UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 1,January 29, 20222023
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file no: 1-6458
JOHN DEERE CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
| | |
| | |
Delaware | | 36-2386361 |
| ||
| ||
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 |
2.00% Senior Notes Due 2031 | | JDCC 31 | | New York Stock Exchange |
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.
Yes ☒No ☐
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).
Yes ☒No ☐
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 | ☐ |
Non-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 ☐ No ☒
At May 26, 2022,February 23, 2023 2,500 shares of common stock, without par value, of the registrant were outstanding, all of which were owned by John Deere Financial Services, Inc., a wholly-owned subsidiary of Deere & Company.
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
Statements of Consolidated Income
(Unaudited)
(in millions)
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | Three Months Ended |
| ||||||||||||
| | May 1 | | May 2 | | May 1 | | May 2 |
| | January 29 | | January 30 |
| ||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
|
| 2023 |
| 2022 |
| ||||||
Revenues | | | | | | | | | | | | | | | | | | | | |
Finance income earned on retail notes | | $ | 242.8 | | $ | 234.2 | | $ | 482.8 | | $ | 471.5 | | | $ | 315.9 | | $ | 240.0 | |
Lease revenues | |
| 236.5 | |
| 256.2 | |
| 478.0 | |
| 519.8 | | |
| 240.7 | |
| 241.5 | |
Revolving charge account income | |
| 65.9 | |
| 65.9 | |
| 132.4 | |
| 138.8 | | |
| 82.9 | |
| 66.5 | |
Finance income earned on wholesale receivables | |
| 71.0 | |
| 80.3 | |
| 130.9 | |
| 153.6 | | |
| 151.5 | |
| 59.9 | |
Other income | |
| 35.2 | |
| 38.7 | |
| 70.2 | |
| 48.6 | | |
| 29.6 | |
| 35.0 | |
Total revenues | |
| 651.4 | |
| 675.3 | |
| 1,294.3 | |
| 1,332.3 | | |
| 820.6 | |
| 642.9 | |
Expenses | | | | | | | | | | | | | | | | | | | | |
Interest expense | |
| 55.7 | |
| 125.0 | |
| 155.2 | | | 259.0 | | |
| 301.0 | | | 99.5 | |
Operating expenses: | | | | | | | | | | | | | | | | | | | | |
Depreciation of equipment on operating leases | |
| 165.8 | |
| 184.6 | |
| 334.6 | | | 379.4 | | |
| 164.5 | | | 168.8 | |
Administrative and operating expenses | |
| 115.2 | |
| 106.3 | |
| 211.6 | | | 198.8 | | |
| 108.5 | | | 96.4 | |
Fees paid to John Deere | |
| 99.6 | |
| 39.4 | |
| 139.3 | | | 70.9 | | |||||||
Fees and interest paid to John Deere | |
| 57.6 | | | 39.7 | | |||||||||||||
Provision (credit) for credit losses | |
| 13.2 | |
| (15.6) | | | 12.0 | |
| (16.2) | | | | 3.5 | |
| (1.2) | |
Total operating expenses | |
| 393.8 | |
| 314.7 | |
| 697.5 | |
| 632.9 | | |
| 334.1 | |
| 303.7 | |
Total expenses | |
| 449.5 | |
| 439.7 | |
| 852.7 | |
| 891.9 | | |
| 635.1 | |
| 403.2 | |
Income of consolidated group before income taxes | |
| 201.9 | |
| 235.6 | |
| 441.6 | |
| 440.4 | | |
| 185.5 | |
| 239.7 | |
Provision for income taxes | |
| 44.5 | |
| 59.0 | |
| 96.5 | | | 98.0 | | |
| 39.6 | | | 52.0 | |
Income of consolidated group | |
| 157.4 | |
| 176.6 | |
| 345.1 | |
| 342.4 | | |
| 145.9 | |
| 187.7 | |
Equity in income of unconsolidated affiliate | |
| 1.1 | |
| .6 | |
| 3.0 | | | 1.5 | | |
| 1.0 | | | 1.9 | |
Net income | |
| 158.5 | |
| 177.2 | |
| 348.1 | |
| 343.9 | | |
| 146.9 | |
| 189.6 | |
Less: Net loss attributable to noncontrolling interests | | | (.1) | | | | | | (.1) | | | | | | | (.2) | | | | |
Net income attributable to the Company | | $ | 158.6 | | $ | 177.2 | | $ | 348.2 | | $ | 343.9 | | | $ | 147.1 | | $ | 189.6 | |
See Condensed Notes to Interim Consolidated Financial Statements.
2
John Deere Capital Corporation and Subsidiaries
Statements of Consolidated Comprehensive Income
(Unaudited)
(in millions)
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | Three Months Ended |
| ||||||||||||
| | May 1 | | May 2 | | May 1 | | May 2 |
| | January 29 | | January 30 |
| ||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
|
| 2023 |
| 2022 |
| ||||||
| | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 158.5 | | $ | 177.2 | | $ | 348.1 | | $ | 343.9 | | | $ | 146.9 | | $ | 189.6 | |
| | | | | | | | | | | | | | | | | | | | |
Other comprehensive income (loss), net of income taxes | | | | | | | | | | | | | | | | | | | | |
Cumulative translation adjustment | |
| (34.2) | | | 3.6 | | | (70.6) | | | 39.3 | | | | 66.2 | | | (36.4) | |
Unrealized gain on derivatives | |
| 27.7 | | | 2.3 | | | 40.7 | | | 5.3 | | |||||||
Unrealized gain (loss) on derivatives | | | (14.3) | | | 13.0 | | |||||||||||||
Unrealized gain (loss) on debt securities | | | (.2) | | | | | | (.4) | | | .1 | | | | .4 | | | (.2) | |
Other comprehensive income (loss), net of income taxes | |
| (6.7) | |
| 5.9 | |
| (30.3) | |
| 44.7 | | |
| 52.3 | |
| (23.6) | |
| | | | | | | | | | | | | | | | | | | | |
Comprehensive income of consolidated group | |
| 151.8 | |
| 183.1 | |
| 317.8 | |
| 388.6 | | |
| 199.2 | |
| 166.0 | |
Less: Comprehensive loss attributable to noncontrolling interests | | | (.1) | | | | | | (.1) | | | | | | | (.2) | | | | |
Comprehensive income attributable to the Company | | $ | 151.9 | | $ | 183.1 | | $ | 317.9 | | $ | 388.6 | | | $ | 199.4 | | $ | 166.0 | |
See Condensed Notes to Interim Consolidated Financial Statements.
3
John Deere Capital Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
(in millions)
| | | | | | | | | | | | | | | | | | | | |
| | May 1 | | October 31 | | May 2 |
| | January 29 | | October 30 | | January 30 |
| ||||||
| | 2022 | | 2021 | | 2021 |
| | 2023 | | 2022 | | 2022 |
| ||||||
Assets |
| | |
| | |
| | | |
| | |
| | |
| | | |
Cash and cash equivalents | | $ | 632.1 | | $ | 677.0 | | $ | 667.0 | | | $ | 1,055.0 | | $ | 661.8 | | $ | 664.5 | |
Marketable securities | | | 1.6 | | | 2.1 | | | 2.0 | | | | 1.8 | | | 1.1 | | | 1.8 | |
Receivables: | | | | | | | | | | | | | | | | | | | | |
Retail notes | |
| 22,211.4 | |
| 21,343.5 | |
| 19,146.1 | | |
| 23,937.2 | |
| 22,860.3 | |
| 22,336.1 | |
Retail notes securitized | |
| 4,079.2 | |
| 4,662.4 | |
| 4,106.3 | | |
| 5,101.4 | |
| 5,951.6 | |
| 3,517.9 | |
Revolving charge accounts | |
| 3,425.0 | |
| 3,740.1 | |
| 3,267.9 | | |
| 2,834.0 | |
| 4,165.8 | |
| 2,684.8 | |
Wholesale receivables | |
| 7,346.4 | |
| 5,951.3 | |
| 8,424.1 | | |
| 9,752.1 | |
| 8,404.5 | |
| 6,312.0 | |
Financing leases | |
| 896.5 | |
| 972.3 | |
| 789.1 | | |
| 1,030.8 | |
| 1,120.7 | |
| 878.4 | |
Total receivables | |
| 37,958.5 | |
| 36,669.6 | |
| 35,733.5 | | |
| 42,655.5 | |
| 42,502.9 | |
| 35,729.2 | |
Allowance for credit losses | |
| (124.5) | |
| (129.0) | |
| (129.8) | | |
| (121.7) | |
| (128.4) | |
| (121.4) | |
Total receivables – net | |
| 37,834.0 | |
| 36,540.6 | |
| 35,603.7 | | |
| 42,533.8 | |
| 42,374.5 | |
| 35,607.8 | |
Other receivables | |
| 81.2 | |
| 85.1 | |
| 91.1 | | |
| 108.2 | |
| 91.4 | |
| 91.5 | |
Receivables from John Deere | |
| 149.0 | |
| 191.6 | |
| 299.5 | | |
| 171.2 | |
| 214.8 | |
| 156.8 | |
Equipment on operating leases – net | |
| 4,708.7 | |
| 4,947.6 | |
| 5,008.9 | | |
| 4,693.4 | |
| 4,853.5 | |
| 4,745.6 | |
Notes receivable from John Deere | | | 211.5 | | | 393.5 | | | 301.5 | | | | 494.4 | | | 370.7 | | | 371.7 | |
Investment in unconsolidated affiliate | |
| 22.4 | |
| 21.9 | |
| 21.5 | | |
| 25.8 | |
| 22.6 | |
| 22.7 | |
Deferred income taxes | |
| 29.6 | |
| 32.7 | |
| 31.0 | | |
| 24.4 | |
| 23.3 | |
| 30.4 | |
Other assets | |
| 342.8 | |
| 324.5 | |
| 342.6 | | |
| 298.4 | |
| 314.3 | |
| 334.4 | |
Total Assets | | $ | 44,012.9 | | $ | 43,216.6 | | $ | 42,368.8 | | | $ | 49,406.4 | | $ | 48,928.0 | | $ | 42,027.2 | |
| | | | | | | | | | | | | | | | | | | | |
Liabilities and Stockholder’s Equity | | | | | | | | | | | | | | | | | | | | |
Short-term external borrowings: | | | | | | | | | | | | | | | | | | | | |
Commercial paper and other notes payable | | $ | 1,731.5 | | $ | 678.9 | | $ | 1,168.9 | | | $ | 3,637.8 | | $ | 2,402.3 | | $ | 568.6 | |
Securitization borrowings | |
| 4,000.9 | |
| 4,595.2 | |
| 4,092.5 | | |
| 4,863.9 | |
| 5,710.9 | |
| 3,473.8 | |
Current maturities of long-term external borrowings | |
| 6,153.7 | |
| 5,819.1 | |
| 5,702.9 | | |
| 6,080.1 | |
| 5,989.6 | |
| 6,104.0 | |
Total short-term external borrowings | |
| 11,886.1 | |
| 11,093.2 | |
| 10,964.3 | | |
| 14,581.8 | |
| 14,102.8 | |
| 10,146.4 | |
Notes payable to John Deere | |
| 5,276.4 | |
| 5,619.4 | |
| 5,752.4 | | |
| 4,416.2 | |
| 5,225.5 | |
| 5,306.4 | |
Other payables to John Deere | |
| 599.4 | |
| 97.6 | |
| 81.2 | | |
| 664.2 | |
| 1,024.2 | |
| 186.3 | |
Accounts payable and accrued expenses | |
| 817.0 | |
| 876.0 | |
| 840.8 | | |
| 893.4 | |
| 866.1 | |
| 782.8 | |
Deposits held from dealers and merchants | |
| 126.9 | |
| 131.8 | |
| 125.8 | | |
| 127.8 | |
| 137.3 | |
| 126.1 | |
Deferred income taxes | |
| 246.8 | |
| 265.1 | |
| 295.7 | | |
| 225.5 | |
| 239.4 | |
| 260.5 | |
Long-term external borrowings | |
| 20,391.3 | |
| 20,607.3 | |
| 19,783.0 | | |
| 23,493.4 | |
| 22,527.8 | |
| 20,566.5 | |
Total liabilities | |
| 39,343.9 | |
| 38,690.4 | |
| 37,843.2 | | |
| 44,402.3 | |
| 44,123.1 | |
| 37,375.0 | |
Commitments and contingencies (Note 9) | | | | | | | | | | | | | | | | | | | | |
Stockholder’s equity: | | | | | | | | | | | | | | | | | | | | |
Common stock, without par value (issued and outstanding – 2,500 shares owned by John Deere Financial Services, Inc.) | |
| 1,482.8 | |
| 1,482.8 | |
| 1,482.8 | | |
| 1,482.8 | |
| 1,482.8 | |
| 1,482.8 | |
Retained earnings | |
| 3,264.2 | |
| 3,091.0 | |
| 3,074.3 | | |
| 3,572.4 | |
| 3,425.3 | |
| 3,240.6 | |
Accumulated other comprehensive loss | |
| (79.7) | |
| (49.4) | |
| (33.1) | | |
| (52.4) | |
| (104.7) | |
| (73.0) | |
Total Company stockholder’s equity | |
| 4,667.3 | |
| 4,524.4 | |
| 4,524.0 | | |
| 5,002.8 | |
| 4,803.4 | |
| 4,650.4 | |
Noncontrolling interests | |
| 1.7 | |
| 1.8 | |
| 1.6 | | |
| 1.3 | |
| 1.5 | |
| 1.8 | |
Total stockholder’s equity | |
| 4,669.0 | |
| 4,526.2 | |
| 4,525.6 | | |
| 5,004.1 | |
| 4,804.9 | |
| 4,652.2 | |
Total Liabilities and Stockholder’s Equity | | $ | 44,012.9 | | $ | 43,216.6 | | $ | 42,368.8 | | | $ | 49,406.4 | | $ | 48,928.0 | | $ | 42,027.2 | |
See Condensed Notes to Interim Consolidated Financial Statements.
4
John Deere Capital Corporation and Subsidiaries
Statements of Consolidated Cash Flows
(Unaudited)
(in millions)
| | | | | | | |
| | Six Months Ended | | ||||
| | May 1 | | May 2 | | ||
|
| 2022 |
| 2021 |
| ||
Cash Flows from Operating Activities: | | | | | | | |
Net income | | $ | 348.1 | | $ | 343.9 | |
Adjustments to reconcile net income to net cash | | | | | | | |
provided by operating activities: | | | | | | | |
Provision (credit) for credit losses | |
| 12.0 | | | (16.2) | |
Provision for depreciation and amortization | |
| 347.2 | | | 390.5 | |
Credit for deferred income taxes | |
| (25.8) | | | (48.8) | |
Undistributed earnings of unconsolidated affiliate | |
| (2.9) | | | (1.5) | |
Change in accounts payable and accrued expenses | |
| (46.7) | | | (43.3) | |
Change in accrued income taxes payable/receivable | |
| | | | (16.8) | |
Other | |
| (90.8) | | | 82.0 | |
Net cash provided by operating activities | |
| 541.1 | |
| 689.8 | |
| | | | | | | |
Cash Flows from Investing Activities: | | | | | | | |
Cost of receivables acquired (excluding wholesale) | |
| (11,109.0) | | | (10,873.3) | |
Collections of receivables (excluding wholesale) | |
| 10,839.7 | | | 10,048.1 | |
Increase in wholesale receivables – net | |
| (1,577.9) | | | (1,209.2) | |
Cost of equipment on operating leases acquired | |
| (831.4) | | | (814.0) | |
Proceeds from sales of equipment on operating leases | |
| 775.8 | | | 762.6 | |
Cost of notes receivable acquired from John Deere | | | (122.9) | | | (70.8) | |
Collections of notes receivable from John Deere | | | 335.3 | | | 127.4 | |
Other | |
| (7.6) | | | (2.8) | |
Net cash used for investing activities | |
| (1,698.0) | |
| (2,032.0) | |
| | | | | | | |
Cash Flows from Financing Activities: | | | | | | | |
Increase in commercial paper and other notes payable – net | |
| 1,051.6 | | | 981.4 | |
Decrease in securitization borrowings – net | |
| (593.7) | | | (563.4) | |
Increase (decrease) in short-term borrowings with John Deere – net | |
| (90.2) | | | 403.4 | |
Proceeds from issuance of long-term external borrowings | |
| 3,658.0 | | | 3,422.4 | |
Payments of long-term external borrowings | |
| (2,722.9) | | | (2,772.1) | |
Dividends paid | |
| (175.0) | | | (135.0) | |
Debt issuance costs | |
| (16.1) | | | (18.2) | |
Net cash provided by financing activities | |
| 1,111.7 | |
| 1,318.5 | |
| | | | | | | |
Effect of exchange rate changes on cash, cash equivalents, and restricted cash | |
| (9.4) | | | 8.7 | |
Net decrease in cash, cash equivalents, and restricted cash | |
| (54.6) | |
| (15.0) | |
Cash, cash equivalents, and restricted cash at beginning of period | |
| 772.8 | |
| 769.4 | |
Cash, cash equivalents, and restricted cash at end of period | | $ | 718.2 | | $ | 754.4 | |
| | | | | | | |
Components of cash, cash equivalents, and restricted cash: | | | | | | | |
Cash and cash equivalents | | | 632.1 | | | 667.0 | |
Restricted cash* | | | 86.1 | | | 87.4 | |
Total cash, cash equivalents, and restricted cash | | $ | 718.2 | | $ | 754.4 | |
| | | | | | | |
| | Three Months Ended | | ||||
| | January 29 | | January 30 | | ||
|
| 2023 |
| 2022 |
| ||
Cash Flows from Operating Activities: | | | | | | | |
Net income | | $ | 146.9 | | $ | 189.6 | |
Adjustments to reconcile net income to net cash | | | | | | | |
provided by operating activities: | | | | | | | |
Provision (credit) for credit losses | |
| 3.5 | | | (1.2) | |
Provision for depreciation and amortization | |
| 170.1 | | | 175.1 | |
Credit for deferred income taxes | |
| (11.3) | | | (5.8) | |
Change in accounts payable and accrued expenses | |
| 29.1 | | | (72.6) | |
Change in accrued income taxes payable/receivable | |
| 10.0 | | | 11.7 | |
Other | |
| (9.6) | | | (28.1) | |
Net cash provided by operating activities | |
| 338.7 | |
| 268.7 | |
| | | | | | | |
Cash Flows from Investing Activities: | | | | | | | |
Cost of receivables acquired (excluding wholesale) | |
| (5,686.3) | | | (5,197.5) | |
Collections of receivables (excluding wholesale) | |
| 6,902.4 | | | 6,294.1 | |
Increase in wholesale receivables – net | |
| (1,148.5) | | | (457.9) | |
Cost of equipment on operating leases acquired | |
| (375.3) | | | (317.4) | |
Proceeds from sales of equipment on operating leases | |
| 386.2 | | | 362.0 | |
Cost of notes receivable acquired from John Deere | | | (120.8) | | | (107.1) | |
Collections of notes receivable from John Deere | | | 2.2 | | | 106.3 | |
Other | |
| (12.9) | | | (6.5) | |
Net cash provided by (used for) investing activities | |
| (53.0) | |
| 676.0 | |
| | | | | | | |
Cash Flows from Financing Activities: | | | | | | | |
Increase (decrease) in commercial paper and other notes payable – net | |
| 1,223.2 | | | (110.3) | |
Decrease in securitization borrowings – net | |
| (849.3) | | | (1,122.6) | |
Decrease in short-term borrowings with John Deere – net | |
| (964.7) | | | (181.0) | |
Proceeds from issuance of long-term external borrowings | |
| 2,298.9 | | | 1,799.3 | |
Payments of long-term external borrowings | |
| (1,618.5) | | | (1,302.4) | |
Dividends paid | |
| | | | (40.0) | |
Debt issuance costs | |
| (8.6) | | | (6.1) | |
Net cash provided by (used for) financing activities | |
| 81.0 | |
| (963.1) | |
| | | | | | | |
Effect of exchange rate changes on cash, cash equivalents, and restricted cash | |
| 13.1 | | | (5.2) | |
Net increase (decrease) in cash, cash equivalents, and restricted cash | |
| 379.8 | |
| (23.6) | |
Cash, cash equivalents, and restricted cash at beginning of period | |
| 766.1 | |
| 772.8 | |
Cash, cash equivalents, and restricted cash at end of period | | $ | 1,145.9 | | $ | 749.2 | |
| | | | | | | |
Components of cash, cash equivalents, and restricted cash: | | | | | | | |
Cash and cash equivalents | | $ | 1,055.0 | | $ | 664.5 | |
Restricted cash* | | | 90.9 | | | 84.7 | |
Total cash, cash equivalents, and restricted cash | | $ | 1,145.9 | | $ | 749.2 | |
* Restricted cash is reported in other assets on the consolidated balance sheets and primarily relates to the securitization of receivables (see Note 5).
See Condensed Notes to Interim Consolidated Financial Statements.
5
John Deere Capital Corporation and Subsidiaries
Statements of Changes in Consolidated Stockholder’s Equity
For the Three and Six Months Ended May 1,January 29, 2023 and January 30, 2022 and May 2, 2021
(Unaudited)
(in millions)
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| | Total | | | | | | | | Other | | Non- | | | Total | | | | | | | | Other | | Non- | | ||||||
| | Stockholder’s | | Common | | Retained | | Comprehensive | | Controlling | | | Stockholder’s | | Common | | Retained | | Comprehensive | | Controlling | | ||||||||||
| | Equity | | Stock | | Earnings | | Income (Loss) | | Interests |
| | Equity | | Stock | | Earnings | | Income (Loss) | | Interests |
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Three Months Ended May 2, 2021 | | | | | | | | | | | | | | | | | ||||||||||||||||
Balance January 31, 2021 | | $ | 4,342.5 | | $ | 1,482.8 | | $ | 2,897.1 | | $ | (39.0) | | $ | 1.6 | | ||||||||||||||||
Balance October 31, 2021 | | $ | 4,526.2 | | $ | 1,482.8 | | $ | 3,091.0 | | $ | (49.4) | | $ | 1.8 | | ||||||||||||||||
Net income | | | 177.2 | | | | | | 177.2 | | | | | | | | |
| 189.6 | | | | |
| 189.6 | | | | | | | |
Other comprehensive income | | | 5.9 | | | | | | | | | 5.9 | | | | | ||||||||||||||||
Balance May 2, 2021 | | $ | 4,525.6 | | $ | 1,482.8 | | $ | 3,074.3 | | $ | (33.1) | | $ | 1.6 | | ||||||||||||||||
| | | | | | | | | | | | | | | | | ||||||||||||||||
Six Months Ended May 2, 2021 | | | | | | | | | | | | | | | | | ||||||||||||||||
Balance November 1, 2020 | | $ | 4,298.2 | | $ | 1,482.8 | | $ | 2,891.6 | | $ | (77.8) | | $ | 1.6 | | ||||||||||||||||
ASU No. 2016-13 adoption | | | (26.2) | | | | | | (26.2) | | | | | | | | ||||||||||||||||
Net income | |
| 343.9 | | | | |
| 343.9 | | | | | | | | ||||||||||||||||
Other comprehensive income | |
| 44.7 | | | | | | | | | 44.7 | | | | | ||||||||||||||||
Dividends declared | |
| (135.0) | | | | | | (135.0) | | | | | | | | ||||||||||||||||
Balance May 2, 2021 | | $ | 4,525.6 | | $ | 1,482.8 | | $ | 3,074.3 | | $ | (33.1) | | $ | 1.6 | | ||||||||||||||||
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Three Months Ended May 1, 2022 | | | | | | | | | | | | | | | | | ||||||||||||||||
Balance January 30, 2022 | | $ | 4,652.2 | | $ | 1,482.8 | | $ | 3,240.6 | | $ | (73.0) | | $ | 1.8 | | ||||||||||||||||
Net income (loss) | | | 158.5 | | | | | | 158.6 | | | | | | (.1) | | ||||||||||||||||
Other comprehensive loss | | | (6.7) | | | | | | | | | (6.7) | | | | | |
| (23.6) | | | | | | | | | (23.6) | | | | |
Dividends declared | | | (135.0) | | | | | | (135.0) | | | | | | | | |
| (40.0) | | | | | | (40.0) | | | | | | | |
Balance May 1, 2022 | | $ | 4,669.0 | | $ | 1,482.8 | | $ | 3,264.2 | | $ | (79.7) | | $ | 1.7 | | ||||||||||||||||
Balance January 30, 2022 | | $ | 4,652.2 | | $ | 1,482.8 | | $ | 3,240.6 | | $ | (73.0) | | $ | 1.8 | | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Six Months Ended May 1, 2022 | | | | | | | | | | | | | | | | | ||||||||||||||||
Balance October 31, 2021 | | $ | 4,526.2 | | $ | 1,482.8 | | $ | 3,091.0 | | $ | (49.4) | | $ | 1.8 | | ||||||||||||||||
Balance October 30, 2022 | | $ | 4,804.9 | | $ | 1,482.8 | | $ | 3,425.3 | | $ | (104.7) | | $ | 1.5 | | ||||||||||||||||
Net income (loss) | |
| 348.1 | | | | |
| 348.2 | | | | | | (.1) | | |
| 146.9 | | | | |
| 147.1 | | | | | | (.2) | |
Other comprehensive loss | |
| (30.3) | | | | | | | | | (30.3) | | | | | ||||||||||||||||
Dividends declared | |
| (175.0) | | | | | | (175.0) | | | | | | | | ||||||||||||||||
Balance May 1, 2022 | | $ | 4,669.0 | | $ | 1,482.8 | | $ | 3,264.2 | | $ | (79.7) | | $ | 1.7 | | ||||||||||||||||
Other comprehensive income | |
| 52.3 | | | | | | | | | 52.3 | | | | | ||||||||||||||||
Balance January 29, 2023 | | $ | 5,004.1 | | $ | 1,482.8 | | $ | 3,572.4 | | $ | (52.4) | | $ | 1.3 | |
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. References to agriculture“agriculture and turfturf” include both production and precision agriculture and small agriculture and turf. 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 independent John Deere retail dealers. The Company also purchases and finances a limited amount of non-John Deere retail notes. TheIn addition, 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). Additionally, theThe Company also provides wholesale financing to dealers of John Deere agriculture and turf equipment and construction and forestry equipment, primarily to finance inventories of equipment for those dealers (wholesale receivables). In addition,Further, the Company leases John Deere equipment and a limited amount of non-John Deere equipment to retail customers (financing and operating leases). The Company also offers credit enhanced international export financing to select customers and dealers, which generallyprimarily involves John Deere products. Retail notes, revolving charge accounts, wholesale receivables, and financing leases are collectively called “Customer Receivables.” Customer Receivables and wholesale receivables 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 security in the goods associated with those Receivables or with the use of other collateral.
The Company uses a 52/53 week fiscal year with quarters ending on the last Sunday in the reporting period. The secondfirst quarter ends for fiscal years 2023 and 2022 were January 29, 2023 and 2021 were May 1,January 30, 2022, and May 2, 2021, respectively. Both second quartersperiods contained 13 weeks, while both year-to-date periods contained 26 weeks. Unless otherwise stated, references to particular years, quarters, or quartersmonths refer to the Company'sCompany’s fiscal years generally ending in October and the associated periods in those fiscal years.
The Company is the primary beneficiary of and consolidates certain variable interest entities (VIEs) that are special purpose entities (SPEs) related to the securitization of receivables. See Note 5 for more information on these SPEs.
(2) Summary of Significant Accounting Policies and New Accounting Standards
Quarterly Financial Statements
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.
7
Use of Estimates in Financial Statements
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. Actual results could differ from those estimates.
New Accounting Standards
The Company closely monitors all Accounting Standard Updates (ASUs) issued by the Financial Accounting Standards Board (FASB) and other authoritative guidance. ASUs adopted in 20222023 did not have a material impact on the Company’s financial statements.
In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which will be effective in the first quarter of fiscal year 2024. The ASU eliminates the accounting guidance for troubled debt restructurings, enhances disclosures for certain receivable modifications related to borrowers experiencing financial difficulty, and requires disclosure of current period gross write-offs by year of origination. ASU No. 2022-02 and other ASUs to be adopted in future periods are being evaluated and at this point are not expected to have a material impact on the Company’s financial statements.
(3) Other Comprehensive Income Items
The after-tax components of accumulated other comprehensive income (loss) were as follows (in millions of dollars):
| | | | | | | | | | | | | | | | | | |
| | May 1 | | October 31 | | May 2 | | January 29 | | October 30 | | January 30 | ||||||
| | 2022 | | 2021 | | 2021 | | 2023 | | 2022 | | 2022 | ||||||
Cumulative translation adjustment | | $ | (125.1) | | $ | (54.5) | | $ | (30.2) | | $ | (102.8) | | $ | (169.0) | | $ | (90.9) |
Unrealized gain (loss) on derivatives | | | 47.5 | | | 6.8 | | | (1.4) | |||||||||
Unrealized gain on derivatives | | | 52.5 | | | 66.8 | | | 19.8 | |||||||||
Unrealized loss on debt securities | | | (2.1) | | | (1.7) | | | (1.5) | | | (2.1) | | | (2.5) | | | (1.9) |
Total accumulated other comprehensive income (loss) | | $ | (79.7) | | $ | (49.4) | | $ | (33.1) | | $ | (52.4) | | $ | (104.7) | | $ | (73.0) |
8
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 |
| | Before | | Tax | | After |
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| | Tax | | (Expense) | | Tax |
| | Tax | | (Expense) | | Tax |
| ||||||
Three Months Ended May 1, 2022 | | Amount | | Credit | | Amount |
| |||||||||||||
Three Months Ended January 29, 2023 | | Amount | | Credit | | Amount |
| |||||||||||||
Cumulative translation adjustment |
| $ | (34.2) | | | | | $ | (34.2) | | | $ | 66.2 | | | | | $ | 66.2 | |
Unrealized gain (loss) on derivatives: | | | | | | | | | | | | | | | | | | | | |
Unrealized hedging gain (loss) | |
| 35.2 | | $ | (7.3) | |
| 27.9 | | |
| (1.9) | | $ | .4 | |
| (1.5) | |
Reclassification of realized (gain) loss to: | | | | | | | | | | | | | | | | | | | | |
Interest rate contracts – Interest expense | |
| (.2) | | | | | | (.2) | | |
| (16.3) | | | 3.5 | | | (12.8) | |
Net unrealized gain (loss) on derivatives | |
| 35.0 | |
| (7.3) | |
| 27.7 | | |
| (18.2) | |
| 3.9 | |
| (14.3) | |
Unrealized gain (loss) on debt securities: | | | | | | | | | | | | | | | | | | | | |
Unrealized holding gain (loss) | | | (.2) | | | | | | (.2) | | | | .7 | | | (.3) | | | .4 | |
Total other comprehensive income (loss) | | $ | .6 | | $ | (7.3) | | $ | (6.7) | | | $ | 48.7 | | $ | 3.6 | | $ | 52.3 | |
| | | | | | | | | | | | | | | | | | | | |
Six Months Ended May 1, 2022 | | | | | | | | | | | ||||||||||
Three Months Ended January 30, 2022 | | | | | | | | | | | ||||||||||
Cumulative translation adjustment | | $ | (70.6) | | | | | $ | (70.6) | | | $ | (36.4) | | | | | $ | (36.4) | |
Unrealized gain (loss) on derivatives: | | | | | | | | | | | | | | | | | | | | |
Unrealized hedging gain (loss) | |
| 50.6 | | $ | (10.6) | |
| 40.0 | | |
| 15.4 | | $ | (3.3) | |
| 12.1 | |
Reclassification of realized (gain) loss to: | | | | | | | | | | | | | | | | | | | | |
Interest rate contracts – Interest expense | |
| .9 | | | (.2) | | | .7 | | |
| 1.1 | | | (.2) | |
| .9 | |
Net unrealized gain (loss) on derivatives | |
| 51.5 | |
| (10.8) | |
| 40.7 | | |
| 16.5 | |
| (3.5) | |
| 13.0 | |
Unrealized gain (loss) on debt securities: | | | | | | | | | | | | | | | | | | | | |
Unrealized holding gain (loss) | | | (.5) | | | .1 | | | (.4) | | | | (.3) | | | .1 | | | (.2) | |
Total other comprehensive income (loss) | | $ | (19.6) | | $ | (10.7) | | $ | (30.3) | | | $ | (20.2) | | $ | (3.4) | | $ | (23.6) | |
| | | | | | | | | | | ||||||||||
Three Months Ended May 2, 2021 | | | | | | | | | | | ||||||||||
Cumulative translation adjustment | | $ | 3.6 | | | | | $ | 3.6 | | ||||||||||
Unrealized gain (loss) on derivatives: | | | | | | | | | | | ||||||||||
Unrealized hedging gain (loss) | |
| .6 | | $ | (.1) | |
| .5 | | ||||||||||
Reclassification of realized (gain) loss to: | | | | | | | | | | | ||||||||||
Interest rate contracts – Interest expense | |
| 2.3 | | | (.5) | |
| 1.8 | | ||||||||||
Net unrealized gain (loss) on derivatives | |
| 2.9 | | | (.6) | |
| 2.3 | | ||||||||||
Unrealized gain (loss) on debt securities: | | | | | | | | | | | ||||||||||
Unrealized holding gain (loss) | | | (.2) | | | .2 | | | | | ||||||||||
Total other comprehensive income (loss) | | $ | 6.3 | | $ | (.4) | | $ | 5.9 | | ||||||||||
| | | | | | | | | | | ||||||||||
Six Months Ended May 2, 2021 | | | | | | | | | | | ||||||||||
Cumulative translation adjustment | | $ | 39.3 | | | | | $ | 39.3 | | ||||||||||
Unrealized gain (loss) on derivatives: | | | | | | | | | | | ||||||||||
Unrealized hedging gain (loss) | |
| .1 | | | | |
| .1 | | ||||||||||
Reclassification of realized (gain) loss to: | | | | | | | | | | | ||||||||||
Interest rate contracts – Interest expense | |
| 6.6 | | $ | (1.4) | |
| 5.2 | | ||||||||||
Net unrealized gain (loss) on derivatives | |
| 6.7 | |
| (1.4) | |
| 5.3 | | ||||||||||
Unrealized gain (loss) on debt securities: | | | | | | | | | | | ||||||||||
Unrealized holding gain (loss) | | | (.2) | | | .3 | | | .1 | | ||||||||||
Total other comprehensive income (loss) | | $ | 45.8 | | $ | (1.1) | | $ | 44.7 | |
9
(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 30 days or more past the contractual payment due date. Non-performing Receivables represent receivables for which the Company has ceased accruing finance income. Generally, when retail notes, revolving charge accounts, and financing lease accountsCustomer Receivables are 90 days delinquent, accrual of finance income and lease revenue is suspended, and accrued finance income and lease revenue previously recognized is reversed. Generally, when a wholesale receivable becomes 60 days delinquent, the Company determines whether the accrual of finance income on interest-bearing wholesale receivables should be suspended and whether accrued finance income previously recognized should be reversed. During the second quarter and first sixthree months of 2023 and 2022, $3.0$2.8 million and $6.8$3.8 million, respectively, of accrued finance income and lease revenue was reversed on non-performing Receivables. Finance income and lease revenue for non-performing Receivables is recognized on a cash basis. Accrual of finance income and lease revenue is generally resumed when the receivable becomes contractually current and collections are reasonably assured. During the secondfirst quarter of both 2023 and first six months2022, $3.1 million of 2022, finance income and lease revenue of $3.9 million and $7.0 million, respectively, was recognized from cash payments on non-performing Receivables.
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 financing lease accounts are 120 days delinquent, the collateral is repossessed or the account is designated for litigation, and the estimated uncollectible amount from the customer is written off to the allowance for credit losses. Revolving charge accounts are generally deemed to be uncollectible and written off to the allowance for credit losses when delinquency reaches 120 days. Generally, when a wholesale account becomes 60 days delinquent, the Company determines whether the collateral should be repossessed or the account designated for litigation, and the estimated uncollectible amount is written off to the allowance for credit losses.
The credit quality analysis of retail notes, financing leases, and revolving charge accounts (collectively, Customer Receivables) by year of origination was as follows (in millions of dollars):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | May 1, 2022 | ||||||||||||||||||||||
| | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior Years | | Revolving Charge Accounts | | Total | ||||||||
Customer Receivables: |
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| | |
Agriculture and turf | | | | | | | | | | | | | | | | | | | | | | | | |
Current | | $ | 5,095.0 | | $ | 8,934.0 | | $ | 4,492.9 | | $ | 2,108.4 | | $ | 925.3 | | $ | 370.4 | | $ | 3,299.5 | | $ | 25,225.5 |
30-59 days past due | | | 18.0 | | | 66.3 | | | 31.6 | | | 16.9 | | | 7.6 | | | 4.0 | | | 11.0 | | | 155.4 |
60-89 days past due | | | 3.7 | | | 20.7 | | | 9.7 | | | 5.4 | | | 3.7 | | | 1.8 | | | 4.1 | | | 49.1 |
90+ days past due | | | | | | .3 | | | .6 | | | | | | .2 | | | .1 | | | | | | 1.2 |
Non-performing | | | 3.5 | | | 32.2 | | | 30.9 | | | 19.1 | | | 15.4 | | | 14.9 | | | 14.9 | | | 130.9 |
Construction and forestry | | | | | | | | | | | | | | | | | | | | | | | | |
Current | | | 1,326.9 | | | 1,929.9 | | | 902.5 | | | 380.7 | | | 116.3 | | | 26.8 | | | 91.1 | | | 4,774.2 |
30-59 days past due | | | 15.6 | | | 43.0 | | | 28.7 | | | 11.0 | | | 3.5 | | | 1.4 | | | 3.1 | | | 106.3 |
60-89 days past due | | | 6.2 | | | 19.3 | | | 12.1 | | | 4.9 | | | 1.4 | | | .3 | | | .7 | | | 44.9 |
90+ days past due | | | .2 | | | | | | .6 | | | .4 | | | | | | | | | | | | 1.2 |
Non-performing | | | 2.7 | | | 37.6 | | | 43.8 | | | 24.5 | | | 9.6 | | | 4.6 | | | .6 | | | 123.4 |
Total Customer Receivables | | $ | 6,471.8 | | $ | 11,083.3 | | $ | 5,553.4 | | $ | 2,571.3 | | $ | 1,083.0 | | $ | 424.3 | | $ | 3,425.0 | | $ | 30,612.1 |
109
| | | | | | | | | | | | | | | | | | | | | | | | |
| | October 31, 2021 | ||||||||||||||||||||||
| | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior Years | | Revolving Charge Accounts | | Total | ||||||||
Customer Receivables: |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Agriculture and turf | | | | | | | | | | | | | | | | | | | | | | | | |
Current | | $ | 11,318.1 | | $ | 5,719.1 | | $ | 2,842.5 | | $ | 1,431.0 | | $ | 582.8 | | $ | 119.9 | | $ | 3,620.9 | | $ | 25,634.3 |
30-59 days past due | | | 34.7 | | | 47.5 | | | 24.2 | | | 13.7 | | | 5.9 | | | 2.9 | | | 13.1 | | | 142.0 |
60-89 days past due | | | 12.8 | | | 17.4 | | | 8.4 | | | 5.1 | | | 2.4 | | | .7 | | | 3.2 | | | 50.0 |
90+ days past due | | | .5 | | | .5 | | | .1 | | | .2 | | | .1 | | | | | | | | | 1.4 |
Non-performing | | | 20.1 | | | 44.5 | | | 26.4 | | | 22.3 | | | 10.6 | | | 12.5 | | | 6.4 | | | 142.8 |
Construction and forestry | | | | | | | | | | | | | | | | | | | | | | | | |
Current | | | 2,356.4 | | | 1,198.5 | | | 573.5 | | | 215.6 | | | 42.5 | | | 5.4 | | | 92.3 | | | 4,484.2 |
30-59 days past due | | | 36.6 | | | 33.0 | | | 21.1 | | | 5.8 | | | 2.0 | | | .1 | | | 2.7 | | | 101.3 |
60-89 days past due | | | 12.5 | | | 8.4 | | | 5.0 | | | 2.6 | | | .5 | | | .2 | | | 1.0 | | | 30.2 |
90+ days past due | | | .1 | | | .4 | | | .9 | | | | | | .1 | | | | | | | | | 1.5 |
Non-performing | | | 21.9 | | | 50.0 | | | 33.9 | | | 15.1 | | | 6.3 | | | 2.9 | | | .5 | | | 130.6 |
Total Customer Receivables | | $ | 13,813.7 | | $ | 7,119.3 | | $ | 3,536.0 | | $ | 1,711.4 | | $ | 653.2 | | $ | 144.6 | | $ | 3,740.1 | | $ | 30,718.3 |
The credit quality analysis of Customer Receivables by year of origination was as follows (in millions of dollars):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | January 29, 2023 | ||||||||||||||||||||||
| | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior Years | | Revolving Charge Accounts | | Total | ||||||||
Customer Receivables: |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Agriculture and turf | | | | | | | | | | | | | | | | | | | | | | | | |
Current | | $ | 2,458.1 | | $ | 10,776.6 | | $ | 6,318.7 | | $ | 3,112.2 | | $ | 1,292.6 | | $ | 566.4 | | $ | 2,686.3 | | $ | 27,210.9 |
30-59 days past due | | | 1.7 | | | 29.4 | | | 29.2 | | | 48.2 | | | 10.4 | | | 42.8 | | | 27.2 | | | 188.9 |
60-89 days past due | | | 1.3 | | | 12.2 | | | 10.5 | | | 18.0 | | | 3.7 | | | 14.1 | | | 5.9 | | | 65.7 |
90+ days past due | | | | | | 1.2 | | | .2 | | | 2.9 | | | 1.0 | | | .2 | | | | | | 5.5 |
Non-performing | | | .3 | | | 35.1 | | | 43.3 | | | 29.1 | | | 15.0 | | | 19.6 | | | 7.8 | | | 150.2 |
Construction and forestry | | | | | | | | | | | | | | | | | | | | | | | | |
Current | | | 553.7 | | | 2,156.3 | | | 1,339.0 | | | 538.4 | | | 177.7 | | | 68.5 | | | 99.0 | | | 4,932.6 |
30-59 days past due | | | 1.5 | | | 9.9 | | | 23.6 | | | 34.3 | | | 15.7 | | | 52.1 | | | 4.6 | | | 141.7 |
60-89 days past due | | | .4 | | | 4.3 | | | 15.7 | | | 17.7 | | | 6.4 | | | 23.0 | | | 2.0 | | | 69.5 |
90+ days past due | | | | | | .1 | | | .2 | | | .4 | | | .2 | | | | | | | | | .9 |
Non-performing | | | | | | 38.9 | | | 51.8 | | | 26.1 | | | 13.0 | | | 6.5 | | | 1.2 | | | 137.5 |
Total Customer Receivables | | $ | 3,017.0 | | $ | 13,064.0 | | $ | 7,832.2 | | $ | 3,827.3 | | $ | 1,535.7 | | $ | 793.2 | | $ | 2,834.0 | | $ | 32,903.4 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | May 2, 2021 | | October 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior Years | | Revolving Charge Accounts | | Total | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior Years | | Revolving Charge Accounts | | Total | ||||||||||||||||
Customer Receivables: |
| | |
| | |
| | |
| | |
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| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
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| | |
Agriculture and turf | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Current | | $ | 5,347.9 | | $ | 7,187.4 | | $ | 3,645.2 | | $ | 1,976.0 | | $ | 899.2 | | $ | 305.4 | | $ | 3,137.1 | | $ | 22,498.2 | | $ | 11,764.5 | | $ | 6,958.0 | | $ | 3,488.7 | | $ | 1,519.7 | | $ | 582.8 | | $ | 153.2 | | $ | 4,022.7 | | $ | 28,489.6 |
30-59 days past due | | | 17.8 | | | 56.7 | | | 33.0 | | | 16.5 | | | 9.2 | | | 4.5 | | | 19.1 | | | 156.8 | | | 40.1 | | | 55.8 | | | 31.4 | | | 15.0 | | | 6.4 | | | 2.7 | | | 18.4 | | | 169.8 |
60-89 days past due | | | 3.6 | | | 28.8 | | | 12.9 | | | 7.2 | | | 3.5 | | | 1.8 | | | 4.8 | | | 62.6 | | | 11.8 | | | 19.5 | | | 10.8 | | | 4.4 | | | 2.0 | | | 1.1 | | | 4.5 | | | 54.1 |
90+ days past due | | | | | | | | | .8 | | | .7 | | | .3 | | | | | | | | | 1.8 | | | .4 | | | .2 | | | .2 | | | | | | | | | | | | | | | .8 |
Non-performing | | | 1.9 | | | 42.6 | | | 41.7 | | | 38.6 | | | 18.2 | | | 18.3 | | | 16.5 | | | 177.8 | | | 24.7 | | | 38.4 | | | 29.2 | | | 13.7 | | | 11.2 | | | 10.2 | | | 7.8 | | | 135.2 |
Construction and forestry | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Current | | | 1,190.7 | | | 1,587.1 | | | 844.0 | | | 357.4 | | | 88.9 | | | 18.3 | | | 85.2 | | | 4,171.6 | | | 2,373.7 | | | 1,526.3 | | | 658.1 | | | 230.7 | | | 57.2 | | | 10.5 | | | 107.7 | | | 4,964.2 |
30-59 days past due | | | 15.5 | | | 37.8 | | | 25.3 | | | 8.9 | | | 4.1 | | | 1.0 | | | 3.1 | | | 95.7 | | | 44.5 | | | 40.6 | | | 20.7 | | | 7.6 | | | 1.8 | | | .6 | | | 3.1 | | | 118.9 |
60-89 days past due | | | 6.4 | | | 11.3 | | | 10.4 | | | 6.0 | | | 1.4 | | | .4 | | | 1.3 | | | 37.2 | | | 18.1 | | | 11.4 | | | 6.0 | | | 3.0 | | | .7 | | | .1 | | | 1.0 | | | 40.3 |
90+ days past due | | | | | | .6 | | | 3.9 | | | | | | | | | | | | | | | 4.5 | | | .3 | | | 1.3 | | | | | | 1.4 | | | | | | | | | | | | 3.0 |
Non-performing | | | .7 | | | 36.2 | | | 32.4 | | | 19.6 | | | 8.9 | | | 4.6 | | | .8 | | | 103.2 | | | 19.3 | | | 51.2 | | | 27.6 | | | 15.4 | | | 5.5 | | | 2.9 | | | .6 | | | 122.5 |
Total Customer Receivables | | $ | 6,584.5 | | $ | 8,988.5 | | $ | 4,649.6 | | $ | 2,430.9 | | $ | 1,033.7 | | $ | 354.3 | | $ | 3,267.9 | | $ | 27,309.4 | | $ | 14,297.4 | | $ | 8,702.7 | | $ | 4,272.7 | | $ | 1,810.9 | | $ | 667.6 | | $ | 181.3 | | $ | 4,165.8 | | $ | 34,098.4 |
1110
| | | | | | | | | | | | | | | | | | | | | | | | |
| | January 30, 2022 | ||||||||||||||||||||||
| | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior Years | | Revolving Charge Accounts | | Total | ||||||||
Customer Receivables: |
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| | |
| | |
| | |
| | |
| | |
| | |
Agriculture and turf | | | | | | | | | | | | | | | | | | | | | | | | |
Current | | $ | 2,181.1 | | $ | 10,156.1 | | $ | 5,099.4 | | $ | 2,469.2 | | $ | 1,175.8 | | $ | 539.0 | | $ | 2,565.0 | | $ | 24,185.6 |
30-59 days past due | | | 4.4 | | | 67.7 | | | 39.7 | | | 23.8 | | | 12.6 | | | 5.7 | | | 23.5 | | | 177.4 |
60-89 days past due | | | .2 | | | 17.5 | | | 13.3 | | | 7.6 | | | 4.2 | | | 2.2 | | | 4.7 | | | 49.7 |
90+ days past due | | | | | | 1.5 | | | | | | .1 | | | .1 | | | .1 | | | | | | 1.8 |
Non-performing | | | .4 | | | 27.9 | | | 45.0 | | | 26.0 | | | 22.1 | | | 20.0 | | | 5.9 | | | 147.3 |
Construction and forestry | | | | | | | | | | | | | | | | | | | | | | | | |
Current | | | 625.7 | | | 2,131.1 | | | 1,050.4 | | | 471.3 | | | 159.0 | | | 39.5 | | | 80.8 | | | 4,557.8 |
30-59 days past due | | | 7.4 | | | 58.5 | | | 32.1 | | | 18.0 | | | 5.5 | | | 1.6 | | | 2.6 | | | 125.7 |
60-89 days past due | | | | | | 20.5 | | | 15.1 | | | 6.5 | | | 1.9 | | | .7 | | | 1.1 | | | 45.8 |
90+ days past due | | | | | | 1.0 | | | 1.8 | | | 2.0 | | | | | | | | | | | | 4.8 |
Non-performing | | | .4 | | | 26.4 | | | 44.7 | | | 30.2 | | | 12.1 | | | 6.3 | | | 1.2 | | | 121.3 |
Total Customer Receivables | | $ | 2,819.6 | | $ | 12,508.2 | | $ | 6,341.5 | | $ | 3,054.7 | | $ | 1,393.3 | | $ | 615.1 | | $ | 2,684.8 | | $ | 29,417.2 |
The credit quality analysis of wholesale receivables by year of origination was as follows (in millions of dollars):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | May 1, 2022 | | January 29, 2023 | ||||||||||||||||||||||||||||||||||||||||||||
| | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior Years | | Revolving | | Total | | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior Years | | Revolving | | Total | ||||||||||||||||
Wholesale receivables: |
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| | |
| | |
| | |
| | |
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| | |
| | |
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Agriculture and turf | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Current | | $ | 223.2 | | $ | 149.8 | | $ | 41.4 | | $ | 7.8 | | $ | 1.2 | | $ | 1.8 | | $ | 5,548.6 | | $ | 5,973.8 | | $ | 114.6 | | $ | 283.2 | | $ | 45.7 | | $ | 20.2 | | $ | 3.7 | | $ | 1.2 | | $ | 7,349.9 | | $ | 7,818.5 |
30+ days past due | | | | | | | | | | | | | | | | | | | | | 18.5 | | | 18.5 | | | | | | .3 | | | | | | | | | | | | | | | 9.2 | | | 9.5 |
Non-performing | | | | | | | | | | | | | | | | | | | | | 5.9 | | | 5.9 | | | | | | | | | | | | | | | | | | | | | 5.9 | | | 5.9 |
Construction and forestry | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Current | | | 3.7 | | | 33.0 | | | 1.9 | | | 1.7 | | | .2 | | | | | | 1,304.4 | | | 1,344.9 | | | 5.8 | | | 3.8 | | | 23.7 | | | 1.0 | | | .3 | | | .1 | | | 1,875.8 | | | 1,910.5 |
30+ days past due | | | | | | | | | | | | | | | | | | | | | 3.3 | | | 3.3 | | | | | | | | | | | | | | | | | | | | | 7.7 | | | 7.7 |
Non-performing | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total wholesale receivables | | $ | 226.9 | | $ | 182.8 | | $ | 43.3 | | $ | 9.5 | | $ | 1.4 | | $ | 1.8 | | $ | 6,880.7 | | $ | 7,346.4 | | $ | 120.4 | | $ | 287.3 | | $ | 69.4 | | $ | 21.2 | | $ | 4.0 | | $ | 1.3 | | $ | 9,248.5 | | $ | 9,752.1 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | October 31, 2021 | | October 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior Years | | Revolving | | Total | | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior Years | | Revolving | | Total | ||||||||||||||||
Wholesale receivables: |
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| | |
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| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Agriculture and turf | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Current | | $ | 339.6 | | $ | 77.1 | | $ | 21.1 | | $ | 9.2 | | $ | 2.7 | | $ | .4 | | $ | 4,233.4 | | $ | 4,683.5 | | $ | 381.3 | | $ | 62.7 | | $ | 25.0 | | $ | 3.8 | | $ | .3 | | $ | 1.1 | | $ | 6,238.1 | | $ | 6,712.3 |
30+ days past due | | | | | | | | | | | | | | | | | | | | | 12.0 | | | 12.0 | | | | | | .1 | | | | | | | | | | | | | | | 8.3 | | | 8.4 |
Non-performing | | | | | | | | | | | | | | | | | | | | | 6.7 | | | 6.7 | | | | | | | | | | | | | | | | | | | | | 5.5 | | | 5.5 |
Construction and forestry | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Current | | | 39.4 | | | 4.0 | | | 3.4 | | | .3 | | | | | | | | | 1,199.6 | | | 1,246.7 | | | 4.8 | | | 28.2 | | | 1.4 | | | .4 | | | .1 | | | | | | 1,633.8 | | | 1,668.7 |
30+ days past due | | | | | | | | | | | | | | | | | | | | | 2.4 | | | 2.4 | | | | | | | | | | | | | | | | | | | | | 9.6 | | | 9.6 |
Non-performing | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total wholesale receivables | | $ | 379.0 | | $ | 81.1 | | $ | 24.5 | | $ | 9.5 | | $ | 2.7 | | $ | .4 | | $ | 5,454.1 | | $ | 5,951.3 | | $ | 386.1 | | $ | 91.0 | | $ | 26.4 | | $ | 4.2 | | $ | .4 | | $ | 1.1 | | $ | 7,895.3 | | $ | 8,404.5 |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | May 2, 2021 | ||||||||||||||||||||||
| | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior Years | | Revolving | | Total | ||||||||
Wholesale receivables: |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Agriculture and turf | | | | | | | | | | | | | | | | | | | | | | | | |
Current | | $ | 189.8 | | $ | 138.4 | | $ | 45.0 | | $ | 12.4 | | $ | 3.6 | | $ | .8 | | $ | 6,591.4 | | $ | 6,981.4 |
30+ days past due | | | | | | | | | | | | | | | | | | | | | 9.7 | | | 9.7 |
Non-performing | | | | | | | | | .4 | | | | | | | | | | | | 4.3 | | | 4.7 |
Construction and forestry | | | | | | | | | | | | | | | | | | | | | | | | |
Current | | | 4.9 | | | 6.6 | | | 4.7 | | | .5 | | | | | | | | | 1,407.7 | | | 1,424.4 |
30+ days past due | | | | | | | | | | | | | | | | | | | | | 3.9 | | | 3.9 |
Non-performing | | | | | | | | | | | | | | | | | | | | | | | | |
Total wholesale receivables | | $ | 194.7 | | $ | 145.0 | | $ | 50.1 | | $ | 12.9 | | $ | 3.6 | | $ | .8 | | $ | 8,017.0 | | $ | 8,424.1 |
11
| | | | | | | | | | | | | | | | | | | | | | | | |
| | January 30, 2022 | ||||||||||||||||||||||
| | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior Years | | Revolving | | Total | ||||||||
Wholesale receivables: |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Agriculture and turf | | | | | | | | | | | | | | | | | | | | | | | | |
Current | | $ | 101.1 | | $ | 237.1 | | $ | 54.2 | | $ | 11.3 | | $ | 6.5 | | $ | 2.1 | | $ | 4,510.5 | | $ | 4,922.8 |
30+ days past due | | | | | | | | | | | | | | | | | | | | | 12.6 | | | 12.6 |
Non-performing | | | | | | | | | | | | | | | | | | | | | 6.3 | | | 6.3 |
Construction and forestry | | | | | | | | | | | | | | | | | | | | | | | | |
Current | | | 3.5 | | | 35.7 | | | 2.3 | | | 2.7 | | | .2 | | | | | | 1,324.9 | | | 1,369.3 |
30+ days past due | | | | | | | | | | | | | | | | | | | | | 1.0 | | | 1.0 |
Non-performing | | | | | | | | | | | | | | | | | | | | | | | | |
Total wholesale receivables | | $ | 104.6 | | $ | 272.8 | | $ | 56.5 | | $ | 14.0 | | $ | 6.7 | | $ | 2.1 | | $ | 5,855.3 | | $ | 6,312.0 |
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.
Recoveries from freestanding credit enhancements, such as dealer deposits, and certain credit insurance contracts are not included in the estimate of expected credit losses. Recoveries from dealer deposits are recognized in other income on the statements of consolidated income when the dealer’s withholding account is charged. During the three months ended January 29, 2023 and January 30, 2022, recoveries from freestanding credit enhancements recorded in other income were $2.0 million and $1.1 million, respectively.
An analysis of the allowance for credit losses and investment in Receivables during 2023 was as follows (in millions of dollars):
| | | | | | | | | | | | | |
| | Three Months Ended |
| ||||||||||
| | January 29, 2023 |
| ||||||||||
| | Retail Notes | | Revolving | | | | | | |
| ||
| | & Financing | | Charge | | Wholesale | | Total |
| ||||
| | Leases | | Accounts | | Receivables | | Receivables |
| ||||
Allowance: | | | | | | | | | | | | | |
Beginning of period balance | | $ | 95.4 | | $ | 21.9 | | $ | 11.1 | | $ | 128.4 | |
Provision (credit) for credit losses* | |
| 6.8 | | | (3.7) | | | (.5) | | | 2.6 | |
Write-offs | |
| (10.2) | | | (7.5) | | | (.1) | | | (17.8) | |
Recoveries | |
| 2.4 | | | 5.3 | | | .6 | | | 8.3 | |
Translation adjustments | |
| .4 | | | | | | (.2) | | | .2 | |
End of period balance | | $ | 94.8 | | $ | 16.0 | | $ | 10.9 | | $ | 121.7 | |
| | | | | | | | | | | | | |
Receivables: | | | | | | | | | | | | | |
End of period balance | | $ | 30,069.4 | | $ | 2,834.0 | | $ | 9,752.1 | | $ | 42,655.5 | |
*Excludes provision for credit losses on unfunded commitments of $.9 million. The estimated credit losses related to unfunded commitments are recorded in accounts payable and accrued expenses on the consolidated balance sheets.
The allowance for credit losses decreased $6.7 million in the first three months of 2023, primarily driven by a lower allowance on revolving charge accounts, which continue to benefit from strong fundamentals within the
12
Recoveries from freestandingagricultural market. The allowance for credit enhancements, such as dealer deposits,losses on retail notes and certain credit insurance contracts are not included in the estimate of expected credit losses. Recoveries from dealer deposits are recognized in other income on the statements of consolidated income when the dealer’s withholding account is charged. Recoveries from freestanding credit enhancements recorded in other income were $1.9 million for the second quarter and $3.1 million forfinancing leases was relatively flat during the first six monthsquarter of 2022, respectively, compared with $5.7 million2023, as the impacts of favorable agricultural conditions were offset by higher expected losses on turf customer accounts. The Company continues to monitor the economy as part of the allowance setting process, including potential impacts of inflation and $6.6 million forinterest rates, among other factors, and qualitative adjustments to the same periods last year, respectively.allowance are incorporated as necessary.
An analysis of the allowance for credit losses and investment in Receivables during 2022 was as follows (in millions of dollars):
| | | | | | | | | | | | | |
| | Three Months Ended |
| ||||||||||
| | May 1, 2022 |
| ||||||||||
| | Retail Notes | | Revolving | | | | | | |
| ||
| | & Financing | | Charge | | Wholesale | | Total |
| ||||
| | Leases | | Accounts | | Receivables | | Receivables |
| ||||
Allowance: | | | | | | | | | | | | | |
Beginning of period balance | | $ | 94.7 | | $ | 15.2 | | $ | 11.5 | | $ | 121.4 | |
Provision (credit) for credit losses* | |
| 10.9 | | | 2.5 | | | .2 | | | 13.6 | |
Write-offs | |
| (13.3) | | | (7.5) | | | (.2) | | | (21.0) | |
Recoveries | |
| 3.7 | | | 7.1 | | | | | | 10.8 | |
Translation adjustments | |
| (.1) | | | .1 | | | (.3) | | | (.3) | |
End of period balance | | $ | 95.9 | | $ | 17.4 | | $ | 11.2 | | $ | 124.5 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended |
| | Three Months Ended |
| ||||||||||||||||||||
| | May 1, 2022 |
| | January 30, 2022 |
| ||||||||||||||||||||
| | Retail Notes | | Revolving | | | | | | |
| | Retail Notes | | Revolving | | | | | | |
| ||||
| | & Financing | | Charge | | Wholesale | | Total |
| | & Financing | | Charge | | Wholesale | | Total |
| ||||||||
| | Leases | | Accounts | | Receivables | | Receivables |
| | Leases | | Accounts | | Receivables | | Receivables |
| ||||||||
Allowance: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning of period balance | | $ | 96.5 | | $ | 20.8 | | $ | 11.7 | | $ | 129.0 | | | $ | 96.5 | | $ | 20.8 | | $ | 11.7 | | $ | 129.0 | |
Provision (credit) for credit losses* | |
| 18.8 | | | (6.9) | | | .3 | | | 12.2 | | |
| 7.9 | | | (9.4) | | | .1 | | | (1.4) | |
Write-offs | |
| (25.8) | | | (11.5) | | | (.2) | | | (37.5) | | |
| (12.5) | | | (4.0) | | | | | | (16.5) | |
Recoveries | |
| 6.6 | | | 14.9 | | | | | | 21.5 | | |
| 2.9 | | | 7.8 | | | | | | 10.7 | |
Translation adjustments | |
| (.2) | | | .1 | | | (.6) | | | (.7) | | |
| (.1) | | | | | | (.3) | | | (.4) | |
End of period balance | | $ | 95.9 | | $ | 17.4 | | $ | 11.2 | | $ | 124.5 | | | $ | 94.7 | | $ | 15.2 | | $ | 11.5 | | $ | 121.4 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Receivables: | | | | | | | | | | | | | | | | | | | | | | | | | | |
End of period balance | | $ | 27,187.1 | | $ | 3,425.0 | | $ | 7,346.4 | | $ | 37,958.5 | | | $ | 26,732.4 | | $ | 2,684.8 | | $ | 6,312.0 | | $ | 35,729.2 | |
*Excludes provision (credit) for credit losses on unfunded commitments of $(.4) million and $(.2) million for the three and six months ended May 1, 2022, respectively.$.2 million. The estimated credit losses related to unfunded commitments are recorded in accounts payable and accrued expenses on the consolidated balance sheets.
The allowance for credit losses increased slightly in the second quarter, in part due to higher portfolio balances, and was lower for the first six months of 2022, reflecting continued strong agricultural market conditions.
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 |
| ||||||||||
| | May 2, 2021 |
| ||||||||||
| | Retail Notes | | Revolving | | | | | | |
| ||
| | & Financing | | Charge | | Wholesale | | Total |
| ||||
| | Leases | | Accounts | | Receivables | | Receivables |
| ||||
Allowance: | | | | | | | | | | | | | |
Beginning of period balance | | $ | 115.7 | | $ | 24.3 | | $ | 9.5 | | $ | 149.5 | |
Provision (credit) for credit losses* | |
| (9.1) | | | (6.1) | | | (.1) | | | (15.3) | |
Write-offs | |
| (7.1) | | | (9.0) | | | (.1) | | | (16.2) | |
Recoveries | |
| 2.1 | | | 9.8 | | | | | | 11.9 | |
Translation adjustments | |
| (.3) | | | (.1) | | | .3 | | | (.1) | |
End of period balance | | $ | 101.3 | | $ | 18.9 | | $ | 9.6 | | $ | 129.8 | |
| | | | | | | | | | | | | |
| | Six Months Ended |
| ||||||||||
| | May 2, 2021 |
| ||||||||||
| | Retail Notes | | Revolving | | | | | | |
| ||
| | & Financing | | Charge | | Wholesale | | Total |
| ||||
| | Leases | | Accounts | | Receivables | | Receivables |
| ||||
Allowance: | | | | | | | | | | | | | |
Beginning of period balance | | $ | 76.9 | | $ | 42.3 | | $ | 9.9 | | $ | 129.1 | |
ASU No. 2016-13 adoption | |
| 32.5 | | | (12.2) | | | (.6) | | | 19.7 | |
Provision (credit) for credit losses* | |
| (2.4) | | | (15.8) | | | (.1) | | | (18.3) | |
Write-offs | |
| (11.2) | | | (14.3) | | | (.1) | | | (25.6) | |
Recoveries | |
| 4.9 | | | 19.0 | | | | | | 23.9 | |
Translation adjustments | |
| .6 | | | (.1) | | | .5 | | | 1.0 | |
End of period balance | | $ | 101.3 | | $ | 18.9 | | $ | 9.6 | | $ | 129.8 | |
| | | | | | | | | | | | | |
Receivables: | | | | | | | | | | | | | |
End of period balance | | $ | 24,041.5 | | $ | 3,267.9 | | $ | 8,424.1 | | $ | 35,733.5 | |
*Excludes provision (credit) for credit losses on unfunded commitments of $(.3) million and $2.1 million for the three and six months ended May 2, 2021, respectively. The estimated credit losses related to unfunded commitments are recorded in accounts payable and accrued expenses on the consolidated balance sheets.
The allowance for credit losses on Receivables decreased $19.7 million in the second quarter of 2021, 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-19. The allowance for credit losses on revolving charge accounts also decreased in the second quarter of 2021, driven by strong payment performance due to continued improvements in the agriculture market. For the first six months of 2021, the allowance for credit losses increased slightly, as the reductions noted above were largely offset by the impact of adopting ASU No. 2016-13.
Troubled Debt Restructuring
A troubled debt restructuring is thea significant 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 six months of 2022, the Company identified 139The following table includes Receivable contracts primarily retail notes,identified as troubled debt restructurings, with aggregate balances of $5.8 million pre-modification and $4.7 million post-modification. During the first six months of 2021, therewhich were 185 Receivable contracts, primarily retail notes with aggregate balances(in millions of $7.8 million pre-modification and $7.2 million post-modification. dollars):
| | | | |
| | | | | | | | | | | | | |
| | | | | | | | Three Months Ended | | ||||
| | | | | | | | January 29 | | January 30 | | ||
| | | | | | 2023 | | 2022 | | ||||
Number of receivable contracts | | | | | | | 36 | | | 87 |
| ||
Pre-modification balance | | | | | | $ | 1.0 | | $ | 3.1 | | ||
Post-modification balance | | | | | | | | | 1.0 | | | 2.2 | |
During thesethe same periods as the table above, there were 0no significant
14
troubled debt restructurings that subsequently defaulted and were written off. At May 1, 2022,January 29, 2023, the Company had 0no commitments to provide additional financing to customers whose accounts were modified in troubled debt restructurings.
(5) Securitization of Receivables
As a part of its overall funding strategy, the Company periodically transfers certain Receivables (retail notes) into VIEs that are 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
13
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.
The components of consolidated restricted assets, secured borrowings, and other liabilities related to secured borrowings in securitization transactions were as follows (in millions of dollars):
| | | | | | | | | | | | | | | | | | | | |
| | May 1 | | October 31 | | May 2 |
| | January 29 | | October 30 | | January 30 |
| ||||||
| | 2022 | | 2021 | | 2021 |
| | 2023 | | 2022 | | 2022 |
| ||||||
Retail notes securitized | | $ | 4,079.2 | | $ | 4,662.4 | | $ | 4,106.3 | | | $ | 5,101.4 | | $ | 5,951.6 | | $ | 3,517.9 | |
Allowance for credit losses | |
| (12.2) | |
| (13.5) | |
| (14.3) | | |
| (12.5) | ��� |
| (15.7) | |
| (10.1) | |
Other assets (primarily restricted cash) | |
| 124.0 | |
| 106.6 | |
| 91.1 | | |
| 97.2 | |
| 155.2 | |
| 100.3 | |
Total restricted securitized assets | | $ | 4,191.0 | | $ | 4,755.5 | | $ | 4,183.1 | | | $ | 5,186.1 | | $ | 6,091.1 | | $ | 3,608.1 | |
| | | | | | | | | | | | | | | | | | | | |
Securitization borrowings | | $ | 4,000.9 | | $ | 4,595.2 | | $ | 4,092.5 | | | $ | 4,863.9 | | $ | 5,710.9 | | $ | 3,473.8 | |
Accrued interest on borrowings | |
| 2.1 | |
| 1.7 | |
| 2.3 | | |
| 5.9 | |
| 6.1 | |
| 1.2 | |
Total liabilities related to restricted securitized assets | | $ | 4,003.0 | | $ | 4,596.9 | | $ | 4,094.8 | | | $ | 4,869.8 | | $ | 5,717.0 | | $ | 3,475.0 | |
(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.
Lease revenues earned by the Company were as follows (in millions of dollars):
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | Three Months Ended | ||||||||||||
| | May 1 | | May 2 | | May 1 | | May 2 | | January 29 | | January 30 | ||||||
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | ||||||
Sales-type and direct financing lease revenues | | $ | 12.5 | | $ | 11.3 | | $ | 25.5 | | $ | 23.1 | | $ | 18.8 | | $ | 13.0 |
Operating lease revenues | | | 218.8 | | | 239.8 | | | 441.9 | | | 486.4 | | | 217.1 | | | 223.1 |
Variable lease revenues | |
| 5.8 | |
| 6.5 | |
| 12.0 | |
| 13.8 | |
| 5.6 | |
| 6.2 |
Total lease revenues | | $ | 237.1 | | $ | 257.6 | | $ | 479.4 | | $ | 523.3 | | $ | 241.5 | | $ | 242.3 |
Variable lease revenues reported above primarily relate to separately invoiced property taxes on leased equipment in certain markets, late fees, and excess use and damage fees. Excess use and damage fees are reported in other income on the statements of consolidated income. Excess useincome and damage fees were $.6$.8 million in the first quarter of both 2023 and $1.4 million for the second quarter and first six months ended May 1, 2022, respectively, compared with $1.4 million and $3.5 million for the same periods last year, respectively.2022.
15
The cost of equipment on operating leases by market was as follows (in millions of dollars):
| | | | | | | | | | | | | | | | | | |
| | May 1 | | October 31 | | May 2 | | January 29 | | October 30 | | January 30 | ||||||
| | 2022 | | 2021 | | 2021 | | 2023 | | 2022 | | 2022 | ||||||
Agriculture and turf | | $ | 4,846.7 | | $ | 5,053.4 | | $ | 5,017.0 | | $ | 4,893.6 | | $ | 5,017.3 | | $ | 4,903.2 |
Construction and forestry | | | 1,222.9 | |
| 1,323.6 | |
| 1,490.4 | | | 1,084.9 | |
| 1,138.0 | | | 1,244.3 |
Total | | | 6,069.6 | | | 6,377.0 | | | 6,507.4 | | | 5,978.5 | | | 6,155.3 | | | 6,147.5 |
Accumulated depreciation | |
| (1,360.9) | | | (1,429.4) | | | (1,498.5) | |
| (1,285.1) | | | (1,301.8) | | | (1,401.9) |
Equipment on operating leases - net | | $ | 4,708.7 | | $ | 4,947.6 | | $ | 5,008.9 | | $ | 4,693.4 | | $ | 4,853.5 | | $ | 4,745.6 |
Total operating lease residual values at May 1,January 29, 2023, October 30, 2022, October 31, 2021, and May 2, 2021January 30, 2022 were $3,335.0$3,257.1 million, $3,547.6$3,366.7 million, and $3,651.2$3,409.5 million, respectively. Certain operating leases are subject to residual value guarantees. The total residual value guarantees were $348.4$467.1 million, $295.8$440.7 million, and $201.9$319.9 million at May 1,January 29, 2023, October 30, 2022, October 31, 2021, and May 2, 2021,January 30, 2022, 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.
14
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 May 1,January 29, 2023, October 30, 2022, October 31, 2021, and May 2, 2021January 30, 2022 were $9.1$11.8 million, $25.4$10.8 million, and $39.5$18.8 million, respectively. Matured operating lease inventory is reported in other assets on the consolidated balance sheets.
(7) Notes Receivable from and Payable to John Deere
The Company provides loans to and holds other receivables from affiliated companies. The loan agreements mature over the next seven years and charge interest at competitive market interest rates. Interest earned from John Deere is recorded in other income and was $4.7$6.9 million for the second quarter and $10.2 million in the first sixthree months of 2022, respectively,2023, compared with $3.1 million and $6.4$5.4 million for the same periodsperiod last year, respectively.year.
The Company had notes receivable from John Deere with the following affiliated companies as follows (in millions of dollars):
| | | | | | | | | | | | | | | | | | | | |
| | May 1 | | October 31 | | May 2 | | | January 29 | | October 30 | | January 30 | | ||||||
| | 2022 | | 2021 | | 2021 | | | 2023 | | 2022 | | 2022 | | ||||||
Limited Liability Company John Deere Financial | | | | | $ | 233.7 | | $ | 127.9 | | | | | | | | | $ | 196.9 | |
Banco John Deere S.A. | | $ | 171.8 | |
| 159.8 | |
| 173.6 | | | $ | 494.4 | | $ | 370.0 | |
| 174.8 | |
John Deere Agricultural Holdings, Inc. | |
| 39.7 | | | | | | | | |
| | | | .7 | | | | |
Total Notes Receivable from John Deere | | $ | 211.5 | | $ | 393.5 | | $ | 301.5 | | | $ | 494.4 | | $ | 370.7 | | $ | 371.7 | |
Limited Liability Company John Deere Financial (JDF Russia) is a John Deere financial services affiliate in Russia. The Company previously provided ruble-denominated loans to JDF Russia to fund JDF Russia’s retail portfolio. The Company had entered into non-designated cross-currency interest rate contracts and foreign currency exchange contracts to hedge against interest rate and foreign currency exchange risk associated with the loans. In April 2022, the loans to JDF Russia and related derivative contracts were assumed by Deere & Company for cash at carrying value as of the date of assumption.
John Deere Agricultural Holdings, Inc. (JDAH) is a John Deere equipment operations affiliate in Russia. The Company purchased wholesale receivables from this affiliate related to independent John Deere dealers in Russia. Cash collections on the wholesale receivables continue to remain strong. The affiliate receivable from JDAH represents cash collections on the Russia wholesale portfolio that have not yet been remitted to the Company. The remaining outstanding wholesale portfolio in Russia held by the Company did not represent a significant portion of its wholesale receivable portfolio at May 1, 2022. John Deere currently requires prepayment of existing equipment inventory in Russia, and, as such, no further wholesale receivables are being purchased by the Company.
16
The Company also obtains funding from affiliated companies. At May 1,January 29, 2023, October 30, 2022, October 31, 2021, and May 2, 2021,January 30, 2022, the Company had notes payable to John Deere of $5,276.4$4,416.2 million, $5,619.4$5,225.5 million and $5,752.4$5,306.4 million, respectively. The intercompany borrowings are primarily short-term in nature or contain a due on demand call option. At May 1, 2022, $524.7January 29, 2023, $544.6 million of the intercompany borrowings were long-term loans without a due on demand call option, which mature in 2024. The Company pays interest to John Deere for these borrowings based on competitive market rates. Interest expense paid to John Deere, which is recorded in fees and interest paid to John Deere, was $17.5$40.0 million and $16.4 million for the second quarterthree months ended January 29, 2023 and $34.0 million for the first six months ofJanuary 30, 2022 respectively, compared with $11.5 million and $21.4 million for the same periods last year, respectively.
(8) Long-Term External Borrowings
Long-term external borrowings of the Company at May 1,January 29, 2023, October 30, 2022, October 31, 2021, and May 2, 2021January 30, 2022 consisted of the following (in millions of dollars):
| | | | | | | | | | | | | | | | | | | |
|
| May 1 | | October 31 | | May 2 |
| January 29 | | October 30 | | January 30 | | ||||||
|
| 2022 | | 2021 | | 2021 |
| 2023 | | 2022 | | 2022 | | ||||||
Senior Debt: |
| | | | | | | | |
| | | | | | | | | |
Medium-term notes |
| $ | 20,445.0 | | $ | 20,649.2 | | $ | 19,801.6 |
| $ | 23,564.2 | | $ | 22,595.4 | | $ | 20,614.7 | |
Other notes | | | 5.4 | | | 15.6 | | | 35.0 | | | .5 | | | 2.5 | | | 8.4 | |
Total senior debt | | | 20,450.4 | | | 20,664.8 | | | 19,836.6 | | | 23,564.7 | | | 22,597.9 | | | 20,623.1 | |
Unamortized debt discount and debt issuance costs | | | (59.1) | | | (57.5) | | | (53.6) | | | (71.3) | | | (70.1) | | | (56.6) | |
Total | | $ | 20,391.3 | | $ | 20,607.3 | | $ | 19,783.0 | | $ | 23,493.4 | | $ | 22,527.8 | | $ | 20,566.5 | |
Medium-term notes are primarily offered by prospectus and issued at fixed and variable rates. The medium-term notes in the table above include unamortized fair value adjustments related to interest rate swaps. The principal balances of the medium-term notes were $20,904.0$24,265.7 million, $20,378.2$23,564.6 million, and $19,438.3$20,541.0 million at May 1,January 29, 2023, October 30, 2022, October 31, 2021, and May 2, 2021, respectively.
In AprilJanuary 30, 2022, the Company issued $600.0 million of sustainability-linkedrespectively, and have serial maturity dates through 2032. All outstanding medium-term notes and other notes in the table above are senior unsecured borrowings and generally rank equally with an initial interest rate of 3.35 percent, which are due in 2029. This transaction supports John Deere’s commitment to environmental sustainability. Failure to meet the stated sustainability performance target will result in a 25-basis point increase to the interest rate payable on the 2029 notes from and including April 2026.each other.
15
(9) Commitments and Contingencies
At May 1, 2022,January 29, 2023, John Deere Financial Inc., the John Deere finance subsidiary in Canada, had $2,186.6$2,101.8 million of medium-term notes outstanding, and a fair value liability of $103.5$118.7 million for derivatives outstanding, prior to considering applicable netting provisions, with notional amounts of $2,545.9$2,702.3 million that were guaranteed by Capital Corporation. The weighted averageweighted-average interest rate on the medium-term notes at May 1, 2022January 29, 2023 was 2.0 percent with a maximum remaining maturity of approximately sevensix years.
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 Corporation has 0no carrying value of assets or liabilities related to JDCFI. Its maximum exposure to loss is the amount of the debt issued by JDCFI and guaranteed by Capital Corporation, which was $780.9$150.1 million at May 1, 2022.January 29, 2023. The weighted average interest rate on the debt at May 1, 2022January 29, 2023 was 2.63.0 percent with a maximum remaining maturity of approximately two years.less than one year. No additional support beyond what was previously contractually required has been provided to JDCFI during the reporting periods.
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. TheAt January 29, 2023, the amount of unused commitments to extend credit to customers and John Deere dealers was $9.7$33.3 billion at May 1, 2022. The amount of unused
17
commitments to extend credit to customers was $30.0and $7.7 billion, at May 1, 2022.respectively. A significant portion of these commitments is not expected to be fully drawn upon; therefore, the total commitment amounts likely do not represent a future cash requirement. The Company generally has the right to unconditionally cancel, alter, or amend the terms of these commitments at any time. Over 95 percent of the unused commitments to extend credit to customers relate to revolving charge accounts. The Company recordedhas a reserve for estimated credit losses of $2.9 million on unfunded commitments that are not unconditionally cancellable of $2.6 million at May 1, 2022,January 29, 2023, which is recorded in accounts payable and accrued expenses on the consolidated balance sheets.
At May 1, 2022,January 29, 2023, 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 May 1, 2022.January 29, 2023.
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) 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.
The fair values of financial instruments that do not approximate the carrying values were as follows (in millions of dollars):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||
| | May 1, 2022 | | October 31, 2021 | | May 2, 2021 |
| | January 29, 2023 | | October 30, 2022 | | January 30, 2022 |
| ||||||||||||||||||||||||
| | Carrying | | Fair | | Carrying | | Fair | | Carrying | | Fair |
| | Carrying | | Fair | | Carrying | | Fair | | Carrying | | Fair |
| ||||||||||||
| | Value | | Value | | Value | | Value | | Value | | Value |
| | Value | | Value | | Value | | Value | | Value | | Value |
| ||||||||||||
Receivables financed – net | | $ | 33,767.0 | | $ | 33,365.3 | | $ | 31,891.7 | | $ | 31,903.6 | | $ | 31,511.7 | | $ | 31,687.9 | | | $ | 37,444.9 | | $ | 36,668.3 | | $ | 36,438.6 | | $ | 35,562.4 | | $ | 32,100.0 | | $ | 32,055.4 | |
Retail notes securitized – net | |
| 4,067.0 | |
| 4,010.7 | |
| 4,648.9 | |
| 4,694.2 | |
| 4,092.0 | |
| 4,173.1 | | |
| 5,088.9 | |
| 4,868.9 | |
| 5,935.9 | | | 5,696.3 | |
| 3,507.8 | |
| 3,521.4 | |
Securitization borrowings | |
| 4,000.9 | |
| 3,937.7 | |
| 4,595.2 | |
| 4,600.0 | |
| 4,092.5 | |
| 4,117.2 | | |
| 4,863.9 | |
| 4,784.8 | |
| 5,710.9 | | | 5,576.6 | |
| 3,473.8 | |
| 3,459.3 | |
Current maturities of long-term external borrowings | |
| 6,153.7 | |
| 6,127.1 | |
| 5,819.1 | |
| 5,842.3 | |
| 5,702.9 | |
| 5,773.5 | | |||||||||||||||||||
Current maturities of long- | |
| 6,080.1 | |
| 5,957.2 | |
| 5,989.6 | | | 5,887.7 | |
| 6,104.0 | |
| 6,110.6 | | |||||||||||||||||||
Long-term external borrowings | |
| 20,391.3 | |
| 20,035.4 | |
| 20,607.3 | |
| 20,887.5 | |
| 19,783.0 | |
| 20,193.2 | | |
| 23,493.4 | |
| 23,126.2 | |
| 22,527.8 | | | 21,792.7 | |
| 20,566.5 | |
| 20,629.5 | |
16
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 external 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 external borrowings have been swapped to current variable interest rates. The carrying values of these long-term external borrowings include adjustments related to fair value hedges.
18
Assets and liabilities measured at fair value on a recurring basis were as follows (in millions of dollars):
| | | | | | | | | | | | | | | | | | | | |
|
| May 1 |
| October 31 |
| May 2 |
|
| January 29 |
| October 30 |
| January 30 |
| ||||||
| | 2022 | | 2021 | | 2021 |
| | 2023 | | 2022 | | 2022 |
| ||||||
Marketable securities |
| | |
| | |
| | | |
| | |
| | |
| | | |
International debt securities | | $ | 1.6 | | $ | 2.1 | | $ | 2.0 | | | $ | 1.8 | | $ | 1.1 | | $ | 1.8 | |
Receivables from John Deere | | | | | | | | | | | | | | | | | | | | |
Derivatives | | | 149.0 | | | 191.6 | | | 299.5 | | | | 171.2 | | | 214.8 | | | 156.8 | |
Other assets | | | | | | | | | | | | | | | | | | | | |
Derivatives | | | 39.7 | |
| 1.1 | |
| .3 | | | | 1.2 | |
| 1.3 | |
| 27.3 | |
Total assets | | $ | 190.3 | | $ | 194.8 | | $ | 301.8 | | | $ | 174.2 | | $ | 217.2 | | $ | 185.9 | |
| | | | | | | | | | | | | | | | | | | | |
Other payables to John Deere | | | | | | | | | | | | | | | | | | | | |
Derivatives | | $ | 599.4 | | $ | 97.6 | | $ | 81.2 | | | $ | 664.2 | | $ | 1,024.2 | | $ | 186.3 | |
Accounts payable and accrued expenses | | | | | | | | | | | | | | | | | | | | |
Derivatives | | | .2 | |
| 4.8 | |
| 1.6 | | | | 29.1 | |
| 14.1 | |
| 1.4 | |
Total liabilities | | $ | 599.6 | | $ | 102.4 | | $ | 82.8 | | | $ | 693.3 | | $ | 1,038.3 | | $ | 187.7 | |
All fair value measurements in the table above were Level 2. 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 nineeight years. At May 1, 2022,January 29, 2023, the amortized cost basis and fair value of these available-for-sale debt securities were $4.9$5.0 million and $1.6$1.8 million, respectively. Unrealized losses at May 1, 2022January 29, 2023 were not recognized in income due to the ability and intent to hold to maturity.
There were no assets or liabilities measured at fair value on a nonrecurring basis, other than Receivables with specific allowances which were not material, during each of the periods ended May 1,January 29, 2023, October 30, 2022, October 31, 2021, and May 2, 2021.January 30, 2022.
The following is a description of the valuation methodologies the Company uses to measure certain balance sheet items 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.
17
(11) Derivative Instruments
It is theThe Company’s policy thatis to execute 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 sheets. Cash collateral received or paid is not offset against the derivative fair values on the consolidated balance sheets. The cash flows from thesethe derivative contracts are recorded in operating activities in the statements of consolidated cash flows. Each derivative is designated as a cash flow hedge, a fair value hedge, or remains undesignated. All designated hedges are formally
19
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.
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 May 1,January 29, 2023, October 30, 2022, October 31, 2021, and May 2, 2021January 30, 2022 were $2,450.0$1,950.0 million, $2,700.0$1,950.0 million, and $1,850.0$2,700.0 million, respectively. Fair value gains or losses on these cash flow hedges wereare recorded in other comprehensive income (OCI) and subsequently reclassified into interest expense in the same periods during which the hedged transactions impact earnings. These amounts offset the effects of interest rate changes on the related borrowings.
The amount of gain recorded in OCI at May 1, 2022January 29, 2023 that is expected to be reclassified to interest expense in the next twelve months if interest rates remain unchanged is $26.1$41.0 million after-tax. NaNNo gains or losses were reclassified from OCI to earnings based on the probability that the original forecasted transaction would not occur.
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 May 1,January 29, 2023, October 30, 2022, October 31, 2021, and May 2, 2021January 30, 2022 were $7,952.3$10,126.7 million, $7,313.6$9,448.9 million, and $7,444.1$7,600.8 million, respectively. The fair value gains or losses on these contracts were generally offset by fair value gains or losses on the hedged items (fixed-rate borrowings) with both items recorded in interest expense.
18
The amounts recorded in the consolidated balance sheets related to borrowings designated in fair value hedging relationships were as follows (in millions of dollars):. Fair value hedging adjustments are included in the carrying amount of the hedged item.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Cumulative Increase (Decrease) of Fair Value | | | Active Hedging Relationships | | Discontinued Hedging Relationships | | |||||||||||||||
| | | | | Hedging Adjustments Included in the | | | Carrying | | Cumulative | | Carrying Amount | | Cumulative | | |||||||||||
| | | | | Carrying Amount | | | Amount of | | Fair Value | | of Formerly | | Fair Value | | |||||||||||
| | Carrying | | Active | | | | | | | | |||||||||||||||
| | Amount of | | Hedging | | Discontinued | | | | |||||||||||||||||
May 1, 2022 | | Hedged Item | | Relationships | | Relationships | | Total | | |||||||||||||||||
January 29, 2023 | | Hedged Item | | Hedging Adjustment | | Hedged Item | | Hedging Adjustment | | |||||||||||||||||
Current maturities of long-term external borrowings | | $ | 185.2 | | $ | .6 | | $ | 7.4 | | $ | 8.0 | | | | | | | | | $ | 1,914.8 | | $ | 15.3 | |
Long-term external borrowings | | | 7,280.1 | | | (564.5) | | | 105.5 | | | (459.0) | | | $ | 9,461.7 | | $ | (618.6) | | | 5,505.8 | | | (82.9) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
October 31, 2021 | | | | | | | | | | | | | | |||||||||||||
October 30, 2022 | | | | | | | | | | | | | | |||||||||||||
Current maturities of long-term external borrowings | | $ | 189.5 | | $ | 2.7 | | $ | (1.7) | | $ | 1.0 | | | | | | | | | $ | 2,514.9 | | $ | 15.5 | |
Long-term external borrowings | | | 7,361.7 | | | 48.3 | | | 222.7 | | | 271.0 | | | $ | 8,453.6 | | $ | (950.1) | | | 5,519.6 | | | (19.1) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
May 2, 2021 | | | | | | | | | | | | | | |||||||||||||
January 30, 2022 | | | | | | | | | | | | | | |||||||||||||
Current maturities of long-term external borrowings | | $ | (.5) | | | | | $ | (.5) | | $ | (.5) | | | $ | 177.4 | | $ | 1.7 | | $ | 2,356.9 | | $ | 8.1 | |
Long-term external borrowings | | | 7,774.0 | | $ | 192.4 | | | 170.9 | | | 363.3 | | | | 7,283.2 | | | (107.6) | | | 5,447.0 | | | 181.3 | |
Derivatives Not Designated as Hedging Instruments
The Company has certain interest rate contracts (swaps and caps), foreign currency 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 January 29, 2023, October 30, 2022, and January 30, 2022 were $4,847.8 million, $3,931.3 million, and $2,798.0 million, the foreign currency exchange contracts were $1,297.8 million, $1,069.0 million, and $967.9 million, and the cross-currency interest rate contracts were $119.3 million, $134.2 million, and $302.9 million, respectively. To facilitate borrowings through securitization of retail notes, interest rate caps were sold with notional amounts of $788.8 million, $1,020.3 million, and $1,469.4 million at January 29, 2023, October 30, 2022, and January 30, 2022, respectively. Interest rate caps were also purchased with notional amounts of $788.8 million, $1,020.3 million, and $1,469.4 million at the same dates, respectively. The fair value gains or losses from derivatives not designated as hedging instruments were recorded in the statements of consolidated income, generally offsetting over time the exposure on the hedged item.
2019
May 1, 2022, October 31, 2021, and May 2, 2021 were $2,791.1 million, $2,970.4 million, and $2,543.4 million, the foreign currency exchange contracts were $903.4 million, $96.7 million, and $119.5 million, and the cross-currency interest rate contracts were $102.6 million, $237.5 million, and $150.7 million, respectively. To facilitate borrowings through securitization of retail notes, interest rate caps were sold with notional amounts of $1,281.9 million, $1,645.4 million, and $1,540.8 million at May 1, 2022, October 31, 2021, and May 2, 2021, respectively. Interest rate caps were also purchased with notional amounts of $1,281.9 million, $1,645.4 million, and $1,540.8 million at the same dates, respectively. The fair value gains or losses from derivatives not designated as hedging instruments were recorded in the statements of consolidated income, generally offsetting over time the exposure on the hedged item.
Fair values of derivative instruments in the consolidated balance sheets were as follows (in millions of dollars):
| | | | | | | | | | | | | | | | | | | | |
|
| May 1 |
| October 31 |
| May 2 |
|
| January 29 |
| October 30 |
| January 30 |
| ||||||
| | 2022 | | 2021 | | 2021 |
| | 2023 | | 2022 | | 2022 |
| ||||||
Receivables from John Deere | | | | | | | | | | | | | | | | | | | | |
Designated as hedging instruments: | | | | | | | | | | | | | | | | | | | | |
Interest rate contracts | | $ | 62.5 | | $ | 162.8 | | $ | 286.7 | | | $ | 90.0 | | $ | 87.5 | | $ | 102.7 | |
| | | | | | | | | | | | | | | | | | | | |
Not designated as hedging instruments: | | | | | | | | | | | | | | | | | | | | |
Interest rate contracts | |
| 81.5 | |
| 23.4 | |
| 8.9 | | |
| 80.9 | |
| 124.5 | |
| 30.6 | |
Cross-currency interest rate contracts | |
| 5.0 | |
| 5.4 | |
| 3.9 | | |
| .3 | |
| 2.8 | |
| 23.5 | |
Total not designated | |
| 86.5 | |
| 28.8 | |
| 12.8 | | |
| 81.2 | |
| 127.3 | |
| 54.1 | |
| | | | | | | | | | | | | | | | | | | | |
Other Assets | | | | | | | | | | | | | | | | | | | | |
Not designated as hedging instruments: | | | | | | | | | | | | | | | | | | | | |
Foreign currency exchange contracts | |
| 39.7 | |
| 1.1 | |
| .3 | | |
| 1.2 | |
| 1.3 | |
| 27.3 | |
| | | | | | | | | | | | | | | | | | | | |
Total derivative assets | | $ | 188.7 | | $ | 192.7 | | $ | 299.8 | | | $ | 172.4 | | $ | 216.1 | | $ | 184.1 | |
| | | | | | | | | | | | | | | | | | | | |
Other Payables to John Deere | | | | | | | | | | | | | | | | | | | | |
Designated as hedging instruments: | | | | | | | | | | | | | | | | | | | | |
Interest rate contracts | | $ | 545.2 | | $ | 79.0 | | $ | 67.9 | | | $ | 629.0 | | $ | 947.9 | | $ | 164.1 | |
| | | | | | | | | | | | | | | | | | | | |
Not designated as hedging instruments: | | | | | | | | | | | | | | | | | | | | |
Interest rate contracts | |
| 54.0 | |
| 17.1 | |
| 11.8 | | |
| 28.7 | |
| 74.2 | |
| 21.9 | |
Cross-currency interest rate contracts | | | .2 | | | 1.5 | |
| 1.5 | | | | 6.5 | | | 2.1 | |
| .3 | |
Total not designated | |
| 54.2 | |
| 18.6 | |
| 13.3 | | |
| 35.2 | |
| 76.3 | |
| 22.2 | |
| | | | | | | | | | | | | | | | | | | | |
Accounts Payable and Accrued Expenses | | | | | | | | | | | | | | | | | | | | |
Not designated as hedging instruments: | | | | | | | | | | | | | | | | | | | | |
Foreign currency exchange contracts | |
| .2 | |
| 4.8 | |
| 1.6 | | |
| 29.1 | |
| 14.1 | |
| 1.4 | |
| | | | | | | | | | | | | | | | | | | | |
Total derivative liabilities | | $ | 599.6 | | $ | 102.4 | | $ | 82.8 | | | $ | 693.3 | | $ | 1,038.3 | | $ | 187.7 | |
2120
The classification and gains (losses), including accrued interest expense related to derivative instruments on the statements of consolidated income consisted of the following (in millions of dollars):
| | | | | | | | | | | | | | | | | ||||
| | Three Months Ended | | Six Months Ended |
| | Three Months Ended |
| ||||||||||||
| | May 1 | | May 2 | | May 1 | | May 2 |
| | January 29 | | January 30 |
| ||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
|
| 2023 |
| 2022 |
| ||||||
Fair Value Hedges | | | | | | | | | | | | | | | | | | | | |
Interest rate contracts - Interest expense |
| $ | (489.5) | | $ | (158.3) | | $ | (629.0) | | $ | (210.6) | |
| $ | 235.3 | | $ | (139.5) | |
| | | | | | | | | | | | | | | | | | | | |
Cash Flow Hedges | | | | | | | | | | | | | | | | | | | | |
Recognized in OCI | | | | | | | | | | | | | | |||||||
Recognized in OCI: | | | | | | | | |||||||||||||
Interest rate contracts - OCI (pretax) |
|
| 35.2 | |
| .6 | |
| 50.6 | |
| .1 | |
| $ | (1.9) | | $ | 15.4 | |
| | | | | | | | | | | | | | | | | | | | |
Reclassified from OCI | | | | | | | | | | | | | | |||||||
Reclassified from OCI: | | | | | | | | |||||||||||||
Interest rate contracts - Interest expense |
|
| .2 | |
| (2.3) | |
| (.9) | |
| (6.6) | |
|
| 16.3 | |
| (1.1) | |
| | | | | | | | | | | | | | | | | | | | |
Not Designated as Hedges | | | | | | | | | | | | | | | | | | | | |
Interest rate contracts - Interest expense * |
| $ | 46.5 | | $ | .9 | | $ | 43.2 | | $ | (1.6) | |
| $ | (1.9) | | $ | (3.3) | |
Foreign currency exchange contracts - Administrative and operating expenses * |
|
| (3.4) | |
| (2.9) | |
| 64.4 | |
| (15.5) | |
| | (135.1) | | | 67.8 | |
Total not designated | | $ | 43.1 | | $ | (2.0) | | $ | 107.6 | | $ | (17.1) | | | $ | (137.0) | | $ | 64.5 | |
* Includes interest and foreign currency 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 May 1,January 29, 2023 and January 30, 2022 and May 2, 2021 were lossesa gain of $454.9$242.5 million and $161.1 million, respectively. The amounts the Company recognized on these affiliate party transactions for the six months ended May 1, 2022 and May 2, 2021 were lossesa loss of $577.5 million and $224.9$122.6 million, respectively.
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 transactions are with both unrelated external counterparties and with John Deere. For derivatives transactions 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 the Company 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 May 1,January 29, 2023, October 30, 2022, October 31, 2021, and May 2, 2021.January 30, 2022.
2221
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):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
May 1, 2022 | | | | | | | | | | | | |
| |||||||||||||
January 29, 2023 | | | | | | | | | | | | |
| |||||||||||||
Derivatives: | | Gross Amounts | | Netting | | Collateral | | Net |
| | Gross Amounts | | Netting | | Collateral | | Net |
| ||||||||
Assets |
| |
|
| | |
| |
|
| |
| |
| |
|
| | |
| |
|
| |
| |
External | | $ | 39.7 | | $ | (.2) | | | | | $ | 39.5 | | | $ | 1.2 | | | | | | | | $ | 1.2 | |
John Deere | |
| 149.0 | | | (82.8) | | | | |
| 66.2 | | |
| 171.2 | | $ | (129.1) | | | | |
| 42.1 | |
Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | |
External | |
| .2 | |
| (.2) | | | | |
| | | |
| 29.1 | |
| | | | | |
| 29.1 | |
John Deere | |
| 599.4 | |
| (82.8) | |
| | |
| 516.6 | | |
| 664.2 | |
| (129.1) | |
| | |
| 535.1 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
October 31, 2021 | | | | | | | | | | | | |
| |||||||||||||
October 30, 2022 | | | | | | | | | | | | |
| |||||||||||||
Derivatives: | | Gross Amounts | | Netting | | Collateral | | Net |
| | Gross Amounts | | Netting | | Collateral | | Net |
| ||||||||
Assets |
| |
|
| | |
| |
|
| |
| |
| |
|
| | |
| |
|
| |
| |
External | | $ | 1.1 | | $ | (.3) | | | | | $ | .8 | | | $ | 1.3 | | $ | (1.1) | | | | | $ | .2 | |
John Deere | |
| 191.6 | |
| (97.6) | |
| | |
| 94.0 | | |
| 214.8 | |
| (128.3) | |
| | |
| 86.5 | |
Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | |
External | |
| 4.8 | |
| (.3) | |
| | |
| 4.5 | | |
| 14.1 | |
| (1.1) | |
| | |
| 13.0 | |
John Deere | |
| 97.6 | |
| (97.6) | |
| | |
| | | |
| 1,024.2 | |
| (128.3) | |
| | |
| 895.9 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
May 2, 2021 |
| | |
| | |
| |
|
| | |
| |||||||||||||
January 30, 2022 |
| | |
| | |
| |
|
| | |
| |||||||||||||
Derivatives: | | Gross Amounts | | Netting | | Collateral | | Net |
| | Gross Amounts | | Netting | | Collateral | | Net |
| ||||||||
Assets | | | |
| | |
| | | | | | | | | |
| | |
| | | | | | |
External | | $ | .3 | | $ | (.1) | | | | | $ | .2 | | | $ | 27.3 | | $ | (1.4) | | | | | $ | 25.9 | |
John Deere | |
| 299.5 | | | (77.9) | | | | |
| 221.6 | | |
| 156.8 | | | (130.9) | | | | |
| 25.9 | |
Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | |
External | |
| 1.6 | |
| (.1) | | $ | (.1) | |
| 1.4 | | |
| 1.4 | |
| (1.4) | | | | |
| | |
John Deere | |
| 81.2 | |
| (77.9) | |
| | |
| 3.3 | | |
| 186.3 | |
| (130.9) | |
| | |
| 55.4 | |
(12) Subsequent Events
On February 13, 2023, Deere & Company increased its investment in JDFS by $240.0 million. JDFS, in turn, increased its investment in Capital Corporation by the same amount.
In February 2023, the Company entered into two retail note securitization transactions. The first transaction resulted in $306.6 million of secured borrowings. The second transaction will result in $982.6 million of secured borrowings and is expected to settle in March 2023.
2322
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 production and precision agriculture, small agriculture and turf, 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.
Smart Industrial Operating Model and Leap Ambitions
John Deere’s Smart Industrial operating model is focused on making significant investments in strengthening its capabilities in digital, automation, autonomy, and alternative propulsion technologies. These technologies are intended to increase worksite efficiency, improve yields, lower input costs, and ease labor constraints. John Deere’s Leap Ambitions are goals designed to boost economic value and sustainability for John Deere’s customers. As an enabling business, the Company is fully integrated with John Deere’s Smart Industrial operating model and is focused on providing financial solutions to help John Deere achieve its Leap Ambitions. John Deere and the Company anticipate opportunities in this area, as John Deere, the Company, and their customers have a vested interest in sustainable practices.
In February 2023, John Deere released its 2022 Sustainability Report, available at JohnDeere.com/sustainability. This report identifies important progress on John Deere’s Leap Ambitions in fiscal year 2022. The information in John Deere’s 2022 Sustainability Report is not incorporated by reference into, and does not form a part of, this Form 10-Q.
Trends and Economic Conditions for Fiscal Year 2022
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 supply and demand for its products.
Industry Trends for Fiscal Year 2023
Industry sales of large agricultural machinery in the U.S. and Canada for 2023 are expectedforecasted to be up about 20 percent.increase 5 to 10 percent compared to 2022. Industry sales of turfsmall agricultural and utilityturf equipment in the U.S. and Canada are expected to be flat.down about 5 percent in 2023. Industry sales of agricultural machinery in Europe are forecastforecasted to be flat to up about 5 percent. Inpercent, while South America,American industry sales of tractors and combines are projected to be up about 10 percent. Asia industry sales of agricultural machinery are forecast to be down moderately. Construction equipment industry sales in the U.S. and Canada for 2022 are expected to increase about 10 percent, while compact construction equipment industry sales in the U.S. and Canada are anticipated to be flat to up 5 percent. Forestry global industry equipment sales are expected to be flat to up 5 percent. Globalpercent in 2023. Asia industry roadbuildingsales are forecasted to be down moderately in 2023. On an industry basis, North American construction equipment and compact construction equipment sales are forecastedboth expected to be flat to up 5 percent.percent in 2023. Global forestry and global roadbuilding industry sales are each expected to be flat.
John Deere Trends
Customers’ demand for integration of technology into equipment is a market trend underlying John Deere’s Smart Industrial operating model and Leap Ambitions framework. Customers have sought to improve profitability, productivity, and sustainability through technology. John Deere’s approach to technology involves hardware and software, guidance, connectivity and digital solutions, automation and machine intelligence, autonomy, and alternative propulsion technologies. This technology is incorporated into products within each of John Deere’s operating segments. Customers continue to adopt technology integrated in the John Deere portfolio of “smart” machines, systems, and solutions. The Company expects this trend to persist for the foreseeable future.
Demand for John Deere’s equipment remains strong, as order books are full through a majority of 2023. Agricultural fundamentals are expected to remain solid into 2023, and retail demand will comprise most of 2023
23
sales. The Company’s full-yearNorth American retail customer fleet age of combines and large tractors remains above average, and dealer inventories are historically low due to the manufacturing and supply chain constraints over the past few years. John Deere expects the replenishment of dealer stock inventory to occur in 2024. Crop prices remain favorable to John Deere customers in part due to low stock-to-use ratios for key grains. John Deere expects to sell more large agricultural equipment in 2023 than 2022 resultsin North America, Europe, and South America. Demand for small agricultural equipment remains stable, while turf and utility equipment product sales are expected to be slightlylower due to the overall U.S. economic conditions. Construction equipment markets are forecasted to be steady. Rental fleets replenishment, the energy industry, and U.S. infrastructure spend are expected to offset moderation in residential home construction. Roadbuilding demand remains strongest in the U.S., largely offset by softening demand in Europe and parts of Asia.
John Deere experienced supply chain disruptions in 2022, which continued into 2023. Supply chain disruptions impacted many aspects of John Deere’s business, including parts availability, increased production costs, and higher inventory levels. Past due deliveries from suppliers were at elevated levels during 2022. Although past due deliveries remain elevated, John Deere experienced improvement during the first quarter of 2023. The reduction in supply chain disruptions contributed to higher levels of production. John Deere implemented mitigation efforts to minimize the impact of supply chain disruptions on its ability to meet customer demand. While supply chain disruptions are expected to persist into 2023, John Deere is working diligently to secure the parts and components that customers need to deliver essential food and infrastructure more profitably and sustainably. Although John Deere experienced some improvement in this area during the first quarter of 2023, concerns remain, and this issue could impact John Deere’s ability to meet customer demand in the remainder of 2023.
Company Trends
Net income for the Company in fiscal 2023 is expected to be lower than fiscal 20212022 primarily due to a higher provision for credit losses, higher selling, general, and administrative expenses, and less favorable financing spreads, higher selling, administrative, and general expenses, and lower gains on operating lease dispositions. These factors are expected to be partially offset by income earned on a higher average portfolio, driven by strong demand of John Deere’s products in 2023, which is favorably impacting forecasted financing volumes.
Central bank policy interest rates increased in the first quarter of 2023 and are projected to continue to increase during 2023, but at a moderating pace compared to 2022. Most of the Company’s Customer Receivables are fixed rate, while its wholesale receivables generally earn a floating rate. The Company has both fixed and floating rate borrowings. The Company manages the risk of interest rate fluctuations by balancing the types and amounts of its funding sources to its Receivable and Lease portfolios. Accordingly, the Company enters into interest rate swap agreements to manage its interest rate exposure. Historically, rising interest rates impact the Company’s borrowings sooner than the benefit is realized from the Receivable and Lease portfolio. As a result, the Company’s financing spread was unfavorably impacted by $50.0 million (after-tax) in the first quarter of 2023 compared to 2022. The Company expects spread compression to persist during 2023.
Inflation was a pervasive feature throughout 2022, and the Company expects inflation to continue in 2023. The Company’s estimation of credit losses may be negatively impacted in the event customers’ operations are negatively impacted due to inflation or rising interest rates. As part of the process to establish the allowance for credit losses, the Company continues to monitor the economy, including potential impacts of inflation and rising interest rates, among other factors, and qualitative adjustments to the allowance are incorporated as necessary. As of January 29, 2023, impacts of inflation and interest rates did not have a material impact on the Company’s allowance.
As the Company’s volume of Receivables and Leases is largely dependent upon the level of retail sales and leases of John Deere products, supply chain disruptions could impact the Company’s future volumes. Despite supply chain challenges, the Company’s volumes are forecast to grow in 2023, driven by strong demand for John Deere equipment.
Supply chain disruptions, inflationary pressures, and rising interest rates are driven by factors outside of the Company’s control, and as a result, the Company cannot reasonably foresee when these conditions will subside.
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For additional information regarding the impact of supply chain disruptions, including mitigation efforts to minimize the impact of potential supply chain disruptions on John Deere’s ability to meet customer demand, as well as inflationary pressures, refer to Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Trends and Economic Conditions” included in Deere & Company’s Quarterly Report on Form 10-Q for the quarter ended January 29, 2023.
Items of Concern and Uncertainties
Other items of concern include global and regional political conditions, economic and trade policies, inflationary pressures, the ongoing pandemic,imposition of new or retaliatory tariffs against certain countries or covering certain products, post-pandemic effects, capital market disruptions, changes in demand and pricing for new and used equipment, and the other items discussed in the “Forward-Looking Statements” below. Significantsignificant fluctuations in foreign currency exchange rates, and volatility in the priceprices of many commodities, and supply chain disruptionscommodities. These items could also impact the Company’s results.results. John Deere and the Company are making investments in technology and in strengthening capabilities in digital, automation, autonomy, and alternative propulsion technologies. As with most technology investments, marketplace adoption and monetization of these features holds an elevated level of uncertainty.
20222023 Compared with 20212022
The total revenues and net income attributable to the Company were as follows (in millions of dollars):
| | | | | | | | | | | | | | | | | | | ||
| | Three Months Ended | | Six Months Ended | | | Three Months Ended | | ||||||||||||
| | May 1 | | May 2 | | May 1 | | May 2 |
| | January 29 | | January 30 |
| ||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
|
| 2023 |
| 2022 |
| ||||||
Total revenues | | $ | 651.4 | | $ | 675.3 | | $ | 1,294.3 | | $ | 1,332.3 | | | $ | 820.6 | | $ | 642.9 | |
Net income attributable to the Company | | | 158.6 | | 177.2 | | | 348.2 | | | 343.9 | | | | 147.1 | | | 189.6 | |
Total revenues increased for the secondfirst quarter and the first six months of 2022 decreased2023 primarily due to lowera 16% increase in average portfolio balances, in addition to higher average financing rates partially offset by an average portfolio that was 5 percent higher in the second quarter and 6 percent higher in the first six months of 2022, compared to the same periodsperiod last year. In addition,Net income for the first six months ofquarter was lower compared to the same period in 2022 benefited from largerprimarily due to less favorable financing spreads, higher selling, administrative, and general expenses, and lower gains on operating lease dispositions.
Net income for the second quarter decreased due to a higher provision for credit losses and less favorable financing spreads,dispositions, partially offset by income earned on a higher average portfolio. For the first six months, net income rose mainly due to income earned on a higher average portfolio and improvement on operating leasebalances.
2425
residual values, partially offset by a higher provision for credit losses and less favorable financing spreads. The prior year also benefited from a favorable adjustment to the provision for credit losses.
Revenues
Finance income, lease revenues, and other income earned by the Company were as follows (in millions of dollars):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | | Three Months Ended | | ||||||||||||||||||
| | May 1 | | May 2 | | % | | May 1 | | May 2 | | % | | | January 29 | | January 30 | | % | | ||||||
| | 2022 | | 2021 | | Change |
| 2022 | | 2021 | | Change | |
| 2023 | | 2022 | | Change | | ||||||
Finance income earned on: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Retail notes | | $ | 242.8 | | $ | 234.2 | | 4 | | $ | 482.8 | | $ | 471.5 | | 2 | | | $ | 315.9 | | $ | 240.0 | | 32 | |
Revolving charge accounts | | | 65.9 | | 65.9 | | | | | 132.4 | | | 138.8 | | (5) | | | | 82.9 | | | 66.5 | | 25 | | |
Wholesale receivables | | | 71.0 | | 80.3 | | (12) | | | 130.9 | | | 153.6 | | (15) | | | | 151.5 | | | 59.9 | | 153 | | |
Lease revenues | | | 236.5 | | 256.2 | | (8) | | | 478.0 | | | 519.8 | | (8) | | | | 240.7 | | | 241.5 | | | | |
Other income | | | 35.2 | | 38.7 | | (9) | | | 70.2 | | | 48.6 | | 44 | | | | 29.6 | | | 35.0 | | (15) | |
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Finance income earned on retail notes, revolving charge accounts, and wholesale receivables increased slightlyduring the first quarter of 2023 compared to 2021 primarily2022, due to higher average portfolio balances, offset by lower average financing rates. Finance income earned on revolving charge accounts decreased for the first six months of 2022 primarily due to lower average financing rates. Finance income earned on wholesale receivables declined due to lowerrates and higher average portfolio balances. Lease revenues decreased primarily due to lower average financing rates and lower average portfolio balances.were about the same for each period.
Other income decreased forin the secondfirst quarter of 20222023 due to lower freestanding credit enhancement recoveries. Other income increased for the first six months of 2022 primarily due to larger gains on operating lease dispositions. Better than expected conditionsWhile demand for used equipment remains strong, lease gains declined in the agriculturefirst quarter as end-of-lease book values are now more closely aligned with equipment sale proceeds. This decrease was partially offset by higher interest earned on the Company’s cash and construction used equipment markets are leading to favorable results when the matured operating lease equipment is sold.cash equivalents.
Revenues earned from John Deere totaled $149.7 million for the second quarter and $288.3$208.2 million for the first six monthsquarter of 2022,2023, compared with $157.7 million and $306.8$138.7 million for the same periodsperiod last year, respectively.year. The decreaseincrease was primarily due to decreasedincreased compensation paid by John Deere for waived or reduced finance charges on Receivableswholesale receivables and Leases, which is amortized into income over the lives of the related Receivables and Leases.retail notes, driven by a higher interest rate environment, in addition to higher average portfolio balances. Revenues earned from John Deere are included in each of the revenue amounts discussed above.
Expenses
Expenses incurred by the Company were as follows (in millions of dollars):
| | | | | | | | | | | | | | | | | | | | | | | | | ||
| | Three Months Ended | | Six Months Ended | | | Three Months Ended | | ||||||||||||||||||
| | May 1 | | May 2 | | % | | May 1 | | May 2 | | % | | | January 29 | | January 30 | | % | | ||||||
| | 2022 | | 2021 | | Change |
| 2022 | | 2021 | | Change | | | 2023 | | 2022 | | Change | | ||||||
Interest expense | | $ | 55.7 | | $ | 125.0 | | (55) | | $ | 155.2 | | $ | 259.0 | | (40) | | | $ | 301.0 | | $ | 99.5 | | 203 | |
Depreciation of equipment on operating leases | | | 165.8 | | 184.6 | | (10) | | | 334.6 | | | 379.4 | | (12) | | | | 164.5 | | | 168.8 | | (3) | | |
Administrative and operating expenses | | | 115.2 | | 106.3 | | 8 | | | 211.6 | | | 198.8 | | 6 | | | | 108.5 | | | 96.4 | | 13 | | |
Fees paid to John Deere | | | 99.6 | | 39.4 | | 153 | | | 139.3 | | | 70.9 | | 96 | | ||||||||||
Fees and interest paid to John Deere | | | 57.6 | | | 39.7 | | 45 | | |||||||||||||||||
Provision (credit) for credit losses | | | 13.2 | | | (15.6) | | | | | 12.0 | | | (16.2) | | | | | | 3.5 | | | (1.2) | | | |
Provision for income taxes | | | 44.5 | | 59.0 | | (25) | | | 96.5 | | | 98.0 | | (2) | | | | 39.6 | | | 52.0 | | (24) | |
The decreaseincrease in interest expense for the secondfirst quarter and first six months of 20222023 was primarily due to lowerhigher average borrowing rates and gains on non-designated derivatives.higher average borrowings.
The depreciationDepreciation of equipment on operating leases for the secondfirst quarter and first six months of 20222023 decreased primarilyslightly due to updated depreciation estimates as a result of improving conditions in the agriculture and construction markets, in addition to lower average balances of equipment on operating leases.
Administrative and operating expenses increased in the first quarter of 2023 compared to 2022 due to higher dealer incentive program costs and higher employment costs, including incentive compensation.
Fees and interest paid to John Deere increased in the second quarter and first six months of 2022 partially due to the remittance of gains on non-designated derivatives that were assumed by Deere & Company (see Note 7). In addition, fees paid to John Deere increased in both the second quarter and first six months of 20222023 primarily due to higher interest on intercompany borrowings from John Deere as a result of larger notional balances in certain high interest rate international markets.driven by higher average borrowing rates.
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The provision (credit) for credit losses increased slightly in the secondfirst quarter and first six months of 20222023 compared withto the same periodsperiod last year, primarily due to favorable allowance adjustmentsnet recoveries on revolving charge accounts in the second quarter of 2021,prior year period, which did not recur in the current year, and higher write-offs on construction and forestry retail notes and finance leases.this year. The annualized provision (credit) for credit losses, as a percentage of the average balance of total Receivables, financed, was .14 percent for the second quarter and .07.03 percent for the first six monthsquarter of 2022,2023, compared with (.18) percent and (.10)(.01) percent for the same periodsperiod last year.
The provision for income taxes decreased during the secondfirst quarter of 20222023 primarily due to favorable discrete tax items and lower pretax income.income in the current quarter.
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Receivables and Leases
Receivable and Lease (excluding wholesale) acquisition volumes were as follows (in millions of dollars):
| | | | | | | | | | | |
| | Three Months Ended | |||||||||
| | May 1 | | May 2 | | $ | | % | |||
| | 2022 | | 2021 | | Change | | Change | |||
Retail notes: |
| | |
| | |
| |
|
|
|
Agriculture and turf | | $ | 3,040.3 | | $ | 3,189.3 | | $ | (149.0) |
| (5) |
Construction and forestry | |
| 779.8 | |
| 700.0 | |
| 79.8 |
| 11 |
Total retail notes | |
| 3,820.1 | |
| 3,889.3 | |
| (69.2) |
| (2) |
Revolving charge accounts | |
| 1,946.8 | |
| 1,795.6 | |
| 151.2 |
| 8 |
Financing leases | |
| 159.6 | |
| 152.5 | |
| 7.1 |
| 5 |
Equipment on operating leases | |
| 521.1 | |
| 511.0 | |
| 10.1 |
| 2 |
Total Receivables and Leases (excluding wholesale) | | $ | 6,447.6 | | $ | 6,348.4 | | $ | 99.2 |
| 2 |
| | | | | | | | | | | |