John Deere 2014 Annual Report Download - page 26

approximately 27 percent, 6 percent and 3 percent, respectively,
while retail note volumes were about the same. The amount of
wholesale notes increased 11 percent and trade receivables
increased 1 percent during 2014. At October 31, 2014 and 2013,
net receivables and leases administered, which include receivables
administered but not owned, were $39,629 million and $36,559
million, respectively.
Total external interest-bearing debt of the financial
services operations was $31,882 million at the end of 2014,
compared with $28,524 million at the end of 2013 and $26,551
million at the end of 2012. Total external borrowings have
changed generally corresponding with the level of the receivable
and lease portfolio, the level of cash and cash equivalents, the
change in payables owed to Deere & Company and the change
in investment from Deere & Company. The financial services
operations’ ratio of total interest-bearing debt to total stock-
holder’s equity was to 7.4 to 1 at the end of 2014, 7.3 to 1 at
the end of 2013 and 7.2 to 1 at the end of 2012.
The Capital Corporation has a revolving credit agreement
to utilize bank conduit facilities to securitize retail notes (see
Note 13). At October 31, 2014, the facility had a total capacity,
or “financing limit,” of up to $3,000 million of secured
financings at any time. The facility was renewed in November
2014 with a capacity of $3,500 million. After a three-year
revolving period, unless the banks and Capital Corporation agree
to renew, Capital Corporation would liquidate the secured
borrowings over time as payments on the retail notes are
collected. At October 31, 2014, $1,617 million of short-term
securitization borrowings was outstanding under the agreement.
During 2014, the financial services operations issued
$3,014 million and retired $2,565 million of retail note securiti-
zation borrowings. During 2014, the financial services operations
also issued $8,171 million and retired $4,390 million of long-
term borrowings, which were primarily medium-term notes.
OFF-BALANCE-SHEET ARRANGEMENTS
At October 31, 2014, the company had approximately $210
million of guarantees issued primarily to banks outside the
U.S. related to third-party receivables for the retail financing
of John Deere equipment. The company may recover a portion
of any required payments incurred under these agreements from
repossession of the equipment collateralizing the receivables.
The maximum remaining term of the receivables guaranteed at
October 31, 2014 was approximately six years.
AGGREGATE CONTRACTUAL OBLIGATIONS
The payment schedule for the company’s contractual obligations
at October 31, 2014 in millions of dollars is as follows:
Less More
than 2&3 4&5 than
Total 1 year years years 5 years
On-balance-sheet
Debt*
Equipment operations ..... $ 5,091 $ 434 $ 270 $ 775 $ 3,612
Financial services** ....... 31,692 9,962 11,477 6,578 3,675
Total ......................... 36,783 10,396 11,747 7, 3 53 7,287
(continued)
Less More
than 2&3 4&5 than
Total 1 year years years 5 years
Interest relating to debt*** .. $ 4,777 $ 609 $ 1,069 $ 745 $ 2,354
Accounts payable .............. 2,743 2,611 90 39 3
Capital leases .................... 87 39 42 4 2
Off-balance-sheet
Purchase obligations .......... 3,007 2,970 37
Operating leases ................ 371 121 134 70 46
Total .................................. $ 47,76 8 $ 16,746 $ 13,119 $ 8,211 $ 9,692
* Principal payments.
** Securitization borrowings of $4,559 million classified as short-term on the balance
sheet related to the securitization of retail notes are included in this table based on
the expected payment schedule (see Note 18).
*** Includes projected payments related to interest rate swaps.
The previous table does not include unrecognized tax
benefit liabilities of approximately $213 million at October 31,
2014, since the timing of future payments is not reasonably
estimable at this time (see Note 8). For additional information
regarding pension and other postretirement employee benefit
obligations, short-term borrowings, long-term borrowings and
lease obligations, see Notes 7, 18, 20 and 21, respectively.
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 assump-
tions 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.
Sales Incentives
At the time a sale to a dealer is recognized, the company records
an estimate of the future sales incentive costs for allowances and
financing programs that will be due when the dealer sells the
equipment to a retail customer. The estimate is based on
historical data, announced incentive programs, field inventory
levels and retail sales volumes. The final cost of these programs
and the amount of accrual required for a specific sale are fully
determined when the dealer sells the equipment to the retail
customer. This is due to numerous programs available at any
particular time and new programs that may be announced after
the company records the sale. Changes in the mix and types of
programs affect these estimates, which are reviewed quarterly.
The sales incentive accruals at October 31, 2014, 2013
and 2012 were $1,573 million, $1,531 million and $1,453
million, respectively. The increase in 2014 was due primarily to
higher sales incentive accruals related to the U.S. and Canada
operations. The increase in 2013 was due primarily to higher
sales volumes.
The estimation of the sales incentive accrual is impacted
by many assumptions. One of the key assumptions is the
historical percent of sales incentive costs to retail sales
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