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14: 10-Q Printable PDF of Form 10-Q -- fmcc630201510q PDF 2.49M
2: EX-12 Statement re: Computation of Ratios HTML 24K
3: EX-15 Letter re: Unaudited Interim Financial Info HTML 20K
4: EX-31.1 Certification -- §302 - SOA'02 HTML 27K
5: EX-31.2 Certification -- §302 - SOA'02 HTML 26K
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7: EX-32.2 Certification -- §906 - SOA'02 HTML 22K
44: R1 Document and Entity Information Document HTML 45K
34: R2 Consolidated Income Statement HTML 70K
42: R3 Consolidated Statement of Comprehensive Income HTML 40K
46: R4 Consolidated Balance Sheet HTML 98K
60: R5 Consolidated Statement of Shareholder's Interest HTML 67K
36: R6 Consolidated Statement of Cash Flows HTML 103K
41: R7 Accounting Policies HTML 44K
31: R8 Finance Receivables HTML 105K
24: R9 Net Investment in Operating Leases HTML 38K
61: R10 Allowance for Credit Losses HTML 205K
48: R11 Transfers of Receivables HTML 175K
47: R12 Variable Interest Entities HTML 26K
52: R13 Derivative Financial Instruments and Hedging HTML 103K
Activities
53: R14 Other Assets and Other Liabilities and Deferred HTML 49K
Income
51: R15 Debt HTML 93K
54: R16 Accumulated Other Comprehensive Income HTML 48K
43: R17 Other Income HTML 43K
45: R18 Fair Value Measurements HTML 101K
50: R19 Segment Information HTML 156K
65: R20 Commitments and Contingencies HTML 36K
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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, or a smaller reporting company. See the definitions
of “large accelerated filer,”“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer o
Non-accelerated filer þ
Smaller reporting company 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
711
778
Derivative financial instruments (Note 7)
823
859
Other assets (Note 8)
2,566
2,601
Total
assets
$
127,599
$
122,108
LIABILITIES
Accounts
payable
Customer deposits, dealer reserves, and other
$
1,204
$
1,148
Affiliated companies
608
330
Total
accounts payable
1,812
1,478
Debt (Note 9)
109,521
105,037
Deferred income taxes
2,527
1,849
Derivative
financial instruments (Note 7)
378
167
Other liabilities and deferred income (Note 8)
1,662
2,210
Total liabilities
115,900
110,741
SHAREHOLDER’S
INTEREST
Shareholder’s interest
5,227
5,227
Accumulated other comprehensive income (Note 10)
(127
)
160
Retained
earnings
6,598
5,980
Total shareholder’s interest attributable to Ford Motor Credit Company
11,698
11,367
Shareholder’s interest attributable
to noncontrolling interests
1
—
Total shareholder’s interest
11,699
11,367
Total liabilities and shareholder’s interest
$
127,599
$
122,108
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 5 and 6 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, and 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 Annual Report on Form 10-K for the year ended December 31, 2014 (“2014 Form 10-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.
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 extraordinary 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 Standards Update (“ASU”) 2014-11, Transfers and Servicing - Repurchase-to-Maturity Transactions, Repurchase Financings and Disclosures. On
January 1, 2015, we adopted the new accounting standard that changes the accounting for repurchase-to-maturity transactions and repurchase financing arrangements. The new standard also requires additional disclosures for certain transfers of financial assets with agreements that both entitle and obligate the transferor to repurchase the transferred assets from the transferee. The adoption of this accounting standard did not impact our financial statements or financial statement disclosures.
Accounting Standards Issued But Not Yet Adopted
ASU 2014-09, Revenue - Revenue from Contracts with Customers.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard that requires recognition of revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. The new standard supersedes virtually all present U.S. GAAP guidance on revenue recognition and requires the use of more estimates and judgments than the present standards, as well as additional disclosures. The FASB has voted to approve a one-year deferral of the effective date from January 1, 2017 to January 1, 2018, while allowing for early adoption as of January 1, 2017. The new accounting standard is expected to have an impact to our income statement, balance sheet, and financial statement disclosures
and we are reviewing our arrangements to evaluate the impact and method of adoption.
The FASB also issued the following standards, none of which
are expected to have a material impact to our financial statements or financial statement disclosures.
Standard
Effective
Date
2015-09
Insurance - Disclosures about Short-Duration Contracts
Derivatives and Hedging - Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity
Stock Compensation - Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period
We segment finance receivables into “consumer” and “non-consumer” receivables. The receivables are generally secured by the vehicles, inventory, or other property being financed.
Finance receivables, net were as follows (in millions):
At
June 30, 2015 and December 31, 2014, includes consumer receivables of $26.9 billion and $24.4 billion, respectively, and non-consumer receivables of $23.1 billion and $21.8 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 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 5 for additional information.
(b)
Ford-sponsored special financing programs attributable to retail financing.
(c)
At June 30, 2015 and December 31,
2014, includes $664 million and $535 million, respectively, of dealer financing receivables with entities (primarily dealers) that are reported as consolidated subsidiaries of Ford. The associated vehicles that are being financed by us are reported as inventory on Ford’s balance sheet.
(d)
At June 30, 2015 and December 31, 2014, excludes
$185 million and $192 million, respectively, of accrued uncollected interest, which we report in Other assets on our balance sheet.
(e)
See Note 4 for additional information related to our allowance for credit losses.
(f)
At June 30, 2015 and December 31,
2014, excludes $1.8 billion and $1.7 billion, respectively, of certain receivables (primarily direct financing leases) that are not subject to fair value disclosure requirements.
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 $13 million and $17 million at June 30, 2015 and December 31, 2014, respectively. The recorded investment of non-consumer receivables greater than 90 days past due and still accruing interest was $1 million and $3 million at June 30, 2015 and December 31,
2014, 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
Non-Consumer Segment
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
Other financing receivables are excluded from our credit quality reporting since the performance of this group of receivables is generally guaranteed by Ford.
Impaired Receivables
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 June 30, 2015 and December 31, 2014 was $380 million, or 0.7% of consumer receivables, and $415 million,
or 0.8% of consumer receivables, respectively. The recorded investment of non-consumer receivables that were impaired at June 30, 2015 and December 31, 2014 was $126 million, or 0.4% of non-consumer receivables, and $110 million, or 0.3% 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, government entities, 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 (a)
23,428
21,556
Less: Allowance for credit losses
(45
)
(38
)
Net investment
in operating leases
$
23,383
$
21,518
__________
(a)
At June 30, 2015 and December 31,
2014, includes net investment in operating leases of $11.9 billion and $9.6 billion, respectively, 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 5 for additional information.
An analysis of the allowance for credit losses related to finance receivables and net investment in operating leases for the periods ended June 30 (in millions) was as follows:
Second
Quarter 2015
Finance Receivables
Net Investment in Operating Leases
Total Allowance
Consumer
Non-Consumer
Total
Allowance
for credit losses
Beginning balance
$
301
$
13
$
314
$
41
$
355
Charge-offs
(70
)
(2
)
(72
)
(26
)
(98
)
Recoveries
31
1
32
16
48
Provision
for credit losses
57
—
57
15
72
Other
(a)
3
1
4
(1
)
3
Ending
balance
$
322
$
13
$
335
$
45
$
380
First
Half 2015
Finance Receivables
Net Investment in Operating Leases
Total Allowance
Consumer
Non-Consumer
Total
Allowance
for credit losses
Beginning balance
$
305
$
16
$
321
$
38
$
359
Charge-offs
(150
)
(1
)
(151
)
(56
)
(207
)
Recoveries
61
3
64
31
95
Provision
for credit losses
110
(4
)
106
33
139
Other
(a)
(4
)
(1
)
(5
)
(1
)
(6
)
Ending
balance
$
322
$
13
$
335
$
45
$
380
Analysis
of ending balance of allowance for credit losses
Collective impairment allowance
$
303
$
13
$
316
$
45
$
361
Specific
impairment allowance
19
—
19
—
19
Ending
balance
322
13
335
45
$
380
Analysis
of ending balance of finance receivables and net investment in operating leases
Collectively evaluated for impairment
55,527
33,845
89,372
23,428
Specifically
evaluated for impairment
380
126
506
—
Recorded
investment
55,907
33,971
89,878
23,428
Ending
balance, net of allowance for credit losses
$
55,585
$
33,958
$
89,543
$
23,383
__________
(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 6 for more 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
Before Allowance
for Credit Losses
Allowance for
Credit Losses
After Allowance
for
Credit Losses
VIE (b)
Retail financing
$
1.4
$
18.8
$
0.1
$
18.7
$
17.3
Wholesale
financing
0.3
20.8
—
20.8
13.3
Finance
receivables
1.7
39.6
0.1
39.5
30.6
Net
investment in operating leases
0.4
9.6
—
9.6
6.6
Total
VIE
$
2.1
$
49.2
$
0.1
$
49.1
$
37.2
Non-VIE
Retail
financing
$
0.3
$
5.6
$
—
$
5.6
$
5.2
Wholesale
financing
—
1.0
—
1.0
0.9
Finance
receivables
0.3
6.6
—
6.6
6.1
Net
investment in operating leases
—
—
—
—
—
Total
Non-VIE
$
0.3
$
6.6
$
—
$
6.6
$
6.1
Total
securitization transactions
Retail financing
$
1.7
$
24.4
$
0.1
$
24.3
$
22.5
Wholesale
financing
0.3
21.8
—
21.8
14.2
Finance
receivables
2.0
46.2
0.1
46.1
36.7
Net
investment in operating leases
0.4
9.6
—
9.6
6.6
Total
securitization transactions
$
2.4
$
55.8
$
0.1
$
55.7
$
43.3
__________
(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.
NOTE 6. VARIABLE INTEREST ENTITIES
VIEs of Which We Are the Primary Beneficiary
We use special purpose entities to issue asset-backed securities in transactions to public and private investors, bank conduits, and government-sponsored
entities or others who obtain funding from government programs. We have deemed most of these special purpose entities to be VIEs as we have determined we have both the power to direct the activities of the entity that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits of the entity that could be significant. 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 5 for information on the financial position and financial performance of our VIEs.
VIEs of Which We Are Not the Primary Beneficiary
We have an investment in Forso Nordic AB, a joint venture determined to be a VIE of which we are not the primary beneficiary. The joint venture provides retail and dealer
financing in its local markets and is financed by external debt and additional subordinated debt provided by the joint venture partner. The operating agreement indicates that the power to direct economically significant activities is shared with the joint venture partner, and the obligation to absorb losses or right to receive benefits resides primarily with the joint venture partner. Our investment in the joint venture is accounted for as an equity method investment and is included in Other assets. Our maximum exposure to any potential losses associated with this VIE is limited to our equity investment and amounted to $64 million and $66 million at June 30, 2015 and December 31,
2014, respectively.
NOTE 7. 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 June 30 were as follows (in millions):
For
the second quarter and first half of 2015, hedge ineffectiveness reflects the net change in fair value on derivatives of $249 million loss and $28 million loss, respectively, and change in value on hedged debt attributable to the change in benchmark interest rates of $239 million gain and $24 million gain, respectively. For the second quarter and first half of 2014, hedge ineffectiveness reflects the net change in fair value on derivatives of $162 million gain and $267 million gain, respectively, and change in value on hedged debt attributable to the change in benchmark interest rates of $157 million loss and $257
million loss, respectively.
NOTE 7. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (Continued)
Balance Sheet Effect of Derivative Financial Instruments
Derivative
financial instruments are recorded on the balance sheet at fair value, presented on a gross basis, and include an adjustment for non-performance risk. Notional amounts are presented on a gross basis. The notional amounts of the derivative financial instruments do not necessarily represent amounts exchanged by the parties and, therefore, are not a direct measure of our financial risk exposure. We enter into master agreements with counterparties that may allow for netting of exposure in the event of default or termination of the counterparty agreement due to breach of contract.
The notional amount and estimated fair value of our derivative financial instruments were as follows (in millions):
NOTE 8. 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.
Accrued interest and other non-finance receivables
$
924
$
921
Collateral held for resale, at net realizable value
347
382
Restricted
cash (a)
74
130
Deferred charges
280
268
Deferred charges – income taxes
177
185
Prepaid
reinsurance premiums and other reinsurance receivables
435
401
Investment in non-consolidated affiliates
146
141
Property and equipment,
net of accumulated depreciation (b)
127
120
Other
56
53
Total other assets
$
2,566
$
2,601
__________
(a)
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.
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 $9.8
billion and $9.8 billion of short-term debt at June 30, 2015 and December 31, 2014, respectively, carried at cost, which approximates fair value. All debt is categorized within Level 2 of the fair value hierarchy.
NOTE 10. ACCUMULATED OTHER COMPREHENSIVE INCOME
The changes in the balance of Accumulated Other Comprehensive Income (“AOCI”) attributable to Ford Credit for the periods ended June 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 were as follows for the periods ended June 30
(in millions):
Second Quarter
First Half
2015
2014
2015
2014
Gains/(Losses)
on derivatives
$
(170
)
$
(40
)
$
(55
)
$
(63
)
Currency
revaluation gains/(losses)
140
31
(11
)
38
Interest and investment income
20
15
45
29
Insurance
fee income
22
15
38
41
Other
35
45
84
72
Total
other income, net
$
47
$
66
$
101
$
117
NOTE 12. FAIR
VALUE MEASUREMENTS
Cash equivalents, marketable securities, and derivative financial instruments are remeasured and presented on our financial statements on a recurring basis at fair value, while other assets and liabilities are measured at fair value on a nonrecurring basis, such as when we have an asset impairment. We did not have any material nonrecurring fair value items. There have been no changes to the types of inputs used or valuation techniques since year end.
Input Hierarchy of Items Measured at Fair Value on a Recurring Basis
The following table categorizes the fair values of items measured at fair value on a recurring basis on our balance sheet, none of which are Level 3 (in millions):
Excludes
time deposits, certificates of deposit, and money market accounts reported at par value on our balance sheet totaling $3.9 billion and $3.8 billion at June 30, 2015 and December 31, 2014, respectively. In addition to these cash equivalents, we also had cash on hand totaling $2.4 billion and $2.0 billion at June 30, 2015 and December 31, 2014, respectively.
(b)
See
Note 7 for additional information regarding derivatives.
We
divide our business segments based on geographic regions: North America (“North America Segment”) and International (“International Segment”). The North America Segment includes our operations in the United States and Canada. The International Segment includes our operations in all other countries in which we do business directly and indirectly.
Key operating data for our business segments for the periods ended or at June 30 were as follows (in millions):
Unallocated/Eliminations
North America Segment
International Segment
Unallocated Risk
Management
Adjustment to Receivables (a)
Total Unallocated/Eliminations
Total
Second Quarter 2015
Total
revenue (b)
$
1,951
$
400
$
(13
)
$
—
$
(13
)
$
2,338
Income
before income taxes
406
113
(13
)
—
(13
)
506
Other
disclosures
Depreciation on vehicles subject to operating leases
849
9
—
—
—
858
Interest
expense
448
151
—
—
—
599
Provision
for credit losses
60
12
—
—
—
72
Second
Quarter 2014
Total revenue (b)
$
1,818
$
419
$
(3
)
$
—
$
(3
)
$
2,234
Income
before income taxes
317
120
(3
)
—
(3
)
434
Other
disclosures
Depreciation on vehicles subject to operating leases
732
10
—
—
—
742
Interest
expense
511
162
—
—
—
673
Provision
for credit losses
17
10
—
—
—
27
First
Half 2015
Total revenue (b)
$
3,848
$
810
$
(38
)
$
—
$
(38
)
$
4,620
Income
before income taxes
785
242
(38
)
—
(38
)
989
Other
disclosures
Depreciation on vehicles subject to operating leases
1,660
14
—
—
—
1,674
Interest
expense
930
307
—
—
—
1,237
Provision
for credit losses
115
24
—
—
—
139
Net
finance receivables and net investment in operating leases
94,831
22,726
—
(4,631
)
(4,631
)
112,926
Total
assets
100,475
27,124
—
—
—
127,599
First
Half 2014
Total revenue (b)
$
3,587
$
820
$
(14
)
$
—
$
(14
)
$
4,393
Income
before income taxes
695
252
(14
)
—
(14
)
933
Other
disclosures
Depreciation on vehicles subject to operating leases
1,427
20
—
—
—
1,447
Interest
expense
1,023
316
—
—
—
1,339
Provision
for credit losses
46
12
—
—
—
58
Net
finance receivables and net investment in operating leases
87,583
22,992
—
(3,982
)
(3,982
)
106,593
Total
assets
93,367
27,074
—
—
—
120,441
__________
(a)
Includes
unearned interest supplements and residual support, allowances for credit losses, and other (primarily accumulated supplemental depreciation).
(b)
Represents Total financing revenue, Insurance premiums earned, and Other income, net.
Commitments and contingencies consist primarily 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 Ford, an affiliate of Ford, or 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 $83 million and $107 million at June 30, 2015 and December 31, 2014, respectively. Of these values, $77 million
and $101 million at June 30, 2015 and December 31, 2014, respectively, were counter-guaranteed by Ford to us. There were no recorded liabilities related to guarantees and limited indemnities at June 30, 2015 and December 31, 2014, respectively.
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 14. 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 to
us 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.
23
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 (the “Company”) as of June 30, 2015, and the related consolidated statements of income and comprehensive income for the three-month and six-month periods ended June 30, 2015 and 2014
and the consolidated statements of shareholder’s interest and cash flows for the six-month periods ended June 30, 2015 and 2014. 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, 2014, and the related consolidated statements of income, comprehensive
income, shareholder’s interest, and cash flows for the year then ended (not presented herein), and in our report dated February 13, 2015, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2014, 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 finance receivables and net investment in operating leases 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 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 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 as the Provision for credit losses on the income statement.
◦
Credit loss measures changes in the provision for credit losses at prior period exchange rates. For analysis purposes, management splits the provision for credit losses primarily 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 on the allowance for credit losses, refer to the “Critical Accounting Estimates – Allowance for Credit Losses” section of Item 7 of Part II of our 2014 Form 10-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 of the vehicles sold. Changes in accumulated supplemental depreciation are primarily driven by changes in our estimate of the number of vehicles that will be returned to us and sold, and changes in our estimate of the expected auction value at the end of the lease term. For additional information on accumulated supplemental
depreciation, refer to the “Critical Accounting Estimates – Accumulated Depreciation on Vehicles Subject to Operating Leases” section of Item 7 of Part II of our 2014 Form 10-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.
25
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
•
Other
– Primarily includes Operating expenses, Other revenue, and Insurance expenses 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 revenue 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 risk management, and other miscellaneous items.
Second Quarter 2015 Compared with Second Quarter 2014
Our net income was $340 million in the second quarter of 2015, compared with $264 million a year ago. On a pre-tax basis, we earned $506 million in the second
quarter of 2015, compared with $434 million a year ago. The following chart shows the factors that contributed to the higher pre-tax profit:
In the second quarter, Ford Credit continued to demonstrate solid growth supporting Ford. Origination practices continue to be consistent, and costs remain well controlled and in line with expectations.
Pre-tax profit improved compared with a year ago as a result of favorable volume and mix, reflecting primarily higher consumer finance receivables
in all geographic segments and an increase in leasing in North America.
We also benefited from the non-recurrence of unusually high insurance losses from storm damage to dealer inventory last year, which is included in Other.
Higher credit losses were a partial offset, reflecting an increase in the reserve and higher charge-offs in North America.
As shown below the chart, pre-tax profit was largely unchanged compared with the first quarter of 2015.
26
Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations (Continued)
Results of operations by business segment and unallocated risk management for the periods ended June 30 are shown below (in millions). For additional information, see Note 13 of our Notes to the Financial Statements.
Second
Quarter
First Half
2015
2014
2015
Over/(Under)
2014
2015
2014
2015
Over/(Under)
2014
Income
before income taxes
North America Segment
$
406
$
317
$
89
$
785
$
695
$
90
International
Segment
113
120
(7
)
242
252
(10
)
Unallocated
risk management
(13
)
(3
)
(10
)
(38
)
(14
)
(24
)
Income
before income taxes
$
506
$
434
$
72
$
989
$
933
$
56
North
America Segment
The North America Segment’s higher pre-tax profit for the second quarter and first half of 2015 is explained by favorable volume and mix and the non-recurrence of unusually high insurance losses from storm damage to dealer inventory last year. Favorable volume and mix primarily reflect an increase in leasing and higher consumer finance receivables. A partial offset was higher credit losses, reflecting an increase in the reserve and higher charge-offs.
International Segment
The International Segment pre-tax profit is largely unchanged for the second quarter and first half of 2015. Favorable volume and mix, driven by an increase in all products, was offset primarily by the adverse
effects on international operations of the strong U.S. dollar and lower financing margin, driven by lower portfolio pricing.
Unallocated Risk Management
The change in unallocated risk management reflects higher net losses related to market valuation adjustments to derivatives. For additional information, see Notes 7 and 12 of our Notes to the Financial Statements.
27
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Shown
below are our financing shares of new Ford- and Lincoln-brand vehicles sold by dealers in the United States and new Ford-brand vehicles sold by dealers in Europe for the periods ended June 30.
Also shown below are our wholesale financing shares of new Ford- and Lincoln-brand vehicles acquired by dealers in the United States, excluding fleet, and of new Ford-brand vehicles acquired by dealers in Europe for the periods ended June 30:
Second
Quarter
First Half
2015
2014
2015
2014
United States
Financing
share
Retail installment and lease
43
%
40
%
44
%
42
%
Wholesale
76
77
76
77
Europe
Financing
share
Retail installment and lease
38
%
36
%
36
%
35
%
Wholesale
98
98
98
98
North
America Segment
The increases in North America Segment contract placement volume for the second quarter and first half of 2015 primarily reflect higher retail installment and lease financing share. The higher financing share was driven by changes in Ford’s marketing programs.
International Segment
The increases in International Segment contract placement volume for the second quarter and first half of 2015, more than explained by
Europe, primarily reflect increases in industry volume and retail installment and lease financing share. The higher financing share in Europe was driven by changes in Ford’s marketing programs.
28
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 (in billions):
Dealer
financing primarily includes wholesale loans to dealers to finance the purchase of vehicle inventory.
(b)
At June 30, 2015 and December 31, 2014, includes consumer receivables before allowance for credit losses of $26.9 billion and $24.4 billion, respectively, and non-consumer receivables before allowance for credit losses of $23.1 billion and $21.8 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 June 30, 2015 and December 31, 2014, includes net investment in operating leases before allowance for credit losses of $11.9 billion and $9.6 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 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. For additional information on our securitization transactions, refer to the “Securitization Transactions” and “On-Balance Sheet Arrangements” sections of Item 7 of Part II of our 2014 Form 10-K Report and Note 5 of our Notes to the Financial Statements for the period ended June 30, 2015.
Managed receivables at June 30, 2015 increased from year-end 2014. We
had growth in all products in all geographic segments, which was offset partially by the exchange rate impact of a strong U.S. dollar.
29
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 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. 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 Part II of our 2014 Form 10-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 Part II of our 2014 Form 10-K Report.
In purchasing retail finance and operating lease contracts,
we use a proprietary scoring system that measures the credit quality of the receivables using several factors, such as credit bureau information, consumer credit risk scores (e.g., FICO score), and contract characteristics. In addition to our proprietary scoring system, we consider other factors, such as employment history, financial stability, and capacity to pay. At June 30, 2015 and December 31, 2014, we classified between 5% and 6% of the outstanding U.S. retail finance and operating lease contracts in our portfolio as higher risk at contract
inception. For additional information on the quality of our receivables, see Note 2 of our Notes to the Financial Statements.
30
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Worldwide Metrics
The following charts show (i) quarterly trends of charge-offs (credit losses, net of recoveries), (ii) loss-to-receivables (“LTR”) ratios (charge-offs on an annualized basis divided by average end-of-period (“EOP”) managed receivables), (iii) credit loss reserve, and (iv) our credit
loss reserve as a percentage of EOP managed receivables:
We continue to experience historically low levels of credit losses. The second quarter LTR of 17 basis points is well below the 10-year average of 46 basis points.
Year-over-year charge-offs were up $17 million and LTR was up five basis points reflecting primarily higher defaults and higher severity in North America.
Quarter-over-quarter charge-offs were down $12 million and LTR was down five basis points, consistent with normal seasonality.
The
reserve as a percent of managed receivables was about equal and was up $25 million on an absolute basis from the first quarter. Our credit loss reserve is based on such factors as historical loss performance, portfolio quality, and receivable levels.
31
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
U.S. Ford- and Lincoln-Brand Retail Installment and Operating Lease
The following charts show the primary drivers of credit losses in the U.S. retail and lease business, which comprised 73%
of our worldwide consumer portfolio at June 30, 2015.
Over-60-day delinquencies remain consistently low at 0.10%, down two basis points from a year ago and down three basis points from first quarter 2015.
Repossessions continue at historically low levels. They were 6,000 units, or 0.89% of average accounts outstanding, down nine basis points from a year ago and down 11 basis points from first quarter 2015. This
represents our lowest repossession ratio on record.
Severity of $8,600 in the second quarter was $1,300 higher than the same period a year ago. Of this increase, $900 primarily reflects higher amounts financed, higher balances at repossession with our growing number of new contracts, and longer term mix. The remainder reflects the change referenced in the chart above. Quarter-over-quarter severity increased by $300.
32
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Residual
Risk
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, industrywide used vehicle prices, marketing incentive plans, and vehicle quality data. 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 Part II of our 2014 Form 10-K Report.
U.S. Ford- and Lincoln-Brand Operating Lease Experience
The following charts show return volumes and auction values at constant second quarter 2015 vehicle mix for vehicles returned in the respective periods. The U.S. operating lease portfolio accounted for about 87% of our total net investment in operating leases at June 30, 2015.
In
the second quarter, lease return volume was lower and the return rate was down five percentage points compared with the same period a year ago, reflecting fewer 24-month versus 36-month lease placements in 2013 relative to 2012.
Our auction values improved year-over-year and quarter-over-quarter, consistent with the industry.
Our worldwide net investment in operating leases was $23.4 billion at the end of the second quarter, up $1.9 billion from year-end 2014.
33
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.
The following rating actions have been taken by these NRSROs since the filing of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2015:
•
On
July 20, 2015, Fitch affirmed its rating for Ford Credit, and maintained a positive outlook.
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 (low)
R-3
Stable
BBB
(low)
Fitch
BBB-
F3
Positive
BBB-
Moody’s
Baa3
P-3
Stable
Baa3
S&P
(a)
BBB-
A-3
Stable
BBB-
__________
(a)
S&P
assigns FCE Bank plc (“FCE”) a long-term senior unsecured credit rating of BBB, a one-notch higher rating than Ford Credit, with a stable outlook.
34
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 maintain a strong investment grade balance sheet with adequate 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 regularly stress test our balance sheet and liquidity to ensure that we continue to meet our financial obligations through economic cycles.
Public Term Funding Plan
The following table shows our planned issuances for full-year 2015, and our global public term funding
issuances through July 27, 2015, and for full-year 2014 and 2013 (in billions), excluding short-term funding programs:
Public Term Funding Plan
2015
Full-Year
Forecast
Through
July 27
2014
Actual
2013
Actual
Unsecured
$
12
-15
$
8
$
13
$
11
Securitizations
(a)
13
-16
9
15
14
Total
$
25
-31
$
17
$
28
$
25
__________
(a)
Includes
Rule 144A offerings.
Through July 27, 2015, we completed about $17 billion of funding in the public term markets, consisting of about $8 billion of unsecured debt in the United States, Canada, and Europe and about $9 billion of public asset-backed security (“ABS”) debt in the United States, Europe, and China.
For 2015, the forecasted ranges are consistent with prior guidance.
35
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Funding Portfolio
The following chart shows the trends in funding for our managed receivables:
At the end of the second quarter, managed receivables were $118 billion, and we ended the quarter with $10 billion in cash. Securitized funding was 40%
of managed receivables.
We are projecting 2015 year-end managed receivables of $123 billion to $128 billion and securitized funding as a percentage of managed receivables in the range of 37% to 39%. We continue to expect this percentage to decline over time.
36
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 marketable securities related to insurance activities) and committed capacity (which includes our credit facilities and asset-backed 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 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 table shows our liquidity sources and utilization (in billions):
Cash,
cash equivalents, and marketable securities (excludes marketable securities related to insurance activities).
(b)
Committed ABS lines are subject to availability of sufficient assets, ability to obtain derivatives to manage interest rate risk, and exclude FCE access to the Bank of England’s Discount Window Facility.
(c)
Used only to support on-balance sheet securitization transactions.
(d)
Adjustments
include other committed ABS lines in excess of eligible receivables and certain cash within FordREV available through future sales of receivables.
As of June 30, 2015, our liquidity remains strong at $26.6 billion, an increase of $100 million from year-end 2014. Our sources of liquidity include cash, committed asset-backed lines, unsecured credit facilities, and the corporate revolver allocation. As of June 30, our liquidity sources including cash totaled $46.8 billion, up $600 million from year-end. We
are focused on maintaining a strong liquidity position to meet our business and funding requirements through economic cycles.
Cash, Cash Equivalents, and Marketable Securities. At June 30, 2015, our cash, cash equivalents, and marketable securities (excluding marketable securities related to insurance activities) totaled $10.0 billion, compared with $8.9 billion at year-end 2014. In the normal course of our funding activities, we may generate more proceeds than are required for our immediate funding needs. These excess amounts 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 marketable securities related to insurance activities) primarily include U.S. Treasury obligations, federal agency securities, bank time deposits with investment-grade institutions and non-U.S. central banks, corporate investment-grade securities, A-1/P-1 (or higher) rated commercial paper, debt obligations of a select group of non-U.S. governments, non-U.S. government agencies, supranational institutions, and money market funds that carry the highest possible ratings.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
The
maturity of these investments ranges from about 90 days to up to about one year 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 include amounts to be used only to support our securitization transactions of $2.7 billion and $2.4 billion at June 30, 2015 and December 31, 2014, respectively.
Committed Capacity. At June 30, 2015, our committed capacity
totaled $36.8 billion, compared with $37.3 billion at December 31, 2014. Our committed capacity is primarily comprised of committed ABS lines from bank-sponsored commercial paper conduits and other financial institutions, unsecured credit facilities with financial institutions, and allocated commitments under Ford’s revolving credit facility (as defined below).
Committed ABS Lines. We and our subsidiaries, including FCE, 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 or wholesale assets or to purchase or make advances under asset-backed securities backed by retail financing, operating leases, or wholesale financing assets for proceeds of up to $31.8 billion ($17.0 billion of retail financing, $6.7 billion of wholesale financing, and $8.1 billion of operating lease assets) at June 30, 2015, of which $4.2 billion are commitments to FCE. These committed liquidity programs have varying maturity dates, with $13.4 billion (of which $2.4 billion relates to FCE commitments) having maturities within the next twelve months and the remaining balance having maturities through 2017. We plan capacity renewals
to protect our global funding needs, optimize capacity utilization, and maintain sufficient liquidity.
Our ability to obtain funding under these programs is subject to having a sufficient amount of assets eligible for these programs as well as our ability to obtain interest rate hedging arrangements for certain securitization transactions. Our capacity in excess of eligible receivables protects us against the risk of lower than planned renewal rates. At June 30, 2015, $16.5 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.
Effective June 2015, 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. This facility is not included in our liquidity sources.
Unsecured Credit Facilities. At June 30, 2015, we
and our majority-owned subsidiaries had $5.0 billion of contractually committed unsecured credit facilities with financial institutions, including the Amended FCE Credit Agreement (as defined below) and the allocation under Ford’s revolving credit facility (as defined below). At June 30, 2015, $4.5 billion was available for use.
Effective June 26, 2015, FCE and the lenders under its syndicated credit facility amended the facility (the “Amended FCE Credit Agreement”), pursuant to which maturity was extended to October 25, 2018 and total commitments were increased to £830 million (equivalent
to $1.3 billion at June 30, 2015). The Amended 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). In addition to customary payment, representation, bankruptcy, and judgment defaults, the Amended FCE Credit Agreement contains cross-payment and cross-acceleration defaults with respect to other debt.
Lenders under Ford’s Third Amended and Restated Credit Agreement dated as of April 30, 2015 (“Ford’s
revolving credit facility”) have commitments totaling $13.4 billion, with about 75% of the commitments maturing on April 30, 2020 and 25% of the commitments maturing on April 30, 2018. Ford has allocated $3.0 billion of commitments, including under a Chinese renminbi sub-facility, to us on an irrevocable and exclusive basis to support our growth and liquidity. At June 30, 2015, all $3.0 billion was available for use.
Funding and Liquidity Risks
Refer to the “Funding and Liquidity” section of Item 7 of Part II of our 2014 Form 10-K Report for a list of factors that could affect our
liquidity and information on our stress testing.
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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 table shows the calculation of our financial statement leverage
(in billions, except for ratios):
Includes debt issued in securitization transactions and payable only out of collections on the underlying securitized assets and related enhancements. 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 following table shows the calculation of our managed leverage (in billions, except for ratios):
Includes
debt issued in securitization transactions and payable only out of collections on the underlying securitized assets and related enhancements. 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.
(b)
Cash, cash equivalents, and marketable securities (excludes marketable securities related to insurance activities).
(c)
Primarily related to market valuation adjustments to
derivatives due to movements in interest rates. Adjustments to debt are related to designated fair value hedges and adjustments to equity are related to retained earnings.
(d)
Equals total adjusted debt over total adjusted equity.
We plan our managed leverage by considering prevailing market conditions and the risk characteristics of our business. At June 30, 2015, our managed leverage was 8.7:1, unchanged from December 31,
2014. For information on our planned distributions, refer to the “Outlook” section below.
Outlook
For the full year, we continue to expect pre-tax profit to be equal to or higher than 2014, year-end managed receivables of $123 billion to $128 billion, distributions to our parent of about $250 million, and year-end managed leverage at the upper end of our range of 8:1 to 9:1.
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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;
•
Decline in Ford’s market share or failure to achieve growth;
•
Lower-than-anticipated market acceptance of Ford’s new or existing products;
•
Market
shift away from sales of larger, more profitable vehicles beyond Ford’s current planning assumption, particularly in the United States;
•
An increase in or continued volatility of fuel prices, or reduced availability of fuel;
•
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, or other events;
•
Economic distress of suppliers that may require Ford to provide substantial financial support or take other measures to ensure supplies of components or materials and could increase costs, affect liquidity, or cause production constraints or disruptions;
•
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 postretirement health care and life insurance liabilities impairing liquidity or financial condition;
•
Worse-than-assumed economic and demographic experience for 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;
•
A
change in requirements under long-term supply arrangements committing Ford to purchase minimum or fixed quantities of certain parts, or to pay a minimum amount to the seller (“take-or-pay”contracts);
•
Adverse effects on results from a decrease in or cessation or clawback of government incentives related to investments;
•
Inherent limitations of internal controls impacting financial statements and safeguarding of assets;
•
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, consumer, or data protection 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 2014 Form 10-K Report, as updated by our subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.
40
Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations (Continued)
Accounting Standards Issued But Not Yet Adopted
For information on accounting standards issued but not yet adopted, see Note 1 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 June 30, 2015 and 2014
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 2014 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 June 30, 2015,
all else constant, such an increase in interest rates would increase our pre-tax cash flow by $7 million over the next 12 months, compared with a decrease of $46 million at December 31, 2014. 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.
ITEM 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. Bernard B. Silverstone, our Chairman of the
Board and Chief Executive Officer (“CEO”), and Michael L. Seneski, 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 (the “Exchange Act”), as of June 30, 2015, 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 June 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM
1A. Risk Factors.
In Item 1A of our 2014 Form 10-K, we included the risk factor “New or increased credit, consumer, or data protection or other regulations resulting in higher costs and/or additional financing restrictions.” The following is an update to that risk factor:
In June 2015, the Consumer Financial Protection Bureau issued a final rule giving it authority to supervise the largest nonbank automotive finance companies, such as Ford Credit, which may lead to examinations of nonbank automotive finance companies for compliance with consumer finance protection laws as early as 2015.
ITEM
5. Other Information.
None.
ITEM 6. Exhibits.
Exhibits: please refer to the Exhibit Index on page 44.
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.
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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.