Leases

12 Months Ended

Oct. 31, 2021

Leases

Leases

Note 7. Leases

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

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

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

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

	2021		2020
Sales-type and direct financing lease revenues	$	48.6	$	46.0
Operating lease revenues		953.0		1,022.5
Variable lease revenues		26.9		28.6
Total lease revenues	$	1,028.5	$	1,097.1

Variable lease revenues reported above includes excess use and damage fees of $6.5 million and $8.2 million for 2021 and 2020, respectively, which were reported in other income on the statement of consolidated income.

Deposits withheld from John Deere dealers and related credit losses on leases are handled in a manner similar to the procedures for retail notes. As with retail notes, there are generally no deposits withheld from dealers on leases related to construction and forestry equipment. In addition, a lease payment discount program, allowing reduced payments over the term of the lease, is administered in a manner similar to finance waivers on retail notes (see Note 4). During 2021, 2020, and 2019, the finance income earned from John Deere on sales-type and direct financing leases containing waiver of finance charges or reduced rates was $3.7 million, $3.3 million, and $3.5 million, respectively. The operating lease revenue earned from John Deere during 2021, 2020, and 2019 was $47.1 million, $57.2 million, and $42.9 million, respectively.

Financing Leases

Sales-type and direct financing lease receivables by market at October 31, 2021 and November 1, 2020 were as follows (in millions of dollars):

	2021		2020
Agriculture and turf	$	500.8	$	447.5
Construction and forestry		168.2		152.7
Total		669.0		600.2
Guaranteed residual values		359.7		240.8
Unguaranteed residual values		33.7		32.6
Unearned finance income		(90.1)		(84.2)
Financing leases receivable	$	972.3	$	789.4

At the time of accepting a lease that qualifies as a sales-type or direct financing lease, the Company records the gross amount of lease payments receivable, estimated residual value of the leased equipment, and unearned finance income. The unearned finance income is recognized as revenue over the lease term using the interest method.

Scheduled payments, including guaranteed residual values, on sales-type and direct financing lease receivables at October 31, 2021 were as follows (in millions of dollars):

Due in:
2022	$	522.9
2023		222.0
2024		151.1
2025		82.7
2026		37.8
Later years		12.2
Total	$	1,028.7

Operating Leases

The cost of equipment on operating leases by market at October 31, 2021 and November 1, 2020 was as follows (in millions of dollars):

	2021		2020
Agriculture and turf	$	5,053.4	$	5,210.4
Construction and forestry		1,323.6		1,595.3
Total		6,377.0		6,805.7
Accumulated depreciation		(1,429.4)		(1,507.9)
Equipment on operating leases - net	$	4,947.6	$	5,297.8

Lease payments from equipment on operating leases are recorded as income on a straight-line method over the lease term. Operating lease assets are recorded at cost and depreciated to their estimated residual value on a straight-line method over the term of the leases. Lease agreements include usage limits and specifications on machine condition, which allow the Company to assess lessees for excess use or damages to the underlying equipment.

Lease payments for equipment on operating leases at October 31, 2021 were scheduled as follows (in millions of dollars):

Due in:
2022	$	685.6
2023		434.9
2024		229.7
2025		106.5
2026		23.5
Later years		4.0
Total	$	1,484.2

The Company estimates the residual values for operating leases at lease inception based on several factors, including lease term, expected hours of usage, historical wholesale sale prices, return experience, intended use of the equipment, market dynamics and trends, and third-party residual guarantees. The Company reviews residual value estimates during the lease term and tests the carrying value of its operating lease assets for impairment when events or circumstances necessitate. The depreciation is adjusted prospectively on a straight-line basis over the remaining lease term if residual value estimates are revised. There were no impairment losses on operating leases recorded during 2021. During 2020, the Company recorded impairment losses on operating leases of $21.0 million due to higher expected return rates and lower estimated values of used construction equipment. During 2019, the Company recorded impairment losses on operating leases of $59.4 million due to lower estimated values of used agriculture and construction equipment. Operating lease impairments are recorded in administrative and operating expenses on the statement of consolidated income.

The total operating lease residual values at October 31, 2021 and November 1, 2020 were $3,547.6 million and $3,826.3 million, respectively. Certain operating leases are subject to residual value guarantees. The total residual value guarantees were $295.8 million and $141.0 million at October 31, 2021 and November 1, 2020, respectively. The increase in residual value guarantees is primarily due to guarantees provided by John Deere dealers, which generally provide a first-loss residual value guarantee on operating lease originations effective after January 2020. The residual value guarantees at October 31, 2021 and November 1, 2020 include $3.0 million and $4.7 million, respectively, of deposits withheld from John Deere dealers, which are available for potential losses on residual values.

The Company discusses with lessees and dealers options to purchase the equipment or extend the lease prior to lease maturity. Equipment returned to the Company upon termination of leases is remarketed by the Company. The matured operating lease inventory balances at October 31, 2021 and November 1, 2020 were $25.4 million and $64.5 million, respectively. Matured operating lease inventory is reported in other assets on the consolidated balance sheet. During 2020, the Company recorded impairment losses on matured operating lease inventory of $9.8 million due to lower estimated values of used construction equipment. During 2019, the Company recorded impairment losses on matured operating lease inventory of $18.0 million. There were no impairment losses on matured operating lease inventory in 2021. Impairment losses on matured operating lease inventory are included in administrative and operating expenses on the statement of consolidated income.

Past due balances of operating leases represent the total balance held (net book value plus accrued lease payments) and still accruing finance income with any payment amounts 30 days or more past the contractual payment due date. These amounts were $53.9 million and $61.3 million at October 31, 2021 and November 1, 2020, respectively. The delinquency status of operating leases granted relief due to COVID, as described below, is based on the modified payment schedule.

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, which generally included payment deferrals of three months or less, was provided in regional programs and on a case-by-case basis with customers that were generally current in their payment obligations. The operating leases granted relief since the beginning of the pandemic that remained outstanding at October 31, 2021 represented approximately 2 percent of the Company’s operating lease portfolio. The majority of operating leases granted short-term relief are beyond the deferral period and have resumed making payments.