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Deere John Capital (DE22B)

Filed: 27 Aug 20, 12:47pm

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 August 2, 2020

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
(State of Incorporation)

36-2386361
(IRS Employer Identification No.)

10587 Double R Boulevard, Suite 100
Reno, Nevada 89521
(Address of principal executive offices)

Telephone Number: (775) 786-5527

Securities Registered Pursuant to Section 12(b) of the Act:

Title of each class

Trading symbol

Name of each exchange on which registered

2.75% Senior Notes Due 2022

DE22B

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 August 2, 2020, 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

Statement of Consolidated Income

(Unaudited)

(in millions)

Three Months Ended 

Nine Months Ended 

 

August 2

July 28

August 2

July 28

 

    

2020

    

2019

    

2020

    

2019

 

Revenues

Finance income earned on retail notes

$

234.9

$

241.5

$

701.4

$

665.0

Revolving charge account income

 

87.8

 

94.3

 

242.7

 

243.0

Finance income earned on wholesale receivables

 

84.6

 

141.9

 

305.3

 

400.9

Lease revenues

 

270.3

 

256.7

 

817.8

 

741.6

Other income

 

18.4

 

7.4

 

47.5

 

55.1

Total revenues

 

696.0

 

741.8

 

2,114.7

 

2,105.6

Expenses

Interest expense

 

161.3

 

256.2

 

597.7

734.7

Operating expenses:

Administrative and operating expenses

 

92.0

 

102.6

 

357.9

313.3

Fees paid to John Deere

 

24.8

 

15.2

 

73.0

42.0

Provision for credit losses

 

16.0

 

23.4

 

100.8

50.3

Depreciation of equipment on operating leases

 

211.8

 

188.0

 

639.6

544.3

Total operating expenses

 

344.6

 

329.2

 

1,171.3

 

949.9

Total expenses

 

505.9

 

585.4

 

1,769.0

 

1,684.6

Income of consolidated group before income taxes

 

190.1

 

156.4

 

345.7

 

421.0

Provision for income taxes

 

44.4

 

11.8

 

75.9

71.4

Income of consolidated group

 

145.7

 

144.6

 

269.8

 

349.6

Equity in income of unconsolidated affiliate

 

.5

 

.4

 

1.6

1.4

Net income

 

146.2

 

145.0

 

271.4

 

351.0

Less: Net income attributable to noncontrolling interests

.2

.1

.2

Net income attributable to the Company

$

146.2

$

144.8

$

271.3

$

350.8

See Condensed Notes to Interim Consolidated Financial Statements.

2

John Deere Capital Corporation and Subsidiaries

Statement of Consolidated Comprehensive Income

(Unaudited)

(in millions)

Three Months Ended 

Nine Months Ended 

 

August 2

July 28

August 2

July 28

 

  

2020

  

2019

  

2020

  

2019

 

Net income

$

146.2

$

145.0

$

271.4

$

351.0

Other comprehensive income (loss), net of income taxes

Cumulative translation adjustment

 

50.0

(3.4)

28.2

(9.8)

Unrealized gain (loss) on derivatives

 

4.2

(6.2)

(4.8)

(21.3)

Unrealized gain on debt securities

.6

Other comprehensive income (loss), net of income taxes

 

54.8

 

(9.6)

 

23.4

 

(31.1)

Comprehensive income of consolidated group

 

201.0

 

135.4

 

294.8

 

319.9

Less: Comprehensive income attributable to noncontrolling interests

.2

.1

.2

Comprehensive income attributable to the Company

$

201.0

$

135.2

$

294.7

$

319.7

See Condensed Notes to Interim Consolidated Financial Statements.

3

John Deere Capital Corporation and Subsidiaries

Consolidated Balance Sheet

(Unaudited)

(in millions)

August 2

November 3

July 28

 

2020

2019

2019

 

Assets

    

    

    

Cash and cash equivalents

$

624.9

$

632.6

$

649.1

Marketable securities

2.4

3.2

6.9

Receivables:

Retail notes

 

15,112.4

 

15,150.5

 

13,437.5

Retail notes securitized

 

5,446.2

 

4,349.6

 

5,159.1

Revolving charge accounts

 

3,918.3

 

3,863.0

 

3,798.7

Wholesale receivables

 

8,428.8

 

8,706.8

 

10,299.5

Financing leases

 

743.6

 

751.6

 

716.9

Total receivables

 

33,649.3

 

32,821.5

 

33,411.7

Allowance for credit losses

 

(140.6)

 

(100.6)

 

(110.4)

Total receivables – net

 

33,508.7

 

32,720.9

 

33,301.3

Other receivables

 

106.9

 

75.1

 

83.2

Receivables from John Deere

 

804.5

 

331.9

 

235.3

Equipment on operating leases – net

 

5,257.2

 

5,530.5

 

5,323.3

Notes receivable from John Deere

366.8

291.7

277.3

Investment in unconsolidated affiliate

 

18.9

 

16.4

 

16.0

Deferred income taxes

 

37.3

 

33.2

 

36.3

Other assets

 

427.8

 

454.4

 

514.6

Total Assets

$

41,155.4

$

40,089.9

$

40,443.3

Liabilities and Stockholder’s Equity

Short-term borrowings:

Commercial paper and other notes payable

$

1,012.0

$

1,460.9

$

1,162.5

Securitization borrowings

 

5,324.1

 

4,277.0

 

4,994.8

John Deere

 

3,796.3

 

1,855.3

 

2,294.8

Current maturities of long-term borrowings

 

4,910.2

 

5,716.6

 

6,269.5

Total short-term borrowings

 

15,042.6

 

13,309.8

 

14,721.6

Other payables to John Deere

 

42.6

 

47.4

 

55.3

Accounts payable and accrued expenses

 

876.0

 

886.7

 

767.0

Deposits withheld from dealers and merchants

 

105.6

 

137.5

 

138.8

Deferred income taxes

 

423.3

 

527.7

 

615.1

Long-term borrowings

 

20,492.1

 

21,052.4

 

20,035.4

Total liabilities

 

36,982.2

 

35,961.5

 

36,333.2

Commitments and contingencies (Note 8)

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

Retained earnings

 

2,762.9

 

2,741.6

 

2,723.2

Accumulated other comprehensive loss

 

(74.0)

 

(97.4)

 

(97.0)

Total Company stockholder’s equity

 

4,171.7

 

4,127.0

 

4,109.0

Noncontrolling interests

 

1.5

 

1.4

 

1.1

Total stockholder’s equity

 

4,173.2

 

4,128.4

 

4,110.1

Total Liabilities and Stockholder’s Equity

$

41,155.4

$

40,089.9

$

40,443.3

See Condensed Notes to Interim Consolidated Financial Statements.

4

John Deere Capital Corporation and Subsidiaries

Statement of Consolidated Cash Flows

For the Nine Months Ended August 2, 2020 and July 28, 2019

(Unaudited)

(in millions)

    

    

2020

    

2019

 

Cash Flows from Operating Activities:

Net income

$

271.4

$

351.0

Adjustments to reconcile net income to net cash

provided by operating activities:

Provision for credit losses

 

100.8

50.3

Provision for depreciation and amortization

 

652.2

561.7

Credit for deferred income taxes

 

(106.3)

(202.9)

Impairment charges

30.8

Undistributed earnings of unconsolidated affiliate

 

(1.4)

(1.2)

Change in accounts payable and accrued expenses

 

(16.1)

18.4

Change in accrued income taxes payable/receivable

 

32.0

448.0

Other

 

129.3

139.6

Net cash provided by operating activities

 

1,092.7

 

1,364.9

Cash Flows from Investing Activities:

Cost of receivables acquired (excluding wholesale)

 

(13,844.2)

(12,884.6)

Collections of receivables (excluding wholesale)

 

12,760.9

12,215.9

(Increase) decrease in wholesale receivables – net

 

353.8

(2,362.5)

Cost of equipment on operating leases acquired

 

(1,359.4)

(1,672.5)

Proceeds from sales of equipment on operating leases

 

978.3

870.4

Cost of notes receivable acquired from John Deere

(163.9)

(105.2)

Collections of notes receivable from John Deere

78.2

31.4

Purchases of marketable securities

(11.0)

Proceeds from maturities and sales of marketable securities

4.0

Other

 

(44.0)

(44.6)

Net cash used for investing activities

 

(1,240.3)

 

(3,958.7)

Cash Flows from Financing Activities:

Decrease in commercial paper and other notes payable – net

 

(444.5)

(948.8)

Increase in securitization borrowings – net

 

1,048.5

1,115.4

Increase in payable to John Deere – net

 

1,775.8

948.1

Proceeds from issuance of long-term borrowings

 

3,062.5

5,150.2

Payments of long-term borrowings

 

(5,008.7)

(3,332.4)

Dividends paid

 

(250.0)

(280.0)

Capital investment from John Deere

.2

Debt issuance costs

 

(21.9)

(25.2)

Net cash provided by financing activities

 

161.7

 

2,627.5

Effect of exchange rate changes on cash, cash equivalents, and restricted cash

 

(.9)

(6.3)

Net increase in cash, cash equivalents, and restricted cash

 

13.2

 

27.4

Cash, cash equivalents, and restricted cash at beginning of period *

 

710.9

 

711.8

Cash, cash equivalents, and restricted cash at end of period *

$

724.1

$

739.2

* At August 2, 2020, November 3, 2019, July 28, 2019, and October 28, 2018, restricted cash, which is reported in other assets on the consolidated balance sheet, was $99.2 million, $78.3 million, $90.1 million and $103.4 million, respectively. The restricted cash 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

Statement of Changes in Consolidated Stockholder’s Equity

For the Three and Nine Months Ended August 2, 2020 and July 28, 2019

(Unaudited)

(in millions)

Company Stockholder

 

Accumulated

Total

Other

Non-

Stockholder’s

Common

Retained

Comprehensive

Controlling

Equity

Stock

Earnings

Income (Loss)

Interests

 

 

Three Months Ended July 28, 2019

Balance April 28, 2019

$

4,024.6

    

$

1,482.8

    

$

2,628.4

    

$

(87.4)

    

$

.8

Net income

145.0

144.8

.2

Other comprehensive loss

(9.6)

(9.6)

Dividends declared

(50.0)

(50.0)

Capital investment

.1

.1

Balance July 28, 2019

$

4,110.1

$

1,482.8

$

2,723.2

$

(97.0)

$

1.1

Nine Months Ended July 28, 2019

Balance October 28, 2018

    

$

4,070.0

    

$

1,482.8

    

$

2,652.4

    

$

(65.9)

    

$

.7

Net income

 

351.0

 

350.8

.2

Other comprehensive loss

 

(31.1)

 

(31.1)

Dividends declared

 

(280.0)

 

(280.0)

Capital investment

 

.2

 

.2

Balance July 28, 2019

$

4,110.1

$

1,482.8

$

2,723.2

$

(97.0)

$

1.1

Three Months Ended August 2, 2020

Balance May 3, 2020

$

3,997.2

    

$

1,482.8

$

2,641.7

$

(128.8)

$

1.5

Net income

146.2

146.2

Other comprehensive income

54.8

54.8

Dividends declared

(25.0)

(25.0)

Balance August 2, 2020

$

4,173.2

$

1,482.8

$

2,762.9

$

(74.0)

$

1.5

Nine Months Ended August 2, 2020

Balance November 3, 2019

$

4,128.4

$

1,482.8

$

2,741.6

$

(97.4)

$

1.4

Net income

 

271.4

 

271.3

.1

Other comprehensive income

 

23.4

23.4

Dividends declared

 

(250.0)

(250.0)

Balance August 2, 2020

$

4,173.2

$

1,482.8

$

2,762.9

$

(74.0)

$

1.5

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 agriculture and turf and construction and forestry operations and used equipment taken in trade for this equipment. 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 John Deere retail dealers. The Company also purchases and finances a limited amount of non-Deere retail notes. 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). The Company also provides wholesale financing for inventories of John Deere agriculture and turf and construction and forestry equipment for dealers of those products (wholesale receivables). In addition, the Company leases John Deere equipment and a limited amount of non-Deere equipment to retail customers (financing and operating leases). The Company also offers credit enhanced international export financing to select customers and dealers, which generally involves John Deere products. Retail notes, revolving charge accounts, wholesale receivables, and financing leases are collectively called “Receivables.” Receivables and equipment on operating leases are collectively called “Receivables and Leases.”

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 that 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 that 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.

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. The COVID-19 (COVID) pandemic has resulted in uncertainties in the Company’s business, which may result in actual outcomes differing significantly from those estimates.

The Company uses a 52/53 week fiscal year with quarters ending on the last Sunday in the reporting period. The third quarter ends for fiscal year 2020 and 2019 were August 2, 2020 and July 28, 2019, respectively. Both periods contained 13 weeks.

7

(2)  New Accounting Standards

New Accounting Standards Adopted

In the first quarter of 2020, the Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), which supersedes Accounting Standards Codification (ASC) 840, Leases. This ASU was adopted using a modified-retrospective approach. The ASU’s primary change is the requirement for lessee entities to recognize a lease liability for payments and a right of use asset during the term of operating lease arrangements. The ASU did not significantly change the lessee’s recognition, measurement, and presentation of expenses and cash flows from the previous accounting standard. Lessors’ accounting under the ASC is largely unchanged from the previous accounting standard. The ASU adds new disclosures about the Company’s leasing activities. The Company elected the optional practical expedients to not reassess whether existing contracts contain leases, not reassess lease classification, and not reassess initial direct costs for existing leases. The Company did not elect the hindsight practical expedient. In addition, the Company elected to combine lease and nonlease components for all asset classes and to not recognize a right of use asset or lease liability for arrangements that qualify as short-term leases. Upon adoption of the ASU, the Company recorded right of use assets and lease liabilities for operating leases of $5.1 million and $5.1 million, respectively. The right of use assets are recorded in other assets and the lease liabilities are recorded in accounts payable and accrued expenses on the consolidated balance sheet. Since the right of use assets and lease liabilities are not significant, no further lessee disclosures have been included in the condensed notes to the interim consolidated financial statements. See Note 6 for additional disclosures related to lessor arrangements. The adoption did not have a material effect on the Company’s operating results or cash flows.

The Company also adopted the following standards in 2020, none of which had a material effect on the Company’s consolidated financial statements:

Accounting Standards Updates

2019-04

Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The adoption was for clarifications to ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities

2020-04

Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which establishes ASC 848, Reference Rate Reform

New Accounting Standards to be Adopted

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, which establishes ASC 326, Financial Instruments – Credit Losses. The ASU revises the measurement of credit losses for financial assets measured at amortized cost from an incurred loss to an expected loss methodology. The ASU affects receivables, debt securities, net investment in leases, and most other financial assets that represent a right to receive cash. Additional disclosures about significant estimates and credit quality are also required. The effective date will be the first quarter of fiscal year 2021. The ASU will be adopted using a modified-retrospective approach. The Company is testing and validating models developed to estimate expected credit losses, assessing appropriate assumptions, designing new procedures and controls, and evaluating the potential effects on the consolidated financial statements.

The Company will also adopt the following standards in future periods, none of which are expected to have a material effect on the Company’s consolidated financial statements:

Accounting Standards Updates

2018-15

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which amends ASC 350-40, Intangibles – Goodwill and Other – Internal-Use Software

2019-04

Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments

2019-12

Simplifying the Accounting for Income Taxes, which amends ASC 740, Income Taxes

8

(3)  Other Comprehensive Income Items

The after-tax changes in accumulated other comprehensive income (loss) were as follows (in millions of dollars):

    

    

Unrealized

    

Unrealized

    

Accumulated

 

Cumulative

Gain (Loss)

Gain (Loss)

Other

 

Translation

on

on

Comprehensive

 

Adjustment

Derivatives

Debt Securities

Income (Loss)

 

Balance October 28, 2018

$

(80.7)

$

14.8

$

(65.9)

Other comprehensive income (loss) items before reclassification

 

(9.8)

 

(16.8)

 

 

(26.6)

Amounts reclassified from accumulated other comprehensive income

 

(4.5)

 

 

(4.5)

Net current period other comprehensive income (loss)

 

(9.8)

 

(21.3)

 

 

(31.1)

Balance July 28, 2019

$

(90.5)

$

(6.5)

$

(97.0)

Balance November 3, 2019

$

(88.4)

$

(7.0)

$

(2.0)

$

(97.4)

Other comprehensive income (loss) items before reclassification

 

28.2

 

(13.9)

 

 

14.3

Amounts reclassified from accumulated other comprehensive income

 

9.1

 

 

9.1

Net current period other comprehensive income (loss)

 

28.2

 

(4.8)

 

 

23.4

Balance August 2, 2020

$

(60.2)

$

(11.8)

$

(2.0)

$

(74.0)

9

Following are amounts recorded in and reclassifications out of other comprehensive income (loss), and the income tax effects (in millions of dollars):

Before

Tax

After

 

Tax

(Expense)

Tax

 

Three Months Ended August 2, 2020

Amount

Credit

Amount

 

Cumulative translation adjustment

    

$

50.0

    

    

$

50.0

Unrealized gain (loss) on derivatives:

Unrealized hedging gain (loss)

 

(1.1)

$

.2

 

(.9)

Reclassification of realized (gain) loss to:

Interest rate contracts – Interest expense

 

6.4

(1.3)

 

5.1

Net unrealized gain (loss) on derivatives

 

5.3

 

(1.1)

 

4.2

Unrealized gain (loss) on debt securities:

Unrealized holding gain (loss)

.6

.6

Total other comprehensive income (loss)

$

55.9

$

(1.1)

$

54.8

Nine Months Ended August 2, 2020

Cumulative translation adjustment

$

28.2

$

28.2

Unrealized gain (loss) on derivatives:

Unrealized hedging gain (loss)

 

(17.6)

$

3.7

 

(13.9)

Reclassification of realized (gain) loss to:

Interest rate contracts – Interest expense

 

11.5

(2.4)

9.1

Net unrealized gain (loss) on derivatives

 

(6.1)

 

1.3

 

(4.8)

Unrealized gain (loss) on debt securities:

Unrealized holding gain (loss)

(.8)

.8

Total other comprehensive income (loss)

$

21.3

$

2.1

$

23.4

Three Months Ended July 28, 2019

Cumulative translation adjustment

$

(3.4)

$

(3.4)

Unrealized gain (loss) on derivatives:

Unrealized hedging gain (loss)

 

(6.7)

$

1.4

 

(5.3)

Reclassification of realized (gain) loss to:

Interest rate contracts – Interest expense

 

(1.1)

.2

 

(.9)

Net unrealized gain (loss) on derivatives

 

(7.8)

1.6

 

(6.2)

Total other comprehensive income (loss)

$

(11.2)

$

1.6

$

(9.6)

Nine Months Ended July 28, 2019

Cumulative translation adjustment

$

(9.8)

$

(9.8)

Unrealized gain (loss) on derivatives:

Unrealized hedging gain (loss)

 

(21.3)

$

4.5

 

(16.8)

Reclassification of realized (gain) loss to:

Interest rate contracts – Interest expense

 

(5.7)

1.2

 

(4.5)

Net unrealized gain (loss) on derivatives

 

(27.0)

 

5.7

 

(21.3)

Total other comprehensive income (loss)

$

(36.8)

$

5.7

$

(31.1)

10

(4)  Receivables

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.

The Company monitors the credit quality of Receivables based on delinquency status. Non-performing Receivables represent loans for which the Company has ceased accruing finance income. Generally, when retail notes, revolving charge accounts, and financing lease accounts are 90 days delinquent, accrual of finance income and lease revenue is suspended. 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. Finance income for non-performing Receivables is recognized on a cash basis. Accrual of finance income is generally resumed when the receivable becomes contractually current and collections are reasonably assured.

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, after charging the dealer’s withholding account, if any, 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.

Due to the significant, negative effects of COVID, the Company provided short-term relief to dealers and retail customers during the second and third quarters of 2020. The relief was provided in regional programs and on a case-by-case basis with customers that were generally current in their payment obligations. For retail receivable customers, which include retail notes, financing leases, and revolving charge accounts, the relief generally included payment deferrals of three months or less. The retail receivables granted relief, which were primarily construction accounts, represented approximately 5 percent of the retail receivables balance at August 2, 2020. The relief provided to dealers generally included payment deferrals of three months or less and short-term interest rate reductions in certain markets. The wholesale receivables granted relief, which primarily related to agriculture and turf dealers, represented approximately 3 percent of the wholesale receivables balance at August 2, 2020. The delinquency status of receivables granted relief is based on the modified payment schedule.

11

An age analysis of past due Receivables that are still accruing interest and non-performing Receivables was as follows (in millions of dollars):

August 2, 2020

 

    

    

    

90 Days

    

 

30-59 Days

60-89 Days

or Greater

Total

 

Past Due

Past Due

Past Due

Past Due

 

Retail notes:

Agriculture and turf

$

100.9

$

49.2

$

1.5

$

151.6

Construction and forestry

 

58.5

11.9

70.4

Revolving charge accounts:

Agriculture and turf

 

18.3

3.5

21.8

Construction and forestry

 

2.6

1.0

3.6

Wholesale receivables:

Agriculture and turf

 

10.9

1.1

1.4

13.4

Construction and forestry

 

3.4

.3

1.1

4.8

Financing leases:

Agriculture and turf

 

13.4

10.2

2.1

25.7

Construction and forestry

 

1.9

2.7

4.6

Total Receivables

$

209.9

$

79.9

$

6.1

$

295.9

    

Total

    

Total Non-

    

    

Total

 

Past Due

Performing

Current

Receivables

 

Retail notes:

Agriculture and turf

$

151.6

$

190.8

$

16,628.5

$

16,970.9

Construction and forestry

 

70.4

 

76.9

3,440.4

 

3,587.7

Revolving charge accounts:

Agriculture and turf

 

21.8

 

7.4

3,794.6

 

3,823.8

Construction and forestry

 

3.6

.7

90.2

 

94.5

Wholesale receivables:

Agriculture and turf

 

13.4

 

3.8

6,905.0

 

6,922.2

Construction and forestry

 

4.8

2.2

1,499.6

 

1,506.6

Financing leases:

Agriculture and turf

 

25.7

 

14.1

560.4

 

600.2

Construction and forestry

 

4.6

 

6.4

132.4

 

143.4

Total Receivables

$

295.9

$

302.3

$

33,051.1

$

33,649.3

12

November 3, 2019

 

    

    

    

90 Days

    

 

30-59 Days

60-89 Days

or Greater

Total

 

Past Due

Past Due

Past Due

Past Due

 

Retail notes:

Agriculture and turf

$

120.0

$

64.2

$

1.5

$

185.7

Construction and forestry

 

73.9

26.6

 

100.5

Revolving charge accounts:

Agriculture and turf

 

19.1

9.2

 

28.3

Construction and forestry

 

3.2

1.2

 

4.4

Wholesale receivables:

Agriculture and turf

 

4.1

1.9

.8

 

6.8

Construction and forestry

 

.1

.3

.3

 

.7

Financing leases:

Agriculture and turf

 

14.6

7.8

.5

 

22.9

Construction and forestry

 

2.8

.7

 

3.5

Total Receivables

$

237.8

$

111.9

$

3.1

$

352.8

Total

Total Non-

Total

 

Past Due

Performing

Current

Receivables

 

Retail notes:

Agriculture and turf

 

$

185.7

 

$

168.7

$

15,831.5

 

$

16,185.9

Construction and forestry

 

100.5

 

112.9

3,100.8

 

3,314.2

Revolving charge accounts:

Agriculture and turf

 

28.3

 

6.1

3,727.9

 

3,762.3

Construction and forestry

 

4.4

 

.9

95.4

 

100.7

Wholesale receivables:

Agriculture and turf

 

6.8

 

6.3

6,544.6

 

6,557.7

Construction and forestry

 

.7

2.9

2,145.5

 

2,149.1

Financing leases:

Agriculture and turf

 

22.9

 

11.6

569.8

 

604.3

Construction and forestry

 

3.5

 

2.5

141.3

 

147.3

Total Receivables

 

$

352.8

$

311.9

$

32,156.8

$

32,821.5

13

July 28, 2019

 

    

    

    

90 Days

    

 

30-59 Days

60-89 Days

or Greater

Total

 

Past Due

Past Due

Past Due

Past Due

 

Retail notes:

Agriculture and turf

$

107.7

$

53.0

$

2.8

$

163.5

Construction and forestry

 

82.3

33.6

 

115.9

Revolving charge accounts:

Agriculture and turf

 

22.4

5.1

 

27.5

Construction and forestry

 

3.9

1.4

 

5.3

Wholesale receivables:

Agriculture and turf

 

4.4

.2

.7

 

5.3

Construction and forestry

 

1.1

1.5

.2

 

2.8

Financing leases:

Agriculture and turf

 

11.9

13.3

.2

 

25.4

Construction and forestry

 

2.8

.5

 

3.3

Total Receivables

$

236.5

$

108.6

$

3.9

$

349.0

    

Total

    

Total Non-

    

    

Total

 

Past Due

Performing

Current

Receivables

 

Retail notes:

Agriculture and turf

$

163.5

$

173.2

$

15,139.6

$

15,476.3

Construction and forestry

 

115.9

 

115.6

2,888.8

 

3,120.3

Revolving charge accounts:

Agriculture and turf

 

27.5

 

10.0

3,662.4

 

3,699.9

Construction and forestry

 

5.3

1.4

92.1

 

98.8

Wholesale receivables:

Agriculture and turf

 

5.3

 

6.1

8,065.2

 

8,076.6

Construction and forestry

 

2.8

3.6

2,216.5

 

2,222.9

Financing leases:

Agriculture and turf

 

25.4

 

22.1

524.5

 

572.0

Construction and forestry

 

3.3

 

2.4

139.2

 

144.9

Total Receivables

$

349.0

$

334.4

$

32,728.3

$

33,411.7

14

Allowances for credit losses on Receivables are maintained in amounts considered to be appropriate in relation to the Receivables outstanding based on historical loss experience by product category, portfolio duration, delinquency trends, economic conditions in the Company’s major markets and geographies, and credit risk quality.

An analysis of the allowance for credit losses and investment in Receivables was as follows (in millions of dollars):

Three Months Ended

 

August 2, 2020

 

Revolving

 

Retail

Charge

Wholesale

Financing

Total

 

Notes

Accounts

Receivables

Leases

Receivables

 

Allowance:

Beginning of period balance

$

83.3

$

42.3

$

9.1

$

5.1

$

139.8

Provision (credit) for credit losses

 

2.9

13.2

(.5)

.4

16.0

Write-offs

 

(5.0)

(21.3)

(.1)

(.5)

(26.9)

Recoveries

 

2.1

8.1

.4

.3

10.9

Translation adjustments

 

.4

.4

.8

End of period balance

$

83.7

$

42.3

$

9.3

$

5.3

$

140.6

Nine Months Ended

 

August 2, 2020

 

Revolving

 

Retail

Charge

Wholesale

Financing

Total

 

Notes

Accounts

Receivables

Leases

Receivables

 

Allowance:

Beginning of period balance

$

48.3

$

39.3

$

7.6

$

5.4

$

100.6

Provision (credit) for credit losses

 

69.5

31.3

(1.0)

1.0

100.8

Write-offs

 

(38.3)

(50.1)

(.9)

(1.3)

(90.6)

Recoveries

 

4.0

21.8

1.3

.5

27.6

Translation adjustments

 

.2

2.3

(.3)

2.2

End of period balance

$

83.7

$

42.3

$

9.3

$

5.3

$

140.6

Balance individually evaluated *

$

1.7

$

4.9

$

6.6

Receivables:

End of period balance

$

20,558.6

$

3,918.3

$

8,428.8

$

743.6

$

33,649.3

Balance individually evaluated *

$

101.1

$

.9

$

17.0

$

1.0

$

120.0

*    Remainder is collectively evaluated.

The increase in the allowance for credit losses during the first nine months of 2020 was primarily due to the negative economic effects related to COVID and other macroeconomic issues, which have significantly affected certain retail borrowers, particularly of construction equipment.

15

Three Months Ended

 

July 28, 2019

 

Revolving

 

Retail

Charge

Wholesale

Financing

Total

 

Notes

Accounts

Receivables

Leases

Receivables

 

Allowance:

Beginning of period balance

$

54.1

$

42.3

$

8.0

$

6.0

$

110.4

Provision (credit) for credit losses

 

5.5

17.9

(.3)

.3

 

23.4

Write-offs

 

(7.2)

(25.4)

(.1)

(.5)

 

(33.2)

Recoveries

 

1.8

7.5

.4

.1

 

9.8

End of period balance

$

54.2

$

42.3

$

8.0

$

5.9

$

110.4

Nine Months Ended

 

July 28, 2019

 

Revolving

 

Retail

Charge

Wholesale

Financing

Total

 

Notes

Accounts

Receivables

Leases

Receivables

 

Allowance:

Beginning of period balance

$

51.6

$

42.3

$

8.0

$

4.8

$

106.7

Provision (credit) for credit losses

 

18.1

33.3

(4.0)

2.9

 

50.3

Write-offs

 

(20.4)

(50.8)

(.1)

(2.1)

 

(73.4)

Recoveries

 

5.0

17.5

4.0

.3

 

26.8

Translation adjustments

 

(.1)

.1

 

End of period balance

$

54.2

$

42.3

$

8.0

$

5.9

$

110.4

Balance individually evaluated *

$

2.0

$

2.9

$

.6

$

5.5

Receivables:

End of period balance

$

18,596.6

$

3,798.7

$

10,299.5

$

716.9

$

33,411.7

Balance individually evaluated *

$

60.8

$

.2

$

10.1

$

1.7

$

72.8

*    Remainder is collectively evaluated.

Receivables are considered impaired when it is probable the Company will be unable to collect all amounts due according to the contractual terms. Receivables reviewed for impairment generally include those that are either past due, or have provided bankruptcy notification, or require significant collection efforts. Receivables that are impaired are generally classified as non-performing.

16

An analysis of impaired Receivables was as follows (in millions of dollars):

    

    

Unpaid

    

    

Average

 

Recorded

Principal

Specific

Recorded

 

Investment

Balance

Allowance

Investment

 

August 2, 2020 *

Receivables with specific allowance:

Retail notes

$

2.7

$

2.6

$

1.7

$

3.1

Wholesale receivables

14.8

14.8

4.9

15.2

Total with specific allowance

 

17.5

 

17.4

 

6.6

 

18.3

Receivables without specific allowance:

Retail notes

 

27.2

26.5

28.1

Wholesale receivables

2.2

2.2

2.2

Total without specific allowance

 

29.4

 

28.7

 

30.3

Total

$

46.9

$

46.1

$

6.6

$

48.6

Agriculture and turf

$

41.5

$

40.8

$

6.6

$

42.9

Construction and forestry

 

5.4

5.3

5.7

Total

$

46.9

$

46.1

$

6.6

$

48.6

November 3, 2019 *

Receivables with specific allowance: 

Retail notes

$

4.9

$

4.6

$

1.9

$

5.0

Wholesale receivables

5.3

5.3

2.9

5.7

Total with specific allowance

 

10.2

 

9.9

 

4.8

 

10.7

Receivables without specific allowance:

Retail notes

 

22.9

22.4

25.0

Wholesale receivables

3.9

3.9

4.1

Total without specific allowance

 

26.8

 

26.3

 

29.1

Total

$

37.0

$

36.2

$

4.8

$

39.8

Agriculture and turf

$

30.3

$

29.7

$

4.6

$

32.0

Construction and forestry

 

6.7

6.5

.2

7.8

Total

$

37.0

$

36.2

$

4.8

$

39.8

July 28, 2019 *

Receivables with specific allowance:

Retail notes

$

4.8

$

4.6

$

2.0

$

4.8

Wholesale receivables

5.3

5.3

2.9

5.8

Financing leases

.6

.5

.6

.6

Total with specific allowance

 

10.7

 

10.4

 

5.5

 

11.2

Receivables without specific allowance:

Retail notes

 

23.3

22.8

25.4

Wholesale receivables

4.8

4.8

4.3

Total without specific allowance

 

28.1

 

27.6

 

29.7

Total

$

38.8

$

38.0

$

5.5

$

40.9

Agriculture and turf

$

30.7

$

30.1

$

5.2

$

32.2

Construction and forestry

 

8.1

7.9

.3

8.7

Total

$

38.8

$

38.0

$

5.5

$

40.9

*    Finance income recognized was not material.

17

A troubled debt restructuring is generally the 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 dates, a reduction of the face amount or maturity amount of the debt, or a reduction of accrued interest. During the first nine months of 2020, the Company identified 328 Receivable contracts, primarily retail notes, as troubled debt restructurings with aggregate balances of $12.6 million pre-modification and $11.6 million post-modification. The short-term relief related to COVID mentioned earlier did not meet the definition of a troubled debt restructuring. During the first nine months of 2019, there were 233 Receivable contracts, primarily retail notes, with aggregate balances of $11.7 million pre-modification and $11.3 million post-modification. During these same periods, there were 0 significant troubled debt restructurings that subsequently defaulted and were written off. At August 2, 2020, the Company had 0 commitments to lend additional funds to borrowers whose accounts were modified in troubled debt restructurings.

(5)  Securitization of Receivables

The Company, as a part of its overall funding strategy, periodically transfers certain Receivables (retail notes) into variable interest entities (VIEs) that are special purpose entities (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 did 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 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.

In these securitizations, the retail notes are transferred to certain SPEs or to non-VIE banking operations, which in turn issue debt to investors. The debt securities issued to the third party investors result in secured borrowings, which are recorded as “Securitization borrowings” on the balance sheet. The securitized retail notes are recorded as “Retail notes securitized” on the balance sheet. The total restricted assets on the consolidated balance sheet related to these securitizations include the retail notes securitized less an allowance for credit losses, and other assets primarily representing restricted cash. Restricted cash results from contractual requirements in securitized borrowing arrangements and serves as a credit enhancement. The restricted cash is used to satisfy payment deficiencies, if any, in the required payments on secured borrowings. The balance of restricted cash is contractually stipulated and is either a fixed amount as determined by the initial balance of the retail notes securitized or a fixed percentage of the outstanding balance of the retail notes securitized. The restriction is removed either after all secured borrowing payments are made or proportionally as these receivables are collected and borrowing obligations reduced. For those securitizations in which retail notes are transferred into SPEs, the SPEs supporting the secured borrowings are consolidated unless the Company does not have both the power to direct the activities that most significantly impact the SPEs’ economic performance and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the SPEs. No additional support to these SPEs beyond what was previously contractually required has been provided during the reporting periods.

In certain securitizations, the Company consolidates the SPEs since it has both the power to direct the activities that most significantly impact the SPEs’ economic performance through its role as servicer of all the Receivables held by the SPEs and the obligation through variable interests in the SPEs to absorb losses or receive benefits that could potentially be significant to the SPEs. The restricted assets (retail notes securitized, allowance for credit losses, and other assets) of the consolidated SPEs totaled $3,342.5 million, $2,894.4 million, and $3,425.2 million at August 2, 2020, November 3, 2019, and July 28, 2019, respectively. The liabilities (securitization borrowings and accrued interest) of these SPEs totaled $3,258.8 million, $2,847.2 million, and $3,316.4 million at August 2, 2020, November 3, 2019, and July 28, 2019, respectively. The credit holders of these SPEs do not have legal recourse to the Company’s general credit.

In certain securitizations, the Company transfers retail notes to non-VIE banking operations, which are not consolidated since the Company does not have a controlling interest in the entities. The Company’s carrying values and interests related to the securitizations with the unconsolidated non-VIEs were restricted assets (retail notes securitized, allowance for credit losses, and other assets) of $642.4 million, $447.0 million, and

18

$532.6 million at August 2, 2020, November 3, 2019, and July 28, 2019, respectively. The liabilities (securitization borrowings and accrued interest) were $606.0 million, $420.5 million, and $492.7 million at August 2, 2020, November 3, 2019, and July 28, 2019, respectively.

In certain securitizations, the Company transfers retail notes into bank-sponsored, multi-seller, commercial paper conduits, which are SPEs that are not consolidated. The Company does not service a significant portion of the conduits’ receivables, and therefore, does not have the power to direct the activities that most significantly impact the conduits’ economic performance. These conduits provide a funding source to the Company (as well as other transferors into the conduit) as they fund the retail notes through the issuance of commercial paper. The Company’s carrying values and variable interest related to these conduits were restricted assets (retail notes securitized, allowance for credit losses, and other assets) of $1,551.3 million, $1,079.2 million, and $1,286.1 million at August 2, 2020, November 3, 2019, and July 28, 2019, respectively. The liabilities (securitization borrowings and accrued interest) related to these conduits were $1,463.4 million, $1,015.2 million, and $1,189.6 million at August 2, 2020, November 3, 2019, and July 28, 2019, respectively.

The Company’s carrying amount of the liabilities to the unconsolidated conduits, compared to the maximum exposure to loss related to these conduits, which would only be incurred in the event of a complete loss on the restricted assets was as follows (in millions of dollars):

August 2

2020

Carrying value of liabilities

$

1,463.4

Maximum exposure to loss

 

1,551.3

The total assets of unconsolidated VIEs related to securitizations were approximately $41.3 billion at August 2, 2020.

The components of consolidated restricted assets related to secured borrowings in securitization transactions were as follows (in millions of dollars):

August 2

November 3

July 28

 

2020

2019

2019

 

Retail notes securitized

$

5,446.2

$

4,349.6

$

5,159.1

Allowance for credit losses

 

(14.0)

 

(11.2)

 

(12.9)

Other assets

 

104.0

 

82.2

 

97.7

Total restricted securitized assets

$

5,536.2

$

4,420.6

$

5,243.9

The components of consolidated secured borrowings and other liabilities related to securitizations were as follows (in millions of dollars):

August 2

November 3

July 28

 

2020

2019

2019

 

Securitization borrowings

$

5,324.1

$

4,277.0

$

4,994.8

Accrued interest on borrowings

 

4.1

 

5.9

 

3.9

Total liabilities related to restricted securitized assets

$

5,328.2

$

4,282.9

$

4,998.7

The secured borrowings related to these restricted securitized retail notes are obligations that are payable as the retail notes are liquidated. Repayment of the secured borrowings depends primarily on cash flows generated by the restricted assets. Due to the Company’s short-term credit rating, cash collections from these restricted assets are not required to be placed into a segregated collection account until immediately prior to the time payment is required to the secured creditors. At August 2, 2020, the maximum remaining term of all restricted securitized retail notes was approximately seven years.

19

(6)  Leases

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

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

The Company estimates the residual values for operating leases at lease inception based on several factors, including lease term, expected hours of usage, historical wholesale sale prices, return experience, intended use of the equipment, market dynamics and trends, and dealer residual guarantees. The Company reviews residual value estimates during the lease term and tests the carrying value of its operating lease assets for impairment when events or circumstances necessitate. The depreciation is adjusted on a straight-line basis over the remaining lease term if residual value estimates decline. Lease agreements include usage limits and specifications on machine condition, which allow the Company to assess lessees for excess use or damages to the underlying equipment. During the second quarter of 2020, the Company recorded impairment losses on operating leases of $21.0 million due to higher expected return rates and lower estimated values of used construction equipment. Operating lease impairments are recorded in administrative and operating expenses on the statement of consolidated income.

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

Due to the significant, negative effects of COVID, the Company provided short-term relief to lessees during the second and third quarters of 2020. The relief, which generally included payment deferrals of three months or less, was provided in regional programs and on a case-by-case basis with customers that were generally current in their payment obligations. The operating leases granted relief, which primarily related to construction accounts, represented approximately 3 percent of the Company’s operating lease portfolio at August 2, 2020. See Note 4 for information related to short-term relief on financing leases.

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

Three Months Ended

Nine Months Ended

August 2, 2020

August 2, 2020

Sales-type and direct financing lease revenues

$

12.0

$

34.3

Operating lease revenues

253.5

768.8

Variable lease revenues

 

4.8

 

14.7

Total lease revenues

$

270.3

$

817.8

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

20

Sales-type and direct financing lease receivables by product category were as follows (in millions of dollars):

August 2

November 3

2020

2019

Agriculture and turf

$

434.3

$

422.7

Construction and forestry

148.3

 

153.2

Total

582.6

575.9

Guaranteed residual values

203.1

195.1

Unguaranteed residual values

42.6

61.1

Unearned finance income

 

(84.7)

(80.5)

Financing leases receivable

$

743.6

$

751.6

Scheduled payments, including guaranteed residual values, on sales-type and direct financing lease receivables at August 2, 2020 were as follows (in millions of dollars):

August 2

2020

Due in:

Remainder of 2020

$

110.7

2021

320.5

2022

157.0

2023

104.3

2024

62.1

2025

23.8

Later years

 

7.3

Total

$

785.7

Scheduled payments on financing lease receivables under the previous lease standard at November 3, 2019 were as follows (in millions of dollars):

November 3

2019

Due in:

2020

$

225.6

2021

155.2

2022

103.8

2023

58.3

2024

24.2

Later years

8.8

Total

$

575.9

Lease payments from equipment on operating leases are recorded as income on a straight-line method over the lease terms. Operating lease assets are recorded at cost and depreciated to their estimated residual value on a straight-line method over the terms of the leases.

The cost of equipment on operating leases by product category was as follows (in millions of dollars):

August 2

November 3

2020

2019

Agriculture and turf

$

5,082.8

$

5,109.4

Construction and forestry

1,648.3

 

1,778.6

Total

6,731.1

6,888.0

Accumulated depreciation

 

(1,473.9)

(1,357.5)

Equipment on operating leases - net

$

5,257.2

$

5,530.5

21

The total operating lease residual values at August 2, 2020 and November 3, 2019 were $3,791.7 million and $3,876.5 million, respectively. Certain operating leases are subject to residual value guarantees. The total residual value guarantees were $110.1 million and $65.7 million at August 2, 2020 and November 3, 2019, respectively.

Lease payments for equipment on operating leases at August 2, 2020 were scheduled as follows (in millions of dollars):

August 2

2020

Due in:

Remainder of 2020

$

216.5

2021

684.7

2022

405.1

2023

182.1

2024

69.8

2025

6.8

Later years

 

.8

Total

$

1,565.8

Rental payments for equipment on operating leases under the previous lease standard at November 3, 2019 were scheduled as follows (in millions of dollars):

November 3

2019

Due in:

2020

$

738.3

2021

484.4

2022

231.6

2023

92.8

2024

14.1

Later years

.3

Total

$

1,561.5

The Company discusses with lessees and dealers options to purchase the equipment or extend the lease prior to lease maturity. Equipment returned to the Company upon termination of leases is remarketed by the Company. The matured operating lease inventory balances at August 2, 2020 and November 3, 2019 were $100.7 million and $160.8 million, respectively. Matured operating lease inventory is reported in other assets on the consolidated balance sheet. During the second quarter of 2020, the Company recorded impairment losses on matured operating lease inventory of $9.8 million due to lower estimated values of used construction equipment. Impairment losses on matured operating lease inventory are included in administrative and operating expenses on the statement of consolidated income.

22

(7)  Notes Receivable from John Deere

The Company makes loans to affiliated companies. The Company receives interest from John Deere at competitive market interest rates. The lending agreements mature over the next seven years. Interest earned from John Deere was $4.4 million for the third quarter and $12.4 million in the first nine months of 2020, compared with $4.5 million and $12.1 million for the same periods last year.

The Company had notes receivable from John Deere with the following affiliated companies as follows (in millions of dollars):

August 2

November 3

July 28

2020

2019

2019

Limited Liability Company John Deere Financial

$

125.6

$

148.3

$

148.9

Banco John Deere S.A.

241.2

 

143.4

 

128.4

Total Notes Receivable from John Deere

$

366.8

$

291.7

$

277.3

(8)  Commitments and Contingencies

At August 2, 2020, John Deere Financial Inc., the John Deere finance subsidiary in Canada, had $1,639.1 million of medium-term notes outstanding, and a fair value liability of $66.9 million for derivatives outstanding, prior to considering applicable netting provisions, with a notional amount of $2,790.2 million that were guaranteed by Capital Corporation. The weighted average interest rate on the medium-term notes at August 2, 2020 was 2.6 percent with a maximum remaining maturity of approximately six 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 0 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 $1,452.8 million at August 2, 2020. The weighted average interest rate on the debt at August 2, 2020 was 2.3 percent with a maximum remaining maturity of approximately three years. 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. The amount of unused commitments to extend credit to John Deere dealers was $8.5 billion at August 2, 2020. The amount of unused commitments to extend credit to customers was $28.1 billion at August 2, 2020. 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. At August 2, 2020, Capital Corporation had $204.2 million in unused loan commitments, which are unconditionally cancellable, denominated in rubles to Limited Liability Company John Deere Financial, the John Deere finance subsidiary in Russia.

At August 2, 2020, 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 August 2, 2020.

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.

23

(9)  Income Taxes

The Company’s unrecognized tax benefits at August 2, 2020 were $31.0 million, compared to $32.5 million at November 3, 2019. The liability at August 2, 2020, November 3, 2019, and July 28, 2019 consisted of approximately $16.1 million, $17.6 million, and $16.4 million, respectively, which would affect the effective tax rate if the tax benefits were recognized. The remaining liability was related to tax positions for which there are offsetting tax receivables, or the uncertainty was only related to timing. The Company expects that any reasonably possible change in the amounts of unrecognized tax benefits in the next 12 months would not be significant.

(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):

August 2, 2020

November 3, 2019

July 28, 2019

 

Carrying

Fair

Carrying

Fair

Carrying

Fair

 

Value

Value *

Value

Value *

Value

Value *

 

Receivables financed – net

$

28,076.5

$

28,275.8

$

28,382.5

$

28,396.6

$

28,155.1

$

28,165.9

Retail notes securitized – net

 

5,432.2

 

5,543.9

 

4,338.4

 

4,361.9

 

5,146.2

 

5,154.2

Securitization borrowings

 

5,324.1

 

5,380.7

 

4,277.0

 

4,301.7

 

4,994.8

 

5,017.6

Current maturities of long-term borrowings

 

4,910.2

 

4,958.2

 

5,716.6

 

5,727.9

 

6,269.5

 

6,276.3

Long-term borrowings

20,492.1

21,038.2

21,052.4

21,369.9

20,035.4

20,298.1

*    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 borrowings and short-term 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 borrowings have been swapped to current variable interest rates. The carrying values of these long-term borrowings include adjustments related to fair value hedges.

24

Assets and liabilities measured at fair value as Level 2 measurements on a recurring basis were as follows (in millions of dollars):

    

August 2

    

November 3

    

July 28

 

2020

2019

2019

 

Marketable securities

International debt securities

$

2.4

$

3.2

$

6.9

Receivables from John Deere

Derivatives:

Interest rate contracts

795.4

331.4

234.4

Cross-currency interest rate contracts

 

9.1

 

.5

 

.9

Other assets

Derivatives:

Interest rate contracts

 

 

 

.1

Foreign exchange contracts

 

3.7

 

1.9

 

4.7

Total assets *

$

810.6

$

337.0

$

247.0

Other payables to John Deere

Derivatives:

Interest rate contracts

$

42.5

$

44.4

$

53.3

Cross-currency interest rate contracts

 

.1

3.0

 

2.0

Accounts payable and accrued expenses

Derivatives:

Foreign exchange contracts

 

6.2

 

9.9

 

5.6

Total liabilities

$

48.8

$

57.3

$

60.9

*    Excluded from this table 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 within one year or less. At August 2, 2020, the amortized cost basis and fair value of these available-for-sale debt securities were $5.9 million and $2.4 million, respectively.

Fair value, nonrecurring Level 3 measurements from impairments were as follows (in millions of dollars):

Fair Value *

Losses

Three Months Ended

Nine Months Ended

August 2

November 3

July 28

August 2

July 28

August 2

July 28

2020

2019

2019

2020

2019

2020

2019

Equipment on operating leases – net

$

855.4

$

21.0

Other assets

141.9

9.8

Total

$

997.3

$

30.8

*    See Receivables with specific allowances in Note 4 that were not significant. See Note 6 for impairments on lease residual values.

The following is a description of the valuation methodologies the Company uses to measure certain financial instruments on the balance sheet at fair value:

Marketable securities – The international debt securities were valued using quoted prices for identical assets in inactive markets.

Derivatives – The Company’s derivative financial instruments consist of interest rate swaps and caps, foreign currency futures, forwards, and swaps, and cross-currency interest rate 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.

25

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.

Equipment on operating leases - net – The impairments are based on an income approach (discounted cash flow), using the contractual payments, plus estimates of return rates and equipment sale price at lease maturity. Inputs include historic return rates and realized sales values.

Other assets – The impairments are measured at the fair value of the matured operating lease inventory. The valuations were based on a market approach. The inputs include sales of comparable assets.

(11)  Derivative Instruments

It is the Company’s policy that 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 balance sheet. Cash collateral received or paid is not offset against the derivative fair values on the balance sheet. Each derivative is designated as a cash flow hedge, a fair value hedge, or remains undesignated. All designated hedges are formally 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 August 2, 2020, November 3, 2019, and July 28, 2019 were $1,900.0 million, $3,150.0 million, and $2,500.0 million, respectively. Fair value gains or losses on these cash flow hedges were recorded in other comprehensive income (OCI) and subsequently reclassified into interest expense in the same periods during which the hedged transactions affected earnings. These amounts offset the effects of interest rate changes on the related borrowings. The cash flows from these contracts were recorded in operating activities in the statement of consolidated cash flows.

The amount of loss recorded in OCI at August 2, 2020 that is expected to be reclassified to interest expense in the next twelve months if interest rates remain unchanged is approximately $11.4 million after-tax. NaN 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 these receive-fixed/pay-variable interest rate contracts at August 2, 2020, November 3, 2019, and July 28, 2019 were $8,179.8 million, $8,336.9 million, and $8,864.9 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.

26

The amounts recorded in the consolidated balance sheet related to borrowings designated in fair value hedging relationships were as follows (in millions of dollars):

Cumulative Increase (Decrease) of Fair Value

Hedging Adjustments Included in the

Carrying Amount

Carrying

Active

Amount of

Hedging

Discontinued

August 2, 2020

Hedged Item

Relationships

Relationships

Total

Current maturities of long-term borrowings

$

104.6

$

2.6

$

2.0

$

4.6

Long-term borrowings

8,826.4

737.6

39.5

777.1

November 3, 2019

Current maturities of long-term borrowings

$

185.4

$

.3

$

(4.4)

$

(4.1)

Long-term borrowings

8,378.1

292.8

(31.6)

261.2

July 28, 2019

Current maturities of long-term borrowings

$

187.3

$

1.1

$

(4.8)

$

(3.7)

Long-term borrowings

8,774.0

182.7

(49.7)

133.0

Derivatives not designated as hedging instruments

The Company has certain interest rate contracts (swaps and caps), foreign 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 these interest rate swaps at August 2, 2020, November 3, 2019, and July 28, 2019 were $2,423.2 million, $2,312.4 million, and $1,963.0 million, the foreign exchange contracts were $211.1 million, $691.6 million, and $1,034.2 million, and the cross-currency interest rate contracts were $123.5 million, $91.1 million, and $81.9 million, respectively. To facilitate borrowings through securitization of retail notes, interest rate caps were sold with notional amounts of $2,171.0 million, $1,611.3 million, and $1,813.8 million at August 2, 2020, November 3, 2019, and July 28, 2019, respectively. Interest rate caps were also purchased with notional amounts of $2,171.0 million, $1,611.3 million, and $1,813.8 million at the same dates. The fair value gains or losses from the interest rate contracts were recognized currently in interest expense and the gains or losses from foreign exchange contracts in administrative and operating expenses, generally offsetting over time the expenses on the exposures being hedged. The cash flows from these non-designated contracts were recorded in operating activities in the statement of consolidated cash flows.

27

Fair values of derivative instruments in the consolidated balance sheet were as follows (in millions of dollars):

    

August 2

    

November 3

    

July 28

 

2020

2019

2019

 

Receivables from John Deere

Designated as hedging instruments:

Interest rate contracts

$

785.3

$

328.8

$

229.0

Not designated as hedging instruments:

Interest rate contracts

 

10.1

 

2.6

 

5.4

Cross-currency interest rate contracts

 

9.1

 

.5

 

.9

Total not designated

 

19.2

 

3.1

 

6.3

Other Assets

Not designated as hedging instruments:

Interest rate contracts

 

 

 

.1

Foreign exchange contracts

 

3.7

 

1.9

 

4.7

Total not designated

 

3.7

 

1.9

 

4.8

Total derivative assets

$

808.2

$

333.8

$

240.1

Other Payables to John Deere

Designated as hedging instruments:

Interest rate contracts

$

24.1

$

26.5

$

32.4

Not designated as hedging instruments:

Interest rate contracts

 

18.4

 

17.9

 

20.9

Cross-currency interest rate contracts

.1

3.0

 

2.0

Total not designated

 

18.5

 

20.9

 

22.9

Accounts Payable and Accrued Expenses

Not designated as hedging instruments:

Foreign exchange contracts

 

6.2

 

9.9

 

5.6

Total derivative liabilities

$

48.8

$

57.3

$

60.9

28

The classification and gains (losses) including accrued interest expense related to derivative instruments on the statement of consolidated income consisted of the following (in millions of dollars):

Three Months Ended

Nine Months Ended

 

August 2

July 28

August 2

July 28

 

   

2020

   

2019

   

2020

   

2019

 

Fair Value Hedges

Interest rate contracts - Interest expense

 

$

76.7

$

192.4

$

568.0

$

462.0

Cash Flow Hedges

Recognized in OCI

Interest rate contracts - OCI (pretax)

 

 

(1.1)

 

(6.7)

 

(17.6)

 

(21.3)

Reclassified from OCI

Interest rate contracts - Interest expense

 

 

(6.4)

 

1.1

 

(11.5)

 

5.7

Not Designated as Hedges

Interest rate contracts - Interest expense *

 

$

(2.2)

$

(9.4)

$

(3.0)

$

(21.1)

Foreign exchange contracts - Administrative and operating expenses *

 

 

(47.2)

 

8.1

 

47.3

 

24.6

Total not designated

$

(49.4)

$

(1.3)

$

44.3

$

3.5

*    Includes interest and foreign 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 August 2, 2020 and July 28, 2019 were gains of $62.8 million and $184.2 million, respectively. The amounts the Company recognized on these affiliate party transactions for the nine months ended August 2, 2020 and July 28, 2019 were gains of $568.1 million and $444.4 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 executed with an unrelated external counterparty permits the net settlement of amounts owed in the event of default or termination.

The Company’s outstanding derivatives have been transacted with both unrelated external counterparties and with John Deere. For derivatives transacted 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.

Certain of the Company’s derivative agreements executed directly with the unrelated external counterparties contain credit support provisions that may require the Company to post or receive collateral based on the size of the net liability or net asset positions, credit ratings, and market conventions. At August 2, 2020, November 3, 2019, and July 28, 2019, there were 0 aggregate liability positions for derivatives with credit-risk-related contingent features. In accordance with these agreements, 0 collateral was posted or received at August 2, 2020, November 3, 2019, or July 28, 2019. During the third quarter of 2020, the Company paid $2.3 million of collateral that was outstanding at August 2, 2020 to participate in an international futures market to hedge currency exposure, which is not included in the table on the subsequent page.

29

The Company also 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 it 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 August 2, 2020, November 3, 2019, and July 28, 2019.

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):

August 2, 2020

 

Derivatives:

Gross Amounts
Recognized

Netting
Arrangements

Cash Collateral Received/Paid

Net
Amount

 

Assets

    

    

    

    

    

    

    

External

$

3.7

$

(.2)

$

3.5

John Deere

 

804.5

(35.4)

 

769.1

Liabilities

External

 

6.2

 

(.2)

 

6.0

John Deere

 

42.6

 

(35.4)

 

7.2

November 3, 2019

 

Derivatives:

Gross Amounts
Recognized

Netting
Arrangements

Cash Collateral Received/Paid

Net
Amount

 

Assets

    

    

    

    

    

    

    

External

$

1.9

$

(.2)

 

$

1.7

John Deere

 

331.9

 

(42.6)

 

289.3

Liabilities

External

 

9.9

 

(.2)

 

9.7

John Deere

 

47.4

 

(42.6)

 

4.8

July 28, 2019

    

    

    

    

    

 

Derivatives:

Gross Amounts
Recognized

Netting
Arrangements

Cash Collateral Received/Paid

Net
Amount

 

Assets

 

External

$

4.8

$

(.5)

$

4.3

John Deere

 

235.3

(48.7)

 

186.6

Liabilities

External

 

5.6

 

(.5)

 

5.1

John Deere

 

55.3

 

(48.7)

 

6.6

30

(12)   Pension and Other Postretirement Benefits

The Company is a participating employer in certain Deere & Company sponsored defined benefit pension plans for employees in the U.S. and certain defined benefit pension plans outside the U.S. These pension plans provide for benefits that are based primarily on years of service and employee compensation. Pension expense is actuarially determined based on the Company’s employees included in the plan. The Company’s pension expense was $1.1 million for the third quarter and $1.7 million for the first nine months of 2020, compared to $.3 million and $.5 million for the same periods last year. The accumulated benefit obligation and plan net assets for the employees of the Company are not determined separately from Deere & Company. The Company provides defined benefit health care and life insurance plans for certain retired employees in the U.S. as a participating employer in Deere & Company’s sponsored plans. Health care and life insurance benefits expense is actuarially determined based on the Company’s employees included in the plans and amounted to $1.7 million for the third quarter and $8.3 million for the first nine months of 2020, compared with $.7 million and $3.3 million for the same periods last year. The increase from the prior year is primarily due to a $3.3 million curtailment loss in the first quarter of 2020 related to voluntary employee-separation programs (See Note 13). Further disclosure for these plans is included in Deere & Company’s Form 10-Q for the quarter ended August 2, 2020.

(13)   Employee-Separation Programs

During the first nine months of 2020, the Company incurred voluntary employee-separation program expenses of $8.7 million as part of its efforts to create a more efficient organization structure and reduce operating costs. The programs provided for cash payments based on years of service. The expenses were recorded primarily in the period in which the employees irrevocably accepted the separation offer. Included in the total pretax expense noted above for the first nine months of 2020 was a non-cash charge of $3.3 million resulting from a curtailment in certain OPEB plans during the first quarter of 2020 (See Note 12). The expenses were recorded in administrative and operating expenses.

During the third quarter and early fourth quarter of 2020, the Company announced additional employee-separation programs as part of an initiative to improve organizational efficiency. The programs will provide for cash payments based on years of service. The expenses will generally be recorded in the period the employees irrevocably accept the separation offer, which is expected to be primarily in the fourth quarter of 2020. The programs’ total pretax expenses are estimated to be about $10.0 million.

31

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 agriculture and turf equipment 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.

Trends and Economic Conditions

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 demand for its products.

Industry sales of agricultural machinery in the U.S. and Canada are expected to be down 5 to 10 percent for fiscal year 2020 compared to the prior year. Industry sales in Europe are also forecast to be 5 to 10 percent lower in 2020. South American industry sales of tractors and combines are projected to be down 10 to 15 percent. Asian industry sales are forecast to be down slightly in 2020. Industry sales of turf and utility equipment in the U.S. and Canada are expected to be about 5 percent lower in 2020. John Deere’s agriculture and turf segment sales decreased 5 percent in the third quarter and 10 percent for the first nine months. Construction equipment industry sales in North America for 2020 are expected to decline about 20 percent. In forestry, global industry sales are expected to be 20 to 25 percent lower. John Deere’s construction and forestry segment sales decreased 28 percent in the third quarter and 22 percent in the first nine months.

The Company’s full year 2020 results are expected to decline due to a higher provision for credit losses, a higher provision for income taxes from favorable discrete adjustments in the prior year, and less favorable financing spreads, partially offset by lower losses and impairments on operating lease residual values.

COVID Effects and Actions

During the first nine months of 2020, the effects of COVID and the related actions of governments and other authorities to contain COVID, have affected the Company’s operations, results, cash flows, and forecasts.

The Company’s first priority in addressing the effects of COVID continues to be the health, safety, and overall welfare of its employees. The Company effectively activated previously established business continuity plans and proactively implemented health and safety measures at its operations around the world.

The economic effects of COVID have reduced customer demand for some of John Deere’s products and services, particularly construction, forestry, and roadbuilding equipment, which resulted in lower shipment volumes. During most of the third quarter of 2020, all of John Deere’s factories have operated, some at reduced capacity due to component shortages or lower demand. As the Company’s acquisition volume of Receivables and Leases is largely dependent upon the level of sales and leases of John Deere products, the effects noted above may impact the Company’s acquisition volumes.

The Company continued to work closely with its customers, including John Deere dealers and retail customers, during the third quarter and, if necessary, provided short-term relief on obligations owed to the Company. The relief was provided in regional programs and on a case-by-case basis with customers that were generally current in their payment obligations. For retail customers, the relief generally included payment deferrals of three months or less and primarily related to construction accounts. The relief provided to dealers generally included payment deferrals of three months or less and short-term interest rate reductions in certain markets and primarily related to agriculture and turf dealers. The Receivables and Leases granted relief represented approximately 4 percent of the Receivable and Lease portfolio at August 2, 2020 (See Notes 4 and 6).

32

The future financial effects of COVID are unknown due to many factors. These factors and other market variabilities include uncertainty of the effectiveness of governmental actions to address COVID, including health, monetary, and fiscal policies, the effect of elevated levels of sovereign and state debt, capital market disruptions, changes in demand and pricing for new and used equipment, trade agreements, other geopolitical events, significant fluctuations in foreign currency exchange rates, and volatility in the price of many commodities. As a result, predicting the Company’s forecasted financial performance is difficult and subject to many assumptions.

2020 Compared with 2019

The total revenues and net income attributable to the Company were as follows (in millions of dollars):

Three Months Ended

Nine Months Ended

August 2

July 28

August 2

July 28

 

   

2020

   

2019

   

2020

   

2019

 

Total revenues

$

696.0

$

741.8

$

2,114.7

$

2,105.6

Net income attributable to the Company

146.2

144.8

271.3

350.8

Total revenues for the third quarter of 2020 decreased primarily due to lower average financing rates. Total revenues for the first nine months of 2020 increased primarily due to a higher average portfolio, partially offset by lower average financing rates. Net income for the current quarter was about the same as the third quarter of 2019 with lower losses on operating lease residual values, a reduced provision for credit losses, and decreased administrative and operating expenses, offset by a higher provision for income taxes from favorable discrete adjustments in the prior year. Results for the first nine months declined due to a higher provision for credit losses, unfavorable financing spreads, increased losses and impairments on lease residual values, and a higher provision for income taxes, offset in part by income from a higher average portfolio.

Revenues

The finance income and lease revenues earned by the Company were as follows (in millions of dollars):

Three Months Ended

Nine Months Ended

August 2

July 28

%

August 2

July 28

%

2020

2019

Change

    

2020

2019

Change

Finance income earned from:

Retail notes

$

234.9

$

241.5

(3)

$

701.4

$

665.0

5

Revolving charge accounts

87.8

94.3

(7)

242.7

243.0

Wholesale receivables

84.6

141.9

(40)

305.3

400.9

(24)

Lease revenues

270.3

256.7

5

817.8

741.6

10

Finance income earned on wholesale receivables was lower primarily due to lower average financing rates and lower average portfolio balances. The increases in lease revenues were primarily due to higher average portfolio balances and higher lease payments and compensation from John Deere on operating leases.

Revenues earned from John Deere totaled $165.8 million for the third quarter and $510.0 million in the first nine months of 2020, compared with $196.6 million and $550.1 million for the same periods last year. The decrease was primarily due to decreased compensation paid by John Deere for waived or reduced finance charges on wholesale receivables. Revenues earned from John Deere are included in the revenue amounts discussed above and in “Other income” on the statement of consolidated income.

33

Expenses

Significant expenses incurred by the Company were as follows (in millions of dollars):

Three Months Ended

Nine Months Ended

August 2

July 28

%

August 2

July 28

%

2020

2019

Change

 

2020

2019

Change

Interest expense

$

161.3

$

256.2

(37)

$

597.7

$

734.7

(19)

Administrative and operating expenses

92.0

102.6

(10)

357.9

313.3

14

Provision for credit losses

16.0

23.4

(32)

100.8

50.3

100

Depreciation of equipment on operating leases

211.8

188.0

13

639.6

544.3

18

Provision for income taxes

44.4

11.8

276

75.9

71.4

6

The decrease in interest expense for the third quarter and first nine months of 2020 was primarily due to lower average interest rates, partially offset by higher average borrowings.

Administrative and operating expenses decreased for the third quarter of 2020 primarily due to lower losses on lease residual values, partially offset by foreign exchange losses. Administrative and operating expenses increased in the first nine months of 2020 primarily due to higher losses and impairments on lease residual values and foreign exchange losses. See Note 6 for additional information related to the impairments on lease residual values.

The depreciation of equipment on operating leases for the third quarter and first nine months of 2020 increased primarily due to updated depreciation estimates and higher average balances of equipment on operating leases.

The provision for credit losses decreased for the third quarter of 2020 primarily due to lower net write-offs. The provision for credit losses increased in the first nine months of 2020 primarily due to an increase in the allowance for credit losses and higher net write-offs of construction and forestry retail notes. The allowance increase was primarily due to the negative economic effects related to COVID and other macroeconomic issues, which have significantly affected certain retail borrowers, particularly of construction equipment (See Note 4). The annualized provision for credit losses, as a percentage of the average balance of total Receivables financed, was .20 percent in the third quarter and .42 percent in the first nine months of 2020, compared with .29 percent and .21 percent for the same periods last year. See the Company’s most recently filed annual report on Form 10-K for further information regarding the Company’s allowance for credit losses policies.

The provision for income taxes increased in the third quarter primarily due to favorable discrete tax adjustments in the prior year period and higher pretax income in the current quarter. The higher provision for income taxes in the first nine months of 2020 was primarily related to favorable discrete tax adjustments in the prior year, partially offset by lower pretax income in the current year.

34

Receivables and Leases

Receivable and Lease (excluding wholesale) acquisition volumes were as follows (in millions of dollars):

Three Months Ended

August 2

July 28

$

%

2020

2019

Change

Change 

Retail notes:

    

    

    

    

    

    

Agriculture and turf

$

2,399.9

$

2,056.0

$

343.9

 

17

Construction and forestry

 

568.3

 

511.6

 

56.7

 

11

Total retail notes

 

2,968.2

 

2,567.6

 

400.6

 

16

Revolving charge accounts

 

1,723.0

 

1,705.9

���

 

17.1

 

1

Financing leases

 

144.7

 

182.3

 

(37.6)

 

(21)

Equipment on operating leases

 

351.2

 

588.0

 

(236.8)

 

(40)

Total Receivables and Leases (excluding wholesale)

$

5,187.1

$

5,043.8

$

143.3

 

3

Nine Months Ended

August 2

July 28

$

%

2020

2019

Change

Change 

Retail notes:

    

    

    

    

    

    

Agriculture and turf

$

6,525.4

$

5,770.6

$

754.8

 

13

Construction and forestry

 

1,490.0

 

1,367.3

 

122.7

 

9

Total retail notes

 

8,015.4

 

7,137.9

 

877.5

 

12

Revolving charge accounts

 

5,487.2

 

5,365.4

 

121.8

 

2

Financing leases

 

335.7

 

325.7

 

10.0

 

3

Equipment on operating leases

 

1,343.3

 

1,589.4

 

(246.1)

 

(15)

Total Receivables and Leases (excluding wholesale)

$

15,181.6

$

14,418.4

$

763.2

 

5

Total Receivables and Leases owned were as follows (in millions of dollars):

    

August 2

    

November 3

    

July 28

 

2020

2019

2019

 

Retail notes:

Agriculture and turf

$

16,970.9

$

16,185.9

$

15,476.3

Construction and forestry

 

3,587.7

 

3,314.2

 

3,120.3

Total retail notes

 

20,558.6

 

19,500.1

 

18,596.6

Revolving charge accounts

 

3,918.3

 

3,863.0

 

3,798.7

Wholesale receivables

 

8,428.8

 

8,706.8

 

10,299.5

Financing leases

 

743.6

 

751.6

 

716.9

Equipment on operating leases

 

5,257.2

 

5,530.5

 

5,323.3

Total Receivables and Leases

$

38,906.5

$

38,352.0

$

38,735.0

35

Total Receivables 30 days or more past due, non-performing Receivables, and the allowance for credit losses were as follows (in millions of dollars and as a percentage of the Receivables balance):

August 2

November 3

July 28

2020

2019

2019

Dollars

Percent

Dollars

Percent

Dollars

Percent

Receivables 30 days or more past due *

$

295.9

.88

$

352.8

1.07

$

349.0

1.04

Non-performing Receivables

302.3

.90

311.9

.95

334.4

1.00

Allowance for credit losses

140.6

.42

100.6

.31

110.4

.33

*   The delinquency status of receivables granted relief due to COVID is based on the modified payment schedule (See Note 4).

Receivables 30 days or more past due continue to accrue finance income. The Company ceases to accrue finance income once Receivables are considered non-performing. An allowance for credit losses is recorded for the estimated uncollectible amount. The allowance for credit losses is subject to an ongoing evaluation based on many quantitative and qualitative factors, including historical net loss experience by product category, portfolio duration, delinquency trends, economic conditions in the Company’s major markets and geographies, and credit risk quality. The Company believes its allowance is sufficient to provide for losses inherent in its existing Receivable portfolio. See Note 4 for additional information related to the allowance for credit losses.

Deposits withheld from dealers and merchants amounted to $105.6 million at August 2, 2020, compared with $137.5 million at November 3, 2019 and $138.8 million at July 28, 2019. These balances primarily represent the aggregate dealer retail note and lease withholding accounts from individual John Deere dealers to which losses from retail notes and leases originating from the respective dealers can be charged.

Write-offs and recoveries of Receivables, by product, and as an annualized percentage of average balances held during the period, were as follows (in millions of dollars):

Three Months Ended

August 2, 2020

July 28, 2019

Dollars

Percent

Dollars

Percent

Write-offs:

    

    

    

    

    

    

    

Retail notes:

Agriculture and turf

$

(2.1)

 

(.05)

$

(1.6)

 

(.04)

Construction and forestry

 

(2.9)

 

(.33)

 

(5.6)

 

(.73)

Total retail notes

 

(5.0)

 

(.10)

 

(7.2)

 

(.16)

Revolving charge accounts

 

(21.3)

 

(2.30)

 

(25.4)

 

(2.82)

Wholesale receivables

 

(.1)

 

 

(.1)

 

Financing leases

(.5)

(.28)

(.5)

(.30)

Total write-offs

 

(26.9)

 

(.33)

 

(33.2)

 

(.41)

Recoveries:

Retail notes:

Agriculture and turf

 

1.6

 

.04

 

1.4

 

.04

Construction and forestry

 

.5

 

.06

 

.4

 

.05

Total retail notes

 

2.1

 

.04

 

1.8

 

.04

Revolving charge accounts

 

8.1

 

.87

 

7.5

 

.84

Wholesale receivables

.4

.02

.4

.02

Financing leases

.3

.17

 

.1

 

.06

Total recoveries

 

10.9

 

.13

 

9.8

 

.13

Total net write-offs

$

(16.0)

 

(.20)

$

(23.4)

 

(.28)

36

Nine Months Ended

August 2, 2020

July 28, 2019

Dollars

Percent

Dollars

Percent

Write-offs:

    

    

    

    

    

    

    

Retail notes:

Agriculture and turf

$

(8.2)

 

(.07)

$

(5.7)

 

(.05)

Construction and forestry

 

(30.1)

 

(1.18)

 

(14.7)

 

(.65)

Total retail notes

 

(38.3)

 

(.26)

 

(20.4)

 

(.15)

Revolving charge accounts

 

(50.1)

 

(2.06)

 

(50.8)

 

(2.11)

Wholesale receivables

 

(.9)

 

(.01)

 

(.1)

 

Financing leases

(1.3)

(.25)

(2.1)

(.41)

Total write-offs

 

(90.6)

 

(.37)

 

(73.4)

 

(.31)

Recoveries:

Retail notes:

Agriculture and turf

 

2.9

 

.02

 

4.1

 

.04

Construction and forestry

 

1.1

 

.04

 

.9

 

.04

Total retail notes

 

4.0

 

.03

 

5.0

 

.04

Revolving charge accounts

 

21.8

 

.90

 

17.5

 

.73

Wholesale receivables

1.3

.02

4.0

.06

Financing leases

.5

.10

 

.3

 

.06

Total recoveries

 

27.6

 

.11

 

26.8

 

.11

Total net write-offs

$

(63.0)

 

(.26)

$

(46.6)

 

(.20)

Safe Harbor Statement

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: Statements under “Overview” and other forward-looking statements herein that relate to future events, expectations and trends involve factors that are subject to change, and risks and uncertainties that could cause actual results to differ materially.

Factors that could materially affect the Company’s operations, access to capital, expenses, and results include changes in, uncertainty surrounding and the impact of governmental trade, banking, monetary, and fiscal policies, including financial regulatory reform and its effects on the consumer finance industry, derivatives, funding costs, and other areas. Actions by central banks, financial, and securities regulators may affect the costs and expenses of financing the Company and the financing rates it is able to offer. The Company’s business is affected by general economic conditions in the global markets in which the Company operates because deteriorating economic conditions and political instability can result in decreased customer confidence, lower demand for equipment, higher credit losses, and greater currency risk. The Company’s business is also affected by actions of banks, financing and leasing companies, and other lenders that compete with the Company for customers; capital market disruptions; significant changes in capital market liquidity and associated funding costs; interest rates (including the availability of IBOR reference rates) and foreign currency exchange rates and their volatility; changes to and compliance with privacy regulations; changes in weather patterns; the political and social stability of the global markets in which the Company operates; the effects of, or response to, terrorism and security threats; wars and other conflicts; natural disasters; and the spread of major epidemics (including COVID) and government and industry responses to epidemics such as travel restrictions and extended shut down of businesses.

Uncertainties related to the magnitude and duration of the COVID pandemic may significantly adversely affect John Deere’s and the Company’s business and outlook. These uncertainties include: prolonged reduction or closure of John Deere’s and the Company’s operations, or a delayed recovery in our operations; additional closures as mandated or otherwise made necessary by governmental authorities; absence of employees due to illness; the impact of the pandemic on the financial condition and credit risk of the Company's customers and dealers, which could affect the demand for financing and lead to higher credit losses and losses on lease residual values; requests by the Company’s customers or dealers for payment deferrals and contract modifications; the impact of disruptions in the global capital markets and/or continued declines in John Deere’s and the Company’s financial performance,

37

outlook or credit ratings, which could impact John Deere’s and the Company’s ability to obtain funding in the future; a resurgence in COVID cases following a reopening in any country, state, or region; and the impact of the pandemic on demand for John Deere’s products and services. It is unclear when a sustained economic recovery could occur and what a recovery may look like. All of these factors could materially and adversely affect our business, liquidity, results of operations and financial position.

Significant changes in market liquidity conditions, changes in the Company’s credit ratings, and any failure to comply with financial covenants in credit agreements could impact access to funding and funding costs, which could reduce the Company’s earnings and cash flows. Financial market conditions could also negatively impact customer access to capital for purchases of John Deere’s products and customer confidence and purchase decisions, borrowing and repayment practices, and the number and size of customer loan delinquencies and defaults. A debt crisis, in Europe or elsewhere, could negatively impact currencies, global financial markets, social and political stability, funding sources and costs, asset and obligation values, customers, and Company operations and results. Security breaches, cybersecurity attacks, technology failures, and other disruptions to the Company’s information technology infrastructure also could materially affect results. The Company’s operations could be impaired by changes in the equity, bond, and other financial markets, which would negatively affect earnings.

The withdrawal of the United Kingdom from the European Union and the perceptions as to the impact of the withdrawal may adversely affect business activity, political stability and economic conditions in the United Kingdom, the European Union and elsewhere. The economic conditions and outlook could be further adversely affected by (i) uncertainty regarding any new or modified trade arrangements between the United Kingdom and the European Union and/or other countries, (ii) the risk that one or more other European Union countries could come under increasing pressure to leave the European Union, or (iii) the risk that the euro as the single currency of the Eurozone could cease to exist. Any of these developments, or the perception that any of these developments are likely to occur, could affect economic growth or business activity in the United Kingdom or the European Union, and could result in the relocation of businesses, cause business interruptions, lead to economic recession or depression, and impact the stability of the financial markets, availability of credit, currency exchange rates, interest rates, financial institutions, and political, financial and monetary systems. Any of these developments could affect our businesses, liquidity, results of operations and financial position.

The liquidity and ongoing profitability of the Company depend largely on timely access to capital in order to meet future cash flow requirements, and to fund operations, costs, and purchases of John Deere’s products. If general economic conditions deteriorate or capital markets become more volatile, including as a result of the COVID pandemic, funding could be unavailable or insufficient. Additionally, customer confidence levels may result in declines in credit applications and increases in delinquencies and default rates, which could materially impact the Company’s write-offs and provision for credit losses.

In addition, the Company’s business is closely related to John Deere’s business. Further information, including factors that could materially affect the Company’s and John Deere’s financial results, is included in the most recent Deere & Company Form 10-K and Form 10-Q (including, but not limited to, the factors discussed in Item 1A. Risk Factors of the Form 10-K and quarterly reports on Form 10-Q) and other Deere & Company and Capital Corporation quarterly and other filings with the SEC.

Critical Accounting Policies

See the Company’s critical accounting policies discussed in the Management’s Discussion and Analysis of the most recent annual report filed on Form 10-K. There have been no material changes to these policies.

38

Capital Resources and Liquidity

For additional information on the Company’s dependence on and relationships with Deere & Company, see the Company’s most recently filed annual report on Form 10-K.

During the first nine months of 2020, the aggregate net cash provided by operating and financing activities was used primarily to fund Receivables and Leases. Net cash provided by operating activities was $1,092.7 million in the first nine months of 2020. Net cash provided by financing activities totaled $161.7 million in the first nine months of 2020, resulting primarily from a net increase in payables to John Deere of $1,775.8 million, partially offset by a net decrease in total external borrowings of $1,342.2 million and dividends paid of $250.0 million. Net cash used for investing activities totaled $1,240.3 million in the first nine months of 2020, primarily due to the cost of Receivables acquired (excluding wholesale) exceeding the collections of Receivables (excluding wholesale) by $1,083.3 million and the cost of equipment on operating leases acquired exceeding proceeds from sales of equipment on operating leases by $381.1 million, partially offset by a decrease in net wholesale receivables of $353.8 million. Cash, cash equivalents, and restricted cash increased $13.2 million during the first nine months of 2020.

During the first nine months of 2019, the aggregate net cash provided by operating and financing activities was used primarily to fund Receivables and Leases. Net cash provided by operating activities was $1,364.9 million in the first nine months of 2019. Net cash provided by financing activities totaled $2,627.5 million in the first nine months of 2019, resulting primarily from an increase in total external borrowings of $1,984.4 million and a net increase in payables to John Deere of $948.1 million, partially offset by dividends paid of $280.0 million. Net cash used for investing activities totaled $3,958.7 million in the first nine months of 2019, primarily due to an increase in net wholesale receivables of $2,362.5 million and the cost of equipment on operating leases acquired exceeding proceeds from sales of equipment on operating leases by $802.1 million and the cost of Receivables acquired (excluding wholesale) exceeding the collections of Receivables (excluding wholesale) by $668.7 million. Cash, cash equivalents, and restricted cash increased $27.4 million during the first nine months of 2019.

The Company relies on its ability to raise substantial amounts of funds to finance its Receivable and Lease portfolios. The Company has access to most global markets at a reasonable cost and expects to have sufficient sources of global funding and liquidity to meet its funding needs. The Company’s ability to meet its debt obligations is supported in a number of ways. The assets of the Company are self-liquidating in nature. A solid equity position is available to absorb unusual losses on these assets and all commercial paper is backed by unsecured, committed borrowing lines from various banks. Liquidity is also provided by the Company’s ability to securitize these assets and through the issuance of term debt. Additionally, liquidity may be provided through loans from John Deere. The Company’s commercial paper outstanding at August 2, 2020, November 3, 2019, and July 28, 2019 was $940.9 million, $1,345.5 million, and $1,026.1 million, respectively, while the total cash, cash equivalents, and marketable securities position was $627.3 million, $635.8 million, and $656.0 million, respectively. The amount of cash, cash equivalents, and marketable securities held by foreign subsidiaries was $124.6 million, $134.7 million, and $157.1 million at August 2, 2020, November 3, 2019, and July 28, 2019, respectively.

Capital Corporation has a revolving credit agreement to utilize bank conduit facilities to securitize retail notes (See Note 5). At August 2, 2020, this facility had a total capacity, or “financing limit,” of $3,500.0 million of secured financings at any time. After a two-year revolving period, unless the banks and Capital Corporation agree to renew, Capital Corporation would liquidate the secured borrowings over time as payments on the retail notes are collected. At August 2, 2020, $2,068.0 million of short-term securitization borrowings were outstanding under the agreement.

During the first nine months of 2020, the Company issued $3,062.5 million and retired $5,008.7 million of long-term borrowings, which were primarily medium-term notes. During the first nine months of 2020, the Company also issued $3,274.3 million and retired $2,225.8 million of retail note securitization borrowings and maintained an average commercial paper balance of $1,632.1 million. At August 2, 2020, the Company’s funding profile included $1,012.0 million of commercial paper and other notes payable, $5,324.1 million of securitization borrowings, $3,796.3 million of loans from John Deere, $25,402.3 million of unsecured term debt,

39

and $4,173.2 million of equity capital. The Company’s funding profile may be altered to reflect such factors as relative costs of funding sources, assets available for securitizations, and capital market accessibility.

Total interest-bearing indebtedness amounted to $35,534.7 million at August 2, 2020, compared with $34,362.2 million at November 3, 2019 and $34,757.0 million at July 28, 2019. Total short-term indebtedness amounted to $15,042.6 million at August 2, 2020, compared with $13,309.8 million at November 3, 2019 and $14,721.6 million at July 28, 2019. Total long-term indebtedness amounted to $20,492.1 million at August 2, 2020, compared with $21,052.4 million at November 3, 2019 and $20,035.4 million at July 28, 2019. The ratio of total interest-bearing debt, including securitization indebtedness, to stockholder’s equity was 8.5 to 1 at August 2, 2020, compared with 8.3 to 1 at November 3, 2019 and 8.5 to 1 at July 28, 2019.

Stockholder’s equity was $4,173.2 million at August 2, 2020, compared with $4,128.4 million at November 3, 2019 and $4,110.1 million at July 28, 2019. The increase in the first nine months of 2020 was primarily due to net income attributable to the Company of $271.3 million and a change in the cumulative translation adjustment of $28.2 million, partially offset by dividends paid of $250.0 million.

Lines of Credit

The Company has access to bank lines of credit with various banks throughout the world. Some of the lines are available to both the Company and Deere & Company. Worldwide lines of credit totaled $8,071.1 million at August 2, 2020, $6,051.7 million of which were unused. For the purpose of computing unused credit lines, commercial paper and short-term bank borrowings, excluding secured borrowings and the current portion of long-term borrowings, of the Company and Deere & Company were primarily considered to constitute utilization. Included in the total credit lines at August 2, 2020 was a 364-day credit facility agreement of $3,000.0 million, expiring in fiscal April 2021. In addition, total credit lines included long-term credit facility agreements of $2,500.0 million, expiring in fiscal April 2024, and $2,500.0 million, expiring in fiscal April 2025. These credit agreements require the Company to maintain its consolidated ratio of earnings to fixed charges at not less than 1.05 to 1 for each fiscal quarter and its ratio of senior debt, excluding securitization indebtedness, to capital base (total subordinated debt and stockholder’s equity excluding accumulated other comprehensive income (loss)) at not more than 11 to 1 at the end of any fiscal quarter. All of the requirements of the credit agreements have been met during the periods included in the consolidated financial statements.

Debt Ratings

The Company’s ability to obtain funding is affected by its debt ratings, which are closely related to the outlook for and the financial condition of John Deere, and the nature and availability of support facilities, such as its lines of credit and the support agreement from Deere & Company.

To access public debt capital markets, the Company relies on credit rating agencies to assign short-term and long-term credit ratings to the Company’s securities as an indicator of credit quality for fixed income investors. A credit rating agency may change or withdraw Company ratings based on its assessment of the Company’s current and future ability to meet interest and principal repayment obligations. Each agency’s rating should be evaluated independently of any other rating. Lower credit ratings generally result in higher borrowing costs, including costs of derivative transactions, and reduced access to debt capital markets.

The senior long-term and short-term debt ratings and outlook currently assigned to unsecured Company debt securities by the rating agencies engaged by the Company are the same as those for John Deere. Those ratings are as follows:

    

Senior Long-Term

    

Short-Term

    

Outlook

 

Fitch Ratings

A

F1

Stable

Moody’s Investors Service, Inc.

 

A2

 

Prime-1

 

Stable

Standard & Poor’s

 

A

 

A-1

 

Stable

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Dividends

Capital Corporation declared and paid cash dividends to John Deere Financial Services, Inc. (JDFS) of $250.0 million and $280.0 million in the first nine months of 2020 and 2019, respectively. In each case, JDFS paid comparable dividends to Deere & Company.

On August 27, 2020, Capital Corporation declared a $25.0 million dividend to be paid to JDFS on September 15, 2020. JDFS, in turn, declared a $25.0 million dividend to Deere & Company, also payable on September 15, 2020.

Item 3.     Quantitative and Qualitative Disclosures About Market Risk.

See the Company’s most recent annual report filed on Form 10-K (Part II, Item 7A). There has been no material change in this information.

Item 4.     Controls and Procedures.

The Company’s principal executive officer and its principal financial officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (Act)) were effective as of August 2, 2020, based on the evaluation of these controls and procedures required by Rule 13a-15(b) or 15d-15(b) of the Act. During the third quarter, there were no changes that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

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PART II.  OTHER INFORMATION

Item 1.     Legal Proceedings.

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 financial statements.

Item 1A.  Risk Factors.

See the Company’s most recent annual report on Form 10-K (Part I, Item 1A).

The COVID pandemic resulted in additional risks that could materially adversely affect the Company’s business, financial condition, results of operations and/or cash flows.

COVID was identified in late 2019 and has spread globally. The rapid spread has resulted in governments and other authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place orders and shutdowns. These measures have impacted and may further impact all or portions of the Company’s workforce and operations and the operations of customers. Countries around the world have been affected by the pandemic and have taken containment measures. Considerable uncertainty exists regarding such measures and potential future measures. Restrictions on the Company’s workforce’s access to its facilities could limit its ability to meet customer servicing expectations and have a material adverse effect on the Company’s financial condition, cash flows and results of operations. There is no certainty that measures taken by governmental authorities will be sufficient to mitigate the risks posed by the virus, and the Company’s ability to perform critical functions could be harmed.

The COVID pandemic caused a global recession and there is no certainty about when a sustained economic recovery may occur. The COVID pandemic has also significantly increased economic and demand uncertainty and has led to disruption and volatility in the global capital markets, which increases the cost of capital and adversely impacts access to capital. Economic uncertainties could affect the value of the equipment financed or leased, the demand for financings and the financial condition and credit risk of our dealers and customers. Risks related to negative economic conditions are described in our risk factor titled “Negative economic conditions and outlook can materially weaken demand for John Deere’s equipment and services, limit access to funding and result in higher funding costs for the Company and John Deere” under “Risk Factors” in our annual report on Form 10-K for the year ended November 3, 2019.

Uncertainties related to the magnitude and duration of the COVID pandemic may significantly adversely affect John Deere’s and the Company’s business and outlook. These uncertainties include: prolonged reduction or closure of John Deere’s and the Company’s operations, or a delayed recovery in such operations; additional closures as mandated or otherwise made necessary by governmental authorities; absence of employees due to illness; requests by the Company’s customers or dealers for payment deferrals and contract modifications; the impact of disruptions in the global capital markets and/or declines in John Deere’s and the Company’s financial performance, outlook or credit ratings, which could impact John Deere’s and the Company’s ability to obtain funding in the future; a resurgence in COVID cases following a reopening in any country, state, or region; and the impact of the pandemic on demand for John Deere’s products and services. It is unclear when a sustained economic recovery could occur and what a recovery may look like. All of these factors could materially and adversely affect our business, liquidity, results of operations and financial position.

The ultimate magnitude of COVID effects, including the extent of its impact on the Company’s financial and operational results, which could be material, will be determined by the length of time that the pandemic continues, its effect on the demand for our services, as well as the effect of governmental regulations imposed in response to the pandemic. We cannot at this time predict the impact of the COVID pandemic, but it could have a material adverse effect on our business, financial condition, results of operations and/or cash flows.

There has been no additional material change to the other risks included in the most recent annual report filed on Form 10-K. The risks described in the annual report on Form 10-K, and the “Safe Harbor Statement” in this report, are not the only risks faced by the Company. Additional risks and uncertainties may also materially affect

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the Company’s business, financial condition or operating results. One should not consider the risk factors to be a complete discussion of risks, uncertainties, and assumptions.

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds.

Omitted pursuant to instruction H.

Item 3.     Defaults Upon Senior Securities.

Omitted pursuant to instruction H.

Item 4.     Mine Safety Disclosures.

Not applicable.

Item 5.     Other Information.

None.

Item 6.     Exhibits.

Certain instruments relating to long-term borrowings, constituting less than 10 percent of the registrant’s total assets, are not filed as exhibits herewith pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K. The registrant will file copies of such instruments upon request of the SEC.

3.1

Certificate of Incorporation, as amended (Exhibit 3.1 to Form 10-K of the registrant for the year ended October 31, 1999, Securities and Exchange Commission file number 1-6458*)

3.2

Bylaws, as amended (Exhibit 3.2 to Form 10-K of the registrant for the year ended October 31, 1999, Securities and Exchange Commission file number 1-6458*)

31.1

Rule 13a-14(a)/15d-14(a) Certification

31.2

Rule 13a-14(a)/15d-14(a) Certification

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Section 1350 Certifications

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

*     Incorporated by reference. Copies of these exhibits are available from the Company upon request.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

JOHN DEERE CAPITAL CORPORATION

Date:

August 27, 2020

By:

/s/ Ryan D. Campbell

Ryan D. Campbell

Senior Vice President and

Principal Financial Officer and

Principal Accounting Officer

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