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14: 10-Q Printable PDF of Form 10-Q -- fmcc0930201610q PDF 4.84M
2: EX-12 Statement re: Computation of Ratios HTML 24K
3: EX-15 Letter re: Unaudited Interim Financial Info HTML 20K
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16: R2 Consolidated Income Statement HTML 66K
17: R3 Consolidated Statement of Comprehensive Income HTML 39K
18: R4 Consolidated Balance Sheet HTML 90K
19: R5 Consolidated Statement of Shareholder's Interest HTML 68K
20: R6 Consolidated Statement of Cash Flows HTML 96K
21: R7 Accounting Policies HTML 38K
22: R8 Cash, Cash Equivalents, and Marketable Securities HTML 55K
23: R9 Finance Receivables HTML 99K
24: R10 Net Investment in Operating Leases HTML 38K
25: R11 Allowance for Credit Losses HTML 206K
26: R12 Transfers of Receivables HTML 175K
27: R13 Variable Interest Entities HTML 25K
28: R14 Derivative Financial Instruments and Hedging HTML 94K
Activities
29: R15 Other Assets and Other Liabilities and Deferred HTML 50K
Income
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31: R17 Accumulated Other Comprehensive Income/(Loss) HTML 48K
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33: R19 Segment Information HTML 156K
34: 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
913
727
Derivative financial instruments (Note 8)
1,857
924
Other assets (Note 9)
2,515
2,286
Total
assets
$
142,992
$
137,448
LIABILITIES
Accounts
payable
Customer deposits, dealer reserves, and other
$
1,200
$
1,104
Affiliated companies
587
313
Total
accounts payable
1,787
1,417
Debt (Note 10)
123,537
119,601
Deferred income taxes
3,146
2,808
Derivative
financial instruments (Note 8)
123
243
Other liabilities and deferred income (Note 9)
1,687
1,665
Total liabilities
130,280
125,734
SHAREHOLDER’S
INTEREST
Shareholder’s interest
5,227
5,227
Accumulated other comprehensive income/(loss) (Note 11)
(648
)
(607
)
Retained
earnings
8,133
7,093
Total shareholder’s interest attributable to Ford Motor Credit Company
12,712
11,713
Shareholder’s interest attributable
to noncontrolling interests
—
1
Total shareholder’s interest
12,712
11,714
Total liabilities and shareholder’s interest
$
142,992
$
137,448
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 6 and 7 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, 2015 (“2015 Form 10-K Report”). We are an indirect, wholly owned subsidiary of Ford Motor Company (“Ford”).
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
We adopted the following standards during 2016, none of which have a material impact to our financial statements or financial statement disclosures:
Standard
Effective
Date
2015-16
Business Combinations - Simplifying the Accounting for Measurement-Period Adjustments
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
Accounting Standard Update (“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 are assessing the potential impact to our financial statements and disclosures.
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 present U.S. GAAP guidance 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. The new standard is effective as of January 1, 2019, and early adoption is permitted. We are assessing the potential impact to our financial statements and disclosures.
ASU
2014-09, Revenue - Revenue from Contracts with Customers. In May 2014, the 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 FASB has also issued several updates to ASU 2014-09. The new standard supersedes U.S. GAAP guidance on revenue recognition and requires the use of more estimates and judgments than the present standards. It also requires additional disclosures. We plan to adopt the new revenue guidance effective January 1, 2017 by recognizing the cumulative effect of initially applying the new standard as an adjustment to the opening balance
of equity. We do not expect a material impact to our financial statements or disclosures.
NOTE 2. 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 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):
Unearned
interest supplements from Ford and affiliated companies
(2,785
)
(2,119
)
Consumer finance receivables
65,109
59,949
Non-Consumer
Dealer
financing
35,226
36,037
Other financing
1,034
1,210
Non-Consumer finance receivables
36,260
37,247
Total
recorded investment
$
101,369
$
97,196
Recorded investment in finance receivables
$
101,369
$
97,196
Allowance
for credit losses
(478
)
(373
)
Finance receivables, net
$
100,891
$
96,823
Net
finance receivables subject to fair value (a)
$
98,760
$
95,008
Fair value
100,054
96,180
__________
(a)
At
September 30, 2016 and December 31, 2015, excludes $2.1 billion and $1.8 billion, respectively, of certain receivables (primarily 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 September 30, 2016 and December 31, 2015
was $207 million and $209 million, respectively, of accrued uncollected interest, which we report in Other assets on our balance sheet.
Included in recorded investment in finance receivables at September 30, 2016 and December 31, 2015 were consumer receivables of $29.9 billion and $27.6 billion, respectively, and non-consumer receivables of $23.3 billion and $26.1 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 6 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 $24 million and $16 million at September 30, 2016 and December 31, 2015, 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 September 30, 2016 and December 31, 2015, 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 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
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 September 30, 2016 and December 31, 2015 was $366 million, or 0.6% of consumer receivables, and $375 million, or 0.6% of consumer receivables, respectively. The recorded investment of non-consumer receivables that were impaired at September 30,
2016 and December 31, 2015 was $140 million, or 0.4% of non-consumer receivables, and $134 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, 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
27,024
25,128
Allowance for credit losses
(63
)
(49
)
Net investment in operating
leases
$
26,961
$
25,079
__________
(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
September 30, 2016 and December 31, 2015, net investment in operating leases before allowance for credit losses includes $10.0 billion and $13.3 billion 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 6 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 September 30 was as follows (in millions):
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 7 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
$
1.4
$
20.9
$
0.1
$
20.8
$
18.9
Wholesale
financing
2.0
25.1
—
25.1
15.3
Finance
receivables
3.4
46.0
0.1
45.9
34.2
Net
investment in operating leases
0.5
13.3
—
13.3
8.9
Total
VIE
$
3.9
$
59.3
$
0.1
$
59.2
$
43.1
Non-VIE
Retail
financing
$
0.4
$
6.7
$
—
$
6.7
$
6.1
Wholesale
financing
—
1.0
—
1.0
0.8
Finance
receivables
0.4
7.7
—
7.7
6.9
Net
investment in operating leases
—
—
—
—
—
Total
Non-VIE
$
0.4
$
7.7
$
—
$
7.7
$
6.9
Total
securitization transactions
Retail financing
$
1.8
$
27.6
$
0.1
$
27.5
$
25.0
Wholesale
financing
2.0
26.1
—
26.1
16.1
Finance
receivables
3.8
53.7
0.1
53.6
41.1
Net
investment in operating leases
0.5
13.3
—
13.3
8.9
Total
securitization transactions
$
4.3
$
67.0
$
0.1
$
66.9
$
50.0
__________
(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 7. 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. We have deemed most of these special purpose entities to be VIEs. 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 6 for additional information on the financial position and financial performance of our VIEs.
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 $70 million and $66 million at September 30, 2016 and December 31, 2015, respectively.
NOTE 8. 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 2015, hedge ineffectiveness reflects the net change in fair value on derivatives of $373 million gain and $345 million gain, respectively, and change in value on hedged debt attributable to the change in benchmark interest rates of $363 million loss and $339
million loss, respectively.
NOTE 8. 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 exposure in the event of default or breach of the counterparty agreement.
The fair value of our derivative instruments and the associated notional amounts, presented gross, were as follows (in millions):
At
September 30, 2016 and December 31, 2015, the fair value of assets and liabilities available for counterparty netting was $87 million and $167 million, respectively. All derivatives are categorized within Level 2 of the fair value hierarchy.
NOTE 9. 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):
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 $12.6
billion and $10.4 billion of short-term debt at September 30, 2016 and December 31, 2015, respectively, carried at cost, which approximates fair value. All other debt is categorized within Level 2 of the fair value hierarchy.
NOTE 11. 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 were as follows for the periods ended September 30
(in millions):
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 September 30 were as follows (in millions):
Unallocated/Eliminations
North America Segment
International Segment
Unallocated Risk
Management
Adjustment to Receivables (a)
Total Unallocated/Eliminations
Total
Third Quarter 2016
Total
revenue (b)
$
2,340
$
411
$
45
$
—
$
45
$
2,796
Income
before income taxes
398
124
45
—
45
567
Other
disclosures:
Depreciation on vehicles subject to operating leases
1,072
13
—
—
—
1,085
Interest
expense
552
145
—
—
—
697
Provision
for credit losses
122
16
—
—
—
138
Third
Quarter 2015
Total revenue (b)
$
2,054
$
421
$
3
$
—
$
3
$
2,478
Income
before income taxes
415
123
3
—
3
541
Other
disclosures:
Depreciation on vehicles subject to operating leases
947
9
—
—
—
956
Interest
expense
431
151
—
—
—
582
Provision
for credit losses
84
16
—
—
—
100
First
Nine Months 2016
Total revenue (b)
$
6,830
$
1,252
$
10
$
—
$
10
$
8,092
Income
before income taxes
1,089
382
10
—
10
1,481
Other
disclosures:
Depreciation on vehicles subject to operating leases
3,149
25
—
—
—
3,174
Interest
expense
1,593
437
—
—
—
2,030
Provision
for credit losses
356
47
—
—
—
403
Net
finance receivables and net investment in operating leases
109,664
24,761
—
(6,573
)
(6,573
)
127,852
Total
assets
114,461
28,531
—
—
—
142,992
First
Nine Months 2015
Total revenue (b)
$
5,902
$
1,231
$
(35
)
$
—
$
(35
)
$
7,098
Income
before income taxes
1,200
365
(35
)
—
(35
)
1,530
Other
disclosures:
Depreciation on vehicles subject to operating leases
2,607
23
—
—
—
2,630
Interest
expense
1,361
458
—
—
—
1,819
Provision
for credit losses
199
40
—
—
—
239
Net
finance receivables and net investment in operating leases
99,241
23,139
—
(5,190
)
(5,190
)
117,190
Total
assets
104,067
27,423
—
—
—
131,490
__________
(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 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 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 $41 million and $80 million at September 30, 2016 and December 31, 2015, respectively. Of these values, $37 million
and $74 million at September 30, 2016 and December 31, 2015, respectively, were counter-guaranteed by Ford to us. There were no recorded liabilities related to guarantees and limited indemnities at September 30, 2016 and December 31, 2015.
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 September 30, 2016, and the related consolidated statements of income and comprehensive income for the three-month
and nine-month periods ended September 30, 2016 and 2015 and the consolidated statements of shareholder’s interest and cash flows for the nine-month periods ended September 30, 2016 and 2015. 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, 2015, 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 11, 2016, 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, 2015, 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 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 2015 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 (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 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 2015 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.
Third Quarter 2016 Compared with Third Quarter 2015
The
following chart shows our key metrics:
In the third quarter of 2016, pre-tax profit was strong - the best quarterly profit since 2011 -- and receivables were higher than a year ago, in line with expectations.
Our portfolio performance remained robust, despite higher LTRs.
Our originations, servicing, and collections practices remained disciplined and consistent.
As shown below the chart, year-to-date key metrics were unfavorable
compared with a year ago.
26
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
On a pre-tax basis, we earned $567 million in the third quarter of 2016, compared with $541 million a year ago. The following chart shows the factors that contributed to the strong third quarter pre-tax profit:
Ford
Credit’s pre-tax profit improvement is explained primarily by favorable volume, mix, and market valuation adjustments to derivatives. Partial offsets include unfavorable lease residual performance and higher credit losses.
The favorable volume and mix was driven by growth in all products globally.
Lease residual performance reflects higher depreciation in North America related to expected lower auction values in the lease portfolio.
Credit loss performance primarily reflects higher charge-offs as a result of higher defaults and severities in North America.
27
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 September 30 are shown below (in millions). For additional information, see Note 13 of our Notes to the Financial Statements.
Third
Quarter
First Nine Months
2015
2016
2016 Over/(Under) 2015
2015
2016
2016 Over/(Under) 2015
Income
before income taxes
North America Segment
$
415
$
398
$
(17
)
$
1,200
$
1,089
$
(111
)
International
Segment
123
124
1
365
382
17
Unallocated
risk management
3
45
42
(35
)
10
45
Income
before income taxes
$
541
$
567
$
26
$
1,530
$
1,481
$
(49
)
North
America Segment
The North America Segment’s lower pre-tax profit for the third quarter and first nine months of 2016 is primarily explained by unfavorable lease residual performance and higher credit losses, partially offset by favorable volume and mix. The unfavorable lease residual performance reflects higher depreciation related to expected lower auction values in the lease portfolio and credit loss performance reflects higher charge-offs as a result of higher defaults and severities. The favorable volume and mix was driven by growth in all products.
International Segment
The International Segment’s pre-tax profit for the third quarter and first nine months of 2016 is largely unchanged. The
result is explained by favorable volume and mix driven by growth in all products, offset by the adverse effect of the stronger U.S. dollar and lower margin driven by lower portfolio yield.
Unallocated Risk Management
The improvement in unallocated risk management for the third quarter and first nine months of 2016 primarily reflects higher net gains related to market valuation adjustments to derivatives. For additional information, see Notes 8 and 13 of our Notes to the Financial Statements.
28
Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations (Continued)
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 North America Segment’s retail installment and lease share of new Ford- and Lincoln-brand vehicles sold by dealers and wholesale financing share of new Ford- and Lincoln-brand vehicles acquired by dealers. Also shown is our North America Segment’s consumer financing contract placement volume for new and used vehicles. All data is for the periods ended September 30:
The decrease in total contract
volume for the third quarter and first nine months of 2016 reflects lower retail installment and lease financing share in the United States.
29
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
The following chart shows our International Segment’s retail installment and lease share of new Ford-brand vehicles sold by dealers and wholesale financing share of new Ford-brand vehicles acquired by dealers. Also shown is our International Segment’s consumer financing contract placement volume
for new and used vehicles. All data is for the periods ended September 30:
Total contract volume in the third quarter and first nine months of 2016 increased from a year ago, primarily reflecting growth in China and Mexico.
Our operations in China achieved record contract volume in the third quarter, as more consumers are choosing to finance the purchase of vehicles.
30
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:
__________
*
At
December 31, 2014, September 30, 2015, December 31, 2015, and September 30, 2016, includes consumer receivables before allowance for credit losses of $24.4 billion, $27.7 billion, $27.6 billion, and $29.9 billion, respectively, and non-consumer receivables before allowance for credit losses of $21.8 billion, $23.1 billion,
$26.1 billion, and $23.3 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, 2014, September 30, 2015, December 31, 2015, and September 30, 2016, includes net investment in operating leases before allowance for credit losses of $9.6 billion, $11.3 billion,
$13.3 billion, and $10.0 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 Part
II of our 2015 Form 10-K Report and Note 6 of our Notes to the Financial Statements for the period ended September 30, 2016.
**
Dealer financing primarily includes wholesale loans to dealers to finance the purchase of vehicle inventory.
Receivables at September 30, 2016 increased from year-end 2015, driven by growth in consumer finance receivables and operating leases globally.
31
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 lending 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 Part II of our 2015 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 2015 Form 10-K Report.
In purchasing retail finance and operating lease contracts, we use a proprietary scoring system that measures credit quality using several factors, such
as credit bureau information, consumer credit risk scores (e.g., FICO score), contract characteristics, and customer characteristics, including employment history, financial stability, and capacity to pay. 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 3 of our Notes to the Financial Statements.
32
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
average placement FICO score remained consistent with the second quarter of 2016 and the same period last year.
Our average retail term remains largely unchanged from last year, and retail contracts of 73 months and longer continued to be a relatively small part of our business. We remain focused on managing the trade cycle – building customer relationships and loyalty while offering financing products and terms customers want.
Our origination and risk management processes deliver robust portfolio performance.
33
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 73% of our worldwide consumer portfolio at September 30, 2016. 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, and we continue to see credit losses increase toward more normal levels.
Delinquencies and the repossession ratio were up from the same period last year.
Severities have increased over the last number of quarters. These increases include factors such as higher average amount financed, longer-term financing, shorter average time to repossession, lower auction values, and higher principal outstanding at repossession.
Lower auction values accounted for about half of the severity increase in the third quarter from the prior year, with the other half explained by the other factors.
Charge-offs
and the LTR ratio were up year-over-year, primarily reflecting higher defaults and higher severities. The higher defaults reflect an increased default frequency as well as growth in receivables.
34
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 for the third quarter of 2016 is higher than last year, primarily reflecting the U.S. retail and lease business 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, 2016, compared to June 30, 2016, reflecting credit loss performance trends and growth in retail receivables.
The reserve as a percent of managed receivables was up from the third quarter of 2015.
35
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, and lease customers also are more likely to buy or lease another Ford or Lincoln vehicle. We manage our lease share with an enterprise view to support sales, protect residual values, and manage the trade cycle. Ford Credit and Ford work together under a One Ford lease strategy that 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, 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 2015 Form 10-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 about 88% of our total net investment in operating leases at September 30, 2016.
Given significant industry growth in leasing and higher new vehicle incentives, we lowered our projection on residual values which makes the relative cost of leasing higher. As a result, lease share and
lease placement volume in the third quarter were lower compared to a year ago. We continue to expect full-year lease share to be lower than the first quarter of 2016, reflecting the parameters of our lease strategy.
36
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
The following charts show lease return volumes and auction values at constant third quarter 2016 vehicle mix for vehicles returned in the respective periods:
Lease
return volume in the third quarter of 2016 was up from the prior year, reflecting higher lease placements in recent years and an increased return rate. The higher mix of 36-month leases returning in 2016 reflects the shift toward longer term leasing made in 2013.
Our off-lease vehicle auction values in the third quarter of 2016 were lower than a year ago and slightly lower than the prior quarter, with 36-month off-lease auction values about $600 lower year-over-year. Our auction performance has been consistent with the industry when comparing similar vehicle age and segment.
Over the last several years, we have seen industry lease share grow with rising industry volumes. As a result, the supply of off-lease vehicles is higher and will continue to grow for the next several years. The
increased supply of used vehicles, along with higher new vehicle incentives, is resulting in lower auction values, particularly in smaller, more fuel efficient vehicles given low fuel prices. We expect this trend to continue, and we are planning for lower auction values going forward.
37
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, 2016.
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-
38
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 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 regularly 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 $134 billion at the end of the third quarter of 2016 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 trend lower over time. The calendarization of the funding plan may result in quarterly fluctuations of the securitized funding percentage. We expect this mix to be higher in the fourth quarter.
39
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 2014 and 2015, planned
issuances for full-year 2016, and our global public term funding issuances through October 26, 2016, excluding short-term funding programs:
For 2016, we now project full-year public term funding in the range of $26 billion to $29 billion. Through October 26, 2016, we have completed $26 billion of public term issuance.
40
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 have a target of at least $25 billion. As of September 30,
2016, liquidity available for use was up $9.8 billion from year-end 2015 and down $500 million from second quarter 2016.
As of September 30, 2016, our liquidity remained strong at $33.3 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, 2016 our liquidity sources including cash totaled $50.2 billion, up $500 million from year-end.
Cash,
Cash Equivalents, and Marketable Securities. At September 30, 2016, our cash, cash equivalents, and marketable securities (excluding amounts related to insurance activities) totaled $9.2 billion, compared with $11.2 billion at year-end 2015. 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 amounts 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, 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 included
amounts to be used only to support our securitization transactions of $2.6 billion and $4.3 billion at September 30, 2016 and December 31, 2015, respectively.
Committed Capacity. At September 30, 2016, our committed capacity totaled $41.0 billion, up $2.5 billion from December 31, 2015. Our committed
capacity is primarily comprised of committed 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 $35.6 billion
($19.2 billion of retail financing, $6.1 billion of wholesale financing, and $10.3 billion of operating leases) at September 30, 2016. These committed facilities have varying maturity dates, with $18.0 billion having maturities within the next twelve months and the remaining balance having maturities through 2018. 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, 2016, $14.3 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, 2016, we and our majority-owned subsidiaries had $5.4 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, 2016,
$5.3 billion was available for use.
FCE’s £990 million (equivalent to $1.3 billion at September 30, 2016) syndicated credit facility (the “FCE Credit Agreement”) matures in 2019. At September 30, 2016, £990 million (equivalent to $1.3 billion) 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). In addition to customary payment, representation, bankruptcy, and judgment defaults, the FCE Credit Agreement contains
cross-payment and cross-acceleration defaults with respect to other FCE debt.
Lenders under the Ford corporate credit facility have commitments totaling $13.4 billion, with 75% of the commitments maturing on April 30, 2021 and 25% of the commitments maturing on April 30, 2019. 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. During the third quarter of 2016, the Chinese renminbi sub-facility was utilized for the first time, with approximately $60 million drawn and repaid during the quarter. At September 30, 2016, 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 2015 Form 10-K Report for a list of factors that could affect our liquidity and information on our stress testing.
42
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, 2016,
financial statement leverage was 9.7:1, and managed leverage was 9.2:1. We target managed leverage in the range of 8:1 to 9:1. Managed leverage is above the targeted range reflecting growth in receivables and the continued impact of a strong U.S. dollar, but continues to trend toward our target range. For information on our planned distributions, refer to the “Outlook” section.
43
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Outlook
We
continue to expect our full-year 2016 pre-tax profit to be about $1.8 billion.
In the fourth quarter, we expect higher supplemental depreciation in our lease portfolio, reflecting expected lower auction values.
Additionally, FCE Bank expects a one-time charge of approximately $80 million related to the settlement of a deficit in a Ford-sponsored retirement plan. The offset will be reflected in Ford of Europe’s results.
44
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 or services;
•
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 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 2015 Form 10-K Report, as updated by our subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.
45
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:
Standard
Effective
Date (a)
2014-15
Going Concern - Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
Early adoption for each of the standards, except standard 2016-01, is permitted.
(b)
For additional information, see Note 1 of our Notes to the Financial Statements.
(c)
The FASB has issued the following
updates to the Revenue from Contracts with Customers standard: Accounting Standard Update (“ASU”) 2015-14 (Deferral of the Effective Date), ASU 2016-08 (Principal versus Agent Considerations (Reporting Revenue Gross versus Net)), ASU 2016-10 (Identifying Performance Obligations and Licensing), and ASU 2016-12 (Narrow-Scope Improvements and Practical Expedients). We plan to adopt the new revenue guidance effective January 1, 2017.
Other Financial Information
The interim financial information included in this Quarterly Report on Form 10-Q for the periods
ended September 30, 2016 and 2015 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 2015 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, 2016, all else constant, such an increase in interest rates would increase our pre-tax cash flow by $5 million over the next 12 months, compared with an increase of $7 million at December 31, 2015. 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.
46
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, 2016, 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, 2016 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 1. Legal Proceedings.
Ford Motor Credit Company v. Sudesh Agrawal. On January 18, 2011, a state trial court judge in Cuyahoga County, Ohio certified a nationwide class action with an Ohio subclass in a counterclaim arising out of a collection action. Class claimants allege breach of contract, fraud, and statutory violations for Ford Credit’s lease-end wear and use charges. Class claimants allege that the standard applied by Ford Credit in determining the condition of vehicles at lease-end is different
than the standard set forth in claimants’ leases. The Court of Appeals of Ohio, Eighth Appellate District, affirmed nationwide class certification and certification of an Ohio subclass. We appealed, and on December 17, 2013, the Supreme Court of Ohio reversed the Court of Appeals and remanded the case for further proceedings. On March 13, 2014, the Court of Appeals reversed the trial court order certifying the classes and remanded the case for further proceedings. On September 28, 2015, the trial court re-certified a nationwide class action with an Ohio subclass. We appealed, and on September 22, 2016, the Court of Appeals reversed the trial court order certifying the classes and remanded the case for further proceedings.
ITEM
5. Other Information.
None.
ITEM 6. Exhibits.
Exhibits: please refer to the Exhibit Index on page 50.
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.
48
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.
