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LEASES | 9 Months Ended
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Aug. 02, 2020
LEASES |
LEASES | (15) Leases The Company is both a lessee and a lessor. The Company leases for its own use, under leases with expected use periods generally ranging from less than one year to 20 years, primarily warehouse facilities, office space, production equipment, information technology equipment, and vehicles. The Company’s financial services segment leases to users equipment produced or sold by the Company, and a limited amount of other equipment. These leases are usually written for periods of less than one year to seven years. The Company determines if an arrangement is or contains a lease at the contract inception. Lessee The Company recognizes on the balance sheet a lease liability and a right of use asset for leases with a term greater than 12 months for both operating and finance leases. The amounts of the lease liability and right of use asset are determined at lease commencement and are based on the present value of the lease payments over the lease term. The lease payments are discounted using the Company’s incremental borrowing rate since the rate implicit in the lease is generally not readily determinable. The Company determines the incremental borrowing rate for each lease based primarily on the lease term and the economic environment of the country where the asset will be used, adjusted as if the borrowings were collateralized. Leases with contractual periods greater than 12 months and that do not meet the finance lease criteria are classified as operating leases. Certain real estate leases contain one or more options to terminate or renew, with terms that can generally extend the lease term from one to 10 years. Options that the Company is reasonably certain to exercise are included in the lease term. The Company has elected to combine lease and nonlease components, such as maintenance and utilities costs included in a lease contract, for all asset classes. Leases with an initial term of 12 months or less are expensed on a straight-line basis over the lease term and recorded in short-term lease expense. Variable lease expense primarily includes warehouse facilities leases with payments based on utilization exceeding contractual minimum amounts and leases with payments indexed to inflation when the index changes after lease commencement. The lease expense by type consisted of the following in millions of dollars:
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Three Months Ended | ​ | Nine Months Ended | ​
​ | ​ | August 2, 2020 | ​ | August 2, 2020 | ​
Operating lease expense | ​ | $ | 29 | ​ | $ | 92 | ​
Short-term lease expense | ​ | ​ | 8 | ​ | ​ | 18 | ​
Variable lease expense | ​ | ​ | 8 | ​ | ​ | 28 | ​
Finance lease: | ​ | ​ | ​ | ​ | ​ | ​ | ​
Depreciation expense | ​ | ​ | 3 | ​ | ​ | 10 | ​
Interest on lease liabilities | ​ | ​ | 1 | ​ | ​ | 2 | ​
Total lease expense | ​ | $ | 49 | ​ | $ | 150 | ​
​ Operating and finance lease right of use assets and liabilities follow in millions of dollars:
​ | ​ | ​ | ​ | ​
​ | ​ | August 2, 2020 | ​
Operating leases: | ​ | ​ | ​ | ​
Other assets | ​ | $ | 341 | ​
Accounts payable and accrued expenses | ​ | ​ | 318 | ​
​ | ​ | ​ | ​ | ​
Finance leases: | ​ | ​ | ​ | ​
Property and equipment - net | ​ | $ | 56 | ​
​ | ​ | ​ | ​ | ​
Short-term borrowings | ​ | $ | 18 | ​
Long-term borrowings | ​ | ​ | 33 | ​
Total finance lease liabilities | ​ | $ | 51 | ​
​ The weighted-average remaining lease term in years and discount rates follows:
​ | ​ | ​ | ​ | ​
​ | ​ | ​ | August 2, 2020 | ​
Weighted-average remaining lease terms: | ​ | ​ | ​ | ​
Operating leases | ​ | ​ | 7 | ​
Finance leases | ​ | ​ | 3 | ​
​ | ​ | ​ | ​ | ​
Weighted-average discount rate: | ​ | ​ | ​ | ​
Operating leases | ​ | ​ | 2.2% | ​
Finance leases | ​ | ​ | 2.4% | ​
​ Lease payment amounts in each of the next five years at August 2, 2020 follow in millions of dollars:
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Operating | ​ | Finance | ​
Due in: | ​ | Leases | ​ | Leases | ​
Remainder of 2020 | ​ | $ | 30 | ​ | $ | 5 | ​
2021 | ​ | ​ | 83 | ​ | ​ | 18 | ​
2022 | ​ | ​ | 71 | ​ | ​ | 15 | ​
2023 | ​ | ​ | 50 | ​ | ​ | 10 | ​
2024 | ​ | ​ | 39 | ​ | ​ | 3 | ​
2025 | ​ | ​ | 22 | ​ | ​ | 1 | ​
Later years | ​ | ​ | 43 | ​ | ​ | 2 | ​
Total lease payments | ​ | ​ | 338 | ​ | ​ | 54 | ​
Less imputed interest | ​ | ​ | 20 | ​ | ​ | 3 | ​
Total lease liabilities | ​ | $ | 318 | ​ | $ | 51 | ​
​ Future minimum lease payments under the previous lease standard for operating and capital leases at November 3, 2019 follow in millions of dollars:
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Operating | ​ | Capital | ​
Due in: | ​ | Leases | ​ | Leases | ​
2020 | ​ | $ | 111 | ​ | $ | 12 | ​
2021 | ​ | ​ | 77 | ​ | ​ | 10 | ​
2022 | ​ | ​ | 56 | ​ | ​ | 6 | ​
2023 | ​ | ​ | 39 | ​ | ​ | 2 | ​
2024 | ​ | ​ | 28 | ​ | ​ | 1 | ​
Later years | ​ | ​ | 26 | ​ | ​ | 1 | ​
Total minimum lease payments | ​ | $ | 337 | ​ | $ | 32 | ​
​ Cash paid for amounts included in the measurement of lease liabilities:
​ | ​ | ​ | ​ | ​
​ | ​ | Nine Months Ended | ​
​ | ​ | August 2, 2020 | ​
Operating cash flows from operating leases | ​ | $ | 92 | ​
Operating cash flows from finance leases | ​ | ​ | 2 | ​
Financing cash flows from finance leases | ​ | ​ | 16 | ​
​ Right of use assets obtained in exchange for lease liabilities:
​ | ​ | ​ | ​ | ​
​ | ​ | Nine Months Ended | ​
​ | ​ | August 2, 2020 | ​
Operating leases | ​ | $ | 27 | ​
Finance leases | ​ | ​ | 37 | ​
​ Lessor The Company leases equipment manufactured or sold by the Company 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 receivables - net” on the consolidated balance sheet. Operating leases are reported in “Equipment on operating leases - net” on the consolidated balance sheet. 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 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 dealer 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 on a straight-line basis over the remaining lease term if residual value estimates decline. 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. In the second quarter of 2020, the Company recorded impairment losses on operating leases of $22 million due to higher expected equipment return rates and lower estimated values of used construction equipment. Operating lease impairments are recorded in “Other operating expenses.” 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 retail 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 “Finance and interest income” and “Other operating expenses” on the statement of consolidated income. Variable lease revenues primarily relate to property taxes on leased assets in certain markets and late fees. Due to the significant, negative effects of COVID, the Company provided short-term relief to lessees during the second and third quarters of 2020. The relief, which included payment deferrals of three months or less, was provided in regional programs and on a case-by-case basis and primarily related to construction accounts. The operating leases granted relief represented approximately 4 percent of the Company’s operating lease portfolio at August 2, 2020. See Note 11 for sales-type and direct financing leases provided payment relief. Lease revenues earned by the Company were as follows in millions of dollars:
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Three Months Ended | ​ | Nine Months Ended | ​
​ | ​ | August 2, 2020 | ​ | August 2, 2020 | ​
Sales-type and direct financing lease revenues | ​ | $ | 33 | ​ | $ | 101 | ​
Operating lease revenues | ​ | ​ | 361 | ​ | ​ | 1,104 | ​
Variable lease revenues | ​ | ​ | 6 | ​ | ​ | 17 | ​
Total lease revenues | ​ | $ | 400 | ​ | $ | 1,222 | ​
​ 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. Sales-type and direct financing lease receivables by product category were as follows in millions of dollars:
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | August 2 | ​ | November 3 | ​
​ | ​ | 2020 | ​ | 2019 | ​
Agriculture and turf | ​ | $ | 902 | ​ | $ | 897 | ​
Construction and forestry | ​ | ​ | 979 | ​ | ​ | 1,033 | ​
Total | ​ | ​ | 1,881 | ​ | ​ | 1,930 | ​
Guaranteed residual values | ​ | ​ | 238 | ​ | ​ | 232 | ​
Unguaranteed residual values | ​ | ​ | 80 | ​ | ​ | 101 | ​
Less unearned finance income | ​ | ​ | 223 | ​ | ​ | 212 | ​
Financing leases receivables | ​ | $ | 1,976 | ​ | $ | 2,051 | ​
​ Scheduled payments, including guaranteed residual values, on sales-type and direct financing lease receivables at August 2, 2020 follow in millions of dollars:
​ | ​ | ​ | ​ | ​
​ | ​ | August 2 | ​
Due in: | ​ | 2020 | ​
Remainder of 2020 | ​ | $ | 296 | ​
2021 | ​ | ​ | 850 | ​
2022 | ​ | ​ | 488 | ​
2023 | ​ | ​ | 281 | ​
2024 | ​ | ​ | 146 | ​
2025 | ​ | ​ | 46 | ​
Later years | ​ | ​ | 12 | ​
Total | ​ | $ | 2,119 | ​
​ Scheduled payments on financing lease receivables under the previous lease standard at November 3, 2019 follow in millions of dollars:
​ | ​ | ​ | ​ | ​
​ | ​ | November 3 | ​
Due in: | ​ | 2019 | ​
2020 | ​ | $ | 833 | ​
2021 | ​ | ​ | 557 | ​
2022 | ​ | ​ | 321 | ​
2023 | ​ | ​ | 153 | ​
2024 | ​ | ​ | 53 | ​
Later years | ​ | ​ | 13 | ​
Total | ​ | $ | 1,930 | ​
​ Lease payments from operating leases are recorded as income on a straight-line method over the lease terms. 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 cost of equipment on operating leases by product category was as follows in millions of dollars:
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | August 2 | ​ | November 3 | ​
​ | ​ | 2020 | ​ | 2019 | ​
Agriculture and turf | ​ | $ | 7,162 | ​ | $ | 7,257 | ​
Construction and forestry | ​ | ​ | 2,013 | ​ | ​ | 2,165 | ​
Total | ​ | ​ | 9,175 | ​ | ​ | 9,422 | ​
Less accumulated depreciation | ​ | ​ | 2,017 | ​ | ​ | 1,855 | ​
Equipment on operating leases - net | ​ | $ | 7,158 | ​ | $ | 7,567 | ​
​ The total operating lease residual values at August 2, 2020 and November 3, 2019 were $5,167 million and $5,259 million, respectively. Certain operating leases are subject to residual value guarantees. The total residual value guarantees were $691 million and $647 million at August 2, 2020 and November 3, 2019, respectively. Lease payments for equipment on operating leases at August 2, 2020 were scheduled as follows in millions of dollars:
​ | ​ | ​ | ​ | ​
​ | ​ | August 2 | ​
Due in: | ​ | 2020 | ​
Remainder of 2020 | ​ | $ | 300 | ​
2021 | ​ | ​ | 993 | ​
2022 | ​ | ​ | 633 | ​
2023 | ​ | ​ | 324 | ​
2024 | ​ | ​ | 140 | ​
2025 | ​ | ​ | 15 | ​
Total | ​ | $ | 2,405 | ​
​ Rental payments for equipment on operating leases under the previous lease standard at November 3, 2019 were scheduled as follows in millions of dollars:
​ | ​ | ​ | ​ | ​
​ | ​ | November 3 | ​
Due in: | ​ | 2019 | ​
2020 | ​ | $ | 1,086 | ​
2021 | ​ | ​ | 759 | ​
2022 | ​ | ​ | 419 | ​
2023 | ​ | ​ | 193 | ​
2024 | ​ | ​ | 41 | ​
Total | ​ | $ | 2,498 | ​
​ 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 August 2, 2020 and November 3, 2019 were $106 million and $163 million, respectively. In the second quarter of 2020, the Company recorded impairment losses on matured operating lease inventory of $10 million due to lower estimated values of used construction equipment. Impairment losses on matured operating lease inventory are included in “Other operating expenses.”

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