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Receivables

9 Months Ended

Aug. 01, 2021

(4) Receivables

Credit Quality

The Company monitors the credit quality of Receivables based on delinquency status. Past due balances of Receivables still accruing finance income represent the total balance held (principal plus accrued interest) with any payment amounts 30 days or more past the contractual payment due date. Non-performing Receivables represent receivables for which the Company has ceased accruing finance income. Generally, when retail notes, revolving charge accounts, and financing lease accounts are 90 days delinquent, accrual of finance income and lease revenue is suspended, and accrued finance income previously recognized is reversed. Generally, when a wholesale receivable becomes 60 days delinquent, the Company determines whether the accrual of finance income on interest-bearing wholesale receivables should be suspended and whether accrued finance income previously recognized should be reversed. Finance income for non-performing Receivables is recognized on a cash basis. Accrual of finance income is generally resumed when the receivable becomes contractually current and collections are reasonably assured.

Receivable balances are written off to the allowance for credit losses when, in the judgment of management, they are considered uncollectible. Generally, when retail notes and financing lease accounts are 120 days delinquent, the collateral is repossessed or the account is designated for litigation, and the estimated uncollectible amount from the customer is written off to the allowance for credit losses. Revolving charge accounts are generally deemed to be uncollectible and written off to the allowance for credit losses when delinquency reaches 120 days. Generally, when a wholesale account becomes 60 days delinquent, the Company determines whether the collateral should be repossessed or the account designated for litigation, and the estimated uncollectible amount is written off to the allowance for credit losses.

Due to the economic effects of COVID, the Company provided short-term payment relief to dealers and retail customers 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. Receivables granted relief since the beginning of the pandemic that remained outstanding at August 1, 2021 represented approximately 3 percent of the Receivables balance. The majority of Receivables granted short-term relief are beyond the deferral period and have either resumed making payments or are reported as delinquent based on the modified payment schedule.

The credit quality analysis of retail notes, financing leases, and revolving charge accounts (collectively, Customer Receivables) at August 1, 2021 was as follows (in millions of dollars):


	Year of Origination
	2021		2020		2019		2018		2017		Prior		Revolving Charge Accounts		Total
Customer Receivables:
Agriculture and turf
Current	$	8,075.6	$	6,472.1	$	3,246.0	$	1,695.6	$	733.9	$	207.4	$	3,570.9	$	24,001.5
30-59 days past due		31.1		42.1		25.1		14.9		5.3		2.7		11.4		132.6
60-89 days past due		11.7		21.4		10.0		4.4		2.6		1.1		3.4		54.6
90+ days past due		.1		.5		.2		.2								1.0
Non-performing		11.0		45.8		31.6		28.3		13.1		14.4		5.7		149.9
Construction and forestry
Current		1,765.6		1,413.7		715.0		281.3		63.2		10.6		91.5		4,340.9
30-59 days past due		28.2		38.0		21.8		8.0		2.7		.7		2.9		102.3
60-89 days past due		11.3		16.1		8.6		4.2		1.3		.3		1.1		42.9
90+ days past due		3.2				4.5										7.7
Non-performing		9.0		44.1		36.0		17.7		7.2		3.8		.8		118.6
Total Customer Receivables	$	9,946.8	$	8,093.8	$	4,098.8	$	2,054.6	$	829.3	$	241.0	$	3,687.7	$	28,952.0

The credit quality analysis of Customer Receivables at November 1, 2020 and August 2, 2020 was as follows (in millions of dollars):


	November 1, 2020						August 2, 2020
	Retail Notes & Financing Leases		Revolving Charge Accounts		Total		Retail Notes & Financing Leases		Revolving Charge Accounts		Total
Customer Receivables:
Agriculture and turf
Current	$	18,341.2	$	3,710.3	$	22,051.5	$	17,188.9	$	3,794.6	$	20,983.5
30-59 days past due		111.4		11.5		122.9		114.3		18.3		132.6
60-89 days past due		47.6		3.5		51.1		59.4		3.5		62.9
90+ days past due		2.0				2.0		3.6				3.6
Non-performing		172.7		5.4		178.1		204.9		7.4		212.3
Construction and forestry
Current		3,759.5		92.3		3,851.8		3,572.8		90.2		3,663.0
30-59 days past due		82.0		2.4		84.4		60.4		2.6		63.0
60-89 days past due		38.8		1.1		39.9		14.6		1.0		15.6
90+ days past due		1.9				1.9
Non-performing		79.5		.9		80.4		83.3		.7		84.0
Total Customer Receivables	$	22,636.6	$	3,827.4	$	26,464.0	$	21,302.2	$	3,918.3	$	25,220.5

The credit quality analysis of wholesale receivables at August 1, 2021 was as follows (in millions of dollars):


	Year of Origination
	2021		2020		2019		2018		2017		Prior		Revolving		Total
Wholesale receivables:
Agriculture and turf
Current	$	260.9	$	106.2	$	30.6	$	12.5	$	3.1	$	.5	$	5,946.0	$	6,359.8
30-59 days past due														10.1		10.1
60-89 days past due														3.8		3.8
90+ days past due														2.8		2.8
Non-performing														4.3		4.3
Construction and forestry
Current		7.5		5.1		3.9		.4						1,332.0		1,348.9
30-59 days past due														1.3		1.3
60-89 days past due														.2		.2
90+ days past due
Non-performing
Total wholesale receivables	$	268.4	$	111.3	$	34.5	$	12.9	$	3.1	$	.5	$	7,300.5	$	7,731.2

The credit quality analysis of wholesale receivables at November 1, 2020 and August 2, 2020 was as follows (in millions of dollars):


	November 1, 2020		August 2, 2020
Wholesale receivables:
Agriculture and turf
Current	$	5,693.7	$	6,905.0
30-59 days past due		3.9		10.9
60-89 days past due		4.4		1.1
90+ days past due		1.1		1.4
Non-performing		4.0		3.8
Construction and forestry
Current		1,385.9		1,499.6
30-59 days past due		.3		3.4
60-89 days past due				.3
90+ days past due				1.1
Non-performing				2.2
Total wholesale receivables	$	7,093.3	$	8,428.8

Allowance for Credit Losses

The allowance for credit losses is an estimate of the credit losses expected over the life of the Company’s Receivable portfolio. The Company measures expected credit losses on a collective basis when similar risk characteristics exist. Risk characteristics considered by the Company include product category, market, geography, credit risk, and remaining duration. Receivables that do not share risk characteristics with other receivables in the portfolio are evaluated on an individual basis. Non-performing Receivables are included in the estimate of expected credit losses.

The Company utilizes loss forecast models, which are selected based on the size and credit risk of the underlying pool of receivables, to estimate expected credit losses. Transition matrix models are used for large and complex Customer Receivable pools, while weighted average remaining maturity (WARM) models are used for smaller and less complex Customer Receivable pools. Transition matrix models, which are used for the majority of the Customer Receivables, estimate credit losses using historical delinquency and default information to assign probabilities that a receivable will pay as contractually scheduled or become delinquent and advance through the various delinquency stages. The model simulates the runoff of the portfolio, month-by-month, over the life of the receivables until the balances are fully repaid or default, using roll rates applied to the outstanding portfolio. The roll rates are applied based on the delinquency status of the customer accounts and are further segmented based on the credit risk and remaining duration of the underlying receivables. Estimated recovery rates are applied to the balance at default to calculate the expected credit losses. The modeled expected credit losses are adjusted based on reasonable and supportable forecasts, which may include economic indicators such as commodity prices, industry equipment sales, unemployment rates, and housing starts. The WARM models apply historical average annual loss rates, adjusted for current and forecasted economic conditions, to the projected portfolio runoff. Expected credit losses on wholesale receivables are based on historical loss rates, adjusted for current economic conditions and reasonable and supportable forecasts. Management reviews each model’s output quarterly, and qualitative adjustments are incorporated as necessary.

Recoveries from freestanding credit enhancements, such as dealer deposits, are not included in the estimate of expected credit losses. Recoveries from dealer deposits are recognized in other income on the statement of consolidated income when the dealer’s withholding account is charged. During the three and nine months ended August 1, 2021, $3.2 million and $9.8 million, respectively, were recorded in other income related to recoveries from freestanding credit enhancements. Prior to the adoption of ASU No. 2016-13, the allowance for credit losses was estimated on probable credit losses incurred after consideration of expected recoveries from freestanding credit enhancements.

An analysis of the allowance for credit losses and investment in Receivables during 2021 was as follows (in millions of dollars):


	Three Months Ended
	August 1, 2021
	Retail Notes		Revolving
	& Financing		Charge		Wholesale		Total
	Leases		Accounts		Receivables		Receivables
Allowance:
Beginning of period balance	$	101.3	$	18.9	$	9.6	$	129.8
Provision (credit) for credit losses*		13.6		(.1)		2.2		15.7
Write-offs		(8.5)		(8.4)		(.2)		(17.1)
Recoveries		3.2		7.6				10.8
Translation adjustments		(.2)		.1		(.1)		(.2)
End of period balance	$	109.4	$	18.1	$	11.5	$	139.0


	Nine Months Ended
	August 1, 2021
	Retail Notes		Revolving
	& Financing		Charge		Wholesale		Total
	Leases		Accounts		Receivables		Receivables
Allowance:
Beginning of period balance	$	76.9	$	42.3	$	9.9	$	129.1
ASU No. 2016-13 adoption (see Note 2)		32.5		(12.2)		(.6)		19.7
Provision (credit) for credit losses*		11.2		(15.9)		2.1		(2.6)
Write-offs		(19.7)		(22.7)		(.3)		(42.7)
Recoveries		8.1		26.6				34.7
Translation adjustments		.4				.4		.8
End of period balance	$	109.4	$	18.1	$	11.5	$	139.0

Receivables:
End of period balance	$	25,264.3	$	3,687.7	$	7,731.2	$	36,683.2

*Excludes provision for credit losses on unfunded commitments of $2.1 million for the nine months ended August 1, 2021, which is recorded in accounts payable and accrued expenses on the consolidated balance sheet. There was no change in the provision for credit losses on unfunded commitments for the third quarter of 2021.

The allowance for credit losses on Receivables increased $9.2 million in the third quarter of 2021, primarily due to growth in the retail notes and financing leases portfolio.

For the first nine months of 2021, the allowance for credit losses increased $9.9 million, primarily due to the adoption of ASU No. 2016-13 and growth in the retail notes and financing leases portfolio. These increases were partially offset by a reduction in the allowance on revolving charge accounts and a lower allowance on construction and forestry retail notes and financing leases. The allowance on revolving charge accounts was favorably impacted by strong payment performance due to continued improvements in the agriculture market, while expected credit losses on construction and forestry retail notes and financing leases decreased due to improving market conditions and better than expected performance of accounts granted payment relief due to the economic effects of COVID.

An analysis of the allowance for credit losses and investment in Receivables during 2020 was as follows (in millions of dollars):


	Three Months Ended
	August 2, 2020
	Retail Notes		Revolving
	& Financing		Charge		Wholesale		Total
	Leases		Accounts		Receivables		Receivables
Allowance:
Beginning of period balance	$	88.4	$	42.3	$	9.1	$	139.8
Provision (credit) for credit losses		3.3		13.2		(.5)		16.0
Write-offs		(5.5)		(21.3)		(.1)		(26.9)
Recoveries		2.4		8.1		.4		10.9
Translation adjustments		.4				.4		.8
End of period balance	$	89.0	$	42.3	$	9.3	$	140.6


	Nine Months Ended
	August 2, 2020
	Retail Notes		Revolving
	& Financing		Charge		Wholesale		Total
	Leases		Accounts		Receivables		Receivables
Allowance:
Beginning of period balance	$	53.7	$	39.3	$	7.6	$	100.6
Provision (credit) for credit losses		70.5		31.3		(1.0)		100.8
Write-offs		(39.6)		(50.1)		(.9)		(90.6)
Recoveries		4.5		21.8		1.3		27.6
Translation adjustments		(.1)				2.3		2.2
End of period balance	$	89.0	$	42.3	$	9.3	$	140.6

Receivables:
End of period balance	$	21,302.2	$	3,918.3	$	8,428.8	$	33,649.3

The allowance for credit losses increased $40.0 million in the first nine months of 2020 primarily due to the negative economic effects of COVID and other macroeconomic issues, which significantly affected certain retail borrowers, particularly of construction equipment.

Troubled Debt Restructurings

A troubled debt restructuring is generally the modification of debt in which a creditor grants a concession it would not otherwise consider to a debtor that is experiencing financial difficulties. These modifications may include a reduction of the stated interest rate, an extension of the maturity date, a reduction of the face amount or maturity amount of the debt, or a reduction of accrued interest. During the first nine months of 2021, the Company identified 287 Receivable contracts, primarily retail notes, as troubled debt restructurings with aggregate balances of $10.3 million pre-modification and $9.4 million post-modification. During the first nine months of 2020, there were 328 Receivable contracts, primarily retail notes, with aggregate balances of $12.6 million pre-modification and $11.6 million post-modification. The short-term relief related to COVID mentioned on page 11 did not meet the definition of a troubled debt restructuring. During these same periods, there were no significant troubled debt restructurings that subsequently defaulted and were written off. At August 1, 2021, the Company had no commitments to provide additional financing to customers whose accounts were modified in troubled debt restructurings.