UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
or
For the transition period from ____ to ____
Commission file no:
JOHN DEERE CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
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Telephone Number: ( |
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol | Name of each exchange on which registered | ||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
☒ | Smaller reporting company | ||
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
At August 1, 2021,
The registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with certain reduced disclosures as permitted by those instructions.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
John Deere Capital Corporation and Subsidiaries
Statement of Consolidated Income
(Unaudited)
(in millions)
Three Months Ended | Nine Months Ended |
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August 1 | August 2 | August 1 | August 2 |
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| 2021 |
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Revenues | |||||||||||||
Finance income earned on retail notes | $ | | $ | | $ | | $ | | |||||
Revolving charge account income |
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Finance income earned on wholesale receivables |
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Lease revenues |
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Other income |
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Total revenues |
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Expenses | |||||||||||||
Interest expense |
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Operating expenses: | |||||||||||||
Administrative and operating expenses |
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Fees paid to John Deere |
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Provision (credit) for credit losses |
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Depreciation of equipment on operating leases |
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Total operating expenses |
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Total expenses |
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Income of consolidated group before income taxes |
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Provision for income taxes |
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Income of consolidated group |
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Equity in income of unconsolidated affiliate |
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Net income |
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Less: Net income attributable to noncontrolling interests | | | | ||||||||||
Net income attributable to the Company | $ | | $ | | $ | | $ | |
See Condensed Notes to Interim Consolidated Financial Statements.
2
John Deere Capital Corporation and Subsidiaries
Statement of Consolidated Comprehensive Income
(Unaudited)
(in millions)
Three Months Ended | Nine Months Ended |
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August 1 | August 2 | August 1 | August 2 |
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| 2021 |
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| 2020 |
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Net income | $ | | $ | | $ | | $ | | |||||
Other comprehensive income (loss), net of income taxes | |||||||||||||
Cumulative translation adjustment |
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Unrealized gain (loss) on derivatives |
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Unrealized gain (loss) on debt securities | ( | | ( | ||||||||||
Other comprehensive income (loss), net of income taxes |
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Comprehensive income of consolidated group |
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Less: Comprehensive income attributable to noncontrolling interests | | | | ||||||||||
Comprehensive income attributable to the Company | $ | | $ | | $ | | $ | |
See Condensed Notes to Interim Consolidated Financial Statements.
3
John Deere Capital Corporation and Subsidiaries
Consolidated Balance Sheet
(Unaudited)
(in millions)
August 1 | November 1 | August 2 |
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2021 | 2020 | 2020 |
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Assets |
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Cash and cash equivalents | $ | | $ | | $ | | ||||
Marketable securities | | | | |||||||
Receivables: | ||||||||||
Retail notes |
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Retail notes securitized |
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Revolving charge accounts |
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Wholesale receivables |
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Financing leases |
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Total receivables |
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Allowance for credit losses |
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Total receivables – net |
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Other receivables |
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Receivables from John Deere |
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Equipment on operating leases – net |
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Notes receivable from John Deere | | | | |||||||
Investment in unconsolidated affiliate |
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Deferred income taxes |
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Other assets |
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Total Assets | $ | | $ | | $ | | ||||
Liabilities and Stockholder’s Equity | ||||||||||
Short-term borrowings: | ||||||||||
Commercial paper and other notes payable | $ | | $ | | $ | | ||||
Securitization borrowings |
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John Deere |
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Current maturities of long-term borrowings |
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Total short-term borrowings |
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Other payables to John Deere |
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Accounts payable and accrued expenses |
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Deposits withheld from dealers and merchants |
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Deferred income taxes |
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Long-term borrowings |
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Total liabilities |
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Commitments and contingencies (Note 9) | ||||||||||
Stockholder’s equity: | ||||||||||
Common stock, without par value (issued and outstanding – |
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Retained earnings |
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Accumulated other comprehensive loss |
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Total Company stockholder’s equity |
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Noncontrolling interests |
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Total stockholder’s equity |
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Total Liabilities and Stockholder’s Equity | $ | | $ | | $ | |
See Condensed Notes to Interim Consolidated Financial Statements.
4
John Deere Capital Corporation and Subsidiaries
Statement of Consolidated Cash Flows
(Unaudited)
(in millions)
| Nine Months Ended | ||||||
August 1 | August 2 | ||||||
| 2021 |
| 2020 |
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Cash Flows from Operating Activities: | |||||||
Net income | $ | | $ | | |||
Adjustments to reconcile net income to net cash | |||||||
provided by operating activities: | |||||||
Provision (credit) for credit losses |
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Provision for depreciation and amortization |
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Credit for deferred income taxes |
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Impairment charges | | ||||||
Undistributed earnings of unconsolidated affiliate |
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Change in accounts payable and accrued expenses |
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Change in accrued income taxes payable/receivable |
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Other |
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Net cash provided by operating activities |
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Cash Flows from Investing Activities: | |||||||
Cost of receivables acquired (excluding wholesale) |
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Collections of receivables (excluding wholesale) |
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(Increase) decrease in wholesale receivables – net |
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Cost of equipment on operating leases acquired |
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Proceeds from sales of equipment on operating leases |
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Cost of notes receivable acquired from John Deere | ( | ( | |||||
Collections of notes receivable from John Deere | | | |||||
Other |
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Net cash used for investing activities |
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Cash Flows from Financing Activities: | |||||||
Increase (decrease) in commercial paper and other notes payable – net |
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Increase in securitization borrowings – net |
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Increase in payable to John Deere – net |
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Proceeds from issuance of long-term borrowings |
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Payments of long-term borrowings |
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Dividends paid |
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Debt issuance costs |
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Net cash provided by financing activities |
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Effect of exchange rate changes on cash, cash equivalents, and restricted cash |
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Net increase in cash, cash equivalents, and restricted cash |
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Cash, cash equivalents, and restricted cash at beginning of period * |
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Cash, cash equivalents, and restricted cash at end of period * | $ | | $ | |
* At August 1, 2021, November 1, 2020, August 2, 2020, and November 3, 2019, restricted cash, which is reported in other assets on the consolidated balance sheet, was $
See Condensed Notes to Interim Consolidated Financial Statements.
5
John Deere Capital Corporation and Subsidiaries
Statement of Changes in Consolidated Stockholder’s Equity
For the Three and Nine Months Ended August 1, 2021 and August 2, 2020
(Unaudited)
(in millions)
Company Stockholder |
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Accumulated | ||||||||||||||||
Total | Other | Non- | ||||||||||||||
Stockholder’s | Common | Retained | Comprehensive | Controlling | ||||||||||||
Equity | Stock | Earnings | Income (Loss) | Interests |
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Three Months Ended August 2, 2020 | ||||||||||||||||
Balance May 3, 2020 | $ | | $ | | $ | | $ | ( | $ | | ||||||
Net income | | | ||||||||||||||
Other comprehensive income | | | ||||||||||||||
Dividends declared | ( | ( | ||||||||||||||
Balance August 2, 2020 | $ | | $ | | $ | | $ | ( | $ | | ||||||
Nine Months Ended August 2, 2020 | ||||||||||||||||
Balance November 3, 2019 | $ | | $ | | $ | | $ | ( | $ | | ||||||
Net income |
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Other comprehensive income |
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Dividends declared |
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Balance August 2, 2020 | $ | | $ | | $ | | $ | ( | $ | | ||||||
Three Months Ended August 1, 2021 | ||||||||||||||||
Balance May 2, 2021 | $ | | $ | | $ | | $ | ( | $ | | ||||||
Net income | | | | |||||||||||||
Other comprehensive loss | ( | ( | ||||||||||||||
Dividends declared | ( | ( | ||||||||||||||
Balance August 1, 2021 | $ | | $ | | $ | | $ | ( | $ | | ||||||
Nine Months Ended August 1, 2021 | ||||||||||||||||
Balance November 1, 2020 | $ | | $ | | $ | | $ | ( | $ | | ||||||
ASU No. 2016-13 adoption (see Note 2) | ( | ( | ||||||||||||||
Net income |
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Other comprehensive income |
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Dividends declared |
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Balance August 1, 2021 | $ | | $ | | $ | | $ | ( | $ | |
See Condensed Notes to Interim Consolidated Financial Statements.
6
John Deere Capital Corporation and Subsidiaries
Condensed Notes to Interim Consolidated Financial Statements
(Unaudited)
(1) Organization and Consolidation
John Deere Capital Corporation (Capital Corporation) and its subsidiaries are collectively called the Company. John Deere Financial Services, Inc. (JDFS), a wholly-owned finance holding subsidiary of Deere & Company, owns all of the outstanding common stock of Capital Corporation. The Company provides and administers financing for retail purchases of new equipment manufactured by Deere & Company’s production and precision agriculture operations, small agriculture and turf operations, and construction and forestry operations and used equipment taken in trade for this equipment. The Company generally purchases retail installment sales and loan contracts (retail notes) from Deere & Company and its wholly-owned subsidiaries (collectively called John Deere). John Deere generally acquires these retail notes through John Deere retail dealers. The Company also purchases and finances a limited amount of non-Deere retail notes. The Company also finances and services revolving charge accounts, in most cases acquired from and offered through merchants in the agriculture and turf and construction and forestry markets (revolving charge accounts). The Company also provides wholesale financing for inventories of John Deere agriculture and turf and construction and forestry equipment for dealers of those products (wholesale receivables). In addition, the Company leases John Deere equipment and a limited amount of non-Deere equipment to retail customers (financing and operating leases). The Company also offers credit enhanced international export financing to select customers and dealers, which generally involves John Deere products. Retail notes, revolving charge accounts, wholesale receivables, and financing leases are collectively called “Receivables.” Receivables and equipment on operating leases are collectively called “Receivables and Leases.” The Company generally secures its Receivables, other than certain revolving charge accounts, by retaining as collateral a security interest in the goods associated with those Receivables or with the use of other collateral.
Beginning in fiscal year 2021, John Deere implemented a new operating model and reporting structure. With this change, John Deere’s agriculture and turf operations were divided into two new segments: production and precision agriculture and small agriculture and turf. There were no changes to John Deere’s construction and forestry or financial services segments. Receivables and Leases managed by the Company continue to be evaluated by market (agriculture and turf and construction and forestry). References to agriculture and turf include both production and precision agriculture and small agriculture and turf.
The Company has prepared its interim consolidated financial statements, without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the U.S. have been condensed or omitted as permitted by such rules and regulations. All adjustments, consisting of normal recurring adjustments, have been included. Management believes the disclosures are adequate to present fairly the financial position, results of operations, and cash flows at the dates and for the periods presented. It is suggested these interim consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto appearing in the Company’s latest annual report on Form 10-K. Results for interim periods are not necessarily indicative of those to be expected for the fiscal year.
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts and related disclosures. The COVID pandemic has resulted in uncertainties in the Company’s business, which may result in actual outcomes differing from those estimates.
The Company uses a 52/53 week fiscal year with quarters ending on the last Sunday in the reporting period. The third quarter ends for fiscal year 2021 and 2020 were August 1, 2021 and August 2, 2020, respectively. Both third quarters contained
7
(2) New Accounting Standards
New Accounting Standards Adopted
In the first quarter of 2021, the Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU)
The Company holds deposits from dealers (dealer deposits), which are recorded in deposits withheld from dealers and merchants, to absorb certain credit losses. Prior to adopting this ASU, the allowance for credit losses was estimated on probable credit losses incurred after consideration of recoveries from dealer deposits. The ASU considers dealer deposits and certain credit insurance contracts as freestanding credit enhancements. As a result, after adoption, credit losses recovered from dealer deposits and certain credit insurance contracts are presented in other income and no longer as part of the allowance for credit losses or the provision for credit losses. The ASU also modified the treatment of the estimated write-off on delinquent receivables by no longer including the estimated benefit of charges to the dealer deposits in the write-off amount (see Note 4). This change increases the estimated write-offs on delinquent financing receivables with the benefit of credit losses recovered from dealer deposits presented in other income. This benefit, in both situations, is recorded when the dealer deposits are charged and no longer based on estimated recoveries.
The effects of adopting the ASU on the consolidated balance sheet were as follows (in millions of dollars):
November 1 | Cumulative Effect | November 2 | |||||||
2020 | from Adoption | 2020 | |||||||
Assets | |||||||||
Allowance for credit losses | $ | ( | $ | ( | $ | ( | |||
Deferred income taxes | | | | ||||||
Liabilities | |||||||||
Accounts payable and accrued expenses | $ | | $ | ( | $ | | |||
Deposits withheld from dealers and merchants | | | | ||||||
Deferred income taxes | | ( | | ||||||
Stockholder’s equity | |||||||||
Retained earnings | $ | | $ | ( | $ | |
Note 4 contains additional disclosures as well as the Company’s updated allowance for credit losses accounting policy.
The Company also adopted the following standards in 2021, none of which had a material effect on the Company’s consolidated financial statements:
Accounting Standards Updates
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which amends ASC 350-40, Intangibles – Goodwill and Other – Internal-Use Software | |
Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments | |
Reference Rate Reform (Topic 848): Scope |
8
New Accounting Standards to be Adopted
The Company will adopt the following standards in future periods, none of which are expected to have a material effect on the Company’s consolidated financial statements:
Accounting Standards Updates
Simplifying the Accounting for Income Taxes, which amends ASC 740, Income Taxes | |
Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable Fees and Other Costs |
(3) Other Comprehensive Income Items
The after-tax changes in accumulated other comprehensive income (loss) were as follows (in millions of dollars):
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Cumulative | Gain (Loss) | Gain (Loss) | Other |
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Translation | on | on | Comprehensive |
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Adjustment | Derivatives | Debt Securities | Income (Loss) |
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Balance November 3, 2019 | $ | ( | $ | ( | $ | ( | $ | ( | |||||
Other comprehensive income (loss) items before reclassification |
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Amounts reclassified from accumulated other comprehensive income |
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Net current period other comprehensive income (loss) |
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Balance August 2, 2020 | $ | ( | $ | ( | $ | ( | $ | ( | |||||
Balance November 1, 2020 | $ | ( | $ | ( | $ | ( | $ | ( | |||||
Other comprehensive income (loss) items before reclassification |
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Amounts reclassified from accumulated other comprehensive income |
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Net current period other comprehensive income (loss) |
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Balance August 1, 2021 | $ | ( | $ | ( | $ | ( | $ | ( |
9
Amounts recorded in and reclassifications out of other comprehensive income (loss), and the income tax effects were as follows (in millions of dollars):
Before | Tax | After |
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Tax | (Expense) | Tax |
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Three Months Ended August 1, 2021 | Amount | Credit | Amount |
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Cumulative translation adjustment |
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Unrealized gain (loss) on derivatives: | ||||||||||
Unrealized hedging gain (loss) |
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Reclassification of realized (gain) loss to: | ||||||||||
Interest rate contracts – Interest expense |
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Net unrealized gain (loss) on derivatives |
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Unrealized gain (loss) on debt securities: | ||||||||||
Unrealized holding gain (loss) | ( | ( | ||||||||
Total other comprehensive income (loss) | $ | ( | $ | ( | $ | ( | ||||
Nine Months Ended August 1, 2021 | ||||||||||
Cumulative translation adjustment | $ | | $ | | ||||||
Unrealized gain (loss) on derivatives: | ||||||||||
Unrealized hedging gain (loss) |
| ( | $ | |
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Reclassification of realized (gain) loss to: | ||||||||||
Interest rate contracts – Interest expense |
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Net unrealized gain (loss) on derivatives |
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Unrealized gain (loss) on debt securities: | ||||||||||
Unrealized holding gain (loss) | ( | | ( | |||||||
Total other comprehensive income (loss) | $ | | $ | ( | $ | | ||||
Three Months Ended August 2, 2020 | ||||||||||
Cumulative translation adjustment | $ | | $ | | ||||||
Unrealized gain (loss) on derivatives: | ||||||||||
Unrealized hedging gain (loss) |
| ( | $ | |
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Reclassification of realized (gain) loss to: | ||||||||||
Interest rate contracts – Interest expense |
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Net unrealized gain (loss) on derivatives |
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Unrealized gain (loss) on debt securities: | ||||||||||
Unrealized holding gain (loss) | | | ||||||||
Total other comprehensive income (loss) | $ | | $ | ( | $ | | ||||
Nine Months Ended August 2, 2020 | ||||||||||
Cumulative translation adjustment | $ | | $ | | ||||||
Unrealized gain (loss) on derivatives: | ||||||||||
Unrealized hedging gain (loss) |
| ( | $ | |
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Reclassification of realized (gain) loss to: | ||||||||||
Interest rate contracts – Interest expense |
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Net unrealized gain (loss) on derivatives |
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Unrealized gain (loss) on debt securities: | ||||||||||
Unrealized holding gain (loss) | ( | | ||||||||
Total other comprehensive income (loss) | $ | | $ | | $ | |
10
(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
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
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
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: |
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Agriculture and turf | ||||||||||||||||||||||||
Current | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||
30-59 days past due | | | | | | | | | ||||||||||||||||
60-89 days past due | | | | | | | | | ||||||||||||||||
90+ days past due | | | | | | |||||||||||||||||||
Non-performing | | | | | | | | | ||||||||||||||||
Construction and forestry | ||||||||||||||||||||||||
Current | | | | | | | | | ||||||||||||||||
30-59 days past due | | | | | | | | | ||||||||||||||||
60-89 days past due | | | | | | | | | ||||||||||||||||
90+ days past due | | | | |||||||||||||||||||||
Non-performing | | | | | | | | | ||||||||||||||||
Total Customer Receivables | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | |
11
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: |
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Agriculture and turf | ||||||||||||||||||
Current | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
30-59 days past due | | | | | | | ||||||||||||
60-89 days past due | | | | | | | ||||||||||||
90+ days past due | | | | | ||||||||||||||
Non-performing | | | | | | | ||||||||||||
Construction and forestry | ||||||||||||||||||
Current | | | | | | | ||||||||||||
30-59 days past due | | | | | | | ||||||||||||
60-89 days past due | | | | | | | ||||||||||||
90+ days past due | | | ||||||||||||||||
Non-performing | | | | | | | ||||||||||||
Total Customer Receivables | $ | | $ | | $ | | $ | | $ | | $ | |
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: |
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Agriculture and turf | ||||||||||||||||||||||||
Current | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||
30-59 days past due | | | ||||||||||||||||||||||
60-89 days past due | | | ||||||||||||||||||||||
90+ days past due | | | ||||||||||||||||||||||
Non-performing | | | ||||||||||||||||||||||
Construction and forestry | ||||||||||||||||||||||||
Current | | | | | | | ||||||||||||||||||
30-59 days past due | | | ||||||||||||||||||||||
60-89 days past due | | | ||||||||||||||||||||||
90+ days past due | ||||||||||||||||||||||||
Non-performing | ||||||||||||||||||||||||
Total wholesale receivables | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | |
12
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 | $ | | $ | | ||
30-59 days past due | | | ||||
60-89 days past due | | | ||||
90+ days past due | | | ||||
Non-performing | | | ||||
Construction and forestry | ||||||
Current | | | ||||
30-59 days past due | | | ||||
60-89 days past due | | |||||
90+ days past due | | |||||
Non-performing | | |||||
Total wholesale receivables | $ | | $ | |
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, $
13
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 | $ | | $ | | $ | | $ | | |||||
Provision (credit) for credit losses* |
| | ( | | | ||||||||
Write-offs |
| ( | ( | ( | ( | ||||||||
Recoveries |
| | | | |||||||||
Translation adjustments |
| ( | | ( | ( | ||||||||
End of period balance | $ | | $ | | $ | | $ | |
Nine Months Ended |
| ||||||||||||
August 1, 2021 |
| ||||||||||||
Retail Notes | Revolving |
| |||||||||||
& Financing | Charge | Wholesale | Total |
| |||||||||
Leases | Accounts | Receivables | Receivables |
| |||||||||
Allowance: |
|
|
|
| |||||||||
Beginning of period balance | $ | | $ | | $ | | $ | | |||||
ASU No. 2016-13 adoption (see Note 2) | | ( | ( | | |||||||||
Provision (credit) for credit losses* |
| | ( | | ( | ||||||||
Write-offs |
| ( | ( | ( | ( | ||||||||
Recoveries |
| | | | |||||||||
Translation adjustments |
| | | | |||||||||
End of period balance | $ | | $ | | $ | | $ | | |||||
Receivables: | |||||||||||||
End of period balance | $ | | $ | | $ | | $ | |
*Excludes provision for credit losses on unfunded commitments of $
The allowance for credit losses on Receivables increased $
For the first nine months of 2021, the allowance for credit losses increased $
14
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 | $ | | $ | | $ | | $ | | |||||
Provision (credit) for credit losses |
| | | ( |
| | |||||||
Write-offs |
| ( | ( | ( |
| ( | |||||||
Recoveries |
| | | |
| | |||||||
Translation adjustments |
| | |
| | ||||||||
End of period balance | $ | | $ | | $ | | $ | |
Nine Months Ended |
| ||||||||||||
August 2, 2020 |
| ||||||||||||
Retail Notes | Revolving |
| |||||||||||
& Financing | Charge | Wholesale | Total |
| |||||||||
Leases | Accounts | Receivables | Receivables |
| |||||||||
Allowance: |
|
|
|
| |||||||||
Beginning of period balance | $ | | $ | | $ | | $ | | |||||
Provision (credit) for credit losses |
| | | ( |
| | |||||||
Write-offs |
| ( | ( | ( |
| ( | |||||||
Recoveries |
| | | |
| | |||||||
Translation adjustments |
| ( | |
| | ||||||||
End of period balance | $ | | $ | | $ | | $ | | |||||
Receivables: | |||||||||||||
End of period balance | $ | | $ | | $ | | $ | |
The allowance for credit losses increased $
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
15
(5) Securitization of Receivables
The Company, as a part of its overall funding strategy, periodically transfers certain Receivables (retail notes) into variable interest entities (VIEs) that are special purpose entities (SPEs), or non-VIE banking operations, as part of its asset-backed securities programs (securitizations). The structure of these transactions is such that the transfer of the retail notes does not meet the accounting criteria for sales of receivables, and is, therefore, accounted for as a secured borrowing. SPEs utilized in securitizations of retail notes differ from other entities included in the Company’s consolidated statements because the assets they hold are legally isolated. Use of the assets held by the SPEs or the non-VIEs is restricted by terms of the documents governing the securitization transactions.
In these securitizations, the retail notes are transferred to certain SPEs or to non-VIE banking operations, which in turn issue debt to investors. The debt securities issued to the third-party investors result in secured borrowings, which are recorded as “Securitization borrowings” on the consolidated balance sheet. The securitized retail notes are recorded as “Retail notes securitized” on the consolidated balance sheet. The total restricted assets on the consolidated balance sheet related to these securitizations include the retail notes securitized less an allowance for credit losses, and other assets primarily representing restricted cash. Restricted cash results from contractual requirements in securitized borrowing arrangements and serves as a credit enhancement. The restricted cash is used to satisfy payment deficiencies, if any, in the required payments on secured borrowings. The balance of restricted cash is contractually stipulated and is either a fixed amount as determined by the initial balance of the retail notes securitized or a fixed percentage of the outstanding balance of the retail notes securitized. The restriction is removed either after all secured borrowing payments are made or proportionally as these receivables are collected and borrowing obligations reduced. For those securitizations in which retail notes are transferred into SPEs, the SPEs supporting the secured borrowings are consolidated unless the Company does not have both the power to direct the activities that most significantly impact the SPEs’ economic performance and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the SPEs. No additional support to these SPEs beyond what was previously contractually required has been provided during the reporting periods.
In certain securitizations, the Company consolidates the SPEs since it has both the power to direct the activities that most significantly impact the SPEs’ economic performance through its role as servicer of all the Receivables held by the SPEs and the obligation through variable interests in the SPEs to absorb losses or receive benefits that could potentially be significant to the SPEs. The restricted assets (retail notes securitized, allowance for credit losses, and other assets) of the consolidated SPEs totaled $
In certain securitizations, the Company transfers retail notes to non-VIE banking operations, which are not consolidated since the Company does not have a controlling interest in the entities. The Company’s carrying values and interests related to the securitizations with the unconsolidated non-VIEs were restricted assets (retail notes securitized, allowance for credit losses, and other assets) of $
16
In certain securitizations, the Company transfers retail notes into bank-sponsored, multi-seller, commercial paper conduits, which are SPEs that are not consolidated. The Company does not service a significant portion of the conduits’ receivables, and therefore, does not have the power to direct the activities that most significantly impact the conduits’ economic performance. These conduits provide a funding source to the Company (as well as other transferors into the conduit) as they fund the retail notes through the issuance of commercial paper. The Company’s carrying values and variable interest related to these conduits were restricted assets (retail notes securitized, allowance for credit losses, and other assets) of $
The Company’s carrying amount of the liabilities to the unconsolidated conduits, compared to the maximum exposure to loss related to these conduits, which would only be incurred in the event of a complete loss on the restricted assets was as follows (in millions of dollars):
August 1 | ||||||||||
2021 | ||||||||||
Carrying value of liabilities | $ | | ||||||||
Maximum exposure to loss |
| |
The total assets of unconsolidated VIEs related to securitizations were approximately $
The components of consolidated restricted assets related to secured borrowings in securitization transactions were as follows (in millions of dollars):
August 1 | November 1 | August 2 |
| |||||||
2021 | 2020 | 2020 |
| |||||||
Retail notes securitized | $ | | $ | | $ | | ||||
Allowance for credit losses |
| ( |
| ( |
| ( | ||||
Other assets |
| |
| |
| | ||||
Total restricted securitized assets | $ | | $ | | $ | |
The components of consolidated secured borrowings and other liabilities related to securitizations were as follows (in millions of dollars):
August 1 | November 1 | August 2 |
| |||||||
2021 | 2020 | 2020 |
| |||||||
Securitization borrowings | $ | | $ | | $ | | ||||
Accrued interest on borrowings |
| |
| |
| | ||||
Total liabilities related to restricted securitized assets | $ | | $ | | $ | |
The secured borrowings related to these restricted securitized retail notes are obligations that are payable as the retail notes are liquidated. Repayment of the secured borrowings depends primarily on cash flows generated by the restricted assets. Due to the Company’s short-term credit rating, cash collections from these restricted assets are not required to be placed into a segregated collection account until immediately prior to the time payment is required to the secured creditors. At August 1, 2021, the maximum remaining term of all restricted securitized retail notes was approximately
17
(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 | Nine Months Ended | |||||||||||
August 1 | August 2 | August 1 | August 2 | |||||||||
2021 | 2020 | 2021 | 2020 | |||||||||
Sales-type and direct financing lease revenues | $ | | $ | | $ | | $ | | ||||
Operating lease revenues | | | | | ||||||||
Variable lease revenues |
| |
| |
| |
| | ||||
Total lease revenues | $ | | $ | | $ | | $ | |
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):
August 1 | November 1 | August 2 | |||||||
2021 | 2020 | 2020 | |||||||
Agriculture and turf | $ | | $ | | $ | | |||
Construction and forestry | |
| |
| | ||||
Total | | | | ||||||
Accumulated depreciation |
| ( | ( | ( | |||||
Equipment on operating leases - net | $ | | $ | | $ | |
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
The total operating lease residual values at August 1, 2021, November 1, 2020, and August 2, 2020 were $
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 August 1, 2021, November 1, 2020, and August 2, 2020 were $
18
matured operating lease inventory were 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 August 1, 2021 represented approximately
(7) Notes Receivable from John Deere
The Company makes loans to affiliated companies. The Company receives interest from John Deere at competitive market interest rates. The lending agreements mature over the next
The Company had notes receivable from John Deere with the following affiliated companies as follows (in millions of dollars):
August 1 | November 1 | August 2 | ||||||||
2021 | 2020 | 2020 | ||||||||
Limited Liability Company John Deere Financial | $ | | $ | | $ | | ||||
Banco John Deere S.A. | |
| |
| | |||||
Total Notes Receivable from John Deere | $ | | $ | | $ | |
(8) Long-Term Borrowings
Long-term borrowings of the Company at August 1, 2021, November 1, 2020, and August 2, 2020 consisted of the following (in millions of dollars):
| August 1 | November 1 | August 2 | ||||||
| 2021 | 2020 | 2020 | ||||||
Senior Debt: |
| ||||||||
Medium-term notes |
| $ | | $ | | $ | | ||
Other notes | | | | ||||||
Total senior debt | | | | ||||||
Unamortized debt discount and debt issuance costs | ( | ( | ( | ||||||
Total | $ | | $ | | $ | |
The medium-term notes in the table above include fair value adjustments related to interest rate swaps. The principal balances of the medium-term notes were $
(9) Commitments and Contingencies
At August 1, 2021, John Deere Financial Inc., the John Deere finance subsidiary in Canada, had $
Capital Corporation has a variable interest in John Deere Canada Funding Inc. (JDCFI), a wholly-owned subsidiary of John Deere Financial Inc., which was created as a VIE to issue debt in public markets to fund the operations of affiliated companies in Canada. Capital Corporation has a variable interest in JDCFI because it provides guarantees for all debt issued by JDCFI, however it does not consolidate JDCFI because it does not have the power to direct the activities that most significantly impact JDCFI’s economic performance. Capital
19
Corporation has
The Company has commitments to extend credit to customers and John Deere dealers through lines of credit and other pre-approved credit arrangements. The Company applies the same credit policies and approval process for these commitments to extend credit as it does for its Receivables. Collateral is not required for these commitments, but if credit is extended, collateral may be required upon funding. The amount of unused commitments to extend credit to John Deere dealers was $
At August 1, 2021, the Company had restricted other assets associated with borrowings related to securitizations (see Note 5). Excluding the securitization programs, the remaining balance of restricted other assets was not material as of August 1, 2021.
The Company is subject to various unresolved legal actions which arise in the normal course of its business, the most prevalent of which relate to retail credit matters. The Company believes the reasonably possible range of losses for these unresolved legal actions would not have a material effect on its consolidated financial statements.
(10) Income Taxes
The Company’s unrecognized tax benefits at August 1, 2021 were $
(11) Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To determine fair value, the Company uses various methods including market and income approaches. The Company utilizes valuation models and techniques that maximize the use of observable inputs. The models are industry-standard models that consider various assumptions including time values and yield curves as well as other economic measures. These valuation techniques are consistently applied.
Level 1 measurements consist of quoted prices in active markets for identical assets or liabilities. Level 2 measurements include significant other observable inputs such as quoted prices for similar assets or liabilities in active markets; identical assets or liabilities in inactive markets; observable inputs such as interest rates and yield curves; and other market-corroborated inputs. Level 3 measurements include significant unobservable inputs.
20
The fair values of financial instruments that do not approximate the carrying values were as follows (in millions of dollars):
August 1, 2021 | November 1, 2020 | August 2, 2020 |
| ||||||||||||||||
Carrying | Fair | Carrying | Fair | Carrying | Fair |
| |||||||||||||
Value | Value | Value | Value | Value | Value |
| |||||||||||||
Receivables financed – net |
| $ | | $ | |
| $ | | $ | |
| $ | | $ | | ||||
Retail notes securitized – net |
| |
| |
| |
| |
| |
| | |||||||
Securitization borrowings |
| |
| |
| |
| |
| |
| | |||||||
Current maturities of long-term borrowings |
| |
| |
| |
| |
| |
| | |||||||
Long-term borrowings | | | |
| | | |
Fair value measurements above were Level 3 for all Receivables and Level 2 for all borrowings.
Fair values of Receivables that were issued long-term were based on the discounted values of their related cash flows at interest rates currently being offered by the Company for similar Receivables. The fair values of the remaining Receivables approximated the carrying amounts.
Fair values of long-term borrowings and securitization borrowings were based on current market quotes for identical or similar borrowings and credit risk, or on the discounted values of their related cash flows at current market interest rates. Certain long-term borrowings have been swapped to current variable interest rates. The carrying values of these long-term borrowings include adjustments related to fair value hedges.
Assets and liabilities measured at fair value as Level 2 measurements on a recurring basis were as follows (in millions of dollars):
| August 1 |
| November 1 |
| August 2 |
| ||||
2021 | 2020 | 2020 |
| |||||||
Marketable securities |
|
|
| |||||||
International debt securities | $ | | $ | | $ | | ||||
Receivables from John Deere | ||||||||||
Derivatives: | ||||||||||
Interest rate contracts | | | | |||||||
Cross-currency interest rate contracts |
| |
| |
| | ||||
Other assets | ||||||||||
Derivatives: | ||||||||||
Foreign exchange contracts |
| |
| |
| | ||||
Total assets | $ | | $ | | $ | | ||||
Other payables to John Deere | ||||||||||
Derivatives: | ||||||||||
Interest rate contracts | $ | | $ | | $ | | ||||
Cross-currency interest rate contracts |
| | |
| | |||||
Accounts payable and accrued expenses | ||||||||||
Derivatives: | ||||||||||
Foreign exchange contracts |
| |
| |
| | ||||
Total liabilities | $ | | $ | | $ | |
Excluded from the table above were the Company’s cash equivalents, which were carried at cost that approximates fair value. The cash equivalents consist primarily of time deposits and money market funds.
The international debt securities mature over the next nine years. At August 1, 2021, the amortized cost basis and fair value of these available-for-sale debt securities were $
21
Fair value, nonrecurring Level 3 measurements from impairments, excluding Receivables with specific allowances which were not material, were as follows (in millions of dollars):
Fair Value | Losses | ||||||||||||||||||||
Three Months Ended | Nine Months Ended | ||||||||||||||||||||
August 1 | November 1 | August 2 | August 1 | August 2 | August 1 | August 2 | |||||||||||||||
2021 | 2020 | 2020 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||
Equipment on operating leases – net |
|
| $ | |
|
|
| $ | | ||||||||||||
Other assets | | | |||||||||||||||||||
Total | $ | | $ | |
The fair value shown for November 1, 2020 in the table above represents the fair value assessment at May 3, 2020, as the result of impairments taken on operating leases and matured operating lease inventory in the second quarter of 2020 (see Note 6).
The following is a description of the valuation methodologies the Company uses to measure certain financial instruments on the consolidated balance sheet at fair value:
Marketable securities – The international debt securities are valued using quoted prices for identical assets in inactive markets.
Derivatives – The Company’s derivative financial instruments consist of interest rate contracts (swaps and caps), foreign currency exchange contracts (futures, forwards, and swaps), and cross-currency interest rate contracts (swaps). The portfolio is valued based on an income approach (discounted cash flow) using market observable inputs, including swap curves and both forward and spot exchange rates for currencies.
Receivables – Specific reserve impairments are based on the fair value of the collateral, which is measured using a market approach (appraisal values or realizable values). Inputs include a selection of realizable values.
Equipment on operating leases - net – The impairments were based on an income approach (discounted cash flow), using the contractual payments, plus estimates of return rates and equipment sale price at lease maturity. Inputs included historical return rates and realized sales values.
Other assets – The impairments of the matured operating lease inventory were measured at the fair value of that inventory. The valuations were based on a market approach. The inputs included sales of comparable assets.
(12) Derivative Instruments
It is the Company’s policy that derivative transactions are executed only to manage exposures arising in the normal course of business and not for the purpose of creating speculative positions or trading. The Company manages the relationship of the types and amounts of its funding sources to its Receivable and Lease portfolios in an effort to diminish risk due to interest rate and foreign currency fluctuations, while responding to favorable financing opportunities. The Company also has foreign currency exposures at some of its foreign and domestic operations related to financing in currencies other than the functional currencies.
All derivatives are recorded at fair value on the consolidated balance sheet. Cash collateral received or paid is not offset against the derivative fair values on the consolidated balance sheet. Each derivative is designated as a cash flow hedge, a fair value hedge, or remains undesignated. All designated hedges are formally documented as to the relationship with the hedged item as well as the risk-management strategy. Both at inception and on an ongoing basis the hedging instrument is assessed as to its effectiveness. If and when a derivative is determined not to be highly effective as a hedge, the underlying hedged transaction is no longer likely to occur, the hedge designation is removed, or the derivative is terminated, hedge accounting is discontinued.
22
Cash Flow Hedges
Certain interest rate contracts (swaps) were designated as hedges of future cash flows from borrowings. The total notional amounts of the receive-variable/pay-fixed interest rate contracts at August 1, 2021, November 1, 2020, and August 2, 2020 were $
The amount of loss recorded in OCI at August 1, 2021 that is expected to be reclassified to interest expense in the next twelve months if interest rates remain unchanged is approximately $
Fair Value Hedges
Certain interest rate contracts (swaps) were designated as fair value hedges of borrowings. The total notional amounts of the receive-fixed/pay-variable interest rate contracts at August 1, 2021, November 1, 2020, and August 2, 2020 were $
The amounts recorded in the consolidated balance sheet related to borrowings designated in fair value hedging relationships were as follows (in millions of dollars):
Cumulative Increase (Decrease) of Fair Value | |||||||||||||
Hedging Adjustments Included in the | |||||||||||||
Carrying Amount | |||||||||||||
Carrying | Active | ||||||||||||
Amount of | Hedging | Discontinued | |||||||||||
August 1, 2021 | Hedged Item | Relationships | Relationships | Total | |||||||||
Current maturities of long-term borrowings | $ | | $ | | $ | ( | $ | | |||||
Long-term borrowings | | | | | |||||||||
November 1, 2020 | |||||||||||||
Current maturities of long-term borrowings | $ | | $ | | $ | | |||||||
Long-term borrowings | | $ | | | | ||||||||
August 2, 2020 | |||||||||||||
Current maturities of long-term borrowings | $ | | $ | | $ | | $ | | |||||
Long-term borrowings | | | | |
Derivatives Not Designated as Hedging Instruments
The Company has certain interest rate contracts (swaps and caps), foreign exchange contracts (futures, forwards, and swaps), and cross-currency interest rate contracts (swaps), which were not formally designated as hedges. These derivatives were held as economic hedges for underlying interest rate or foreign currency exposures primarily for certain borrowings. The total notional amounts of the interest rate swaps at August 1, 2021, November 1, 2020, and August 2, 2020 were $
23
To facilitate borrowings through securitization of retail notes, interest rate caps were sold with notional amounts of $
Fair values of derivative instruments in the consolidated balance sheet were as follows (in millions of dollars):
| August 1 |
| November 1 |
| August 2 |
| ||||
2021 | 2020 | 2020 |
| |||||||
Receivables from John Deere | ||||||||||
Designated as hedging instruments: | ||||||||||
Interest rate contracts | $ | | $ | | $ | | ||||
Not designated as hedging instruments: | ||||||||||
Interest rate contracts |
| |
| |
| | ||||
Cross-currency interest rate contracts |
| |
| |
| | ||||
Total not designated |
| |
| |
| | ||||
Other Assets | ||||||||||
Not designated as hedging instruments: | ||||||||||
Foreign exchange contracts |
| |
| |
| | ||||
Total not designated |
| |
| |
| | ||||
Total derivative assets | $ | | $ | | $ | | ||||
Other Payables to John Deere | ||||||||||
Designated as hedging instruments: | ||||||||||
Interest rate contracts | $ | | $ | | $ | | ||||
Not designated as hedging instruments: | ||||||||||
Interest rate contracts |
| |
| |
| | ||||
Cross-currency interest rate contracts | | |
| | ||||||
Total not designated |
| |
| |
| | ||||
Accounts Payable and Accrued Expenses | ||||||||||
Not designated as hedging instruments: | ||||||||||
Foreign exchange contracts |
| |
| |
| | ||||
Total derivative liabilities | $ | | $ | | $ | |
24
The classification and gains (losses) including accrued interest expense related to derivative instruments on the statement of consolidated income consisted of the following (in millions of dollars):
Three Months Ended | Nine Months Ended |
| |||||||||||
August 1 | August 2 | August 1 | August 2 |
| |||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| |||||
Fair Value Hedges | |||||||||||||
Interest rate contracts - Interest expense |
| $ | | $ | | $ | ( | $ | | ||||
Cash Flow Hedges | |||||||||||||
Recognized in OCI | |||||||||||||
Interest rate contracts - OCI (pretax) |
|
| ( |
| ( |
| ( |
| ( | ||||
Reclassified from OCI | |||||||||||||
Interest rate contracts - Interest expense |
|
| ( |
| ( |
| ( |
| ( | ||||
Not Designated as Hedges | |||||||||||||
Interest rate contracts - Interest expense * |
| $ | ( | $ | ( | $ | ( | $ | ( | ||||
Foreign exchange contracts - Administrative and operating expenses * |
|
| ( |
| ( |
|
| ( |
| | |||
Total not designated | $ | ( | $ | ( | $ | ( | $ | |
* Includes interest and foreign exchange gains (losses) from cross-currency interest rate contracts.
Included in the table above are interest expense and administrative and operating expense amounts the Company incurred on derivatives transacted with John Deere. The amounts the Company recognized on these affiliate party transactions for the three months ended August 1, 2021 and August 2, 2020 were gains of $
Counterparty Risk and Collateral
Derivative instruments are subject to significant concentrations of credit risk to the banking sector. The Company manages individual unrelated external counterparty exposure by setting limits that consider the credit rating of the unrelated external counterparty, the credit default swap spread of the counterparty, and other financial commitments and exposures between the Company and the unrelated external counterparty banks. All interest rate derivatives are transacted under International Swaps and Derivatives Association (ISDA) documentation. Each master agreement permits the net settlement of amounts owed in the event of default or termination. None of the Company’s derivative agreements contain credit-risk-related contingent features.
The Company’s outstanding derivatives have been transacted with both unrelated external counterparties and with John Deere. For derivatives transacted with John Deere, the Company utilizes a centralized hedging structure in which John Deere enters into a derivative transaction with an unrelated external counterparty and simultaneously enters into a derivative transaction with the Company. Except for collateral provisions, the terms of the transaction between the Company and John Deere are identical to the terms of the transaction between John Deere and its unrelated external counterparty.
The Company has ISDA agreements with John Deere that permit the net settlement of amounts owed between counterparties in the event of early termination. In addition, the Company has a loss sharing agreement with John Deere in which it has agreed to absorb any losses and expenses John Deere incurs if an unrelated external counterparty fails to meet its obligations on a derivative transaction that John Deere entered into to manage exposures of the Company. The loss sharing agreement did not increase the maximum amount of loss that the Company would incur, after considering collateral received and netting arrangements, as of August 1, 2021, November 1, 2020, and August 2, 2020.
25
Derivatives are recorded without offsetting for netting arrangements or collateral. The impact on the derivative assets and liabilities for external derivatives and those with John Deere related to netting arrangements and any collateral received or paid were as follows (in millions of dollars):
August 1, 2021 |
| ||||||||||||
Derivatives: | Gross Amounts | Netting | Collateral | Net |
| ||||||||
Assets |
|
|
|
|
|
|
|
| |||||
External | $ | | $ | ( | $ | | |||||||
John Deere |
| | ( |
| | ||||||||
Liabilities | |||||||||||||
External |
| |
| ( |
| | |||||||
John Deere |
| |
| ( |
|
| |
November 1, 2020 |
| ||||||||||||
Derivatives: | Gross Amounts | Netting | Collateral | Net |
| ||||||||
Assets |
|
|
|
|
|
|
|
| |||||
External | $ | | $ | ( |
| $ | | ||||||
John Deere |
| |
| ( |
|
| | ||||||
Liabilities | |||||||||||||
External |
| |
| ( |
|
| | ||||||
John Deere |
| |
| ( |
|
| |
August 2, 2020 |
|
|
|
|
|
| |||||||
Derivatives: | Gross Amounts | Netting | Collateral | Net |
| ||||||||
Assets |
|
|
| ||||||||||
External | $ | | $ | ( | $ | | |||||||
John Deere |
| | ( |
| | ||||||||
Liabilities | |||||||||||||
External |
| |
| ( |
|
| | ||||||
John Deere |
| |
| ( |
|
| |
26
(13) Pension and Other Postretirement Benefits
The Company is a participating employer in certain Deere & Company sponsored defined benefit pension plans for employees in the U.S. and certain defined benefit pension plans outside the U.S. These pension plans provide for benefits that are based primarily on years of service and employee compensation. Pension expense is actuarially determined based on the Company’s employees included in the plan. The Company’s pension expense was not material for the three and nine month periods ended August 1, 2021 and August 2, 2020. The accumulated benefit obligation and plan net assets for the employees of the Company are not determined separately from Deere & Company. The Company provides defined benefit health care and life insurance plans for certain retired employees in the U.S. as a participating employer in Deere & Company’s sponsored plans. Health care and life insurance benefits expense is actuarially determined based on the Company’s employees included in the plans and amounted to $
(14) Employee-Separation Programs
During the first nine months of 2020, the Company incurred voluntary employee-separation program expenses of $
27
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Results of Operations
Overview
Organization
The Company primarily generates revenues and cash by financing John Deere dealers’ sales and leases of new and used agriculture and turf equipment and construction and forestry equipment. In addition, the Company also provides wholesale financing to dealers of the foregoing equipment and finances retail revolving charge accounts.
Trends and Economic Conditions
The Company’s acquisition volume of Receivables and Leases is largely dependent upon the level of retail sales and leases of John Deere products. The level of John Deere retail sales and leases is responsive to a variety of economic, financial, climatic, legislative, and other factors that influence demand for its products.
Industry sales of large agricultural machinery in the U.S. and Canada are expected to be up about 25 percent for 2021 compared to the prior year. Industry sales of small agricultural and turf equipment in the U.S. and Canada are expected to be up about 10 percent in 2021. Industry sales of agricultural machinery in Europe are forecast to be up about 10 to 15 percent. In South America, industry sales of tractors and combines are projected to be up about 20 percent in 2021. Industry sales of agricultural machinery in Asia are forecast to be up significantly. Construction industry sales in the U.S. and Canada for 2021 are expected to increase about 15 to 20 percent, while compact construction equipment in the U.S. and Canada are forecast to increase about 20 to 25 percent. In forestry, global industry sales are expected to be about 15 percent higher.
Compared to the prior year, the Company’s full year 2021 results are expected to benefit from improvement on operating lease residual values, a lower provision for credit losses, more favorable financing spreads, and income earned on a higher average portfolio.
Items of concern include uncertainty of the effectiveness of governmental and private sector actions to address COVID, trade agreements, the uncertainty of the results of monetary and fiscal policies, the impact of elevated levels of sovereign and state debt, capital market disruptions, changes in demand and pricing for new and used equipment, geopolitical events, and the other items discussed in the “Safe Harbor Statement” below. Significant fluctuations in foreign currency exchange rates and volatility in the price of many commodities could also impact the Company’s results. The future financial effects of COVID are unknown due to many factors. As a result, predicting the Company’s forecasted financial performance is subject to many assumptions.
COVID Effects, Actions, and Recent Developments
The effects of COVID and the related actions of governments and other authorities to contain COVID continue to affect the Company’s operations, results, cash flows, and forecasts.
The Company’s first priority in addressing the effects of COVID continues to be the health, safety, and overall welfare of its employees. The Company effectively activated previously established business continuity plans and proactively implemented health and safety measures at its operations around the world.
The Company continued to work closely with its customers, including John Deere dealers and retail customers, in the first nine months of 2021 in connection with short-term payment relief on obligations owed to the Company. Receivables and operating leases granted relief since the beginning of the pandemic that remained outstanding at August 1, 2021 represented approximately 3 percent and 2 percent of the portfolio balances, respectively (see Notes 4 and 6).
28
2021 Compared with 2020
The total revenues and net income attributable to the Company were as follows (in millions of dollars):
Three Months Ended | Nine Months Ended | ||||||||||||
August 1 | August 2 | August 1 | August 2 |
| |||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| |||||
Total revenues | $ | 682.9 | $ | 696.0 | $ | 2,015.2 | $ | 2,114.7 | |||||
Net income attributable to the Company | 185.7 | 146.2 | 529.6 | 271.3 |
Total revenues for the third quarter and first nine months of 2021 decreased primarily due to lower average financing rates, partially offset by a higher average portfolio and gains on operating lease dispositions in the current year. Net income for the third quarter and first nine months was higher than the same periods in 2020 mainly due to income earned on a higher average portfolio, improvement on operating lease residual values, and more favorable financing spreads. Additionally, a lower provision for credit losses contributed to the improvement for the first nine months of fiscal 2021. Results for the nine-month period last year also included impairments on lease residual values.
Revenues
The finance income, lease revenues, and other income earned by the Company were as follows (in millions of dollars):
Three Months Ended | Nine Months Ended | ||||||||||||||||
August 1 | August 2 | % | August 1 | August 2 | % | ||||||||||||
2021 | 2020 | Change |
| 2021 | 2020 | Change | |||||||||||
Finance income earned from: | |||||||||||||||||
Retail notes | $ | 234.4 | $ | 234.9 | $ | 705.9 | $ | 701.4 | 1 | ||||||||
Revolving charge accounts | 77.3 | 87.8 | (12) | 216.1 | 242.7 | (11) | |||||||||||
Wholesale receivables | 77.5 | 84.6 | (8) | 231.1 | 305.3 | (24) | |||||||||||
Lease revenues | 255.7 | 270.3 | (5) | 775.5 | 817.8 | (5) | |||||||||||
Other income | 38.0 | 18.4 | 107 | 86.6 | 47.5 | 82 |
Finance income earned on retail notes was similar to comparable periods in 2020 primarily due to higher average portfolio balances, offset by lower average financing rates. Finance income earned on revolving charge accounts and wholesale receivables was lower primarily due to lower average financing rates and lower average portfolio balances. Lease revenues decreased primarily due to lower average portfolio balances.
Revenues earned from John Deere totaled $157.6 million for the third quarter and $464.4 million in the first nine months of 2021, compared with $165.8 million and $510.0 million for the same periods last year. The decrease was primarily due to decreased compensation paid by John Deere for waived or reduced finance charges on wholesale receivables and retail notes. Revenues earned from John Deere are included in the revenue amounts discussed above and in “Other income” on the statement of consolidated income.
Other income increased for the third quarter and first nine months of 2021 primarily due to gains on operating lease residual values, which had been revised downward over the term of the leases. Better than expected conditions in the agriculture and construction markets are leading to favorable results when the matured lease equipment is sold. The Company recognized losses on operating lease dispositions in 2020, which were recorded in administrative and operating expenses. In addition, both periods in 2021 benefited from freestanding credit enhancement recoveries (see Note 4), partially offset by lower interest income.
29
Expenses
Significant expenses incurred by the Company were as follows (in millions of dollars):
Three Months Ended | Nine Months Ended | ||||||||||||||||
August 1 | August 2 | % | August 1 | August 2 | % | ||||||||||||
2021 | 2020 | Change |
| 2021 | 2020 | Change | |||||||||||
Interest expense | $ | 114.1 | $ | 161.3 | (29) | $ | 373.1 | $ | 597.7 | (38) | |||||||
Administrative and operating expenses | 105.5 | 92.0 | 15 | 304.3 | 357.9 | (15) | |||||||||||
Provision (credit) for credit losses | 15.7 | 16.0 | (2) | (.5) | 100.8 | (100) | |||||||||||
Depreciation of equipment on operating leases | 180.1 | 211.8 | (15) | 559.5 | 639.6 | (13) | |||||||||||
Provision for income taxes | 41.5 | 44.4 | (7) | 139.5 | 75.9 | 84 |
The decrease in interest expense for the third quarter and first nine months of 2021 was primarily due to lower average interest rates.
Administrative and operating expenses increased for the third quarter of 2021 compared to 2020, primarily due to higher employee incentive compensation. The decrease for the first nine months of 2021 compared to 2020 was primarily due to losses and impairments on operating lease residual values recorded in the prior year (see Note 6). In the current year, the Company recognized gains on the sale of operating lease equipment in other income. Administrative and operating expenses were also impacted by higher employee incentive compensation during the first nine months of 2021.
The provision (credit) for credit losses decreased $.3 million for the third quarter and $101.3 million for the first nine months of 2021, compared to similar periods in 2020. The decrease in the first nine months is primarily due to lower expected losses on retail notes and financing leases caused by improving conditions in the construction and forestry market and better than expected performance of accounts granted payment relief due to the economic effects of COVID. The provision (credit) for credit losses also decreased on revolving charge accounts in 2021, reflecting strong payment performance due to continued improvements in the agriculture market. In addition to the factors noted above, the prior year provision also included an increase in the allowance for credit losses in the second quarter of 2020 related to the negative economic effects of COVID and other macroeconomic issues. The annualized provision (credit) for credit losses, as a percentage of the average balance of total Receivables financed, was .18 percent in the third quarter and zero in the first nine months of 2021, compared with .20 percent and .42 percent for the same periods last year. See Note 2 and Note 4 for further information regarding the Company’s allowance for credit losses policies.
The depreciation of equipment on operating leases for the third quarter and first nine months of 2021 decreased primarily due to updated depreciation estimates and lower average balances of equipment on operating leases.
The provision for income taxes decreased in the third quarter of 2021 due to a lower effective tax rate and favorable discrete items, partially offset by higher pretax income. The provision for income taxes increased during the first nine months of 2021 primarily due to higher pretax income.
30
Receivables and Leases
Receivable and Lease (excluding wholesale) acquisition volumes were as follows (in millions of dollars):
Three Months Ended | |||||||||||
August 1 | August 2 | $ | % | ||||||||
2021 | 2020 | Change | Change | ||||||||
Retail notes: |
|
|
|
|
|
| |||||
Agriculture and turf | $ | 2,948.6 | $ | 2,399.9 | $ | 548.7 |
| 23 | |||
Construction and forestry |
| 710.7 |
| 568.3 |
| 142.4 |
| 25 | |||
Total retail notes |
| 3,659.3 |
| 2,968.2 |
| 691.1 |
| 23 | |||
Revolving charge accounts |
| 1,642.3 |
| 1,723.0 |
| (80.7) |
| (5) | |||
Financing leases |
| 184.8 |
| 144.7 |
| 40.1 |
| 28 | |||
Equipment on operating leases |
| 475.9 |
| 351.2 |
| 124.7 |
| 36 | |||
Total Receivables and Leases (excluding wholesale) | $ | 5,962.3 | $ | 5,187.1 | $ | 775.2 |
| 15 | |||
Nine Months Ended | |||||||||||
August 1 | August 2 | $ | % | ||||||||
2021 | 2020 | Change | Change | ||||||||
Retail notes: |
|
|
|
|
|
| |||||
Agriculture and turf | $ | 8,465.7 | $ | 6,525.4 | $ | 1,940.3 |
| 30 | |||
Construction and forestry |
| 2,042.5 |
| 1,490.0 |
| 552.5 |
| 37 | |||
Total retail notes |
| 10,508.2 |
| 8,015.4 |
| 2,492.8 |
| 31 | |||
Revolving charge accounts |
| 5,429.0 |
| 5,487.2 |
| (58.2) |
| (1) | |||
Financing leases |
| 416.9 |
| 335.7 |
| 81.2 |
| 24 | |||
Equipment on operating leases |
| 1,271.1 |
| 1,343.3 |
| (72.2) |
| (5) | |||
Total Receivables and Leases (excluding wholesale) | $ | 17,625.2 | $ | 15,181.6 | $ | 2,443.6 |
| 16 | |||
Total Receivables and Leases owned were as follows (in millions of dollars):
| August 1 |
| November 1 |
| August 2 | ||||
2021 | 2020 | 2020 | |||||||
Retail notes: |
|
|
| ||||||
Agriculture and turf | $ | 20,056.6 | $ | 18,031.0 | $ | 16,970.9 | |||
Construction and forestry |
| 4,361.2 |
| 3,816.2 |
| 3,587.7 | |||
Total retail notes |
| 24,417.8 |
| 21,847.2 |
| 20,558.6 | |||
Revolving charge accounts |
| 3,687.7 |
| 3,827.4 |
| 3,918.3 | |||
Wholesale receivables |
| 7,731.2 |
| 7,093.3 |
| 8,428.8 | |||
Financing leases |
| 846.5 |
| 789.4 |
| 743.6 | |||
Equipment on operating leases |
| 4,963.8 |
| 5,297.8 |
| 5,257.2 | |||
Total Receivables and Leases | $ | 41,647.0 | $ | 38,855.1 | $ | 38,906.5 |
31
Total Receivables 30 days or more past due, non-performing Receivables, and the allowance for credit losses were as follows (in millions of dollars and as a percentage of the Receivables balance):
August 1 | November 1 | August 2 | ||||||||||||||
2021 | 2020 | 2020 | ||||||||||||||
Dollars | Percent | Dollars | Percent | Dollars | Percent | |||||||||||
Receivables 30 days or more past due * | $ | 359.3 | .98 | $ | 311.9 | .93 | $ | 295.9 | .88 | |||||||
Non-performing Receivables * | 272.8 | .74 | 262.5 | .78 | 302.3 | .90 | ||||||||||
Allowance for credit losses | 139.0 | .38 | 129.1 | .38 | 140.6 | .42 |
* The delinquency status of receivables granted payment relief due to COVID is based on the modified payment schedule (see Note 4).
Receivables 30 days or more past due continue to accrue finance income. The Company ceases to accrue finance income once Receivables are considered non-performing. An allowance for credit losses is recorded for the estimated credit losses expected over the life of the 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. While the Company believes its allowance is sufficient to provide for losses over the life of its existing Receivable portfolio, different assumptions or changes in economic conditions would result in changes to the allowance for credit losses and the provision for credit losses. See Note 4 for additional information related to the allowance for credit losses.
Deposits withheld from dealers and merchants amounted to $125.5 million at August 1, 2021, compared with $114.8 million at November 1, 2020 and $105.6 million at August 2, 2020. These balances primarily represent the aggregate dealer retail note and lease withholding accounts from individual John Deere dealers to which losses from retail notes and leases originating from the respective dealers can be charged. Upon the adoption of ASU 2016-13, recoveries from dealer deposits are recognized in other income when the dealer’s withholding account is charged.
During the third quarter and first nine months ended August 1, 2021, $3.2 million and $9.8 million, respectively, were recorded in other income related to recoveries from dealer deposits and other freestanding credit enhancements. Prior to the adoption of ASU No. 2016-13, the benefit of credit losses recovered from freestanding credit enhancements, such as dealer deposits, were recognized in the provision for credit losses based on estimated recoveries.
32
Write-offs and recoveries of Receivables, by product, and as an annualized percentage of average balances held during the period, were as follows (in millions of dollars):
Three Months Ended | ||||||||||
August 1, 2021 | August 2, 2020 | |||||||||
Dollars | Percent | Dollars | Percent | |||||||
Write-offs: |
|
|
|
|
|
|
| |||
Retail notes: | ||||||||||
Agriculture and turf | $ | (2.5) |
| (.05) | $ | (2.1) |
| (.05) | ||
Construction and forestry |
| (5.1) |
| (.48) |
| (2.9) |
| (.33) | ||
Total retail notes |
| (7.6) |
| (.13) |
| (5.0) |
| (.10) | ||
Revolving charge accounts |
| (8.4) |
| (.95) |
| (21.3) |
| (2.30) | ||
Wholesale receivables |
| (.2) |
| (.01) |
| (.1) |
| |||
Financing leases | (.9) | (.44) | (.5) | (.28) | ||||||
Total write-offs |
| (17.1) |
| (.19) |
| (26.9) |
| (.33) | ||
Recoveries: | ||||||||||
Retail notes: | ||||||||||
Agriculture and turf |
| 2.8 |
| .06 |
| 1.6 |
| .04 | ||
Construction and forestry |
| .3 |
| .03 |
| .5 |
| .06 | ||
Total retail notes |
| 3.1 |
| .05 |
| 2.1 |
| .04 | ||
Revolving charge accounts |
| 7.6 |
| .86 |
| 8.1 |
| .87 | ||
Wholesale receivables | .4 | .02 | ||||||||
Financing leases | .1 | .05 |
| .3 | .17 | |||||
Total recoveries |
| 10.8 |
| .12 |
| 10.9 |
| .13 | ||
Total net write-offs | $ | (6.3) |
| (.07) | $ | (16.0) |
| (.20) |
Nine Months Ended | ||||||||||
August 1, 2021 | August 2, 2020 | |||||||||
Dollars | Percent | Dollars | Percent | |||||||
Write-offs: |
|
|
|
|
|
|
| |||
Retail notes: | ||||||||||
Agriculture and turf | $ | (8.5) |
| (.06) | $ | (8.2) |
| (.07) | ||
Construction and forestry |
| (8.9) |
| (.29) |
| (30.1) |
| (1.18) | ||
Total retail notes |
| (17.4) |
| (.10) |
| (38.3) |
| (.26) | ||
Revolving charge accounts |
| (22.7) |
| (.97) |
| (50.1) |
| (2.06) | ||
Wholesale receivables |
| (.3) |
| (.01) |
| (.9) |
| (.01) | ||
Financing leases | (2.3) | (.39) | (1.3) | (.25) | ||||||
Total write-offs |
| (42.7) |
| (.17) |
| (90.6) |
| (.37) | ||
Recoveries: | ||||||||||
Retail notes: | ||||||||||
Agriculture and turf |
| 6.7 |
| .05 |
| 2.9 |
| .02 | ||
Construction and forestry |
| 1.1 |
| .04 |
| 1.1 |
| .04 | ||
Total retail notes |
| 7.8 |
| .05 |
| 4.0 |
| .03 | ||
Revolving charge accounts |
| 26.6 |
| 1.13 |
| 21.8 |
| .90 | ||
Wholesale receivables | 1.3 | .02 | ||||||||
Financing leases | .3 | .05 |
| .5 | .10 | |||||
Total recoveries |
| 34.7 |
| .14 |
| 27.6 |
| .11 | ||
Total net write-offs | $ | (8.0) |
| (.03) | $ | (63.0) |
| (.26) | ||
33
Safe Harbor Statement
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: Statements under “Overview” and other forward-looking statements herein that relate to future events, expectations and trends involve factors that are subject to change and risks and uncertainties that could cause actual results to differ materially.
Factors that could materially affect the Company’s operations, access to capital, expenses, and results include changes in, uncertainty surrounding, and the impact of governmental trade, banking, monetary, and fiscal policies, including financial regulatory reform and its effects on the consumer finance industry, derivatives, funding costs, and other areas. Actions by central banks, financial, and securities regulators may affect the costs and expenses of financing the Company and the financing rates it is able to offer. The Company’s business is affected by general economic conditions in the global markets in which the Company operates because deteriorating economic conditions and political instability can result in decreased customer confidence, lower demand for equipment, higher credit losses, and greater currency risk. The Company’s business is also affected by changes in demand and pricing for used equipment and resulting impacts on lease residual values; actions of banks, financing and leasing companies, and other lenders that compete with the Company for customers; capital market disruptions; significant changes in capital market liquidity and associated funding costs; interest rates (including the availability of IBOR reference rates) and foreign currency exchange rates and their volatility; changes to accounting standards; changes in tax rates, estimates, laws, and regulations and Company actions related thereto; changes to and compliance with privacy, banking, and other regulations; changes to and compliance with economic sanctions and export controls laws and regulations; compliance with U.S. and foreign laws when expanding to new markets and otherwise; actions by other regulatory bodies; governmental programs, policies, and tariffs for the benefit of certain industries or sectors; sanctions in particular jurisdictions; retaliatory actions to such changes in trade, banking, monetary, and fiscal policies; the political and social stability of the global markets in which the Company operates; changes in weather patterns; the effects of, or response to, terrorism and security threats; wars and other conflicts; natural disasters; the spread of major epidemics (including the COVID pandemic) and government and industry responses to epidemics, such as travel restrictions and extended shut down of businesses; events that damage the Company’s reputation or brand; significant investigations, claims, lawsuits or other legal proceedings; changes in the ability to attract, develop, engage, and retain qualified personnel; the implementation of the smart industrial operating model and other organizational changes; the failure to realize anticipated savings or benefits of cost reduction, productivity, or efficiency efforts; difficulties related to the conversion and implementation of the Company’s information technology systems; and security breaches, cybersecurity attacks, technology failures and other disruptions to the information technology infrastructure of the Company and John Deere dealers.
Uncertainties related to the magnitude and duration of the COVID pandemic may significantly adversely affect John Deere’s and the Company’s business and outlook. These uncertainties include: the duration and impact of any resurgence in COVID cases in any country, state, or region; the emergence, contagiousness, and threat of new and different strains of coronavirus; the availability, acceptance, and effects of vaccines; prolonged reduction or closure of John Deere’s and the Company’s operations, or a delayed recovery in our operations; additional closures as mandated or otherwise made necessary by governmental authorities; additional operating costs due to remote working arrangements, adherence to social distancing guidelines and other COVID-related challenges; increased risk of cyber-attacks on network connections used in remote working arrangements; increased privacy-related risks due to processing health-related personal information; legal claims related to personal protective equipment designed, made, or provided by the Company or alleged exposure to COVID on Company premises; absence of employees due to illness; the impact of the pandemic on the financial condition and credit risk of the Company's customers and dealers, which could affect the demand for financing and lead to higher credit losses and losses on lease residual values; requests by the Company’s customers or dealers for payment deferrals and contract modifications; the impact of disruptions in the global capital markets and/or declines in John Deere’s and the Company’s financial performance, outlook or credit ratings, which could impact John Deere’s and the Company’s ability to obtain funding in the future; and the impact of the pandemic on demand for John Deere’s products and services. It remains unclear when a sustained economic recovery could occur and what a recovery may look like. All of these factors could materially and adversely affect our business, liquidity, results of operations, and financial position.
34
Significant changes in market liquidity conditions, changes in the Company’s credit ratings, and any failure to comply with financial covenants in credit agreements could impact access to funding and funding costs, which could reduce the Company’s earnings and cash flows. Financial market conditions could also negatively impact customer access to capital for purchases of John Deere’s products and customer confidence and purchase decisions, financing and repayment practices, and the number and size of customer delinquencies and defaults. A debt crisis in Europe, Latin America, or elsewhere could negatively impact currencies, global financial markets, social and political stability, funding sources and costs, asset and obligation values, customers, and Company operations and results. The Company’s operations could be impaired by changes in the equity, bond, and other financial markets, which would negatively affect earnings.
The withdrawal of the United Kingdom from the European Union and the perceptions as to the impact of the withdrawal may adversely affect business activity, political stability, and economic conditions in the United Kingdom, the European Union, and elsewhere. The economic conditions and outlook could be further adversely affected by (i) uncertainty regarding any new or modified trade arrangements between the United Kingdom and the European Union and/or other countries, (ii) the risk that one or more other European Union countries could come under increasing pressure to leave the European Union, or (iii) the risk that the euro as the single currency of the Eurozone could cease to exist. Any of these developments, or the perception that any of these developments are likely to occur, could affect economic growth or business activity in the United Kingdom or the European Union, and could result in the relocation of businesses, cause business interruptions, lead to economic recession or depression, and impact the stability of the financial markets, availability of credit, currency exchange rates, interest rates, financial institutions, and political, financial, and monetary systems. Any of these developments could affect our businesses, liquidity, results of operations, and financial position.
The liquidity and ongoing profitability of the Company depend largely on timely access to capital in order to meet future cash flow requirements, and to fund operations, costs, and purchases of John Deere’s products. If general economic conditions deteriorate or capital markets become more volatile, including as a result of the COVID pandemic, funding could be unavailable or insufficient. Additionally, customer confidence levels may result in declines in credit applications and increases in delinquencies and default rates, which could materially impact the Company’s write-offs and provision for credit losses.
The Company’s forward-looking statements are based upon assumptions relating to the factors described above, which are sometimes based upon estimates and data prepared by government agencies. Such estimates and data are often revised. The Company, except as required by law, undertakes no obligation to update or revise its forward-looking statements, whether as a result of new developments or otherwise. In addition, the Company’s business is closely related to John Deere’s business. Further information, including factors that could materially affect the Company’s and John Deere’s financial results, is included in the most recent Deere & Company annual report on Form 10-K and quarterly reports on Form 10-Q (including, but not limited to, the factors discussed in Item 1A. Risk Factors of the annual report on Form 10-K and quarterly reports on Form 10-Q) and other Deere & Company and Capital Corporation filings with the SEC.
Critical Accounting Policies
See the Company’s critical accounting policies discussed in the Management’s Discussion and Analysis of the most recent annual report filed on Form 10-K. There have been no material changes to these policies, other than as described below related to the allowance for credit losses, as a result of the adoption of ASU No. 2016-13 during the first quarter of 2021.
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.
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
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and complex Customer Receivable pools, while weighted average remaining maturity models are used for smaller and less complex Customer Receivable pools. Expected credit losses on wholesale receivables are based on historical loss rates, adjusted for current economic conditions. 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. Management reviews each model’s output quarterly, and qualitative adjustments are incorporated as necessary. While the Company believes its allowance is sufficient to provide for losses over the life of its existing Receivable portfolio, different assumptions or changes in economic conditions would result in changes to the allowance for credit losses and the provision for credit losses.
Capital Resources and Liquidity
For additional information on the Company’s dependence on and relationships with Deere & Company, see the Company’s most recently filed annual report on Form 10-K.
During the first nine months of 2021, the aggregate net cash provided by operating and financing activities was used primarily to fund Receivables and Leases. Net cash provided by operating activities was $1,043.4 million in the first nine months of 2021. Net cash provided by financing activities totaled $2,246.8 million in the first nine months of 2021, resulting primarily from a net increase in total external borrowings of $1,926.1 million and a net increase in payables to John Deere of $578.4 million, partially offset by dividends paid of $230.0 million. Net cash used by investing activities totaled $3,273.9 million in the first nine months of 2021, primarily due to the cost of Receivables acquired (excluding wholesale) exceeding the collections of Receivables (excluding wholesale) by $2,519.4 million, an increase in net wholesale receivables of $578.3 million, and the cost of equipment on operating leases acquired exceeding the proceeds from sales of equipment on operating leases by $168.9 million. Cash, cash equivalents, and restricted cash increased $20.2 million during the first nine months of 2021.
During the first nine months of 2020, the aggregate net cash provided by operating and financing activities was used primarily to fund Receivables and Leases. Net cash provided by operating activities was $1,092.7 million in the first nine months of 2020. Net cash provided by financing activities totaled $161.7 million in the first nine months of 2020, resulting primarily from a net increase in payables to John Deere of $1,775.8 million, partially offset by a net decrease in total external borrowings of $1,342.2 million and dividends paid of $250.0 million. Net cash used for investing activities totaled $1,240.3 million in the first nine months of 2020, primarily due to the cost of Receivables acquired (excluding wholesale) exceeding the collections of Receivables (excluding wholesale) by $1,083.3 million and the cost of equipment on operating leases acquired exceeding proceeds from sales of equipment on operating leases by $381.1 million, partially offset by a decrease in net wholesale receivables of $353.8 million. Cash, cash equivalents, and restricted cash increased $13.2 million during the first nine months of 2020.
The Company relies on its ability to raise substantial amounts of funds to finance its Receivable and Lease portfolios. The Company has access to most global markets at a reasonable cost and expects to have sufficient sources of global funding and liquidity to meet its funding needs. The Company’s ability to meet its debt obligations is supported in a number of ways. The assets of the Company are self-liquidating in nature. A solid equity position is available to absorb unusual losses on these assets and all commercial paper is backed by unsecured, committed borrowing lines from various banks. Liquidity is also provided by the Company’s ability to securitize these assets and through the issuance of term debt. Additionally, liquidity may be provided through loans from John Deere. The Company’s commercial paper outstanding at August 1, 2021, November 1, 2020, and August 2, 2020 was $507.0 million, $125.0 million, and $940.9 million, respectively, while the total cash, cash equivalents, and marketable securities position was $684.8 million, $676.8 million, and $627.3 million, respectively. The amount of cash, cash equivalents, and marketable securities held by foreign subsidiaries was $184.3 million, $163.7 million, and $124.6 million at August 1, 2021, November 1, 2020, and August 2, 2020, respectively.
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Capital Corporation has a revolving credit agreement to utilize bank conduit facilities to securitize retail notes (see Note 5). At August 1, 2021, this facility had a total capacity, or “financing limit,” of $2,000.0 million of secured financings at any time. After a two-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 August 1, 2021, $1,778.9 million of short-term securitization borrowings were outstanding under the agreement.
During the first nine months of 2021, the Company issued $5,210.4 million and retired $4,214.2 million of long-term borrowings, which were primarily medium-term notes. During the first nine months of 2021, the Company also issued $2,800.8 million and retired $2,190.4 million of retail note securitization borrowings and maintained an average commercial paper balance of $919.9 million. At August 1, 2021, the Company’s funding profile included $507.0 million of commercial paper and other notes payable, $5,264.6 million of securitization borrowings, $5,859.2 million of loans from John Deere, $25,882.7 million of unsecured term debt, and $4,600.2 million of equity capital. The Company’s funding profile may be altered to reflect such factors as relative costs of funding sources, assets available for securitizations, and capital market accessibility.
Total interest-bearing indebtedness amounted to $37,513.5 million at August 1, 2021, compared with $35,145.9 million at November 1, 2020 and $35,534.7 million at August 2, 2020. Total short-term indebtedness amounted to $17,376.8 million at August 1, 2021, compared with $15,834.8 million at November 1, 2020 and $15,042.6 million at August 2, 2020. Total long-term indebtedness amounted to $20,136.7 million at August 1, 2021, compared with $19,311.1 million at November 1, 2020 and $20,492.1 million at August 2, 2020. The ratio of total interest-bearing debt, including securitization indebtedness, to stockholder’s equity was 8.2 to 1 at August 1, 2021, compared with 8.2 to 1 at November 1, 2020 and 8.5 to 1 at August 2, 2020.
Stockholder’s equity was $4,600.2 million at August 1, 2021, compared with $4,298.2 million at November 1, 2020 and $4,173.2 million at August 2, 2020. The increase in the first nine months of 2021 was primarily due to net income attributable to the Company of $529.6 million and a change in the cumulative translation adjustment of $22.6 million, partially offset by dividends paid of $230.0 million and the adoption of ASU No. 2016-13 of $26.2 million.
Lines of Credit
The Company has access to bank lines of credit with various banks throughout the world. Some of the lines are available to both the Company and Deere & Company. Worldwide lines of credit totaled $8,000.0 million at August 1, 2021, $6,131.1 million of which were unused. For the purpose of computing unused credit lines, commercial paper and short-term bank borrowings, excluding secured borrowings and the current portion of long-term borrowings, of the Company and Deere & Company were primarily considered to constitute utilization. Included in the total credit lines at August 1, 2021 was a 364-day credit facility agreement of $3,000.0 million, expiring in fiscal April 2022. In addition, total credit lines included long-term credit facility agreements of $2,500.0 million, expiring in fiscal April 2025, and $2,500.0 million, expiring in fiscal March 2026. These credit agreements require the Company to maintain its consolidated ratio of earnings to fixed charges at not less than 1.05 to 1 for each fiscal quarter and its ratio of senior debt, excluding securitization indebtedness, to capital base (total subordinated debt and stockholder’s equity excluding accumulated other comprehensive income (loss)) at not more than 11 to 1 at the end of any fiscal quarter. All of these credit agreement requirements have been met during the periods included in the consolidated financial statements.
Debt Ratings
The Company’s ability to obtain funding is affected by its debt ratings, which are closely related to the outlook for and the financial condition of John Deere, and the nature and availability of support facilities, such as its lines of credit and the support agreement from Deere & Company.
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To access public debt capital markets, the Company relies on credit rating agencies to assign short-term and long-term credit ratings to the Company’s securities as an indicator of credit quality for fixed income investors. A security rating is not a recommendation by the rating agency to buy, sell, or hold Company securities. A credit rating agency may change or withdraw Company ratings based on its assessment of the Company’s current and future ability to meet interest and principal repayment obligations. Each agency’s rating should be evaluated independently of any other rating. Lower credit ratings generally result in higher borrowing costs, including costs of derivative transactions, and reduced access to debt capital markets.
The senior long-term and short-term debt ratings and outlook currently assigned to unsecured Company debt securities by the rating agencies engaged by the Company are the same as those for John Deere. Those ratings are as follows:
| Senior Long-Term |
| Short-Term |
| Outlook |
| |
Fitch Ratings | A | F1 | Stable | ||||
Moody’s Investors Service, Inc. |
| A2 |
| Prime-1 |
| Stable | |
Standard & Poor’s |
| A |
| A-1 |
| Stable |
Dividends
Capital Corporation declared and paid cash dividends to John Deere Financial Services, Inc. (JDFS) of $230.0 million and $250.0 million in the first nine months of 2021 and 2020, respectively. In each case, JDFS paid comparable dividends to Deere & Company.
On August 26, 2021, Capital Corporation declared a $255.0 million dividend to be paid to JDFS on September 15, 2021. JDFS, in turn, declared a $255.0 million dividend to Deere & Company, also payable on September 15, 2021.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
See the Company’s most recent annual report filed on Form 10-K (Part II, Item 7A). There has been no material change in this information.
Item 4. Controls and Procedures.
The Company’s principal executive officer and its principal financial officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (Act)) were effective as of August 1, 2021, based on the evaluation of these controls and procedures required by Rule 13a-15(b) or 15d-15(b) of the Act. During the third quarter, there were no changes that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is subject to various unresolved legal actions which arise in the normal course of its business, the most prevalent of which relate to retail credit matters. The Company believes the reasonably possible range of losses for these unresolved legal actions would not have a material effect on its financial statements.
Item 1A. Risk Factors.
See the Company’s most recent annual report on Form 10-K (Part I, Item 1A). There has been no material change in this information. The risks described in the annual report on Form 10-K, and the “Safe Harbor Statement” in this report, are not the only risks faced by the Company. Additional risks and uncertainties may also materially affect the Company’s business, financial condition, or operating results. One should not consider the risk factors to be a complete discussion of risks, uncertainties, and assumptions.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Omitted pursuant to instruction H.
Item 3. Defaults Upon Senior Securities.
Omitted pursuant to instruction H.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
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Item 6. Exhibits.
Certain instruments relating to long-term borrowings, constituting less than 10 percent of the registrant’s total assets, are not filed as exhibits herewith pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K. The registrant will file copies of such instruments upon request of the SEC.
3.1 | |
3.2 | |
31.1 | |
31.2 | |
32 | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* Incorporated by reference. Copies of these exhibits are available from the Company upon request.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
JOHN DEERE CAPITAL CORPORATION | ||||
Date: | August 26, 2021 | By: | /s/ Ryan D. Campbell | |
Ryan D. Campbell | ||||
Senior Vice President and | ||||
Principal Financial Officer and Principal Accounting Officer |
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