Leases

9 Months Ended

Aug. 02, 2020

Leases

Leases

(6)  Leases

The Company leases John Deere equipment and a limited amount of non-Deere equipment to retail customers through sales-type, direct financing, and operating leases. Sales-type and direct financing leases are reported in financing leases on the consolidated balance sheet. Operating leases are reported in equipment on operating leases – net on the consolidated balance sheet.

Initial lease terms generally range from less than one year to seven years. Leases offered by the Company may include early termination and renewal options. At the end of a lease, the lessee generally has the option to purchase the underlying equipment for a fixed price or return it to the dealer. If the equipment is returned to the dealer, the dealer also has the option to purchase the equipment or return it to the Company for remarketing.

The Company estimates the residual values for operating leases at lease inception based on several factors, including lease term, expected hours of usage, historical wholesale sale prices, return experience, intended use of the equipment, market dynamics and trends, and dealer residual guarantees. The Company reviews residual value estimates during the lease term and tests the carrying value of its operating lease assets for impairment when events or circumstances necessitate. The depreciation is adjusted on a straight-line basis over the remaining lease term if residual value estimates decline. Lease agreements include usage limits and specifications on machine condition, which allow the Company to assess lessees for excess use or damages to the underlying equipment. During the second quarter of 2020, the Company recorded impairment losses on operating leases of $21.0 million due to higher expected return rates and lower estimated values of used construction equipment. Operating lease impairments are recorded in administrative and operating expenses on the statement of consolidated income.

The Company has elected to combine lease and nonlease components. The nonlease components primarily relate to preventative maintenance and extended warranty agreements financed by the customer. The Company has also elected to report consideration related to sales and value-added taxes net of the related tax expense. Property taxes on leased assets are recorded on a gross basis in lease revenues and administrative and operating expenses on the statement of consolidated income. Variable lease revenues primarily relate to separately invoiced property taxes on leased equipment in certain markets, and late fees.

Due to the significant, negative effects of COVID, the Company provided short-term relief to lessees during the second and third quarters of 2020. The relief, which generally included payment deferrals of three months or less, was provided in regional programs and on a case-by-case basis with customers that were generally current in their payment obligations. The operating leases granted relief, which primarily related to construction accounts, represented approximately 3 percent of the Company’s operating lease portfolio at August 2, 2020. See Note 4 for information related to short-term relief on financing leases.

Lease revenues earned by the Company were as follows (in millions of dollars):

	Three Months Ended		Nine Months Ended
	August 2, 2020		August 2, 2020
Sales-type and direct financing lease revenues	$	12.0	$	34.3
Operating lease revenues		253.5		768.8
Variable lease revenues		4.8		14.7
Total lease revenues	$	270.3	$	817.8

At the time of accepting a lease that qualifies as a sales-type or direct 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 recognized as revenue over the lease term using the interest method.

Sales-type and direct financing lease receivables by product category were as follows (in millions of dollars):

	August 2		November 3
	2020		2019
Agriculture and turf	$	434.3	$	422.7
Construction and forestry		148.3		153.2
Total		582.6		575.9
Guaranteed residual values		203.1		195.1
Unguaranteed residual values		42.6		61.1
Unearned finance income		(84.7)		(80.5)
Financing leases receivable	$	743.6	$	751.6

Scheduled payments, including guaranteed residual values, on sales-type and direct financing lease receivables at August 2, 2020 were as follows (in millions of dollars):

	August 2
	2020
Due in:
Remainder of 2020	$	110.7
2021		320.5
2022		157.0
2023		104.3
2024		62.1
2025		23.8
Later years		7.3
Total	$	785.7

Scheduled payments on financing lease receivables under the previous lease standard at November 3, 2019 were as follows (in millions of dollars):

	November 3
	2019
Due in:
2020	$	225.6
2021		155.2
2022		103.8
2023		58.3
2024		24.2
Later years		8.8
Total	$	575.9

Lease payments from 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 on a straight-line method over the terms of the leases.

The cost of equipment on operating leases by product category was as follows (in millions of dollars):

	August 2		November 3
	2020		2019
Agriculture and turf	$	5,082.8	$	5,109.4
Construction and forestry		1,648.3		1,778.6
Total		6,731.1		6,888.0
Accumulated depreciation		(1,473.9)		(1,357.5)
Equipment on operating leases - net	$	5,257.2	$	5,530.5

The total operating lease residual values at August 2, 2020 and November 3, 2019 were $3,791.7 million and $3,876.5 million, respectively. Certain operating leases are subject to residual value guarantees. The total residual value guarantees were $110.1 million and $65.7 million at August 2, 2020 and November 3, 2019, respectively.

Lease payments for equipment on operating leases at August 2, 2020 were scheduled as follows (in millions of dollars):

	August 2
	2020
Due in:
Remainder of 2020	$	216.5
2021		684.7
2022		405.1
2023		182.1
2024		69.8
2025		6.8
Later years		.8
Total	$	1,565.8

Rental payments for equipment on operating leases under the previous lease standard at November 3, 2019 were scheduled as follows (in millions of dollars):

	November 3
	2019
Due in:
2020	$	738.3
2021		484.4
2022		231.6
2023		92.8
2024		14.1
Later years		.3
Total	$	1,561.5

The Company discusses with lessees and dealers options to purchase the equipment or extend the lease prior to lease maturity. Equipment returned to the Company upon termination of leases is remarketed by the Company. The matured operating lease inventory balances at August 2, 2020 and November 3, 2019 were $100.7 million and $160.8 million, respectively. Matured operating lease inventory is reported in other assets on the consolidated balance sheet. During the second quarter of 2020, the Company recorded impairment losses on matured operating lease inventory of $9.8 million due to lower estimated values of used construction equipment. Impairment losses on matured operating lease inventory are included in administrative and operating expenses on the statement of consolidated income.