings, excluding the current maturities of long-term borrowings, mature or may require payment within three months or less.

 

Cash payments by the Company for interest in 2010, 2009 and 2008 were $537 million, $743 million and $829 million, respectively. Cash payments for income taxes during these same periods were $60 million, $59 million and $111 million, respectively.

 

**Note 19****.  Commitments and Contingent Liabilities**

 

At October 31, 2010, John Deere Credit Inc., the John Deere finance subsidiary in Canada, had $642 million of commercial paper, $1,396 million of medium-term notes outstanding, and a fair value liability of $8 million for derivatives with a notional amount of $995 million that were guaranteed by the Company.

 

The Company has commitments to extend credit to customers and John Deere dealers through lines of credit and other pre-approved credit arrangements. The Company applies the same credit policies and approval process for these commitments to extend credit as it does for its Receivables.  Collateral is not required for these commitments, but if credit is extended, collateral may be required upon funding. The amount of unused commitments to extend credit to 

 

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John Deere dealers was $3.3 billion at October 31, 2010. The amount of unused commitments to extend credit to customers was $41.0 billion at October 31, 2010. A significant portion of these commitments is not expected to be fully drawn upon; therefore, the total commitment amounts do not represent a future cash requirement. The Company generally has the right to unconditionally cancel, alter, or amend the terms of these commitments at any time. Over 95 percent of these unused commitments to extend credit to customers relate to revolving charge accounts.

 

At October 31, 2010, the Company had restricted other assets of $12 million. In addition, see Note 6 for restricted assets associated with borrowings related to securitizations.

 

The Company also had other miscellaneous contingencies totaling approximately $5 million at October 31, 2010, for which it believes the probability for payment is substantially remote. The Company’s accrued liability at October 31, 2010 related to these contingencies was not material.

 

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

 

**Note 20****. Other Comprehensive Income Items**

 

Other comprehensive income items are transactions recorded in stockholder’s equity during the year, excluding net income and transactions with the stockholder. Following are the items included in other comprehensive income (loss) and the related tax effects in millions of dollars:

 
| ** **                                           | ** ** | **Before Tax Amount** | ** ** | **Tax (Expense) Credit** | ** ** | **After Tax Amount** | ** ** |
|------------------------------------------------------|------------|----------------------------|------------|--------------------------|------------|---------------------------|------------|
| **2008**                                             |       |                       |       |                     |       |                      |       |
| Cumulative translation adjustment                    |       | $                          | (52.5      | )                        |       |                      | $          | (52.5 | ) |
| Unrealized holding loss and net loss on investments* |       | (1.8                       | )          | $                        | .6         |                      | (1.2       | ) |
| Unrealized loss on derivatives:                      |       |                       |       |                     |       |                      |       |
| Hedging loss                                         |       | (73.5                      | )          | 25.6                     |       | (47.9                     | )          |
| Reclassification of realized loss to net income      |       | 25.6                       |       | (9.4                     | )          | 16.2                      |       |
| Net unrealized loss on derivatives                   |       | (47.9                      | )          | 16.2                     |       | (31.7                     | )          |
| Total other comprehensive income (loss)              |       | $                          | (102.2     | )                        | $          | 16.8                      |       | $ | (85.4 | ) |
| ** **                                           | ** ** | ** **                 | ** ** | ** **               | ** ** | ** **                | ** ** |
| **2009**                                             |       |                       |       |                     |       |                      |       |
| Cumulative translation adjustment                    |       | $                          | 46.6       |                     |       |                      | $          | 46.6 |   |
| Unrealized loss on derivatives:                      |       |                       |       |                     |       |                      |       |
| Hedging loss                                         |       | (90.2                      | )          | $                        | 31.3       |                      | (58.9      | ) |
| Reclassification of realized loss to net income      |       | 84.0                       |       | (29.2                    | )          | 54.8                      |       |
| Net unrealized loss on derivatives                   |       | (6.2                       | )          | 2.1                      |       | (4.1                      | )          |
| Total other comprehensive income                     |       | $                          | 40.4       |                     | $          | 2.1                       |       | $ | 42.5 |   |
|                                                 |       |                       |       |                     |       |                      |       |
| **2010**                                             |       |                       |       |                     |       |                      |       |
| Cumulative translation adjustment                    |       | $                          | (7.2       | )                        |       |                      | $          | (7.2 | ) |
| Unrealized gain on derivatives:                      |       |                       |       |                     |       |                      |       |
| Hedging loss                                         |       | (55.8                      | )          | $                        | 19.1       |                      | (36.7      | ) |
| Reclassification of realized loss to net income      |       | 78.4                       |       | (26.8                    | )          | 51.6                      |       |
| Net unrealized gain on derivatives                   |       | 22.6                       |       | (7.7                     | )          | 14.9                      |       |
| Total other comprehensive income (loss)              |       | $                          | 15.4       |                     | $          | (7.7                      | )          | $ | 7.7 |   |

 

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*               Reclassification of realized gains or losses to net income were not material.

 

55

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**Note 21****.  Financial Instruments**

 

The fair values of financial instruments that do not approximate the carrying values in the financial statements at October 31 are as follows (in millions of dollars):

 
| ** **                                | ** ** | **2010**           | ** ** | **2009**       | ** ** |
|-------------------------------------------|------------|--------------------|------------|----------------|------------|
| ** **                                | ** ** | **Carrying Value** | ** ** | **Fair Value** | ** ** | **Carrying Value** | ** ** | **Fair Value** | ** ** |
| Receivables financed - net                |       | $                  | 17,474     |           | $          | 17,509 |   | $ | 14,856 |   | $ | 14,954 |   |
|                                      |       |               |       |           |       |   |   |   |   |
| Restricted securitized retail notes - net |       | $                  | 2,238      |           | $          | 2,257 |   | $ | 3,086 |   | $ | 3,123 |   |
|                                      |       |               |       |           |       |   |   |   |   |
| Short-term secured borrowings*            |       | $                  | 2,209      |           | $          | 2,229 |   | $ | 3,109 |   | $ | 3,140 |   |
|                                      |       |               |       |           |       |   |   |   |   |
| Long-term borrowings due within one year  |       | $                  | 2,889      |           | $          | 2,922 |   | $ | 2,550 |   | $ | 2,572 |   |
|                                      |       |               |       |           |       |   |   |   |   |
| Long-term borrowings                      |       | $                  | 11,452     |           | $          | 11,952 |   | $ | 12,701 |   | $ | 13,140 |   |

 

----

*               See Note 9.

 

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

 

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

 

Assets and liabilities measured at October 31 at fair value as Level 2 measurements on a recurring basis were as follows (in millions of dollars):

 
| ** **                             | ** ** | **2010** | ** ** | **2009** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
| Other assets                           |       |     |       |     |       |
| Derivatives:                           |       |     |       |     |       |
| Interest rate contracts                |       | $        | 454.3      |     | $          | 488.8 |   |
| Foreign exchange contracts             |       | 4.0      |       | 3.4      |       |
| Cross-currency interest rate contracts |       | 2.9      |       | 173.5    |       |
| Total assets*                          |       | $        | 461.2      |     | $          | 665.7 |   |
|                                   |       |     |       |     |       |
| Accounts payable and accrued expenses  |       |     |       |     |       |
| Derivatives:                           |       |     |       |     |       |
| Interest rate contracts                |       | $        | 31.2       |     | $          | 115.2 |   |
| Foreign exchange contracts             |       | 4.5      |       | 15.0     |       |
| Cross-currency interest rate contracts |       | 48.2     |       | .7       |       |
| Total liabilities                      |       | $        | 83.9       |     | $          | 130.9 |   |

 

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

 

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Fair value, nonrecurring, Level 3 measurements at October 31 and related losses were as follows (in millions of dollars):

 
| ** **            | ** ** | **Fair Value***  | ** **       | **Losses**            | ** ** |
|-----------------------|------------|-----------------------|------------------|-----------------------|------------|
| ** **            | ** ** | **2010**              | ** **       | **2009**              | ** ** | **2010** | ** ** | **2009** | ** ** |
| Receivables:          |       |                  |             |                  |       |   |   |   |   |
| Retail notes          |       | $                     |    1.7 |                  | $          |    3.1 |   | $ |     .1 |   | $ |    3.7 |   |
| Operating loans       |       |   1.1            |             | 13.3                  |       |  2.7 |   | 14.4 |   |
| Wholesale receivables |       | 16.9                  |             |   6.0            |       |   1.9 |   |   1.5 |   |
| Financing leases      |       |     .2 |             |     .7 |       |   |   |   1.4 |   |
| Total Receivables     |       | $                     |  19.9       |                  | $          |  23.1 |   | $ |    4.7 |   | $ |  21.0 |   |

 

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*                                         Does not include cost to sell.

 

Level 1 measurements consist of quoted prices in active markets for identical assets or liabilities. Level 2 measurements include significant other observable inputs such as quoted prices for similar assets or liabilities in active markets; identical assets or liabilities in inactive markets; observable inputs such as interest rates and yield curves; and other market-corroborated inputs. Level 3 measurements include significant unobservable inputs. There were no assets or liabilities valued using level 1 measurements at October 31, 2010.

 

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

 

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

 

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

 

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

 

**Note 22. Derivative Instruments**

 

It is the Company’s policy that derivative transactions are executed only to manage exposures arising in the normal course of business and not for the purpose of creating speculative positions or trading. The Company manages the relationship of the types and amounts of its funding sources to its receivable and lease portfolio in an effort to diminish risk due to interest rate and foreign currency fluctuations, while responding to favorable financing opportunities. The Company also has foreign currency exposures at some of its foreign and domestic operations related to financing in currencies other than the local currencies.

 

All derivatives are recorded at fair value on the balance sheet. Each derivative is designated as a cash flow hedge, a fair value hedge, or remains undesignated. All designated hedges are formally documented as to the relationship with the hedged item as well as the risk-management strategy. Both at inception and on an ongoing basis the hedging instrument is assessed as to its effectiveness, when applicable. If and when a derivative is determined not to be highly effective as a hedge,

 

57

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or the underlying hedged transaction is no longer likely to occur, or the hedge designation is removed, or the derivative is terminated, hedge accounting is discontinued. Any past or future changes in the derivative’s fair value, which will not be effective as an offset to the income effects of the item being hedged, are recognized currently in the income statement.

 

Certain of the Company’s derivative agreements contain credit support provisions that require the Company to post collateral based on reductions in credit ratings. The aggregate fair value of all derivatives with credit-risk-related contingent features that are in a liability position at October 31, 2010 and 2009 was $16 million and $13 million, respectively. The Company, due to its credit rating, has not posted any collateral. If the credit-risk-related contingent features were triggered, the Company would be required to post full collateral for this liability position.

 

Derivative instruments are subject to significant concentrations of credit risk to the banking sector. The Company manages individual counterparty exposure by setting limits that consider the credit rating of the counterparty and the size of other financial commitments and exposures between the Company and the counterparty banks. All interest rate derivatives are transacted under International Swaps and Derivatives Association (ISDA) documentation. Some of these agreements include collateral support arrangements. Each master agreement permits the net settlement of amounts owed in the event of early termination. The maximum amount of loss that the Company would incur if counterparties to derivative instruments fail to meet their obligations, not considering collateral received or netting arrangements, was $461 million and $666 million as of October 31, 2010 and 2009, respectively. The amount of collateral received at October 31, 2010 and 2009 to offset this potential maximum loss was $85 million and $78 million, respectively. The netting provisions of the agreements would reduce the maximum amount of loss the Company would incur if the counterparties to derivative instruments fail to meet their obligations by an additional $52 million and $82 million as of October 31, 2010 and 2009, respectively. None of the concentrations of risk with any individual counterparty was considered significant at October 31, 2010 and 2009.

 

Cash flow hedges

 

Certain interest rate and cross-currency interest rate contracts (swaps) were designated as hedges of future cash flows from borrowings. The total notional amount of the receive-variable/pay-fixed interest rate contracts at October 31, 2010 and 2009 was $1,060 million and $2,492 million, respectively. The total notional amount of the cross-currency interest rate contracts was $849 million at October 31, 2010. The effective portions of the fair value gains or losses on these cash flow hedges were recorded in other comprehensive income (OCI) and subsequently reclassified into interest expense or administrative and operating expenses (foreign exchange) in the same periods during which the hedged transactions affect earnings. These amounts offset the effects of interest rate or foreign currency exchange rate changes on the related borrowings. Any ineffective portions of the gains or losses on all interest rate contracts designated as cash flow hedges were recognized currently in interest expense or administrative and operating expenses (foreign exchange) and were not material during any years presented. The cash flows from these contracts were recorded in operating activities in the statements of consolidated cash flows.

 

The amount of loss recorded in OCI at October 31, 2010 that is expected to be reclassified to interest expense or administrative and operating expenses in the next twelve months if interest rates or exchange rates remain unchanged is approximately $11 million after-tax. These contracts mature in up to 39 months. There were no gains or losses reclassified from OCI to earnings based on the probability that the original forecasted transaction would not occur.

 

Fair value hedges

 

Certain interest rate contracts (swaps) were designated as fair value hedges of borrowings. The total notional amount of the receive-fixed/pay-variable interest rate contracts at October 31, 2010 and 2009 were $5,979 million and $6,120 million, respectively. The effective portions of the fair value gains or losses on these contracts were offset by fair value gains or losses on the hedged items (fixed-rate borrowings). Any ineffective portions of the gains or losses were recognized currently in interest expense and were not material during any years presented. The cash flows from these contracts were recorded in operating activities in the statements of consolidated cash flows.

 

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

 
| ** **                | ** ** | **2010** | ** ** | **2009** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|
| Interest rate contracts * |       | $        | 133.6      |     | $          | 213.0 |   |
| Borrowings **             |       | (133.2   | )          | (212.3   | )          |
|                           |            |          |            |          |            |  |  |

 

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*              Includes changes in fair value of interest rate contracts excluding net accrued interest income of $204.2 million and $165.5 million during 2010 and 2009, respectively.

 

**           Includes adjustments for fair values of hedged borrowings excluding accrued interest expense of $304.0 million and $300.1 million during 2010 and 2009, respectively.

 

Derivatives not designated as hedging instruments

 

The Company has certain interest rate contracts (swaps and caps), foreign exchange contracts (forwards and swaps) and cross-currency interest rate contracts (swaps), which were not formally designated as hedges. These derivatives were held as economic hedges for underlying interest rate or foreign currency exposures primarily for certain borrowings. The total notional amounts of the interest rate swaps at October 31, 2010 and 2009 were $2,009 million and $1,745 million, the foreign exchange contracts were $1,000 million and $1,043 million, and the cross-currency interest rate contracts were $60 million and $839 million, respectively. At October 31, 2010 and 2009, there were also $1,055 million and $1,560 million, respectively, of interest rate caps purchased and the same amounts sold at the same capped interest rate to facilitate borrowings through securitization of retail notes. The fair value gains or losses from the interest rate contracts were recognized currently in interest expense and the gains or losses from foreign exchange contracts in administrative and operating expenses, generally offsetting over time the expenses on the exposures being hedged. The cash flows from these non-designated contracts were recorded in operating activities in the statements of consolidated cash flows.

 

59

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Fair values of derivative instruments in the consolidated balance sheet at October 31 were as follows (in millions of dollars):

 
| ** **                             | ** ** | **2010** | ** ** | **2009** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
|                                   |       |     |       |     |       |
| Other Assets                           |       |     |       |     |       |
| Designated as hedging instruments:     |       |     |       |     |       |
| Interest rate contracts                |       | $        | 418.0      |     | $          | 446.4 |   |
|                                   |       |     |       |     |       |
| Not designated as hedging instruments: |       |     |       |     |       |
| Interest rate contracts                |       | 36.3     |       | 42.4     |       |
| Foreign exchange contracts             |       | 4.0      |       | 3.4      |       |
| Cross-currency interest rate contracts |       | 2.9      |       | 173.5    |       |
| Total not designated                   |       | 43.2     |       | 219.3    |       |
|                                   |       |     |       |     |       |
| Total derivatives                      |       | $        | 461.2      |     | $          | 665.7 |   |
|                                   |       |     |       |     |       |
| Accounts Payable and Accrued Expenses  |       |     |       |     |       |
| Designated as hedging instruments:     |       |     |       |     |       |
| Interest rate contracts                |       | $        | 17.5       |     | $          | 76.6 |   |
| Cross-currency interest rate contracts |       | 46.9     |       |     |       |
| Total designated                       |       | 64.4     |       | 76.6     |       |
|                                   |       |     |       |     |       |
| Not designated as hedging instruments: |       |     |       |     |       |
| Interest rate contracts                |       | 13.7     |       | 38.6     |       |
| Foreign exchange contracts             |       | 4.5      |       | 15.0     |       |
| Cross-currency interest rate contracts |       | 1.3      |       | .7       |       |
| Total not designated                   |       | 19.5     |       | 54.3     |       |
|                                   |       |     |       |     |       |
| Total derivatives                      |       | $        | 83.9       |     | $          | 130.9 |   |

 

60

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

 
| ** **                    | ** ** | **Expense or OCI Classification** | ** ** | **2010**   | ** ** | **2009** | ** ** |
|-------------------------------|------------|---------------------------------------------|------------|------------|------------|----------|------------|
| Fair Value Hedges             | ** ** | ** **                                  | ** ** | ** ** |       |     |       |
| Interest rate contracts       |       | Interest expense                            |       | $          | 337.8      |     | $          | 378.5 |   |
|                          |       |                                        |       |       |       |     |       |
| Cash Flow Hedges              | ** ** | ** **                                  | ** ** | ** ** |       |     |       |
| Recognized in OCI             |       |                                        |       |       |       |     |       |
| (Effective Portion):          |       |                                        |       |       |       |     |       |
| Interest rate contracts       |       | OCI (pretax)*                               |       | (14.0      | )          | (90.2    | )          |
| Foreign exchange contracts    |       | OCI (pretax)*                               |       | (41.8      | )          |     |       |
|                          |       |                                        |       |       |       |     |       |
| Reclassified from OCI         |       |                                        |       |       |       |     |       |
| (Effective Portion):          |       |                                        |       |       |       |     |       |
| Interest rate contracts       |       | Interest expense*                           |       | (67.2      | )          | (84.0    | )          |
| Foreign exchange contracts    |       | Administrative and operating expenses*      |       | (11.2      | )          |     |       |
|                          |       |                                        |       |       |       |     |       |
| 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*                           |       | $          | 32.2       |     | $          | 1.3 |   |
| Foreign exchange contracts    |       | Administrative and operating expenses*      |       | (80.1      | )          | (47.6    | )          |
| Total                         |       |                                        |       | $          | (47.9      | )        | $          | (46.3 | ) |

 

----

|   | *  | Includes interest and foreign exchange gains (losses) from cross-currency interest rate contracts. |
|--------|----|----------------------------------------------------------------------------------------------------|
|   | ** | The amount is not material.                                                                        |

 

**Note 23****.  Geographic Area Information**

 

Based on the way the operations are managed and evaluated by management and materiality considerations, the Company is viewed as one operating segment. However, geographic area information for revenues, operating profit, which is net income of consolidated group before income taxes, and Receivables attributed to the U.S. and countries outside the U.S. is disclosed below. No individual foreign country’s revenues, operating profit or Receivables were material for disclosure purposes.

 

61

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Geographic area information for the years ended October 31, 2010, 2009 and 2008 is presented below (in millions of dollars):

 
| ** **            | ** ** | **2010** | ** ** | **2009** | ** ** | **2008** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|----------|------------|
| **Revenues:**         |       |     |       |     |       |     |       |
| U.S.                  |       | $        | 1,496      |     | $          | 1,567    |       | $ | 1,742 |   |
| Outside the U.S.      |       | 186      |       | 189      |       | 226      |       |
| Total                 |       | $        | 1,682      |     | $          | 1,756    |       | $ | 1,968 |   |
|                  |       |     |       |     |       |     |       |
| **Operating profit:** |       |     |       |     |       |     |       |
| U.S.                  |       | $        | 409        |     | $          | 165      |       | $ | 391 |   |
| Outside the U.S.      |       | 69       |       | 57       |       | 47       |       |
| Total                 |       | $        | 478        |     | $          | 222      |       | $ | 438 |   |
|                  |       |     |       |     |       |     |       |
| **Receivables:**      |       |     |       |     |       |     |       |
| U.S.                  |       | $        | 16,918     |     | $          | 15,223   |       | $ | 15,527 |   |
| Outside the U.S.      |       | 2,942    |       | 2,877    |       | 2,374    |       |
| Total                 |       | $        | 19,860     |     | $          | 18,100   |       | $ | 17,901 |   |

 

**Note 24.****  Unconsolidated Affiliated Companies**

 

The Capital Corporation’s unconsolidated affiliated companies are those in which it generally maintains 20 to 50 percent ownership. The Capital Corporation does not control these companies and accounts for its investments in them on the equity basis. The Company’s equity in the income of these affiliates is reported in the consolidated income statement under “Equity in income of unconsolidated affiliates.” The investment in these companies is recorded in the consolidated balance sheet under “Investments in unconsolidated affiliates.”

 

Summarized financial information of the unconsolidated affiliated companies is as follows (in millions of dollars):

 
| ** **                              | ** ** | **Year Ended October 31,** | ** ** |
|-----------------------------------------|------------|-------------------------------------------|------------|
| ** **                              | ** ** | **2010**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Operations:**                         |       |                                      |       |   |   |   |   |
| Finance income                          |       | $                                         | 9.5        |   | $ | 8.7 |   | $ | 9.1 |   |
| Net income                              |       | 1.7                                       |       | 1.0 |   | 2.0 |   |
| The Company’s equity in net income |       | .9                                        |       | .5 |   | 1.0 |   |
|                                         |            |                                           |            |  |  |  |  |  |  |  |

 
| ** **                             | ** ** | **October 31,** | ** ** |     |       |
|----------------------------------------|------------|----------------------|------------|----------|------------|
| ** **                             | ** ** | **2010**             | ** ** | **2009** | ** ** |   |   |
| **Financial Position:**                |       |                 |       |     |       |   |   |
| Total assets                           |       | $                    | 103.1      |     | $          | 97.1 |   |   |   |
| Total external borrowings              |       | 86.2                 |       | 81.6     |       |   |   |
| Total net assets                       |       | 13.9                 |       | 13.1     |       |   |   |
| The Company’s share of net assets |       | 7.0                  |       | 6.6      |       |   |   |
|                                        |            |                      |            |          |            |  |  |  |  |

 

62

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**Note 25.****  Supplemental Information (Unaudited)**

 

Quarterly Information

 

The Company’s fiscal year ends in October and its interim periods (quarters) end in January, April and July.  Supplemental quarterly information for the Company follows (in millions of dollars):

 
| ** **                                    | ** ** | **First Quarter** | ** ** | **Second Quarter** | ** ** | **Third Quarter** | ** ** | **Fourth Quarter** | ** ** | **Fiscal Year** | ** ** |
|-----------------------------------------------|------------|-------------------|------------|--------------------|------------|-------------------|------------|--------------------|------------|-----------------|------------|
| 2010:                                         |       |              |       |               |       |              |       |               |       |            |       |
| Revenues                                      |       | $                 | 414.4      |               | $          | 412.2             |       | $                  | 445.6      |            | $          | 410.1 |   | $ | 1,682.3 |   |
| Interest expense                              |       | 150.0             |       | 139.9              |       | 123.7             |       | 120.0              |       | 533.6           |       |
| Operating expenses                            |       | 172.4             |       | 165.1              |       | 184.6             |       | 148.7              |       | 670.8           |       |
| Provision for income taxes                    |       | 28.4              |       | 38.0               |       | 48.0              |       | 45.0               |       | 159.4           |       |
| Equity in income of unconsolidated affiliates |       | .3                |       | .2                 |       | .1                |       | .3                 |       | .9              |       |
| Net income                                    |       | $                 | 63.9       |               | $          | 69.4              |       | $                  | 89.4       |            | $          | 96.7 |   | $ | 319.4 |   |
|                                          |       |              |       |               |       |              |       |               |       |            |       |
| 2009:                                         |       |              |       |               |       |              |       |               |       |            |       |
| Revenues                                      |       | $                 | 437.6      |               | $          | 425.9             |       | $                  | 465.3      |            | $          | 427.4 |   | $ | 1,756.2 |   |
| Interest expense                              |       | 207.3             |       | 203.9              |       | 195.3             |       | 182.0              |       | 788.5           |       |
| Operating expenses                            |       | 181.8             |       | 167.5              |       | 173.3             |       | 223.2              |       | 745.8           |       |
| Provision for income taxes                    |       | 13.7              |       | 20.7               |       | 37.6              |       | 1.2                |       | 73.2            |       |
| Equity in income of unconsolidated affiliates |       | .2                |       | .1                 |       |              |       | .2                 |       | .5              |       |
| Net income                                    |       | $                 | 35.0       |               | $          | 33.9              |       | $                  | 59.1       |            | $          | 21.2 |   | $ | 149.2 |   |

 

**Note 26.****  Subsequent Events**

 

On November 29, 2010, the Capital Corporation declared a $79 million dividend to be paid to John Deere Financial Services, Inc. on January 20, 2011. John Deere Financial Services, Inc., in turn, declared a $79 million dividend to Deere & Company, also payable on January 20, 2011.

 

63

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**Index to Exhibits**

 
| 2.                                                                                                                                                                                                                                                                                              | Not applicable                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 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 No. 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 No. 1-6458*)                                                                                                                                                                                                                                                                                          |
|                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4.1                                                                                                                                                                                                                                                                                             | Senior Indenture dated as of March 15, 1997 between the registrant and The Bank of New York Mellon (successor Trustee to The Chase Manhattan Bank National Association), as Trustee (Exhibit 4.1 to registration statement on Form S-3 no. 333-68355, filed December 4, 1998, Securities and Exchange Commission file number 1-6458*)                                                                                                             |
|                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4.2                                                                                                                                                                                                                                                                                             | Subordinated Indenture dated as of September 1, 2003 between the registrant and U.S. Bank National Association, as Trustee (Exhibit 4.3 to registration statement on Form S-3 no. 333-108705, filed September 11, 2003*)                                                                                                                                                                                                                          |
|                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4.3                                                                                                                                                                                                                                                                                             | Terms and Conditions of the Notes, published on May 31, 2002, applicable to the U.S. $3,000,000,000 Euro Medium Term Note Programme of registrant, John Deere Capital Corporation, John Deere Bank S.A., John Deere Credit Limited, John Deere B.V., John Deere Credit Inc. and John Deere Limited. (Exhibit 4.5 to Form 10-K of Deere & Company for the year ended October 31, 2002, Securities and Exchange Commission file number 1-4121*) |
|                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| Certain instruments relating to long-term debt constituting less than 10% of the registrant’s total assets may not be filed as exhibits herewith pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K. The registrant will file copies of such instruments upon request of the Commission. |
|                                                                                                                                                                                                                                                                                            |
| 9.                                                                                                                                                                                                                                                                                              | Not applicable                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.1                                                                                                                                                                                                                                                                                            | Agreement as amended November 1, 1994 between the registrant and Deere & Company concerning agricultural retail notes (Exhibit 10.1 to Form 10-K of Deere & Company for the year ended October 31, 1998, Securities and Exchange Commission file number 1-4121*)                                                                                                                                                                          |
|                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.2                                                                                                                                                                                                                                                                                            | Agreement as amended November 1, 1994 between the registrant and Deere & Company concerning lawn and grounds care retail notes (Exhibit 10.2 to the Form 10-K of Deere & Company for the year ended October 31, 1998, Securities and Exchange Commission file number 1-4121*)                                                                                                                                                             |
|                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.3                                                                                                                                                                                                                                                                                            | Agreement as amended November 1, 1994 between the registrant and John Deere Industrial Equipment Company concerning industrial retail notes (Exhibit 10.3 to the Form 10-K of Deere & Company for the year ended October 31, 1998, Securities and Exchange Commission file number 1-4121*)                                                                                                                                                    |
|                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.4                                                                                                                                                                                                                                                                                            | Agreement dated November 1, 2003 between the registrant and Deere & Company relating to fixed charges ratio, ownership and minimum net worth (Exhibit 10.5 to Form 10-K of Deere & Company for the year ended October 31, 2003, Securities and Exchange Commission File No. 1-4121*)                                                                                                                                                      |
|                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.5                                                                                                                                                                                                                                                                                            | Agreement dated July 14, 1997 between the registrant and John Deere Construction Equipment Company concerning construction retail notes (Exhibit 10.4 to Form 10-K of Deere & Company for the year ended October 31, 2003, Securities and Exchange Commission File No. 1-4121*)                                                                                                                                                               |

 

64

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| 10.6   | Asset Purchase Agreement dated October 29, 2001 between Deere & Company and Deere Capital, Inc. concerning the sale of trade receivables (Exhibit 10.6 to Form 10-K of the registrant for the year ended October 31, 2001*)                                                                                                                                                                                                                                                                                     |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.7   | Asset Purchase Agreement dated October 29, 2001 between John Deere Construction & Forestry Company and Deere Capital, Inc. concerning the sale of trade receivables (Exhibit 10.7 to Form 10-K of the registrant for the year ended October 31, 2001*)                                                                                                                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.8   | Factoring Agreement between John Deere Bank S.A. (as successor by merger in interest to John Deere Finance S.A.) and John Deere Vertrieb, a branch of Deere & Company, concerning the sale of trade receivables (Exhibit 10.21 to the Form 10-K of Deere & Company for the year ended October 31, 2002, Securities and Exchange Commission file number 1-4121*)                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.9   | Receivables Purchase Agreement between John Deere Bank S.A. (as successor by merger in interest to John Deere Finance S.A.) and John Deere Limited (Scotland) concerning the sale of trade receivables (Exhibit 10.22 to the Form 10-K of Deere & Company for the year ended October 31, 2002, Securities and Exchange Commission file number 1-4121*)                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.10  | Five-Year Credit Agreement among registrant, Deere & Company, various financial institutions, JPMorgan Chase Bank N.A. as administrative agent, Citibank N.A. and Credit Suisse as documentation agents, Merrill Lynch Bank USA as co-documentation agent, and Bank of America, N.A. and Deutsche Bank AG, as syndication agents, et al, dated February 28, 2007 (Exhibit 4.1 to Form 10-Q of Deere & Company for the quarter ended April 30, 2007, Securities and Exchange Commission file number 1-4121*) |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 11.    | Not applicable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 12.    | Computation of Ratio of Earnings to Fixed Charges                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 13.    | Not applicable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 14.    | Not applicable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 16.    | Not applicable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 18.    | Not applicable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 21.    | Omitted pursuant to instruction I(2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 22.    | Not applicable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 23.    | Consent of Deloitte & Touche LLP                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 24.    | Power of Attorney (included on signature page)                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 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     | Parts I and II of the Deere & Company Form 10-K for the fiscal year ended October 31, 2010 (Securities and Exchange Commission file number 1-4121*)                                                                                                                                                                                                                                                                                                                                                             |

 

----

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

 

65

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