Leases

6 Months Ended

May 02, 2021

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.

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

	Three Months Ended				Six Months Ended
	May 2, 2021		May 3, 2020		May 2, 2021		May 3, 2020
Sales-type and direct financing lease revenues	$	11.3	$	10.7	$	23.1	$	22.3
Operating lease revenues		239.8		256.8		486.4		515.3
Variable lease revenues		5.1		5.1		10.3		9.9
Total lease revenues	$	256.2	$	272.6	$	519.8	$	547.5

Variable lease revenues reported above primarily relate to separately invoiced property taxes on leased equipment in certain markets and late fees.

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

	May 2		November 1		May 3
	2021		2020		2020
Agriculture and turf	$	5,017.0	$	5,210.4	$	5,112.6
Construction and forestry		1,490.4		1,595.3		1,742.9
Total		6,507.4		6,805.7		6,855.5
Accumulated depreciation		(1,498.5)		(1,507.9)		(1,433.9)
Equipment on operating leases - net	$	5,008.9	$	5,297.8	$	5,421.6

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 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 are revised. There were no impairment losses on operating leases recorded during the six months ended May 2, 2021. 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 total operating lease residual values at May 2, 2021, November 1, 2020, and May 3, 2020 were $3,651.2 million, $3,826.3 million, and $3,859.9 million, respectively. Certain operating leases are subject to residual value guarantees. The total residual value guarantees were $201.9 million, $141.0 million, and $76.5 million at May 2, 2021, November 1, 2020, and May 3, 2020, respectively. The increase in residual value guarantees is primarily due to guarantees provided by John Deere dealers, which generally provide a first-loss residual value guarantee on operating lease originations effective after January 2020.

The Company discusses with lessees and dealers options to purchase the equipment or extend the lease prior to operating lease maturity. Equipment returned to the Company upon termination of leases is remarketed by the Company. The matured operating lease inventory balances at May 2, 2021, November 1, 2020, and May 3, 2020 were $39.5 million, $64.5 million, and $100.7 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. There were no impairment losses recorded on matured operating lease inventory during the six months ended May 2, 2021. Impairment losses on matured operating lease inventory are included in administrative and operating expenses on the statement of consolidated income.

Due to the economic effects of COVID, the Company provided short-term payment relief to lessees during 2020, and to a much lesser extent in 2021. The relief 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 since the beginning of the pandemic that remained outstanding at May 2, 2021 represented approximately 2 percent of the Company’s operating lease portfolio.