REVENUE RECOGNITION

9 Months Ended

Jul. 28, 2019

REVENUE RECOGNITION

REVENUE RECOGNITION

(4)  Revenue Recognition

Sales of equipment and service parts. Sales of equipment and service parts are recognized when each of the following criteria are met: (1) the Company and an independent customer approve a contract with commercial substance, (2) the sales price is determinable and collectability of the payments are probable based on the terms outlined in the contract, and (3) control of the goods has transferred to the customer. Transfer of control generally occurs for equipment and service parts when the good is delivered as specified in the contract and the risks and rewards of ownership are transferred. In the U.S. and most international locations, this transfer occurs primarily when goods are shipped. In Canada and some other international locations, certain goods are shipped to dealers on a consignment basis under which the risks and rewards of ownership are not transferred to the dealer at the time the goods are shipped. Accordingly, in these locations, sales are not recorded until a retail customer has purchased the goods. Generally, no right of return exists on sales of equipment.

In limited instances, equipment is transferred to a customer or a financial institution with an obligation to repurchase the equipment for a specified amount, which is exercisable at the customer’s option. When the equipment is expected to be repurchased, those arrangements are accounted for as leases. When the operating lease criteria are met, no sale is recorded at the time of the equipment transfer and the difference between sale price and the specified repurchase amount is recognized as revenue on a straight-line basis until the customer’s option expires. When this equipment is not expected to be repurchased, a sale is recorded with a return obligation.

Under the terms of sales agreements with dealers, interest-free periods are determined based on the type of equipment sold and the time of year of the sale. These periods range from one to twelve months for most equipment. Interest-free periods may not be extended. Interest is primarily charged to dealers on outstanding balances, from the earlier of the date when goods are sold to retail customers by the dealer or the expiration of certain interest-free periods granted at the time of the sale to the dealer, until payment is received by the Company. Interest charged may not be forgiven and the past due interest rates exceed market rates. Dealers cannot cancel purchases after the equipment is shipped and are responsible for payment even if the equipment is not sold to retail customers. If the interest-free or below market interest rate period exceeds one year, the Company adjusts the expected sales revenue for the effects of the time value of money using a current market interest rate. The revenue related to the financing component is recognized in finance and interest income using the interest method. The Company elected to not adjust the sales price to account for a financing component if the expected interest-free or below market period is one year or less.

Service parts and certain attachments returns are estimable and accrued at the time a sale is recognized. The estimated parts returns are recorded in other assets for the inventory value of estimated part returns, adjusted for restocking fees. The estimated dealer refund liability, adjusted for restocking fees, is recorded in accounts payable and accrued expenses. The estimated returns are based on historical return rates, current dealer inventory levels, and current economic conditions.

Sales incentives. In certain markets, the Company provides sales incentives to dealers. These incentives may be based on a dealer’s purchase volume, or on retail sales incentive programs for allowances and financing programs that will be due when the dealer sells the equipment to a retail customer. At the time of the sale to a dealer, the Company records an estimated cost of these programs as a reduction to the sales price. The estimated cost is based on historical data, field inventory levels, and forecasted sales volumes. The final cost of these programs is determined at the end of the measurement period for volume based incentives or when the dealer sells the equipment to a retail customer. Actual cost differences from the original cost estimate are recognized in net sales.

Product warranties. For most equipment and parts sales, the Company provides a standard warranty to provide assurance that the equipment will function as intended for a specified period. At the time a sale is recognized, the estimated future warranty costs are recorded. The Company generally determines its total warranty liability by applying historical warranty claims rate experience to the estimated amount of equipment that has been sold and is still under warranty based on dealer inventories and retail sales. The historical claims rate is primarily determined by a review of five-year claims costs with consideration of current quality developments. The Company also offers extended warranty arrangements for purchase at the customer’s option. The premiums for extended warranties are recognized in other income in the statement of consolidated income primarily in proportion to the costs expected to be incurred over the contract period. The unamortized extended warranty premiums (deferred revenue) are recorded in accounts payable and accrued expenses in the consolidated balance sheet.

Remanufactured components and parts. The Company remanufactures used engines and components (cores) that are sold to dealers and end customers for maintenance and repair parts. Revenue for remanufactured components is recognized using the same criteria as other parts sales. When a remanufactured part is sold, the Company collects a deposit that is repaid if the customer returns a core that meets certain specifications within a defined time period. The deposit received from the customer is recognized as a liability in accounts payable and accrued expenses and the used component that is expected to be returned is recognized in other assets in the consolidated balance sheet. When a customer returns a core, the deposit is repaid, the liability reversed, and the returned core is recorded in inventory to be remanufactured and sold to another customer. If a core is not returned within the required time as estimated, the deposit is recognized as revenue in net sales, and the estimated core return is recorded as an expense in cost of sales in the statement of consolidated income.

Precision guidance, telematics, and other information enabled solutions. Certain equipment is sold with precision guidance, telematics, and other information gathering and analyzing capabilities. The solutions require hardware, software, and include an obligation to provide telematic services for a specific period of time. These solutions are generally bundled with the sale of the equipment and can also be purchased or renewed separately. The revenue related to the hardware and embedded software is generally recognized at the time of the equipment sale and recorded in net sales in the consolidated statement of income. The revenue for the future services is generally deferred and recognized over the service period. The deferred revenue is recorded as a contract liability in accounts payable and accrued expenses in the consolidated balance sheet and is recognized in other income with the associated expenses recognized in other operating expenses in the statement of consolidated income.

Allowance for credit losses. The Company also records an allowance for credit losses related to the receivables from sales (trade receivables and certain financing receivables) in selling, administrative and general expenses. The allowance represents an estimate of the losses inherent in the receivable portfolio. The allowance is based on many quantitative and qualitative factors. The adequacy of the allowance is reviewed quarterly.

Sales and transaction taxes. The Company collects and remits taxes assessed by different governmental authorities that are both imposed on and concurrent with revenue producing transactions between the Company and its customers. These taxes include sales, use, value-added, and some excise taxes. The Company elected to exclude these taxes from the determination of sales price (excluded from revenues).

Shipping and handling costs. Shipping and handling costs related to the sales of the Company’s equipment after a customer obtains control of the equipment are accrued at the time of the sale in cost of sales.

Contract costs. The Company elected to recognize the incremental costs of obtaining a contract as an expense when incurred because the asset’s amortization period would be one year or less.

The Company’s revenue by primary geographical market, major product line, and timing of revenue recognition in millions of dollars follow:

Three Months Ended July 28, 2019	Agriculture and Turf		Construction and Forestry		Financial Services		Total
Primary geographical markets:
United States	$	2,870	$	1,594	$	632	$	5,096
Canada		299		260		148		707
Western Europe		1,154		458		22		1,634
Central Europe and CIS		324		229		10		563
Latin America		708		171		66		945
Asia, Africa, Australia, New Zealand, and Middle East		684		375		32		1,091
Total	$	6,039	$	3,087	$	910	$	10,036
Major product lines:
Large Agriculture	$	2,985					$	2,985
Small Agriculture		2,172						2,172
Turf		704						704
Construction			$	1,319				1,319
Compact Construction				320				320
Road Building				1,008				1,008
Forestry				333				333
Financial Products		25		7	$	910		942
Other		153		100				253
Total	$	6,039	$	3,087	$	910	$	10,036
Timing of revenue recognition:
Revenue recognized at a point in time	$	5,988	$	3,055			$	9,043
Revenue recognized over time		51		32	$	910		993
Total	$	6,039	$	3,087	$	910	$	10,036

Nine Months Ended July 28, 2019	Agriculture and Turf		Construction and Forestry		Financial Services		Total
Primary geographical markets:
United States	$	9,411	$	4,495	$	1,810	$	15,716
Canada		784		773		458		2,015
Western Europe		3,362		1,174		63		4,599
Central Europe and CIS		865		555		28		1,448
Latin America		2,028		515		199		2,742
Asia, Africa, Australia, New Zealand, and Middle East		1,784		966		92		2,842
Total	$	18,234	$	8,478	$	2,650	$	29,362
Major product lines:
Large Agriculture	$	8,647					$	8,647
Small Agriculture		6,613						6,613
Turf		2,199						2,199
Construction			$	3,806				3,806
Compact Construction				904				904
Road Building				2,420				2,420
Forestry				1,023				1,023
Financial Products		69		20	$	2,650		2,739
Other		706		305				1,011
Total	$	18,234	$	8,478	$	2,650	$	29,362
Timing of revenue recognition:
Revenue recognized at a point in time	$	18,088	$	8,402			$	26,490
Revenue recognized over time		146		76	$	2,650		2,872
Total	$	18,234	$	8,478	$	2,650	$	29,362

Following is a description of the Company’s major product lines:

Large Agriculture – Includes net sales of tractors with more than approximately 200 horsepower and associated attachments, combines, cotton pickers, cotton strippers, self-propelled forage harvesters and related attachments, and sugarcane harvesters, harvesting front-end equipment, sugarcane loaders and pull behind scrapers, tillage, seeding, and application equipment, including sprayers, nutrient management and soil preparation machinery, and related service parts.

Small Agriculture – Includes net sales of medium and utility tractors with less than approximately 200 horsepower, hay and forage equipment, balers, mowers, and related service parts.

Turf – Includes net sales of turf and utility equipment, including riding lawn equipment and walk-behind mowers, golf course equipment, utility vehicles, and commercial mowing equipment, along with a broad line of associated implements, other outdoor power products, and related service parts.

Construction – Includes net sales of a broad range of machines used in construction, earthmoving, and material handling, including backhoe loaders, crawler dozers and loaders, four-wheel-drive loaders, excavators, motor graders, articulated dump trucks, related attachments, and related service parts.

Compact Construction – Includes net sales of smaller construction equipment, including compact excavators, compact track loaders, compact wheel loaders, skid steers, landscape loaders, related attachments, and related service parts.

Road Building – Includes net sales of equipment used in road building and renovation, including milling machines, recyclers, slipform pavers, surface miners, asphalt pavers, compactors, tandem and static rollers mobile crushers and screens, mobile and stationary asphalt plants, related attachments, and related service parts.

Forestry – Includes net sales of equipment used in timber harvesting, including log skidders, feller bunchers, log loaders, log forwarders, log harvesters, and related logging attachments, and related service parts.

Financial Products – Includes finance and interest income primarily from retail notes related to sales of John Deere equipment to end customers, wholesale financing to dealers of John Deere equipment, and revolving charge accounts; lease income from retail leases of John Deere equipment; and revenue from extended warranties.

Other – Includes sales of certain components to other equipment manufacturers, revenue earned over time from precision guidance, telematics, and other information enabled solutions, revenue from service performed at Company owned dealerships and service centers, gains on disposition of property and businesses, trademark licensing revenue, and other miscellaneous revenue items.

The Company invoices in advance of recognizing the sale of certain products and the revenue for certain services. These items are primarily for premiums for extended warranties, advance payments for future equipment sales, and subscription and service revenue related to precision guidance and telematic services. These advanced customer payments are presented as deferred revenue, a contract liability, in accounts payable and accrued expenses in the consolidated balance sheet. The deferred revenue received, but not recognized in revenue, including extended warranty premiums also shown in Note 15, was $1,022 million and $915 million at July 28, 2019 and October 28, 2018, respectively. The contract liability is reduced as the revenue is recognized. During the third quarter and first nine months of 2019, $101 million and $360 million, respectively, of revenue was recognized from deferred revenue that was recorded as a contract liability at the beginning of 2019.

The Company entered into contracts with customers to deliver equipment and services that have not been recognized at July 28, 2019 because the equipment or services have not been provided. These contracts primarily relate to extended warranty and certain precision guidance and telematic services. The amount of unsatisfied performance obligations for contracts with an original duration greater than one year is $878 million at July 28, 2019. The estimated revenue to be recognized by fiscal year follows in millions of dollars: remainder of 2019 - $133, 2020 - $348, 2021 - $197, 2022 - $116, 2023 - $58, and later years - $26. As permitted, the Company elected only to disclose remaining performance obligations with an original contract duration greater than one year. The contracts with an expected duration of one year or less are generally for sales to dealers and end customers for equipment, service parts, repair services, and certain telematics services.