Receivables

12 Months Ended

Oct. 31, 2011

Receivables

Receivables

Note 4. Receivables

Retail Notes Receivable

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

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

	2011						2010
	Unrestricted			Securitized			Unrestricted			Securitized
Agriculture and turf equipment – new	$	6,151.5		$	1,105.2		$	5,725.7		$	818.5
Agriculture and turf equipment – used	4,282.4			1,491.6			3,818.2			1,046.0
Construction and forestry equipment – new	661.1			278.7			556.0			356.8
Construction and forestry equipment – used	159.4			84.0			179.5			70.4
Recreational products	3.5						4.6
Total	11,257.9			2,959.5			10,284.0			2,291.7
Unearned finance income	(309.4		)	(36.3		)	(294.7		)	(26.8		)
Retail notes receivable	$	10,948.5		$	2,923.2		$	9,989.3		$	2,264.9

Retail notes acquired by the Company during the years ended October 31, 2011, 2010 and 2009 had an average original term (based on dollar amounts) of 54 months, 55 months and 54 months, respectively. Historically, because of prepayments, the average actual life of retail notes has been considerably shorter than the average original term. The average actual life for retail notes liquidated in 2011, 2010 and 2009 was 34 months, 36 months and 36 months, respectively.

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

	2011				2010
	Unrestricted		Securitized		Unrestricted		Securitized
Due in:
0-12 months	$	3,605.0	$	1,192.4	$	3,333.1	$	1,043.3
13-24 months	2,762.5		806.8		2,542.0		662.4
25-36 months	2,200.4		523.6		1,971.9		390.8
37-48 months	1,558.4		305.4		1,387.0		158.9
49-60 months	928.7		119.0		842.4		34.6
Over 60 months	202.9		12.3		207.6		1.7
Total	$	11,257.9	$	2,959.5	$	10,284.0	$	2,291.7

Company guidelines relating to down payment requirements and contract terms 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 2011, 2010 and 2009, the Company received proceeds from the sales of Receivables of $2 million, $18 million and $34 million, respectively. The Company acts as agent for the buyers in collection and administration for virtually all of the Receivables it has sold. All Receivables sold are collateralized by security agreements on the related equipment. The Company’s maximum exposure under all Receivable and Lease recourse provisions at October 31, 2011, 2010 and 2009 was $3 million, $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. At October 31, 2011, 2010 and 2009, the balance of all Receivables and Leases administered, but not owned by the Company, was $39 million, $80 million and $128 million, respectively.

Finance income is recognized over the lives of the retail notes using the interest method. During 2011, the average effective yield on retail notes held by the Company was approximately 5.5 percent, compared with 6.1 percent in 2010 and 6.8 percent in 2009. Unearned finance income on variable-rate retail notes is adjusted monthly based on fluctuations in the base rate of a specified bank. Net costs incurred in the acquisition of retail notes are deferred and recognized over the expected lives of the retail notes using the interest method.

A portion of the finance income earned by the Company arises from financing of retail sales of John Deere equipment on which finance charges are waived or reduced by John Deere for a period from the date of the retail sale to a specified subsequent date. The Company receives compensation from John Deere equal to competitive market interest rates for periods during which finance charges have been waived or reduced on retail notes and leases. The Company computes the compensation from John Deere for waived or reduced finance charges based on the Company’s estimated funding costs, administrative and operating expenses, credit losses, and required return on equity. The financing rate following the waiver or interest reduction period is not significantly different from the compensation rate from John Deere. The portions of the Company’s finance income earned that were received from John Deere on retail notes containing waiver of finance charges or reduced rates were 20 percent, 24 percent and 25 percent in 2011, 2010 and 2009, respectively. During 2011, 2010 and 2009, the finance income earned from John Deere on retail notes containing waiver of finance charges or reduced rates was $140 million, $164 million and $187 million, respectively.

A deposit equal to one percent of the face amount of certain John Deere agriculture and turf equipment retail notes originating from each dealer is withheld by the Company from that dealer. Any subsequent retail note losses are charged against the withheld deposits. At the end of each calendar quarter, the balance of each dealer’s withholding account in excess of a specified percent (ranging from one-half to three percent based on dealer qualifications) of the total balance outstanding on retail notes originating with that dealer is remitted to the dealer. To the extent that these deposits withheld from the dealer from whom the retail note was acquired cannot absorb a loss on a retail note, it is charged against the Company’s allowance for credit losses. There is no withholding of dealer deposits on John Deere construction and forestry equipment retail notes or recreational product retail notes.

The Company generally 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.

Revolving Charge Accounts Receivable

Revolving charge account income is generated primarily by three revolving credit products: John Deere Financial multi-use, PowerPlanâ and the John Deere Financial Revolving Plan. John Deere Financial multi-use is primarily used by farmers and ranchers to finance day-to-day operating expenses, such as parts and services. Merchants offer John Deere Financial multi-use as an alternative to carrying in-house accounts receivable, and can initially sell existing balances to the Company under a recourse arrangement. John Deere Financial multi-use income includes a discount paid by merchants for transaction processing and support, and finance charges paid by customers on their outstanding account balances. PowerPlanâ is primarily used by construction companies to finance day-to-day operating expenses, such as parts and services, and is otherwise similar to John Deere Financial multi-use.  Merchants offer PowerPlanâ as an alternative to carrying in-house accounts receivable, and can initially sell existing balances to the Company under a recourse arrangement. PowerPlanâ income includes a discount paid by merchants for transaction processing and support, and finance charges paid by customers on their outstanding account balances.  The John Deere Financial Revolving Plan is used primarily by retail customers of John Deere dealers to finance turf and utility equipment. Income includes a discount paid by dealers on most transactions and finance charges paid by customers on their outstanding account balances. Revolving charge accounts receivable at October 31, 2011 and 2010 totaled $2,452 million and $2,288 million, respectively. Generally, account holders may pay the account balance in full at any time, or make payments over a number of months according to a payment schedule.

Wholesale Receivables

The Company also finances wholesale inventories of John Deere agriculture and turf equipment and construction and forestry equipment owned by dealers of those products in the form of wholesale receivables. Wholesale finance income related to these notes is generally recognized monthly based on the daily balance of wholesale receivables outstanding and the applicable effective interest rate. Interest rates vary with a bank base rate, the type of equipment financed and the balance outstanding. Substantially all of wholesale receivables are secured by equipment financed. The average actual life for wholesale receivables is less than 12 months. Wholesale receivables at October 31, 2011 and 2010 totaled $5,212 million and $4,659 million, respectively.

The Company purchases certain wholesale receivables (trade receivables) from John Deere. These trade receivables arise from John Deere’s sales of goods to independent 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 at the time of the sale to the dealer, until payment is received by the Company. Dealers cannot cancel purchases after the equipment is 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 approximate 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. During 2011, 2010 and 2009, the compensation earned from John Deere on trade receivables for waiver of finance charges or reduced rates was $169 million, $161 million and $214 million, respectively.

Financing Leases

The Company leases agriculture and turf equipment and construction and forestry equipment directly to retail customers. At the time of accepting a lease that qualifies as a financing lease, the Company records the gross amount of lease payments receivable, estimated residual value of the leased equipment and unearned finance income. The unearned finance income is equal to the excess of the gross lease receivable plus the estimated residual value over the cost of the equipment. The unearned finance income is recognized as revenue over the lease term using the interest method. Net costs incurred in the acquisition of financing leases are deferred and recognized over the expected lives of the financing leases using the interest method.

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

	2011			2010
Agriculture and turf equipment	$	325.1		$	298.2
Construction and forestry equipment	148.0			144.8
Total	473.1			443.0
Estimated residual values	51.2			39.1
Unearned finance income	(65.6		)	(61.7		)
Financing leases receivable	$	458.7		$	420.4

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

	2011		2010
Due in:
0-12 months	$	188.8	$	175.3
13-24 months	127.9		120.5
25-36 months	84.7		80.7
37-48 months	50.3		42.1
Over 48 months	21.4		24.4
Total	$	473.1	$	443.0

Deposits withheld from John Deere dealers and related losses on financing leases are handled in a manner similar to the procedures for retail notes. As with retail notes, there are no deposits withheld from dealers on financing 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. During 2011, 2010 and 2009, the finance income earned from John Deere on financing leases containing waiver of finance charges or reduced rates was $1 million.

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 cost to sell and is not depreciated.

Operating Loans

Operating loan income is generated primarily by operating loans that are offered through several leading farm input providers, through direct relationships with agricultural producers to finance the acquisition of materials such as seeds and fertilizers or through agribusinesses. Income on this product is generated from finance charges paid by customers on their outstanding account balances. Operating loans receivable totaled $84 million and $239 million at October 31, 2011 and 2010, respectively.

Concentration of Credit Risk

Receivables have significant concentrations of credit risk in the agriculture and turf sector and construction and forestry sector as shown in the previous tables. On a geographic basis, there is not a disproportionate concentration of credit risk in any area. The Company generally retains as collateral a security interest in the goods associated with Receivables other than certain revolving charge accounts.