Leases

12 Months Ended

Oct. 30, 2022

Leases

Leases

Note 6. 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 sheets. Operating leases are reported in equipment on operating leases – net on the consolidated balance sheets.

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 statements 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):

	2022		2021		2020
Sales-type and direct financing lease revenues	$	56.6	$	48.6	$	46.0
Operating lease revenues		879.9		953.0		1,022.5
Variable lease revenues		23.4		26.9		28.6
Total lease revenues	$	959.9	$	1,028.5	$	1,097.1

Variable lease revenues reported above include excess use and damage fees of $2.4 million, $6.5 million, and $8.2 million for 2022, 2021, and 2020, respectively, which were reported in other income on the statements 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 3). During 2022, 2021, and 2020, the finance income earned from John Deere on sales-type and direct financing leases containing waiver of finance charges or reduced rates was $3.9 million, $3.7 million, and $3.3 million, respectively. The operating lease revenue earned from John Deere during 2022, 2021, and 2020 was $30.0 million, $47.1 million, and $57.2 million, respectively.

Financing Leases

Sales-type and direct financing lease receivables by market at October 30, 2022 and October 31, 2021 were as follows (in millions of dollars):

	2022		2021
Agriculture and turf	$	570.2	$	500.8
Construction and forestry		183.7		168.2
Total		753.9		669.0
Guaranteed residual values		466.5		359.7
Unguaranteed residual values		25.9		33.7
Unearned finance income		(125.6)		(90.1)
Financing leases receivable	$	1,120.7	$	972.3

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 30, 2022 were as follows (in millions of dollars):

Due in:
2023	$	662.9
2024		279.8
2025		148.2
2026		76.8
2027		41.4
Later years		11.3
Total	$	1,220.4

Operating Leases

The cost of equipment on operating leases by market at October 30, 2022 and October 31, 2021 was as follows (in millions of dollars):

	2022		2021
Agriculture and turf	$	5,017.3	$	5,053.4
Construction and forestry		1,138.0		1,323.6
Total		6,155.3		6,377.0
Accumulated depreciation		(1,301.8)		(1,429.4)
Equipment on operating leases - net	$	4,853.5	$	4,947.6

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 30, 2022 were scheduled as follows (in millions of dollars):

Due in:
2023	$	677.1
2024		474.7
2025		273.0
2026		133.8
2027		29.1
Later years		5.0
Total	$	1,592.7

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. Depreciation is adjusted prospectively on a straight-line basis over the remaining lease term if residual value estimates are revised. Operating lease impairments are recorded in administrative and operating expenses on the statements of consolidated income. There were no impairment losses on operating leases recorded during 2022 or 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.

The total operating lease residual values at October 30, 2022 and October 31, 2021 were $3,366.7 million and $3,547.6 million, respectively. For operating lease originations effective after January 2020, John Deere dealers generally provide a first-loss residual value guarantee. The total first-loss residual value guarantees were $440.7 million and $295.8 million at October 30, 2022 and October 31, 2021, respectively.

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 October 30, 2022 and October 31, 2021 were $10.8 million and $25.4 million, respectively. Matured operating lease inventory is reported in other assets on the consolidated balance sheets. 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. There were no impairment losses on matured operating lease inventory in 2022 or 2021. Impairment losses on matured operating lease inventory are included in administrative and operating expenses on the statements 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 $58.7 million and $53.9 million at October 30, 2022 and October 31, 2021, respectively.