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2: EX-12 Statement re: Computation of Ratios HTML 23K
3: EX-15 Letter re: Unaudited Interim Financial Info HTML 20K
4: EX-31.1 Certification -- §302 - SOA'02 HTML 27K
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16: R2 Consolidated Income Statement HTML 69K
17: R3 Consolidated Statement of Comprehensive Income HTML 39K
18: R4 Consolidated Balance Sheet HTML 94K
19: R5 Consolidated Statement of Shareholder's Interest HTML 81K
20: R6 Consolidated Statement of Cash Flows HTML 74K
21: R7 Presentation HTML 26K
22: R8 Accounting Policies HTML 46K
23: R9 Cash, Cash Equivalents, and Marketable Securities HTML 55K
24: R10 Finance Receivables HTML 100K
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26: R12 Allowance for Credit Losses HTML 209K
27: R13 Transfers of Receivables HTML 176K
28: R14 Variable Interest Entities HTML 23K
29: R15 Derivative Financial Instruments and Hedging HTML 97K
Activities
30: R16 Other Assets and Other Liabilities and Deferred HTML 54K
Income
31: R17 Debt HTML 96K
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(Registrant’s
telephone number, including area code)
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. þ Yes o No
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 o
Accelerated filer o
Non-accelerated filer þ
Smaller reporting company o
Emerging growth company o
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes þ No
All of the limited liability company interests in the
registrant (“Shares”) are held by an affiliate of the registrant. None of the Shares are publicly traded.
REDUCED DISCLOSURE FORMAT
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 the reduced disclosure format.
Notes
and accounts receivable from affiliated companies
811
957
Derivative financial instruments (Note 9)
909
982
Other assets (Note 10)
2,822
3,075
Total
assets
$
146,089
$
154,478
LIABILITIES
Accounts
payable
Customer deposits, dealer reserves, and other
$
1,065
$
1,236
Affiliated companies
336
705
Total
accounts payable
1,401
1,941
Debt (Note 11)
126,492
132,380
Deferred income taxes
3,230
3,633
Derivative
financial instruments (Note 9)
166
420
Other liabilities and deferred income (Note 10)
1,997
2,020
Total liabilities
133,286
140,394
SHAREHOLDER’S
INTEREST
Shareholder’s interest
5,227
5,227
Accumulated other comprehensive income/(loss) (Note 12)
(890
)
(405
)
Retained
earnings
8,466
9,262
Total shareholder’s interest attributable to Ford Motor Credit Company
12,803
14,084
Shareholder’s interest attributable
to noncontrolling interests
—
—
Total shareholder’s interest
12,803
14,084
Total liabilities and shareholder’s interest
$
146,089
$
154,478
The
following table includes assets to be used to settle the liabilities of the consolidated variable interest entities (“VIEs”). These assets and liabilities are included in the consolidated balance sheet above. See Notes 7 and 8 for additional information on our VIEs.
The consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information, instructions to the Quarterly Report on Form 10-Q, and Rule 10-01 of Regulation S-X. In the opinion of management, these unaudited financial statements include all adjustments considered necessary for a fair statement
of the results of operations and financial condition for interim periods for Ford Motor Credit Company LLC, its consolidated subsidiaries, and consolidated VIEs in which Ford Motor Credit Company LLC is the primary beneficiary (collectively referred to herein as “Ford Credit,”“we,”“our,” or “us”). Results for interim periods should not be considered indicative of results for any other interim period or for the full year. Reference should be made to the financial statements contained in our Current Report on Form 8-K dated April 27, 2017 (“April 27, 2017 Form 8-K Report”). We are an indirect, wholly owned subsidiary of Ford Motor Company (“Ford”).
We
reclassified certain prior period amounts in our consolidated financial statements to conform to current year presentation.
Forso Nordic AB. We hold a 50% interest in Forso Nordic AB (“Forso”), a joint venture with Credit Agricole Consumer Finance SA (“CACF”). Forso was established to support the sale of Ford vehicles in Denmark, Finland, Norway, and Sweden by providing retail and dealer financing in these markets. We have exercised our call option to purchase CACF’s shares in the joint venture, and as a result, effective August 23, 2017, we consolidated the joint venture for financial reporting purposes. The consolidated results are included in the Europe segment. Our Income before income taxes
includes a $17 million loss, reflecting historical foreign currency translation, as a result of the consolidation. We measured the fair value of joint venture assets and liabilities at the date of consolidation and recognized $1.5 billion in assets (primarily finance receivables) and $1.3 billion in liabilities (primarily debt) on our balance sheet. We expect to finalize the purchase price of CACF’s shares during the fourth quarter of 2017.
NOTE 2. ACCOUNTING POLICIES
Provision for Income Taxes
For
interim tax reporting we estimate one single effective tax rate, which is applied to the year-to-date ordinary income/(loss). Tax effects of significant unusual or infrequently occurring items are excluded from the estimated annual effective tax rate calculation and recognized in the interim period in which they occur.
Adoption of New Accounting Standards
Accounting Standard Update (“ASU”) 2014-09, Revenue - Revenue from Contracts with Customers. We have adopted the new accounting standard, ASC 606 Revenue from Contracts with Customers
and all the related amendments as of January 1, 2017 using the modified retrospective method. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. Adoption of the new revenue standard resulted in changes to the timing of revenue recognition and in the reclassification between financial statement line items. Under the new standard, we recognize insurance commissions at the time of sale of the product or service to our customer; previously, such income was recognized over the life of the insurance contract. The new standard also provided additional clarity that resulted in reclassifications from Other income, net to a new financial statement line entitled
Fee based revenue and other.
We recognized the cumulative effect of initially applying the new standard as a $9 million increase to the opening balance of Retained earnings with the offset primarily reflected in Other assets. When compared to the previous standard, the impact of adopting the new standard was immaterial to Other assets and Retained earnings at September 30, 2017 and Net income for the periods ended September 30, 2017. Under
the previous standard, amounts reported in Fee based revenue and other for the period ended September 30, 2017 would have been included in Other income, net.
We
also adopted the following standards during 2017, none of which had a material impact to our financial statements or financial statement disclosures:
Standard
Effective Date
2017-05
Gains and Losses from the Derecognition of Nonfinancial Assets - Clarifying the Scope of Asset Derecognition Guidance
The following represent the standards that will, or are expected to, result in a significant change in practice and/or have a significant financial impact to Ford Credit.
ASU 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments. In June 2016, the Financial Accounting Standards Board (“FASB”) issued a new accounting
standard which replaces the current incurred loss impairment method with a method that reflects expected credit losses. The new standard is effective as of January 1, 2020, and early adoption is permitted as of January 1, 2019. We will adopt the new credit loss guidance by recognizing the cumulative effect of initially applying the new standard as an adjustment to the opening balance of Retained earnings. We anticipate adoption will increase the amount of expected credit losses reported in Finance Receivables, Net on our consolidated balance sheet and do not expect a material impact to our income statement.
ASU 2016-02, Leases. In February 2016, the FASB issued a
new accounting standard which provides guidance on the recognition, measurement, presentation, and disclosure of leases. The new standard supersedes the present U.S. GAAP standard on leases and requires substantially all leases to be reported on the balance sheet as right-of-use assets and lease liabilities, as well as additional disclosures. We plan to adopt the standard at its effective date of January 1, 2019. We anticipate adoption of the standard will add about $100 million in right-of-use assets and lease obligations to our balance sheet and will not significantly impact pre-tax profit. We plan to elect the practical expedients upon transition that will retain the lease classification and initial direct costs for any leases that exist prior to adoption of the standard. We will not reassess whether any contracts
entered into prior to adoption are leases. We are in the early stages of implementation.
ASU 2017-12, Derivatives and Hedging. In August 2017, the FASB issued a new accounting standard which aligns hedge accounting with risk management activities and simplifies the requirements to qualify for hedge accounting. We plan to adopt the new standard effective January 1, 2018 and are assessing the impact to our hedge accounting processes and financial statement disclosures. We anticipate adoption will not have a material impact to our financial statements.
NOTE 3. CASH, CASH EQUIVALENTS, AND MARKETABLE SECURITIES
The following table categorizes the fair values of cash, cash equivalents, and marketable securities measured at fair value on a recurring basis on our balance sheet (in millions):
We manage finance receivables as “consumer” and “non-consumer” portfolios. The receivables are generally secured by the vehicles, inventory, or other property being financed.
Finance receivables, net were as follows (in millions):
Unearned
interest supplements from Ford and affiliated companies
(2,783
)
(3,136
)
Consumer finance receivables
65,338
72,456
Non-Consumer
Dealer
financing
36,951
36,818
Other financing
1,176
1,898
Non-Consumer finance receivables
38,127
38,716
Total
recorded investment
$
103,465
$
111,172
Recorded investment in finance receivables
$
103,465
$
111,172
Allowance
for credit losses
(484
)
(575
)
Finance receivables, net
$
102,981
$
110,597
Net
finance receivables subject to fair value (a)
$
100,857
$
107,506
Fair value
101,576
107,286
__________
(a)
At
December 31, 2016 and September 30, 2017, Finance receivables, net includes $2.1 billion and $3.1 billion, respectively, of direct financing leases that are not subject to fair value disclosure requirements. The fair value of finance receivables is categorized within Level 3 of the fair value hierarchy.
Excluded from finance receivables at December 31, 2016 and September 30,
2017 was $224 million and $225 million, respectively, of accrued uncollected interest, which we report in Other assets on our balance sheet.
Included in recorded investment in finance receivables at December 31, 2016 and September 30, 2017 were consumer receivables of $32.5 billion and $35.2 billion, respectively, and non-consumer receivables of $26.0 billion and $23.6
billion, respectively, that have been sold for legal purposes in securitization transactions but continue to be reported in our consolidated financial statements. The receivables are available only for payment of the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions; they are not available to pay the other obligations or the claims of Ford Credit’s other creditors. Ford Credit holds the right to receive the excess cash flows not needed to pay the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions (see Note 7 for additional information).
For all finance receivables, we define “past due” as any payment, including principal and interest, that is at least 31 days past the contractual due date. The recorded investment of consumer receivables greater than
90 days past due and still accruing interest was $21 million and $28 million at December 31, 2016 and September 30, 2017, respectively. The recorded investment of non-consumer receivables greater than 90 days past due and still accruing interest was de minimis and $1 million at December 31, 2016 and September 30, 2017, respectively.
The
aging analysis of finance receivables balances was as follows (in millions):
Credit quality ratings for consumer receivables are based on our aging analysis. Refer to the aging table above.
Consumer
receivables credit quality ratings are as follows:
•
Pass – current to 60 days past due
•
Special Mention – 61 to 120 days past due and in intensified collection status
•
Substandard
– greater than 120 days past due and for which the uncollectible portion of the receivables has already been charged off, as measured using the fair value of collateral less costs to sell
Non-Consumer Portfolio
Dealers are assigned to one of four groups according to risk ratings as follows:
•
Group I – strong to superior financial metrics
•
Group
II – fair to favorable financial metrics
•
Group III – marginal to weak financial metrics
•
Group IV – poor financial metrics, including dealers classified as uncollectible
Impaired consumer receivables include accounts that have been rewritten or modified in reorganization proceedings pursuant to the U.S. Bankruptcy Code that are considered to be Troubled Debt Restructurings (“TDRs”), as well as all accounts
greater than 120 days past due. Impaired non-consumer receivables represent accounts with dealers that have weak or poor financial metrics or dealer financing that has been modified in TDRs. The recorded investment of consumer receivables that were impaired at December 31, 2016 and September 30, 2017 was $367 million, or 0.6% of consumer receivables, and $387 million, or 0.5% of consumer receivables, respectively. The recorded investment of non-consumer receivables that were impaired at December 31,
2016 and September 30, 2017 was $107 million, or 0.3% of non-consumer receivables, and $152 million, or 0.4% of non-consumer receivables, respectively. Impaired finance receivables are evaluated both collectively and specifically.
The accrual of revenue is discontinued at the time a receivable is determined to be uncollectible. Accounts may be restored to accrual status only when a customer settles all past-due deficiency balances and future payments are reasonably assured. For receivables in non-accrual status, subsequent
financing revenue is recognized only to the extent a payment is received. Payments are generally applied first to outstanding interest and then to the unpaid principal balance.
A restructuring of debt constitutes a TDR if we grant a concession to a debtor for economic or legal reasons related to the debtor’s financial difficulties that we otherwise would not consider. Consumer and non-consumer receivables that have a modified interest rate below market rate or that were modified in reorganization proceedings pursuant to the U.S. Bankruptcy Code, except non-consumer receivables that are current with minimal risk of loss, are considered to be TDRs. We do not grant concessions on the principal balance of our receivables. If a receivable is modified in a reorganization proceeding, all payment requirements of the reorganization plan need to be met before remaining balances are
forgiven. Finance receivables involved in TDRs are specifically assessed for impairment.
Net investment in operating leases consist
primarily of lease contracts for vehicles with retail customers, daily rental companies, and fleet customers with terms of 60 months or less.
Net investment in operating leases were as follows (in millions):
Net
investment in operating leases before allowance for credit losses
27,273
27,000
Allowance for credit losses
(64
)
(69
)
Net investment in operating
leases
$
27,209
$
26,931
__________
(a)
Includes interest supplements and residual support payments we receive on certain leasing transactions under agreements with Ford and affiliated companies, and other vehicle acquisition costs.
At
December 31, 2016 and September 30, 2017, net investment in operating leases before allowance for credit losses includes $11.8 billion and $9.9 billion, respectively, of net investment in operating leases that have been included in securitization transactions but continue to be reported in our consolidated financial statements. These net investment in operating leases are available only for payment of the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions; they are not available to pay our other obligations or the claims of our other creditors. We hold the right to receive the excess cash flows not needed to pay the
debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions (see Note 7 for additional information).
We have a sale-leaseback agreement with Ford primarily for vehicles that Ford leases to employees of Ford and its subsidiaries. Effective January 1, 2017, the financing we provide under this agreement is reflected on our balance sheet in Finance receivables, net. Previously, these amounts were reflected in Net investment in operating leases. The amount included in Net investment in operating leases at December
31, 2016 was $907 million. The revenue related to these agreements is now reflected in Other financing revenue. Previously, this activity was reflected on our income statement in Operating leases revenue and Depreciation on vehicles subject to operating leases which was $73 million and $67 million for the third quarter of 2016, respectively, and $222 million and $201 million for the first nine months of 2016, respectively.
An analysis of the allowance for credit losses related to finance receivables and net investment in operating leases for the periods ended September 30 (in millions) was as follows:
Third
Quarter 2016
Finance Receivables
Net Investment in Operating Leases
Total Allowance
Consumer
Non-Consumer
Total
Allowance
for credit losses
Beginning balance
$
432
$
17
$
449
$
63
$
512
Charge-offs
(108
)
(5
)
(113
)
(44
)
(157
)
Recoveries
29
1
30
20
50
Provision
for credit losses
112
1
113
25
138
Other
(a)
(1
)
—
(1
)
(1
)
(2
)
Ending
balance
$
464
$
14
$
478
$
63
$
541
First
Nine Months 2016
Finance Receivables
Net Investment in Operating Leases
Total Allowance
Consumer
Non-Consumer
Total
Allowance
for credit losses
Beginning balance
$
357
$
16
$
373
$
49
$
422
Charge-offs
(304
)
(7
)
(311
)
(125
)
(436
)
Recoveries
89
4
93
60
153
Provision
for credit losses
323
1
324
79
403
Other
(a)
(1
)
—
(1
)
—
(1
)
Ending
balance
$
464
$
14
$
478
$
63
$
541
Analysis
of ending balance of allowance for credit losses
Collective impairment allowance
$
445
$
12
$
457
$
63
$
520
Specific
impairment allowance
19
2
21
—
21
Ending
balance
464
14
478
63
$
541
Analysis
of ending balance of finance receivables and net investment in operating leases
Collectively evaluated for impairment
64,743
36,120
100,863
27,024
Specifically
evaluated for impairment
366
140
506
—
Recorded
investment
65,109
36,260
101,369
27,024
Ending
balance, net of allowance for credit losses
$
64,645
$
36,246
$
100,891
$
26,961
__________
(a)
Primarily
represents amounts related to translation adjustments.
We securitize finance receivables and net investment in operating
leases through a variety of programs using amortizing, variable funding, and revolving structures. We also sell finance receivables in structured financing transactions. Due to the similarities between securitization and structured financing, we refer to structured financings as securitization transactions. Our securitization programs are targeted to institutional investors in both public and private transactions in capital markets including the United States, Canada, several European countries, Mexico, and China.
We engage in securitization transactions to fund operations and to maintain liquidity. Our securitization transactions are recorded as asset-backed debt and the associated assets are not derecognized and continue to be included in our financial statements.
The finance receivables
sold for legal purposes and net investment in operating leases included in securitization transactions are available only for payment of the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions. They are not available to pay our other obligations or the claims of our other creditors. We hold the right to receive the excess cash flows not needed to pay the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions. The debt is the obligation of our consolidated securitization entities and not the obligation of Ford Credit or our other subsidiaries.
Most of these securitization transactions utilize VIEs. See Note 8 for additional information concerning
VIEs. The following tables show the assets and debt related to our securitization transactions that were included in our financial statements (in billions):
Finance Receivables and Net Investment in Operating Leases (a)
Related Debt (c)
Before Allowance
for Credit Losses
Allowance for
Credit
Losses
After Allowance
for Credit Losses
VIE (b)
Retail
financing
$
1.7
$
29.9
$
0.2
$
29.7
$
25.7
Wholesale
financing
0.3
23.1
—
23.1
11.3
Finance
receivables
2.0
53.0
0.2
52.8
37.0
Net
investment in operating leases
0.5
9.9
—
9.9
6.3
Total
VIE
$
2.5
$
62.9
$
0.2
$
62.7
$
43.3
Non-VIE
Retail
financing
$
0.3
$
5.3
$
—
$
5.3
$
4.7
Wholesale
financing
—
0.5
—
0.5
0.5
Finance
receivables
0.3
5.8
—
5.8
5.2
Net
investment in operating leases
—
—
—
—
—
Total
Non-VIE
$
0.3
$
5.8
$
—
$
5.8
$
5.2
Total
securitization transactions
Retail financing
$
2.0
$
35.2
$
0.2
$
35.0
$
30.4
Wholesale
financing
0.3
23.6
—
23.6
11.8
Finance
receivables
2.3
58.8
0.2
58.6
42.2
Net
investment in operating leases
0.5
9.9
—
9.9
6.3
Total
securitization transactions
$
2.8
$
68.7
$
0.2
$
68.5
$
48.5
__________
(a)
Unearned
interest supplements and residual support are excluded from securitization transactions.
(b)
Includes assets to be used to settle the liabilities of the consolidated VIEs.
(c)
Includes unamortized discount and debt issuance costs.
NOTE 8. VARIABLE INTEREST ENTITIES
We
use special purpose entities to issue asset-backed securities in transactions to public and private investors. We have deemed most of these special purpose entities to be VIEs of which we are the primary beneficiary. The asset-backed securities are backed by finance receivables and interests in net investments in operating leases. The assets continue to be consolidated by us. We retain interests in our securitization VIEs, including subordinated securities issued by the VIEs, rights to cash held for the benefit of the securitization investors, and rights to receive the excess cash flows not needed to pay the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions.
We have no obligation to repurchase or replace any securitized asset that subsequently becomes delinquent in payment or otherwise is in default,
except when representations and warranties about the eligibility of the securitized assets are breached, or when certain changes are made to the underlying asset contracts. Securitization investors have no recourse to us or our other assets and have no right to require us to repurchase the investments. We generally have no obligation to provide liquidity or contribute cash or additional assets to the VIEs and do not guarantee any asset-backed securities. We may be required to support the performance of certain securitization transactions, however, by increasing cash reserves.
See Note 7 for additional information on the financial position and financial performance of our VIEs.
NOTE 9. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
In the normal course of business, our operations are exposed to global market risks, including the effect of changes in interest rates and foreign currency exchange rates. To manage these risks, we enter into highly effective derivative contracts. We have elected to apply hedge
accounting to certain derivatives. Derivatives that are designated in hedging relationships are evaluated for effectiveness using regression analysis at the time they are designated and throughout the hedge period. Some derivatives do not qualify for hedge accounting; for others, we elect not to apply hedge accounting.
Income Effect of Derivative Financial Instruments
The gains/(losses), by hedge designation, recorded in income for the periods ended September 30 were as follows (in millions):
For
the third quarter and first nine months of 2016, hedge ineffectiveness reflects the net change in fair value on derivatives of $228 million loss and $655 million gain, respectively, and change in value on hedged debt attributable to the change in benchmark interest rates of $227 million gain and $634 million loss, respectively. For the third quarter and first nine months of 2017, hedge ineffectiveness reflects the net change in fair value on derivatives of $40 million loss and $95
million loss, respectively, and change in value on hedged debt attributable to the change in benchmark interest rates of $40 million gain and $95 million gain, respectively.
NOTE 9. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (Continued)
Balance Sheet Effect of Derivative Financial Instruments
Derivative assets and liabilities are recorded on the balance sheet at fair value and are presented on a gross basis. The notional amounts of the derivative instruments do not necessarily represent amounts exchanged by the parties and are not a direct measure of our financial exposure. We also enter into master agreements with counterparties that may allow for netting of exposures in the event of default or breach of the counterparty agreement. Collateral represents cash received or paid under
reciprocal arrangements that we have entered into with our derivative counterparties which we do not use to offset our derivative assets and liabilities.
The fair value of our derivative instruments and the associated notional amounts, presented gross, were as follows (in millions):
Total
derivative financial instruments, gross (b) (c)
$
99,856
$
909
$
166
$
96,676
$
982
$
420
__________
(a)
Includes
forward contracts between Ford Credit and an affiliated company.
(b)
At December 31, 2016 and September 30, 2017, we held collateral of $15 million and $11 million, respectively, and we posted collateral of $12 million and $31 million, respectively.
(c)
At
December 31, 2016 and September 30, 2017, the fair value of assets and liabilities available for counterparty netting was $113 million and $226 million, respectively. All derivatives are categorized within Level 2 of the fair value hierarchy.
NOTE 10. OTHER ASSETS AND OTHER LIABILITIES AND DEFERRED INCOME
Other assets and other liabilities and deferred income consist of various balance sheet items that are combined for financial statement presentation due to their respective materiality compared with other individual asset and liability items.
Restricted cash primarily includes cash held to meet certain local governmental and regulatory reserve requirements and cash held under the terms of certain contractual agreements. Restricted cash does not include required minimum balances or cash securing debt issued through securitization transactions.
Other
liabilities and deferred income were as follows (in millions):
Deferred
revenue balances presented above include amounts from contracts with customers primarily related to admission fee revenue on group financing products available in Argentina and were $120 million, $120 million, and $128 million at December 31, 2016, January 1, 2017, and September 30, 2017, respectively. The January 1, 2017 balance reflects adoption of the new revenue recognition standard. See Note 2 for additional information.
Admission fee revenue on group
financing products is generally recognized evenly over the term of the agreement, which is up to 84 months. Increases in the admission fee deferred revenue balance are the result of payments due during the current period in advance of satisfying our performance under the contract and decreases are a result of revenue recognized during the current period that was previously deferred. The total amount of admission fee revenue recognized for the first nine months of 2017 that was included in the beginning balance of deferred revenue at January 1, 2017 was $21 million.
Asset-backed
debt issued in securitizations is the obligation of the consolidated securitization entity that issued the debt and is payable only out of collections on the underlying securitized assets and related enhancements. This asset-backed debt is not the obligation of Ford Credit or our other subsidiaries.
(b)
Adjustments related to designated fair value hedges of unsecured debt.
(c)
The fair value of debt includes $14.3
billion and $16.5 billion of short-term debt at December 31, 2016 and September 30, 2017, respectively, carried at cost, which approximates fair value. All other debt is categorized within Level 2 of the fair value hierarchy.
NOTE 12. ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)
The changes in the balance of Accumulated other comprehensive income/(loss) (“AOCI”) attributable to Ford Credit for the periods ended September 30 were
as follows (in millions):
Other income consists of various line items that are combined on the income statement due to their respective materiality compared with other individual income and expense items.
The amounts included in Other income, net for the periods ended September 30
were as follows (in millions):
Third Quarter
First Nine Months
2016
2017
2016
2017
Gains/(Losses)
on derivatives
$
186
$
(36
)
$
545
$
(15
)
Currency
revaluation gains/(losses)
(157
)
51
(585
)
73
Interest and investment income
19
33
71
80
Insurance
fee income
21
—
68
—
Other
40
9
125
35
Total
other income, net
$
109
$
57
$
224
$
173
NOTE 14. SEGMENT
INFORMATION
We have three reportable segments in our consolidated financial statements that align with our management reporting structure and reflect the manner in which our Chief Operating Decision Maker manages our business, including resource allocation and performance assessment. These segments are: Americas, Europe, and Asia Pacific. Items excluded in assessing segment performance because they are managed at the corporate level, including market valuation adjustments to derivatives and exchange-rate fluctuations on foreign currency-denominated transactions, are reflected in Unallocated Other. The following is a brief description of our segments:
•Americas Segment -- United States, Canada, Mexico, Brazil, and Argentina
•Europe
Segment -- European region and South Africa
•Asia Pacific Segment -- China and India
We conduct our financing operations directly and indirectly through our subsidiaries and affiliates.
Key operating data for our business segments for the periods ended or at September 30 were as follows (in millions):
Americas
Europe
Asia
Pacific
Total Segments
Unallocated Other (a)
Total
Third Quarter 2016
Total
revenue (b)
$
2,419
$
244
$
88
$
2,751
$
45
$
2,796
Income
before income taxes
423
79
20
522
45
567
Other
disclosures:
Depreciation on vehicles subject to operating leases
1,072
13
—
1,085
—
1,085
Interest
expense
586
69
42
697
—
697
Provision
for credit losses
128
6
4
138
—
138
Third
Quarter 2017
Total revenue (b)
$
2,493
$
247
123
$
2,863
$
—
$
2,863
Income
before income taxes
485
72
23
580
20
600
Other
disclosures:
Depreciation on vehicles subject to operating leases
975
14
—
989
—
989
Interest
expense
669
65
76
810
—
810
Provision
for credit losses
159
7
3
169
—
169
First
Nine Months 2016
Total revenue (b)
$
7,063
$
761
$
258
$
8,082
$
10
$
8,092
Income
before income taxes
1,168
257
46
1,471
10
1,481
Other
disclosures:
Depreciation on vehicles subject to operating leases
3,149
25
—
3,174
—
3,174
Interest
expense
1,687
213
130
2,030
—
2,030
Provision
for credit losses
369
21
13
403
—
403
Net
finance receivables and net investment in operating leases
111,110
19,266
4,049
134,425
(6,573
)
127,852
Total
assets
116,462
22,150
4,380
142,992
—
142,992
First
Nine Months 2017
Total revenue (b)
$
7,359
$
709
$
328
$
8,396
$
—
$
8,396
Income
before income taxes
1,308
223
69
1,600
100
1,700
Other
disclosures:
Depreciation on vehicles subject to operating leases
3,055
35
—
3,090
—
3,090
Interest
expense
1,930
187
191
2,308
—
2,308
Provision
for credit losses
389
21
10
420
—
420
Net
finance receivables and net investment in operating leases
115,331
23,855
5,921
145,107
(7,579
)
137,528
Total
assets
120,398
27,323
6,757
154,478
—
154,478
__________
(a)
Net
finance receivables and Net investment in operating leases include unearned interest supplements and residual support, allowance for credit losses, and other (primarily accumulated supplemental depreciation).
(b)
Total revenue for 2016 includes Total financing revenue, Insurance premiums earned, and Other income, net. For 2017, Total revenue includes Total financing revenue, Insurance premiums earned, and Fee based revenue and other. The change in the definition of Total revenue
is the result of our adoption of the new revenue recognition accounting standard as of January 1, 2017 (see Note 2 for additional information).
Commitments
and contingencies primarily consist of lease commitments, guarantees and indemnifications, and litigation and claims.
Guarantees
and Indemnifications
Guarantees and indemnifications are recorded at fair value at their inception. We regularly review our performance risk under these arrangements, and in the event it becomes probable we will be required to perform under a guarantee or indemnity, the amount of probable payment is recorded.
In some cases, we have guaranteed debt and other financial obligations of outside third parties and unconsolidated affiliates, including Ford. Expiration dates vary, and guarantees will terminate on payment and/or cancellation of the underlying obligation. A payment by us would be triggered by failure of the guaranteed party to fulfill its obligation covered by the guarantee. In some circumstances, we are entitled to recover from a third party amounts paid by us under the guarantee. However,
our ability to enforce these rights is sometimes stayed until the guaranteed party is paid in full, and may be limited in the event of insolvency of the third party or other circumstances.
In the ordinary course of business, we execute contracts involving indemnifications standard in the industry and indemnifications specific to a transaction. These indemnifications might include and are not limited to claims relating to any of the following: environmental, tax, and shareholder matters; intellectual property rights; governmental regulations and employment-related matters; dealer and other commercial contractual relationships; and financial matters, such as securitizations. Performance under these indemnities generally would be triggered by a breach of terms of the contract
or by a third-party claim. While some of these indemnifications are limited in nature, many of them do not limit potential payment. Therefore, we are unable to estimate a maximum amount of future payments that could result from claims made under these unlimited indemnities.
The maximum potential payments under these guarantees and limited indemnities totaled $35 million and $36 million at December 31, 2016 and September 30, 2017, respectively. Of these values, $31 million and $33 million
at December 31, 2016 and September 30, 2017, respectively, were counter-guaranteed by Ford to us. There were no recorded liabilities related to guarantees and limited indemnities at December 31, 2016 and September 30, 2017.
Litigation and Claims
Various legal actions, proceedings, and claims (generally, “matters”) are pending or may be instituted or asserted against us. These include but are not limited
to matters arising out of governmental regulations; tax matters; alleged illegal acts resulting in fines or penalties; financial services; employment-related matters; dealer and other contractual relationships; personal injury matters; investor matters; and financial reporting matters. Certain of the pending legal actions are, or purport to be, class actions. Some of the matters involve or may involve claims for compensatory, punitive, or antitrust or other treble damages in very large amounts, sanctions, assessments, or other relief, which, if granted, would require very large expenditures.
The extent of our financial exposure to these matters is difficult to estimate. Many matters do not specify a dollar amount for damages, and many others specify only a jurisdictional minimum. To the extent an amount is asserted, our historical experience suggests that in most instances
the amount asserted is not a reliable indicator of the ultimate outcome.
We accrue for matters when losses are deemed probable and reasonably estimable. In evaluating matters for accrual and disclosure purposes, we take into consideration factors such as our historical experience with matters of a similar nature, the specific facts and circumstances asserted, the likelihood that we will prevail, and the severity of any potential loss. We reevaluate and update our accruals as matters progress over time.
NOTE 15. COMMITMENTS AND CONTINGENCIES (Continued)
For nearly all of our matters, where our historical experience with similar matters is of limited value (i.e., “non-pattern matters”), we evaluate the matters primarily based on the individual facts and circumstances. For non-pattern matters, we evaluate whether there is a reasonable possibility of a material loss in excess of any accrual that can be estimated. It is reasonably possible that some of the matters for which accruals have not been established could be decided unfavorably and could require us to pay damages or make other expenditures. We do not reasonably expect, based on our analysis, that such matters would have a material effect on future
financial statements for a particular year, although such an outcome is possible.
As noted, the litigation process is subject to many uncertainties, and the outcome of individual matters is not predictable with assurance. Our assessments are based on our knowledge and experience, but the ultimate outcome of any matter could require payment substantially in excess of the amount that we have accrued and/or disclosed.
24
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Shareholder of
Ford Motor Credit Company LLC:
We have reviewed the accompanying consolidated balance sheet of Ford Motor Credit Company LLC and its subsidiaries as of September 30, 2017 and the related consolidated statements of income and comprehensive income for the three-month and nine-month periods ended September 30, 2017 and 2016 and the consolidated statement of shareholder’s interest and condensed consolidated statement of cash flows for the nine-month periods ended September 30, 2017 and 2016. These
interim financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review,
we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2016, and the related consolidated statements of income, comprehensive income, shareholder’s interest, and of cash flows for the year then ended (not presented herein), and in our report dated February 9, 2017, except with respect to our opinion on the consolidated financial statements insofar as it relates to the change in composition of reportable segments discussed in Note 17,
as to which the date is April 27, 2017, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 2016, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Results of Operations
Overview
In general, we measure period-to-period changes in pre-tax results using the causal factors listed below:
•
Volume and Mix – Volume and Mix are primarily reflected within Net financing margin on the income statement.
◦
Volume primarily measures changes in net financing margin driven by changes in average managed receivables
at prior period financing margin yield (defined below in financing margin) at prior period exchange rates. Volume changes are primarily driven by the volume of new and used vehicle sales and leases, the extent to which we purchase retail installment sale and lease contracts, the extent to which we provide wholesale financing, the sales price of the vehicles financed, the level of dealer inventories, Ford-sponsored special financing programs available exclusively through us, and the availability of cost-effective funding for the purchase of retail installment sale and lease contracts and to provide wholesale financing.
◦
Mix
primarily measures changes in net financing margin driven by period over period changes in the composition of our average managed receivables by product and by country or region.
•
Financing Margin – Financing Margin is reflected within Net financing margin on the income statement.
◦
Financing margin variance is the period-to-period change in financing margin yield multiplied by the present period
average managed receivables at prior period exchange rates. This calculation is performed at the product and country level and then aggregated. Financing margin yield equals revenue, less interest expense and scheduled depreciation for the period, divided by average managed receivables for the same period.
◦
Financing margin changes are driven by changes in revenue and interest expense. Changes in revenue are primarily driven by the level of market interest rates, cost assumptions in pricing, mix of business, and competitive environment. Changes in interest expense are primarily driven by the level of market interest rates, borrowing spreads, and asset-liability management.
•
Credit
Loss – Credit Loss is reflected within the Provision for credit losses on the income statement.
◦
Credit loss is the change in the provision for credit losses at prior period exchange rates. For analysis purposes, management splits the provision for credit losses into net charge-offs and the change in the allowance for credit losses.
◦
Net charge-off changes are primarily driven by the number of repossessions, severity per repossession, and
recoveries. Changes in the allowance for credit losses are primarily driven by changes in historical trends in credit losses and recoveries, changes in the composition and size of our present portfolio, changes in trends in historical used vehicle values, and changes in economic conditions. For additional information, refer to the “Critical Accounting Estimates – Allowance for Credit Losses” section of Item 7 of Exhibit 99 to our Current Report on Form 8-K dated April 27, 2017 (“April 27, 2017 Form 8-K Report”).
•
Lease Residual – Lease Residual is reflected
within Depreciation on vehicles subject to operating leases on the income statement.
◦
Lease residual measures changes to residual performance at prior period exchange rates. For analysis purposes, management splits residual performance primarily into residual gains and losses, and the change in accumulated supplemental depreciation.
◦
Residual gain and loss changes are primarily driven by the number of vehicles returned to us and sold, and the difference between
the auction value and the depreciated value (which includes both base and accumulated supplemental depreciation) of the vehicles sold. Changes in accumulated supplemental depreciation are primarily driven by changes in our estimate of the expected auction value at the end of the lease term, and changes in our estimate of the number of vehicles that will be returned to us and sold. For additional information, refer to the “Critical Accounting Estimates” section of Item 7 of Exhibit 99 to our April 27, 2017 Form 8-K Report.
•
Exchange – Reflects changes in pre-tax results driven by the effects of converting functional
currency income to U.S. dollars and is reflected in all lines on the income statement.
26
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
•
Other – Primarily includes Operating expenses, Other revenue, Insurance expenses, and Other income, net on
the income statement at prior period exchange rates.
◦
Changes in operating expenses are primarily driven by salaried personnel costs, facilities costs, and costs associated with the origination and servicing of customer contracts.
◦
In general, Other income, net changes are primarily driven by changes in earnings related to market valuation adjustments to derivatives (primarily
related to movements in interest rates), which are included in Unallocated Other, and other miscellaneous items.
In addition, the following definitions and calculations apply to the charts contained in Item 2 of this report:
•
Cash (as shown on the Funding Structure, Liquidity Sources, and Leverage charts) – Cash and cash equivalents and Marketable securities reported on Ford Credit’s balance sheet, excluding amounts related to insurance activities
•
Securitizations
(as shown on the Public Term Funding Plan chart) – Public securitization transactions, Rule 144A offerings sponsored by Ford Motor Credit, and widely distributed offerings by Ford Credit Canada
•
Term Asset-Backed Securities (as shown on the Funding Structure chart) – Obligations issued in securitization transactions that are payable only out of collections on the underlying securitized assets and related enhancements
•
Total
Debt (as shown on the Leverage chart) – Debt on Ford Credit’s balance sheet. Includes debt issued in securitizations and payable only out of collections on the underlying securitized assets and related enhancements. Ford Credit holds the right to receive the excess cash flows not needed to pay the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions
•
Unallocated Other (as shown on the Pre-Tax Results by Segment chart) – Items excluded in assessing segment performance because they are managed at the corporate level, including market
valuation adjustments to derivatives and exchange-rate fluctuations on foreign currency-denominated transactions
27
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Third Quarter 2017 Compared with Third Quarter 2016
The following chart shows our key metrics:
In
the third quarter of 2017, pre-tax profit of $600 million improved from last year. Receivables were higher with growth globally led by retail receivables and the consolidation of $1.3 billion in receivables for the Forso joint venture in the Nordic region (“Forso”). For additional information, see Note 1 of our Notes to the Financial Statements.
FICO scores remain strong, and our origination, servicing and collection practices continue to be disciplined and consistent. Portfolio performance was robust. The loss-to-receivables ratio of 53 basis points was up 8 basis points and within expectations.
In the third quarter, we distributed $378 million to our parent.
28
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
On a pre-tax basis, we earned $600 million in the third quarter of 2017, compared with $567 million a year ago. The following chart shows the factors that contributed to the strong third quarter pre-tax profit:
Ford Credit’s third
quarter pre-tax profit was $33 million higher compared to the prior year, led primarily by strong receivables growth and lease residual performance.
Unfavorable credit loss performance reflects an increase in reserves and higher actual losses driven primarily by higher defaults.
Other includes unfavorable derivatives market valuation, higher operating costs and a pre-tax loss of $17 million related to the consolidation of the Forso joint venture.
29
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
We
have three reportable segments in our consolidated financial statements that align with our management reporting structure and reflect the manner in which our Chief Operating Decision Maker manages our business, including resource allocation and performance assessment. These segments are: Americas, Europe, and Asia Pacific. Items excluded in assessing segment performance because they are managed at the corporate level are reflected in Unallocated Other. Results of operations by segment and Unallocated Other for the period ended September 30 are shown below (in millions). For additional information, see Note 14 of our Notes to the Financial Statements.
Americas
Segment
The Americas Segment third quarter pre-tax profit is higher compared with 2016, explained primarily by favorable lease residual performance driven by lower supplemental depreciation on the lease portfolio.
The Americas Segment pre-tax profit of $1.3 billion for the first nine months of 2017 is $140 million higher compared with 2016, more than explained by favorable volume and mix.
Europe Segment
The Europe Segment
third quarter pre-tax profit is lower compared with 2016, explained by a pre-tax loss of $17 million upon consolidation of our Forso joint venture in the Nordic region, partially offset by favorable volume and mix.
The Europe Segment pre-tax profit of $223 million for the first nine months of 2017 is $34 million lower compared with 2016, explained primarily by lower financing margin driven by lower yields and a pre-tax loss of $17 million upon consolidation of our Forso joint venture, partially offset by favorable volume and mix.
Asia Pacific Segment
The
Asia Pacific Segment third quarter pre-tax profit is higher compared with 2016, explained primarily by favorable volume and mix, partially offset by lower financing margin driven by higher borrowing costs.
The Asia Pacific Segment pre-tax profit of $69 million for the first nine months of 2017 is $23 million higher compared with 2016, explained primarily by favorable volume and mix, partially offset by lower financing margin driven by higher borrowing cost.
30
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Unallocated
Other
Unallocated Other in the third quarter is lower compared with 2016, reflecting primarily less favorable performance in market valuation adjustments to derivatives. For additional information, see Notes 9 and 14 of our Notes to the Financial Statements.
Unallocated Other pre-tax profit of $100 million for the first nine months of 2017 is $90 million higher compared with 2016, reflecting primarily favorable performance in market valuation adjustments to derivatives.
Our focus is on supporting Ford and Lincoln dealers and customers. This includes going to market with Ford and our dealers to support vehicle sales with financing products and marketing programs. Ford’s marketing programs may encourage or require Ford Credit financing and influence the financing choices customers make. As a result, our financing share, volume, and contract characteristics vary from quarter to quarter as Ford’s marketing programs change.
The following chart shows our United States and Canada retail installment
and lease share of new Ford- and Lincoln-brand vehicle retail sales and wholesale financing share of new Ford- and Lincoln-brand vehicles acquired by dealers. Also shown is Americas’ consumer financing contract placement volume for new and used vehicles. All data is for the periods ended September 30:
In the third quarter of 2017, U.S. retail and lease share and total contract volume were down compared to the prior year, reflecting
changes in Ford’s marketing programs.
31
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
The following chart shows Europe’s retail installment and lease share of new Ford-brand vehicles sold and wholesale financing share of new Ford-brand vehicles acquired by dealers. Also shown is Europe’s consumer financing contract placement volume for new and used vehicles. All data is for the periods ended September 30:
In
the third quarter of 2017, Europe Segment financing share and contract volume were similar to the prior year.
32
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
The following chart shows Asia Pacific’s retail installment share of new Ford-brand vehicles sold by dealers and wholesale financing share of new Ford-brand vehicles acquired by dealers. Also shown is Asia Pacific’s consumer financing contract
placement volume for new and used vehicles. All data is for the periods ended September 30:
In the third quarter of 2017, Asia Pacific Segment total contract volume was up 55% compared with the prior year, reflecting changes in Ford’s marketing programs.
33
Item 2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
Financial Condition
Finance Receivables and Operating Leases
Our receivables, including finance receivables and operating leases, were as follows:
Our operating lease portfolio is prudently managed and is about 20% of total net receivables. Leasing is an important product and our leasing strategy balances sales, share, residuals, and long-term profitability. Our
operating leases in the U.S. and Canada represent 99% of our total operating lease portfolio.
34
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
The following chart shows our reconciliation for our Non-GAAP financial measure, managed receivables:
__________
*
At
December 31, 2015, September 30, 2016, December 31, 2016, and September 30, 2017, includes consumer receivables before allowance for credit losses of $27.6 billion, $29.9 billion, $32.5 billion, and $35.2 billion, respectively, and non-consumer receivables before allowance for credit losses of $26.1 billion, $23.3 billion, $26.0
billion, and $23.6 billion, respectively, that have been sold for legal purposes in securitization transactions but continue to be reported in our consolidated financial statements. In addition, at December 31, 2015, September 30, 2016, December 31, 2016, and September 30, 2017, includes net investment in operating leases before allowance for credit losses of $13.3 billion, $10.0 billion, $11.8 billion, and $9.9
billion, respectively, that have been included in securitization transactions but continue to be reported in our consolidated financial statements. The receivables and net investment in operating leases are available only for payment of the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions; they are not available to pay the other obligations or the claims of Ford Credit’s other creditors. Ford Credit holds the right to receive the excess cash flows not needed to pay the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions. For additional information on our securitization transactions, refer to the “Securitization Transactions” and “On-Balance Sheet Arrangements” sections of Item 7 of Exhibit 99 to our April 27, 2017 Form 8-K Report and
Note 7 of our Notes to the Financial Statements for the period ended September 30, 2017.
35
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Credit Risk
Credit risk is the possibility of loss from a customer’s or dealer’s failure to make payments according to contract terms. Credit losses are a normal part
of a financing business, and credit risk has a significant impact on our business. We actively manage the credit risk of our consumer (retail financing and operating lease) and non-consumer (dealer financing) receivables to balance our level of risk and return using our consistent underwriting standards, effective proprietary scoring system (discussed below), and world-class servicing. The allowance for credit losses (also referred to as the credit loss reserve) represents our estimate of the probable credit losses inherent in our finance receivables and operating leases as of the balance sheet date. The allowance for credit losses is estimated using a combination of models and management judgment, and is based on such factors as historical loss performance, portfolio quality, and receivable levels. The adequacy of our allowance for credit losses is assessed quarterly and the assumptions and models used in establishing the allowance are evaluated regularly. A description
of our allowance setting process is provided in the “Critical Accounting Estimates - Allowance for Credit Losses” section of Item 7 of Exhibit 99 to our April 27, 2017 Form 8-K Report.
Most of our charge-offs are related to retail finance and operating lease contracts. Charge-offs are affected by the number of vehicle repossessions, the unpaid balance outstanding at the time of repossession, the auction price of repossessed vehicles, and other charge-offs. We also incur credit losses on our dealer financing, but default rates for these receivables historically have been substantially lower than those for retail finance and operating lease contracts. For
additional information on severity, refer to the “Critical Accounting Estimates - Allowance for Credit Losses” section of Item 7 of Exhibit 99 to our April 27, 2017 Form 8-K Report.
In purchasing retail finance and operating lease contracts, we use a proprietary scoring system that measures credit quality using information in the credit application, proposed contract terms, credit bureau data, and other information we obtain. After a proprietary risk score is generated, we decide whether to purchase a contract using a decision process based on a judgmental
evaluation of the applicant, the credit application, the proposed contract terms, credit bureau information (e.g., FICO score), proprietary risk score, and other information. Our evaluation emphasizes the applicant’s ability to pay and creditworthiness focusing on payment, affordability, applicant credit history, and stability as key considerations. While FICO is a part of our scoring system, our models enable us to more effectively determine the probability that a customer will pay than using credit scores alone. When we originate business, our models project expected losses and we price accordingly. We ensure the business fits our risk appetite. For additional information on the quality of our receivables, see Note 4 of our Notes to the Financial Statements.
36
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
U.S. Origination Metrics
We support customers across the credit spectrum. Our higher risk business, as classified at contract inception, consistently represents 5%-6% of our portfolio and has been stable for over 10 years.
The following charts show quarterly trends for FICO and higher risk mix and retail contract terms:
The
third quarter average placement FICO score remained consistent.
Our average retail term is unchanged from the prior year, and retail contracts of 73 months and longer continued to be a relatively small part of our business. Ford Credit remains focused on managing the trade cycle – building customer relationships and loyalty while offering financing products and terms customers want.
Ford Credit’s origination and risk management processes deliver robust portfolio performance.
37
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
U.S. Credit Losses
The following charts show the primary drivers of credit losses in the U.S. retail and lease business, which comprised 70% of our worldwide consumer portfolio at September 30, 2017. Loss-to-Receivables (“LTR”) ratios are charge-offs on an annualized basis divided by average managed receivables.
Credit
losses have been at historically low levels for quite some time. Third quarter 2017 charge-offs and the LTR ratio were higher than the prior year but within our placement expectations.
Compared to the prior year, delinquencies have shown a slight improvement while the repossession rate is higher. Both are within our expectations.
Severity has trended favorably during 2017, primarily reflecting an improved auction market.
Credit quality remains strong, reflecting a strong business environment and healthy consumer credit conditions.
38
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Worldwide Credit Losses
The following charts show quarterly trends of charge-offs (credit losses, net of recoveries), LTR ratios, credit loss reserve, and our credit loss reserve as a percentage of end-of-period (“EOP”) managed receivables:
Our worldwide credit loss metrics remain strong. The worldwide LTR ratio in the third quarter of 2017 is higher than the same period in the
prior year, reflecting primarily the U.S. retail and lease business as covered above.
Our credit loss reserve is based on such factors as historical loss performance, portfolio quality, and receivable levels. The credit loss reserve was higher at September 30, 2017, compared to September 30, 2016, reflecting credit loss performance trends and growth in receivables.
The reserve as a percent of managed receivables was up 4 basis points from the prior year.
39
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Residual Risk
Leasing is an important product that many customers want and value. Lease customers also are more likely to buy or lease another Ford or Lincoln vehicle. Ford and Ford Credit manage lease share with an enterprise view to support sales, protect residual values, and manage the trade cycle. Our leasing strategy considers share, term, model mix, geography and other factors.
We are exposed to residual risk on operating leases and similar balloon payment products where the customer may return the financed vehicle to us. Residual risk is the possibility that the amount
we obtain from returned vehicles will be less than our estimate of the expected residual value for the vehicle. We estimate the expected residual value by evaluating recent auction values, return volumes for our leased vehicles, industry-wide used vehicle prices, marketing incentive plans, and vehicle quality data. For operating leases, changes in expected residual values impact the depreciation expense, which is recognized on a straight-line basis over the life of the lease.
For additional information on our residual risk on operating leases, refer to the “Critical Accounting Estimates - Accumulated Depreciation on Vehicles Subject to Operating Leases” section of Item 7 of Exhibit 99 to our April 27, 2017 Form 8-K Report.
U.S.
Ford- and Lincoln-Brand Operating Lease Experience
The following charts show lease placement volume and lease share of Ford- and Lincoln-brand retail sales for vehicles in the respective periods. The U.S. operating lease portfolio accounted for 86% of our total net investment in operating leases at September 30, 2017.
Third quarter 2017 lease placement volume was up compared to the prior year, reflecting Ford’s higher lease mix.
Industry
lease share in the third quarter of 2017 was down compared to the same period last year. Ford Credit’s lease share was up compared to the prior year and remains below the industry, reflecting the Ford sales mix.
40
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
The following charts show lease return volumes, return rates, and off-lease auction values at constant third quarter 2017 vehicle mix in the respective periods:
Lease
return volume in the third quarter of 2017 was up from the prior year, reflecting higher lease placements in recent years and an increased return rate. Our third quarter off-lease auction values were mixed compared to the same period a year ago, but have continued to improve each quarter since the fourth quarter of 2016.
We continue to plan for lower auction values but our outlook has improved. We now expect three-year full year 2017 auction values to be down about 3% compared with 2016 at constant mix.
41
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Credit Ratings
Our short-term and long-term debt is rated by four credit rating agencies designated as nationally recognized statistical rating organizations (“NRSROs”) by the U.S. Securities and Exchange Commission:
•
DBRS Limited (“DBRS”);
•
Fitch,
Inc. (“Fitch”);
•
Moody’s Investors Service, Inc. (“Moody’s”); and
•
Standard & Poor’s Ratings Services, a division of McGraw Hill Financial (“S&P”).
In several markets, locally recognized rating agencies also rate us. A credit rating reflects an assessment by the rating agency of the credit risk associated with a corporate entity or particular securities issued by that entity. Rating
agencies’ ratings of us are based on information provided by us and other sources. Credit ratings assigned to us from all of the NRSROs are closely associated with their opinions on Ford. Credit ratings are not recommendations to buy, sell, or hold securities and are subject to revision or withdrawal at any time by the assigning rating agency. Each rating agency may have different criteria for evaluating company risk and, therefore, ratings should be evaluated independently for each rating agency.
There have been no rating actions taken by these NRSROs since the filing of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2017.
The following chart summarizes certain of the credit ratings and outlook presently assigned
by these four NRSROs:
NRSRO RATINGS
Ford
Credit
NRSROs
Long-Term Senior Unsecured
Short -Term Unsecured
Outlook / Trend
Minimum Long-Term Investment Grade Rating
DBRS
BBB
R-2M
Stable
BBB
(low)
Fitch
BBB
F2
Stable
BBB-
Moody’s
Baa2
P-2
Stable
Baa3
S&P
BBB
A-2
Stable
BBB-
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Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Funding and Liquidity
Our primary funding and liquidity objective is to be well capitalized with a strong investment grade balance sheet and ample liquidity to support our financing activities and growth under a variety of market conditions, including short-term and long-term market disruptions.
Our funding strategy remains focused on diversification, and we plan to continue accessing a variety of markets, channels, and investors.
Our liquidity profile continues to be diverse, robust,
and focused on maintaining liquidity levels that meet our business and funding requirements. We annually stress test our balance sheet and liquidity to ensure that we continue to meet our financial obligations through economic cycles.
Funding Portfolio
The following chart shows the trends in funding for our managed receivables:
Managed receivables of $145 billion as of September 30, 2017,
were funded primarily with term debt and term asset-backed securities. Securitized funding as a percent of managed receivables was 33%.
We expect the mix of securitized funding to remain around 35%. The calendarization of the funding plan will result in quarterly fluctuations of the securitized funding percentage.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Public Term Funding Plan
The
following chart shows our issuances for full year 2015 and 2016, planned issuances for full year 2017, and our global public term funding issuances through October 25, 2017, excluding short-term funding programs:
For 2017, our full year forecast for public term funding is in the range of $28 billion to $32 billion. Through October 25, 2017, we have completed about $25
billion of public term issuance.
The forecast reflects the potential for Ford Credit U.S. to issue euro-denominated debt and on-lend to FCE to provide funding flexibility given the uncertainty around Brexit.
44
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Liquidity Sources
We define gross liquidity as cash, cash equivalents, and marketable securities
(excluding amounts related to insurance activities) and committed capacity (which includes our credit and asset-backed facilities and bank lines), less utilization of liquidity. Utilization of liquidity is the amount funded under our liquidity sources and also includes the cash and cash equivalents required to support securitization transactions. Securitization cash is cash held for the benefit of the securitization investors (for example, a reserve fund). Net liquidity available for use is defined as gross liquidity less certain adjustments for asset-backed capacity in excess of eligible receivables and cash related to the Ford Credit Revolving Extended Variable-utilization program (“FordREV”), which can be accessed through future sales of receivables. While not included in available liquidity, these adjustments represent additional funding sources for future originations.
The
following chart shows our liquidity sources and utilization:
Our liquidity available for use will fluctuate quarterly based on factors including near-term debt maturities, receivable growth, and timing of funding transactions. We target liquidity of at least $25 billion. At September 30, 2017, Ford Credit’s liquidity available for use was $2.9 billion higher than at year-end 2016 and $1.4 billion higher than at June 30,
2017.
As of September 30, 2017, our liquidity remained strong at $29.9 billion. Our sources of liquidity include cash, committed asset-backed facilities, unsecured credit facilities, and the Ford corporate credit facility allocation. As of September 30, 2017, our liquidity sources including cash totaled $50.5 billion, down $0.4 billion from year-end 2016.
Cash, Cash Equivalents, and Marketable
Securities. At September 30, 2017, our cash, cash equivalents, and marketable securities (excluding amounts related to insurance activities) totaled $11.3 billion, compared with $10.8 billion at year-end 2016. In the normal course of our funding activities, we may generate more proceeds than are required for our immediate funding needs. These excess amounts are held primarily in highly liquid investments, which provide liquidity for our anticipated and unanticipated cash needs and give us flexibility in the use of our other funding programs. Our cash, cash equivalents, and marketable securities (excluding amounts related to insurance activities) primarily include U.S. Department of Treasury obligations, federal agency securities, bank time deposits with investment-grade
institutions, commercial paper rated A-1/P-1 or higher, debt obligations of a select group of non-U.S. governments, non-U.S. governmental agencies, supranational institutions, non-U.S. central banks, and money market funds that carry the highest possible ratings.
45
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
The average maturity of these investments ranges from approximately three to six months and is adjusted based on market conditions and liquidity needs. We monitor our cash levels and average maturity on a daily basis. Cash, cash equivalents, and marketable securities included amounts to be used only to support our securitization transactions
of $2.8 billion and $3.4 billion at September 30, 2017 and December 31, 2016, respectively.
Committed Capacity. At September 30, 2017, our committed capacity totaled $39.2 billion, down $0.9 billion from December 31, 2016. Our committed capacity is primarily comprised of committed asset-backed
security (“ABS”) facilities from bank-sponsored commercial paper conduits and other financial institutions, unsecured credit facilities with financial institutions, and allocated commitments under the Ford corporate credit facility.
Committed Asset-Backed Facilities. We and our subsidiaries have entered into agreements with a number of bank-sponsored asset-backed commercial paper conduits and other financial institutions. Such counterparties are contractually committed, at our option, to purchase from us eligible retail receivables or to purchase or make advances under asset-backed securities backed by retail or wholesale finance receivables or operating leases for proceeds of up to $33.4 billion ($16.2
billion of retail financing, $6.3 billion of wholesale financing, and $10.9 billion of operating leases) at September 30, 2017. These committed facilities have varying maturity dates, with $14.1 billion having maturities within the next twelve months and the remaining balance having maturities through 2019. We plan capacity renewals to protect our global funding needs, optimize capacity utilization, and maintain sufficient liquidity.
Our ability to obtain funding under these facilities is subject to having a sufficient amount of eligible assets as well as our ability to obtain interest rate hedging arrangements for certain facilities. At September 30,
2017, $17.0 billion of these commitments were in use. These programs are free of material adverse change clauses, restrictive financial covenants (for example, debt-to-equity limitations and minimum net worth requirements), and generally, credit rating triggers that could limit our ability to obtain funding. However, the unused portion of these commitments may be terminated if the performance of the underlying assets deteriorates beyond specified levels. Based on our experience and knowledge as servicer of the related assets, we do not expect any of these programs to be terminated due to such events.
FCE has pre-positioned retail receivables with the Bank of England which supports access to the Discount Window Facility. Pre-positioned assets are neither pledged to nor held as collateral by the Bank of
England unless the Discount Window Facility is accessed. FCE’s eligibility to access the Discount Window Facility is not reflected in the Liquidity Sources table above.
Unsecured Credit Facilities. At September 30, 2017, we and our majority-owned subsidiaries had $5.8 billion of contractually committed unsecured credit facilities with financial institutions, including the FCE Credit Agreement (as defined below) and the allocation under Ford’s corporate credit facility. At September 30, 2017, $4.8 billion
was available for use.
FCE’s £945 million (equivalent to $1.3 billion at September 30, 2017) syndicated credit facility (the “FCE Credit Agreement”) matures in 2020. At September 30, 2017, £545 million (equivalent to $730 million) was available for use. The FCE Credit Agreement contains certain covenants, including an obligation for FCE to maintain its ratio of regulatory capital to risk-weighted assets at no less than the applicable regulatory minimum, and for the support agreement between FCE and Ford Credit to remain in full force and effect (and enforced by FCE to ensure that its net worth is maintained at no less than $500 million).
Lenders under the Ford corporate credit
facility have commitments totaling $13.4 billion, with 75% of the commitments maturing on April 30, 2022 and 25% of the commitments maturing on April 30, 2020. Ford has allocated $3.0 billion of commitments, including commitments under a Chinese renminbi sub-facility, to us on an irrevocable and exclusive basis to support our growth and liquidity. At September 30, 2017, all $3.0 billion was available for use.
Funding and Liquidity Risks
Refer to the “Funding
and Liquidity” section of Item 7 of Exhibit 99 to our April 27, 2017 Form 8-K Report for a list of factors that could affect our liquidity and information on our stress testing.
46
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Leverage
We use leverage, or the debt-to-equity ratio, to make various business decisions, including evaluating and establishing pricing for finance receivable and operating lease
financing, and assessing our capital structure. We refer to our shareholder’s interest as equity.
The following chart shows the calculation of our financial statement leverage and managed leverage (in billions, except for ratios):
We plan our managed leverage by considering prevailing market conditions and the risk characteristics of our business. At September 30, 2017, financial statement leverage was 9.4:1, and managed leverage was 8.7:1. We target managed leverage in the range of 8:1 to 9:1. For information
on our planned distributions, refer to the “Outlook” section.
47
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Outlook
We now expect full year 2017 pre-tax profit to exceed $2.0 billion driven by strong volume and mix and better-than-expected residual values.
In
the third quarter, we distributed $378 million to our parent.
48
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Risk Factors
Statements included or incorporated by reference herein may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on expectations, forecasts, and assumptions by our management and
involve a number of risks, uncertainties, and other factors that could cause actual results to differ materially from those stated, including, without limitation:
•
Decline in industry sales volume, particularly in the United States, Europe, or China, due to financial crisis, recession, geopolitical events, or other factors;
•
Lower-than-anticipated market acceptance of Ford’s new or existing products or services, or failure to achieve expected growth;
•
Market
shift away from sales of larger, more profitable vehicles beyond Ford’s current planning assumption, particularly in the United States;
•
Continued or increased price competition resulting from industry excess capacity, currency fluctuations, or other factors;
•
Fluctuations in foreign currency exchange rates, commodity prices, and interest rates;
•
Adverse
effects resulting from economic, geopolitical, protectionist trade policies, or other events;
•
Work stoppages at Ford or supplier facilities or other limitations on production (whether as a result of labor disputes, natural or man-made disasters, tight credit markets or other financial distress, production constraints or difficulties, or other factors);
•
Single-source supply of components or materials;
•
Labor
or other constraints on Ford’s ability to maintain competitive cost structure;
•
Substantial pension and other postretirement liabilities impairing liquidity or financial condition;
•
Worse-than-assumed economic and demographic experience for pension and other postretirement benefit plans (e.g., discount rates or investment returns);
•
Restriction
on use of tax attributes from tax law “ownership change;”
•
The discovery of defects in vehicles resulting in delays in new model launches, recall campaigns, or increased warranty costs;
•
Increased safety, emissions, fuel economy, or other regulations resulting in higher costs, cash expenditures, and/or sales restrictions;
•
Unusual
or significant litigation, governmental investigations, or adverse publicity arising out of alleged defects in products, perceived environmental impacts, or otherwise;
•
Adverse effects on results from a decrease in or cessation or clawback of government incentives related to investments;
•
Cybersecurity risks to operational systems, security systems, or infrastructure owned by Ford, Ford Credit, or a third-party vendor or supplier;
•
Failure
of financial institutions to fulfill commitments under committed credit and liquidity facilities;
•
Inability of Ford Credit to access debt, securitization, or derivative markets around the world at competitive rates or in sufficient amounts, due to credit rating downgrades, market volatility, market disruption, regulatory requirements, or other factors;
•
Higher-than-expected credit losses, lower-than-anticipated residual values, or higher-than-expected return volumes for leased vehicles;
•
Increased
competition from banks, financial institutions, or other third parties seeking to increase their share of financing Ford vehicles; and
•
New or increased credit regulations, consumer or data protection regulations, or other regulations resulting in higher costs and/or additional financing restrictions.
We cannot be certain that any expectation, forecast, or assumption made in preparing forward-looking statements will prove accurate, or that any projection will be realized. It is to be expected that there may be differences between projected and actual results. Our forward-looking statements speak only as of the date of their initial
issuance, and we do not undertake any obligation to update or revise publicly any forward-looking statement, whether as a result of new information, future events, or otherwise. For additional discussion, see “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016 (“2016 Form 10-K Report”), as updated by our subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.
49
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Accounting Standards
Issued But Not Yet Adopted
The Financial Accounting Standards Board (“FASB”) has issued the following standards, which are not expected to have a material impact (with the exception of standards 2016-02 and 2016-13) to our financial statements or financial statement disclosures:
Early adoption for each of the standards, except standard 2016-01, is permitted.
(b)
For additional information, see Note 2 of our Notes to the Financial Statements.
Other Financial Information
The
interim financial information included in this Quarterly Report on Form 10-Q for the periods ended September 30, 2017 and 2016 has not been audited by PricewaterhouseCoopers LLP (“PwC”). In reviewing such information, PwC has applied limited procedures in accordance with professional standards for reviews of interim financial information. Readers should restrict reliance on PwC’s reports on such information accordingly. PwC is not subject to the liability provisions of Section 11 of the Securities Act of 1933 for its reports on interim financial information, because such reports do not constitute “reports” or “parts” of registration statements prepared or certified by PwC within the meaning of Sections 7 and 11
of the Securities Act of 1933.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
In our 2016 Form 10-K Report, we discuss in greater detail our market risk, counterparty risk, credit risk, residual risk, liquidity risk, and operating risk.
To provide a quantitative measure of the sensitivity of our pre-tax cash flow to changes in interest rates, we use interest rate scenarios that assume a hypothetical, instantaneous increase or decrease of one percentage point in all interest rates across all maturities (a “parallel shift”), as
well as a base case that assumes that all interest rates remain constant at existing levels. The differences in pre-tax cash flow between these scenarios and the base case over a twelve-month period represent an estimate of the sensitivity of our pre-tax cash flow. Under this model, we estimate that at September 30, 2017, all else constant, such an increase in interest rates would decrease our pre-tax cash flow by $2 million over the next 12 months, compared with an increase of $21 million at December 31, 2016. In reality, interest rate changes are rarely instantaneous or parallel and rates could move more or less than the one percentage point assumed in our analysis. As a result, the actual impact to pre-tax cash flow could be higher or lower than the results detailed above.
50
ITEM
4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. N. Joy Falotico, our Chairman of the Board and Chief Executive Officer (“CEO”), and Marion B. Harris, our Chief Financial Officer (“CFO”) and Treasurer, have performed an evaluation of the Company’s disclosure controls and procedures, as that term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), as of September 30, 2017, and each has concluded that such disclosure controls and procedures are effective to ensure that information
required to be disclosed in our periodic reports filed under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by SEC rules and forms, and that such information is accumulated and communicated to the CEO and CFO to allow timely decisions regarding required disclosures.
Changes in Internal Control Over Financial Reporting. There were no changes in internal control over financial reporting during the quarter ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Submitted electronically with this Report in accordance with the provisions of Regulation S-T.
Instruments defining the rights of holders of certain issues of long-term debt of Ford Credit have not been filed as exhibits to this Report because the
authorized principal amount of any one of such issues does not exceed 10% of the total assets of Ford Credit. Ford Credit will furnish a copy of each such instrument to the SEC upon request.
52
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, Ford Motor Credit Company LLC has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
