Note 3. Cash, Cash Equivalents, and Marketable Securities
Note 4. Finance Receivables
Note 5. Net Investment in Operating Leases
Note 6. Allowance for Credit Losses
Note 7. Transfers of Receivables
Note 8. Variable Interest Entities
Note 9. Derivative Financial Instruments and Hedging Activities
Note 10. Other Assets and Other Liabilities and Deferred Revenue
Note 11. Debt
Note 12. Accumulated Other Comprehensive Income / (Loss)
Note 13. Other Income, Net
Note 14. Segment Information
Note 15. Commitments and Contingencies
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II. Other Information
Item 1. Legal Proceedings.
Item 5. Other Information.
Item 6. Exhibits.
Exhibits
EX-18
fmcc03312019ex18.htm
EX-31.1
fmcc03312019ex311.htm
EX-31.2
fmcc03312019ex312.htm
EX-32.1
fmcc03312019ex321.htm
EX-32.2
fmcc03312019ex322.htm
Ford Motor Credit Earnings 2019-03-31
FMCC 10Q Quarterly Report
Balance Sheet
Income Statement
Cash Flow
10-Q 1 fmcc0331-201910xq.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________
FORM 10-Q
(Mark One)
þ
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2019
or
o
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ____________________ to ____________________
Commission file number 1-6368
Ford Motor Credit Company LLC
(Exact name of registrant as specified in its charter)
Delaware
38-1612444
(State of organization)
(I.R.S. employer identification no.)
One American Road, Dearborn, Michigan
48126
(Address of principal executive offices)
(Zip code)
(313) 322-3000
(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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer o
Non-accelerated filer þ
Smaller reporting company o
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes þ No
All of the limited liability company interests in the registrant (“Shares”) are held by an affiliate of the registrant. None of the Shares are publicly traded.
REDUCED DISCLOSURE FORMAT
The registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced disclosure format.
Depreciation on vehicles subject to operating leases
(1,053
)
(924
)
Interest expense
(912
)
(1,121
)
Net financing margin
956
1,048
Other revenue
Insurance premiums earned
41
47
Fee based revenue and other
58
54
Total financing margin and other revenue
1,055
1,149
Expenses
Operating expenses
345
364
Provision for credit losses (Note 6)
94
33
Insurance expenses
12
10
Total expenses
451
407
Other income, net (Note 13)
37
59
Income before income taxes
641
801
Provision for / (Benefit from) income taxes
(60
)
198
Net income
$
701
$
603
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in millions)
For the periods ended March 31,
2018
2019
First Quarter
(unaudited)
Net income
$
701
$
603
Other comprehensive income / (loss), net of tax (Note 12)
Foreign currency translation
113
20
Comprehensive income / (loss)
$
814
$
623
The accompanying notes are part of the financial statements.
1
Item 1. Financial Statements (Continued)
FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in millions)
December 31, 2018
March 31, 2019
(unaudited)
ASSETS
Cash and cash equivalents (Note 3)
$
9,607
$
11,733
Marketable securities (Note 3)
1,308
1,846
Finance receivables, net
Retail installment contracts, dealer financing, and other financing
110,388
110,595
Finance leases
8,426
8,655
Total finance receivables, net (Note 4)
118,814
119,250
Net investment in operating leases (Note 5)
27,449
27,606
Notes and accounts receivable from affiliated companies
905
907
Derivative financial instruments (Note 9)
670
631
Other assets (Note 10)
3,456
3,442
Total assets
$
162,209
$
165,415
LIABILITIES
Accounts payable
Customer deposits, dealer reserves, and other
$
1,097
$
1,126
Affiliated companies
426
872
Total accounts payable
1,523
1,998
Debt (Note 11)
140,146
142,950
Deferred income taxes
2,595
2,642
Derivative financial instruments (Note 9)
663
684
Other liabilities and deferred revenue (Note 10)
2,307
2,218
Total liabilities
147,234
150,492
SHAREHOLDER’S INTEREST
Shareholder’s interest
5,227
5,227
Accumulated other comprehensive income / (loss) (Note 12)
(829
)
(809
)
Retained earnings
10,577
10,505
Total shareholder’s interest
14,975
14,923
Total liabilities and shareholder’s interest
$
162,209
$
165,415
The following table includes assets to be used to settle the liabilities of the consolidated variable interest entities (“VIEs”). These assets and liabilities are included in the consolidated balance sheet above. See Notes 7 and 8 for additional information on our VIEs.
December 31, 2018
March 31, 2019
(unaudited)
ASSETS
Cash and cash equivalents
$
2,728
$
2,990
Finance receivables, net
58,662
60,745
Net investment in operating leases
16,332
16,013
Derivative financial instruments
27
14
LIABILITIES
Debt
$
53,269
$
52,248
Derivative financial instruments
24
45
The accompanying notes are part of the financial statements.
2
Item 1. Financial Statements (Continued)
FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDER’S INTEREST
(in millions, unaudited)
Shareholder’s Interest
Accumulated Other Comprehensive Income / (Loss)
(Note 12)
Retained Earnings
Total Shareholder’s Interest
Balance at December 31, 2017
$
5,227
$
(419
)
$
11,076
$
15,884
Net income
—
—
701
701
Other comprehensive income / (loss), net of tax
—
113
—
113
Distributions declared
—
—
(1,013
)
(1,013
)
Balance at March 31, 2018
$
5,227
$
(306
)
$
10,764
$
15,685
Balance at December 31, 2018
$
5,227
$
(829
)
$
10,577
$
14,975
Net income
—
—
603
603
Other comprehensive income / (loss), net of tax
—
20
—
20
Distributions declared
—
—
(675
)
(675
)
Balance at March 31, 2019
$
5,227
$
(809
)
$
10,505
$
14,923
The accompanying notes are part of the financial statements.
3
Item 1. Financial Statements (Continued)
FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
For the periods ended March 31,
2018
2019
First Three Months
(unaudited)
Cash flows from operating activities
Net cash provided by / (used in) operating activities
$
2,009
$
1,692
Cash flows from investing activities
Purchases of finance receivables
(11,085
)
(8,542
)
Principal collections of finance receivables
10,814
10,432
Purchases of operating lease vehicles
(3,592
)
(3,184
)
Proceeds from termination of operating lease vehicles
2,481
2,306
Net change in wholesale receivables and other short-duration receivables
(3,668
)
(1,844
)
Purchases of marketable securities
(2,287
)
(803
)
Proceeds from sales and maturities of marketable securities
1,422
274
Settlements of derivatives
100
12
All other investing activities
143
(14
)
Net cash provided by / (used in) investing activities
(5,672
)
(1,363
)
Cash flows from financing activities
Proceeds from issuances of long-term debt
16,779
15,411
Principal payments on long-term debt
(12,156
)
(12,683
)
Change in short-term debt, net
(793
)
(276
)
Cash distributions to parent
(1,013
)
(675
)
All other financing activities
(28
)
(37
)
Net cash provided by / (used in) financing activities
2,789
1,740
Effect of exchange rate changes on cash, cash equivalents and restricted cash
106
38
Net increase / (decrease) in cash, cash equivalents and restricted cash
$
(768
)
$
2,107
Cash, cash equivalents and restricted cash at January 1 (Note 3)
$
9,682
$
9,747
Net increase / (decrease) in cash, cash equivalents and restricted cash
(768
)
2,107
Cash, cash equivalents and restricted cash at March 31 (Note 3)
$
8,914
$
11,854
The accompanying notes are part of the financial statements.
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, 2018 (“2018 Form 10-K Report”). We are an indirect, wholly owned subsidiary of Ford Motor Company (“Ford”). We reclassify certain prior period amounts in our consolidated financial statements to conform to current year presentation.
Restructuring and Other Actions
In the first three months of 2019, we executed separation and restructuring actions associated with our plans to transform the operational fitness of our business.
NOTE 2. ACCOUNTING POLICIES
Provision for Income Taxes
For interim tax reporting we estimate one single effective tax rate, which is applied to the year-to-date ordinary income / (loss). Tax effects of significant unusual or infrequently occurring items are excluded from the estimated annual effective tax rate calculation and recognized in the interim period in which they occur.
Adoption of New Accounting Standards
Accounting Standards Update (“ASU”) 2016-02, Leases. On January 1, 2019, we adopted the Accounting Standards Codification 842, Leases, and all the related amendments (“new lease standard”) to contracts using the modified retrospective method. The comparative information has not been restated and continues to be reported under the lease accounting standard in effect for those periods. Adoption of the standard as a lessor did not significantly impact our financial statements. As a lessee, it added about $100 million of right-of-use assets and lease obligations to our consolidated balance sheet and did not significantly impact our income statement. We do not expect the adoption of the new lease standard to have a significant impact to our net income on an ongoing basis. We elected the practical expedients permitted under the transition guidance of the new standard that retained the lease classification and initial direct costs for any leases that existed prior to adoption of the standard. We did not reassess whether any contracts entered into prior to adoption are leases or contain leases.
We also adopted the following ASUs during 2019, none of which had a material impact to our financial statements or financial statement disclosures:
ASU
Effective Date
2018-16
Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes
January 1, 2019
2018-08
Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made
January 1, 2019
6
Item 1. Financial Statements (Continued)
FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 2. ACCOUNTING POLICIES (Continued)
Accounting Standards Issued But Not Yet Adopted
The following standard is expected to result in a significant change in practice to Ford Credit.
ASU 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments. In June 2016, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard which replaces the current incurred loss impairment method with a method that reflects expected credit losses. We plan to adopt the new standard and the related amendment on the effective date of January 1, 2020 by recognizing the cumulative effect of initially applying the new standard as an adjustment to the opening balance of Retained earnings. We anticipate adoption will increase the amount of expected credit losses reported in Finance receivables, net on our consolidated balance sheet and do not expect a material impact to our income statement.
Change in Accounting Method
As of January 1, 2019, we changed our accounting method for reporting early termination losses related to customer defaults on operating leases. See Note 5 for additional information.
NOTE 3. CASH, CASH EQUIVALENTS, AND MARKETABLE SECURITIES
The following table categorizes the fair values of cash, cash equivalents, and marketable securities measured at fair value on a recurring basis (in millions):
Fair Value Level
December 31, 2018
March 31, 2019
Cash and cash equivalents
U.S. government
1
$
139
$
1,112
U.S. government and agencies
2
25
599
Non-U.S. government and agencies
2
114
394
Corporate debt
2
884
639
Total marketable securities classified as cash equivalents
1,162
2,744
Cash, time deposits and money market funds
8,445
8,989
Total cash and cash equivalents
$
9,607
$
11,733
Marketable Securities
U.S. government
1
$
289
$
241
U.S. government and agencies
2
65
40
Non-U.S. government and agencies
2
610
803
Corporate debt
2
198
556
Other marketable securities
2
146
206
Total marketable securities
$
1,308
$
1,846
Cash, Cash Equivalents, and Restricted Cash
Cash, cash equivalents, and restricted cash as reported in the statement of cash flows are presented separately on our consolidated balance sheet as follows (in millions):
December 31, 2018
March 31, 2019
Cash and cash equivalents
$
9,607
$
11,733
Restricted cash included in other assets (a)
140
121
Total cash, cash equivalents, and restricted cash
$
9,747
$
11,854
__________
(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.
7
Item 1. Financial Statements (Continued)
FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 4. FINANCE RECEIVABLES
We manage finance receivables as “consumer” and “non-consumer” portfolios. The receivables are generally secured by the vehicles, inventory, or other property being financed.
Finance receivables, net were as follows (in millions):
December 31, 2018
March 31, 2019
Consumer
Retail installment contracts, gross
$
70,999
$
69,380
Finance leases, gross
8,748
9,012
Retail financing, gross
79,747
78,392
Unearned interest supplements from Ford and affiliated companies
(3,508
)
(3,478
)
Consumer finance receivables
76,239
74,914
Non-Consumer
Dealer financing
40,996
42,804
Other financing
2,168
2,045
Non-Consumer finance receivables
43,164
44,849
Total recorded investment
$
119,403
$
119,763
Recorded investment in finance receivables
$
119,403
$
119,763
Allowance for credit losses
(589
)
(513
)
Finance receivables, net
$
118,814
$
119,250
Net finance receivables subject to fair value (a)
$
110,388
$
110,595
Fair value (b)
109,794
110,296
__________
(a)
Net finance receivables subject to fair value exclude finance leases. Previously, certain consumer financing products in Europe were classified as retail installment contracts. We now classify these products as finance leases. Comparative information has been revised to reflect this change.
(b)
The fair value of finance receivables is categorized within Level 3 of the fair value hierarchy.
At December 31, 2018 and March 31, 2019, accrued uncollected interest was $264 million and $275 million, respectively, which we report in Other assets on our balance sheet.
Included in recorded investment in finance receivables at December 31, 2018 and March 31, 2019, were consumer receivables of $40.7 billion and $43.2 billion, respectively, and non-consumer receivables of $25.7 billion and $26.3 billion, respectively, that have been sold for legal purposes in securitization transactions but continue to be reported in our consolidated financial statements. The receivables are available only for payment of the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions; they are not available to pay the other obligations or the claims of Ford Credit’s other creditors. Ford Credit holds the right to receive the excess cash flows not needed to pay the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions (see Note 7 for additional information).
Finance Leases
Our finance leases are comprised of sales-type and direct financing leases. We offer finance leases to individuals, leasing companies, government entities, daily rental companies, and fleet customers. These financings include primarily lease plans for terms of 24 to 60 months. In limited cases, a customer may extend the lease term. Early terminations of leases may also occur at the customer’s request subject to our approval. We offer financing products in which the customer may be required to pay any shortfall, or may receive as payment any excess amount between the fair market value and the contractual vehicle value at the end of the term, which are classified as finance leases. In some markets, we finance a vehicle with a series of monthly payments followed by a single balloon payment or the option for the customer to return the vehicle to Ford Credit; these arrangements containing a purchase option are classified as finance leases.
8
Item 1. Financial Statements (Continued)
FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 4. FINANCE RECEIVABLES (Continued)
The amounts contractually due on our finance lease receivables were as follows (in millions):
March 31, 2019
Within one year
$
2,065
After one year and within two years
1,955
After two years and within three years
1,646
After three years and within four years
691
After four years and within five years
124
After five years
2
Total future cash payments
6,483
Less: Present value discount
(315
)
Finance lease receivables
$
6,168
The reconciliation from our finance lease receivables to our finance leases, gross and our finance leases, net is as follows (in millions):
March 31, 2019
Finance lease receivables
$
6,168
Unguaranteed residual assets
2,713
Initial direct costs
131
Finance leases, gross
9,012
Unearned interest supplements from Ford and affiliated companies
(340
)
Allowance for credit losses
(17
)
Finance leases, net
$
8,655
Financing revenue from finance leases was $95 million and $92 million for the periods ended March 31, 2018 and March 31, 2019, respectively, and is included in Retail financing on the income statement. Revenue is recognized using the interest method and includes the accretion of certain direct origination costs that are deferred and interest supplements received from Ford and affiliated companies.
9
Item 1. Financial Statements (Continued)
FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 4. FINANCE RECEIVABLES (Continued)
Aging
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 $20 million at December 31, 2018. At March 31, 2019, there were no balances greater than 90 days past due for which we are still accruing interest.
The aging analysis of finance receivables balances was as follows (in millions):
December 31, 2018
March 31, 2019
Consumer
31-60 days past due
$
859
$
563
61-90 days past due
123
82
91-120 days past due
39
34
Greater than 120 days past due
39
40
Total past due
1,060
719
Current
75,179
74,195
Consumer finance receivables
76,239
74,914
Non-Consumer
Total past due
76
81
Current
43,088
44,768
Non-Consumer finance receivables
43,164
44,849
Total recorded investment
$
119,403
$
119,763
Credit Quality
Consumer Portfolio. Credit quality ratings for consumer receivables are based on our aging analysis. 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; and
•
Substandard – greater than 120 days past due and for which the uncollectible portion of the receivables has already been charged off, as measured using the fair value of collateral less costs to sell.
Non-Consumer Portfolio. Dealers are assigned to one of four groups according to risk ratings as follows:
•
Group I – strong to superior financial metrics;
•
Group II – fair to favorable financial metrics;
•
Group III – marginal to weak financial metrics; and
•
Group IV – poor financial metrics, including dealers classified as uncollectible.
The credit quality analysis of our dealer financing receivables was as follows (in millions):
December 31, 2018
March 31, 2019
Dealer financing
Group I
$
33,656
$
35,403
Group II
5,635
5,744
Group III
1,576
1,533
Group IV
129
124
Total recorded investment
$
40,996
$
42,804
10
Item 1. Financial Statements (Continued)
FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 4. FINANCE RECEIVABLES (Continued)
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 December 31, 2018 and March 31, 2019 was $370 million and $359 million, or 0.5% and 0.5% of consumer receivables, respectively. The recorded investment of non-consumer receivables that were impaired at December 31, 2018 and March 31, 2019 was $129 million and $124 million, or 0.3% and 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.
11
Item 1. Financial Statements (Continued)
FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 5. NET INVESTMENT IN OPERATING LEASES
Net investment in operating leases consist primarily of lease contracts for vehicles with individuals, daily rental companies, and fleet customers with terms of 60 months or less. Payment extensions may be requested by the customer and are generally limited to a maximum of six months over the term of the lease. Term extensions may also be requested by the customer. Term and payment extensions in total generally do not exceed twelve months. A lease can be terminated at any time by satisfying the obligations under the lease agreement. Early termination programs may be occasionally offered to eligible lessees. At the end of the lease, the customer returns the vehicle to the dealer or may have the option to buy the leased vehicle. In the case of a contract default and repossession, the customer typically remains liable for any deficiency between net auction proceeds and the defaulted contract obligations, including any repossession-related expenses.
Accumulated depreciation reduces the value of the vehicles from their initial acquisition value to their expected residual value at the end of the lease. At the time of purchase, we establish the expected residual value for the vehicle based on recent auction values, return volumes for our leased vehicles, industry-wide used vehicle prices, marketing incentive plans, and vehicle quality data. We monitor residual values each month and review the accuracy of our accumulated depreciation on a quarterly basis.
Change in Accounting Method. As of January 1, 2019, we changed our accounting method for reporting early termination losses related to customer defaults on operating leases. Prior to the first quarter of 2019, we presented the early termination loss reserve on operating leases due to customer default events as part of the allowance for credit losses which reduces Net investment in operating leases on the balance sheet. On the income statement, the incurred losses were included in Provision for credit losses. We now consider the effects of operating lease early terminations when determining depreciation estimates, which are included as part of accumulated depreciation within Net investment in operating leases on the balance sheet, and Depreciation on vehicles subject to operating leases on the income statement.
In conjunction with the January 1, 2019 adoption of ASU 2016-02, Leases (described in Note 2), we reviewed our leasing-related accounting policies and updated our depreciation policy for operating leases so that the useful life of the vehicles incorporates our historical experience on early terminations due to customer defaults. We believe this change in accounting method is preferable as the characterization of these changes are better reflected as depreciation. At December 31, 2018, this reclassification increased accumulated depreciation and decreased allowance for credit losses by $78 million, respectively, and had no impact on Net Investment in operating leases. On the income statement, this reclassification increased Depreciation on vehicles subject to operating leases and decreased Provision for credit losses by $25 million, respectively, for the first quarter of 2018.
These changes had no impact on Income before income taxes, Net investment in operating leases, Retained earnings, or to the Net cash provided by / (used in) operating activities. We have reclassified prior period amounts to reflect the above changes.
Net investment in operating leases were as follows (in millions):
December 31, 2018
March 31, 2019
Vehicles, at cost (a)
$
33,593
$
33,585
Accumulated depreciation
(6,144
)
(5,979
)
Net investment in operating leases
$
27,449
27,606
__________
(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. We recognize these upfront collections from Ford and other vehicle acquisition costs as part of Net investment in operating leases, which are amortized to Depreciation on vehicles subject to operating leases over the term of the lease contract.
12
Item 1. Financial Statements (Continued)
FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 5. NET INVESTMENT IN OPERATING LEASES (Continued)
At December 31, 2018 and March 31, 2019, net investment in operating leases includes $16.3 billion and $16.0 billion, respectively, that have been included in securitization transactions but continue to be reported in our consolidated financial statements. These net investments in operating leases are available only for payment of the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions; they are not available to pay our other obligations or the claims of our other creditors. We hold the right to receive the excess cash flows not needed to pay the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions (see Note 7 for additional information).
The amounts contractually due for minimum rentals on operating leases at December 31, 2018 were as follows (in millions):
2019
2020
2021
2022
2023
Total
Minimum rentals on operating leases
$
4,708
$
2,929
$
1,083
$
83
$
6
$
8,809
The amounts contractually due on our operating leases at March 31, 2019 were as follows (in millions):
Within 1 year
After 1 year and within 2 years
After 2 years and within 3 years
After 3 years and within 4 years
After 4 years and within 5 years
Total
Operating lease payments
$
4,719
$
2,924
$
1,040
$
80
$
5
$
8,768
Our operating leases are generally pre-payable without penalty and may cause actual amounts to differ from amounts contractually due.
13
Item 1. Financial Statements (Continued)
FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 6. ALLOWANCE FOR CREDIT LOSSES
An analysis of the allowance for credit losses related to finance receivables for the periods ended March 31 was as follows (in millions):
First Quarter 2018
Consumer
Non-Consumer
Total Allowance
Allowance for credit losses
Beginning balance
$
582
$
15
$
597
Charge-offs
(131
)
(2
)
(133
)
Recoveries
39
1
40
Provision for credit losses
92
2
94
Other
2
—
2
Ending balance
$
584
$
16
$
600
Analysis of ending balance of allowance for credit losses
Collective impairment allowance
$
563
$
15
$
578
Specific impairment allowance
21
1
22
Ending balance
584
16
600
Analysis of ending balance of finance receivables
Collectively evaluated for impairment
75,989
45,059
121,048
Specifically evaluated for impairment
380
108
488
Recorded investment
76,369
45,167
121,536
Ending balance, net of allowance for credit losses
$
75,785
$
45,151
$
120,936
First Quarter 2019
Consumer
Non-Consumer
Total Allowance
Allowance for credit losses
Beginning balance
$
566
$
23
$
589
Charge-offs
(137
)
(17
)
(154
)
Recoveries
43
2
45
Provision for credit losses
24
9
33
Other
—
—
—
Ending balance
$
496
$
17
$
513
Analysis of ending balance of allowance for credit losses
Collective impairment allowance
$
477
$
16
$
493
Specific impairment allowance
19
1
20
Ending balance
496
17
513
Analysis of ending balance of finance receivables
Collectively evaluated for impairment
74,555
44,725
119,280
Specifically evaluated for impairment
359
124
483
Recorded investment
74,914
44,849
119,763
Ending balance, net of allowance for credit losses
$
74,418
$
44,832
$
119,250
14
Item 1. Financial Statements (Continued)
FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 7. TRANSFERS OF RECEIVABLES
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 primarily in the United States, Canada, the United Kingdom, Germany and China.
We engage in securitization transactions to fund operations and to maintain liquidity. Our securitization transactions are recorded as asset-backed debt and the associated assets are not derecognized and continue to be included in our financial statements.
The finance receivables sold for legal purposes and net investment in operating leases included in securitization transactions are available only for payment of the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions. They are not available to pay our other obligations or the claims of our other creditors. We hold the right to receive the excess cash flows not needed to pay the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions. The debt is the obligation of our consolidated securitization entities and not the obligation of Ford Credit or our other subsidiaries.
Most of these securitization transactions utilize VIEs. See Note 8 for additional information concerning VIEs. The following tables show the assets and debt related to our securitization transactions that were included in our financial statements (in billions):
December 31, 2018
Cash and Cash Equivalents
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
$
1.9
$
34.0
$
0.2
$
33.8
$
29.2
Wholesale financing
0.3
24.9
—
24.9
13.9
Finance receivables
2.2
58.9
0.2
58.7
43.1
Net investment in operating leases
0.5
16.3
—
16.3
10.2
Total VIE
$
2.7
$
75.2
$
0.2
$
75.0
$
53.3
Non-VIE
Retail financing
$
0.3
$
6.7
$
—
$
6.7
$
5.9
Wholesale financing
—
0.8
—
0.8
0.6
Finance receivables
0.3
7.5
—
7.5
6.5
Net investment in operating leases
—
—
—
—
—
Total Non-VIE
$
0.3
$
7.5
$
—
$
7.5
$
6.5
Total securitization transactions
Retail financing
$
2.2
$
40.7
$
0.2
$
40.5
$
35.1
Wholesale financing
0.3
25.7
—
25.7
14.5
Finance receivables
2.5
66.4
0.2
66.2
49.6
Net investment in operating leases
0.5
16.3
—
16.3
10.2
Total securitization transactions
$
3.0
$
82.7
$
0.2
$
82.5
$
59.8
__________
(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.
15
Item 1. Financial Statements (Continued)
FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 7. TRANSFERS OF RECEIVABLES (Continued)
March 31, 2019
Cash and Cash Equivalents
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
$
2.1
$
35.4
$
0.2
$
35.2
$
30.6
Wholesale financing
0.3
25.5
—
25.5
11.5
Finance receivables
2.4
60.9
0.2
60.7
42.1
Net investment in operating leases
0.6
16.0
—
16.0
10.1
Total VIE
$
3.0
$
76.9
$
0.2
$
76.7
$
52.2
Non-VIE
Retail financing
$
0.3
$
7.8
$
—
$
7.8
$
6.9
Wholesale financing
—
0.8
—
0.8
0.6
Finance receivables
0.3
8.6
—
8.6
7.5
Net investment in operating leases
—
—
—
—
—
Total Non-VIE
$
0.3
$
8.6
$
—
$
8.6
$
7.5
Total securitization transactions
Retail financing
$
2.4
$
43.2
$
0.2
$
43.0
$
37.5
Wholesale financing
0.3
26.3
—
26.3
12.1
Finance receivables
2.7
69.5
0.2
69.3
49.6
Net investment in operating leases
0.6
16.0
—
16.0
10.1
Total securitization transactions
$
3.3
$
85.5
$
0.2
$
85.3
$
59.7
__________
(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 cost.
16
Item 1. Financial Statements (Continued)
FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 8. VARIABLE INTEREST ENTITIES
We use special purpose entities to issue asset-backed securities in transactions to public and private investors. We have deemed most of these special purpose entities to be VIEs of which we are the primary beneficiary. The asset-backed securities are backed by finance receivables and interests in net investments in operating leases. The assets continue to be consolidated by us. We retain interests in our securitization VIEs, including subordinated securities issued by the VIEs, rights to cash held for the benefit of the securitization investors, and rights to receive the excess cash flows not needed to pay the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions.
We have no obligation to repurchase or replace any securitized asset that subsequently becomes delinquent in payment or otherwise is in default, except when representations and warranties about the eligibility of the securitized assets are breached, or when certain changes are made to the underlying asset contracts. Securitization investors have no recourse to us or our other assets and have no right to require us to repurchase the investments. We generally have no obligation to provide liquidity or contribute cash or additional assets to the VIEs and do not guarantee any asset-backed securities. We may be required to support the performance of certain securitization transactions, however, by increasing cash reserves.
See Note 7 for additional information on the financial position and financial performance of our VIEs and Note 9 for additional information regarding derivatives.
NOTE 9. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
In the normal course of business, our operations are exposed to global market risks, including the effect of changes in interest rates and foreign currency exchange rates. To manage these risks, we enter into highly effective derivative contracts. We have elected to apply hedge accounting to certain derivatives. Derivatives that are designated in hedging relationships are evaluated for effectiveness using regression analysis at the time they are designated and throughout the hedge period. Some derivatives do not qualify for hedge accounting; for others, we elect not to apply hedge accounting.
Income Effect of Derivative Financial Instruments
The gains / (losses), by hedge designation, reported in income for the periods ended March 31 were as follows (in millions):
First Quarter
2018
2019
Fair value hedges
Interest rate contracts
Net interest settlements and accruals on hedging instruments
$
26
$
(20
)
Fair value changes on hedging instruments
(339
)
250
Fair value changes on hedged debt
329
(253
)
Derivatives not designated as hedging instruments
Interest rate contracts
(17
)
(27
)
Foreign currency exchange contracts (a)
(12
)
(6
)
Cross-currency interest rate swap contracts
(58
)
(145
)
Total
$
(71
)
$
(201
)
__________
(a)
Reflects forward contracts between Ford Credit and an affiliated company.
17
Item 1. Financial Statements (Continued)
FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 9. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (Continued)
Balance Sheet Effect of Derivative Financial Instruments
Derivative assets and liabilities are reported 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. Collateral represents cash received or paid under reciprocal arrangements that we have entered into with our derivative counterparties which we do not use to offset our derivative assets and liabilities.
The fair value of our derivative instruments and the associated notional amounts, presented gross, were as follows (in millions):
December 31, 2018
March 31, 2019
Notional
Fair Value of Assets
Fair Value of Liabilities
Notional
Fair Value of Assets
Fair Value of Liabilities
Fair value hedges
Interest rate contracts
$
22,989
$
158
$
208
$
23,894
$
217
$
143
Derivatives not designated as hedging instruments
Interest rate contracts
76,904
235
274
67,726
216
295
Foreign currency exchange contracts
4,318
45
24
3,893
52
30
Cross-currency interest rate swap contracts
5,235
232
157
6,331
146
216
Total derivative financial instruments, gross (a) (b)
$
109,446
$
670
$
663
$
101,844
$
631
$
684
__________
(a)
At December 31, 2018 and March 31, 2019, we held collateral of $19 million and $26 million, respectively, and we posted collateral of $59 million and $63 million, respectively.
(b)
At December 31, 2018 and March 31, 2019, the fair value of assets and liabilities available for counterparty netting was $233 million and $219 million, respectively. All derivatives are categorized within Level 2 of the fair value hierarchy.
18
Item 1. Financial Statements (Continued)
FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 10. OTHER ASSETS AND OTHER LIABILITIES AND DEFERRED REVENUE
Other assets and other liabilities and deferred revenue 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.
Other assets were as follows (in millions):
December 31, 2018
March 31, 2019
Accrued interest and other non-finance receivables
$
1,080
$
1,116
Collateral held for resale, at net realizable value, and other inventory
877
737
Prepaid reinsurance premiums and other reinsurance recoverables
658
663
Deferred charges – income taxes
216
200
Property and equipment, net of accumulated depreciation (a)
192
200
Investment in non-consolidated affiliates
123
127
Restricted cash
140
121
Operating lease assets
—
92
Deferred charges
96
89
Other
74
97
Total other assets
$
3,456
$
3,442
__________
(a)
Accumulated depreciation was $367 million and $375 million at December 31, 2018 and March 31, 2019, respectively.
Other liabilities and deferred revenue were as follows (in millions):
December 31, 2018
March 31, 2019
Unearned insurance premiums and fees
$
775
$
779
Interest payable
752
637
Income tax and related interest (a)
369
329
Deferred revenue
113
126
Operating lease liabilities
—
94
Payroll and employee benefits
70
45
Other
228
208
Total other liabilities and deferred revenue
$
2,307
$
2,218
__________
(a)
Includes tax and interest payable to affiliated companies of $193 million and $182 million at December 31, 2018 and March 31, 2019, respectively.
We have investments in entities for which we do not have the ability to exercise significant influence and fair values are not readily available. We have elected to record these investments at cost (less impairment, if any), adjusted for changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. We report the carrying value of these investments in Other assets in our consolidated balance sheet. These investments were $9 million at both December 31, 2018 and March 31, 2019. There were no material adjustments to the fair values of these investments during the period ending March 31, 2019.
Deferred revenue balances presented above include amounts from contracts with customers primarily related to admission fee revenue on group financing products available in Argentina and were $87 million and $76 million at December 31, 2018 and March 31, 2019, respectively. Admission fee revenue on group financing products is generally recognized evenly over the term of the agreement, which is up to 84 months. Increases in the admission fee deferred revenue balance are the result of payments due during the current period in advance of satisfying our performance under the contract and decreases are a result of revenue recognized during the current period that was previously deferred.
19
Item 1. Financial Statements (Continued)
FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 11. DEBT
Debt outstanding and interest rates were as follows (in millions):
Interest Rates
Debt
Average Contractual
Average Effective
December 31, 2018
March 31, 2019
2018
2019
2018
2019
Short-term debt
Unsecured debt
Floating rate demand notes
$
5,880
$
6,170
Commercial paper
3,749
3,713
Other short-term debt
4,213
3,760
Asset-backed debt
943
983
Total short-term debt
14,785
14,626
3.5
%
3.4
%
3.5
%
3.4
%
Long-term debt
Unsecured debt
Notes payable within one year
14,373
13,814
Notes payable after one year
52,409
55,849
Asset-backed debt (a)
Notes payable within one year
22,130
23,502
Notes payable after one year
36,844
35,306
Unamortized discount
2
1
Unamortized issuance costs
(211
)
(221
)
Fair value adjustments (b)
(186
)
73
Total long-term debt
125,361
128,324
2.8
%
3.0
%
2.8
%
3.0
%
Total debt
$
140,146
$
142,950
2.8
%
3.0
%
2.9
%
3.1
%
Fair value of debt (c)
$
138,888
$
142,595
__________
(a)
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)
These adjustments relate to designated fair value hedges. The carrying value of hedged debt was $38.0 billion and $38.1 billion at December 31, 2018 and March 31, 2019, respectively.
(c)
The fair value of debt includes $13.8 billion and $13.6 billion of short-term debt at December 31, 2018 and March 31, 2019, respectively, carried at cost, which approximates fair value. All other debt is categorized within Level 2 of the fair value hierarchy.
NOTE 12. ACCUMULATED OTHER COMPREHENSIVE INCOME / (LOSS)
The changes in the balance of Accumulated Other Comprehensive Income / (Loss) (“AOCI”) attributable to Ford Credit for the periods ended March 31 were as follows (in millions):
First Quarter
2018
2019
Beginning AOCI balance
$
(419
)
$
(829
)
Net gain / (loss) on foreign currency translation
113
20
Ending AOCI balance
$
(306
)
$
(809
)
20
Item 1. Financial Statements (Continued)
FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 13. OTHER INCOME, NET
Other income consists of various line items that are combined on the income statement due to their respective materiality compared with other individual income and expense items.
The amounts included in Other income, net for the periods ended March 31 were as follows (in millions):
First Quarter
2018
2019
Gains / (Losses) on derivatives
$
(87
)
$
(178
)
Currency revaluation gains / (losses)
62
131
Interest and investment income
42
79
Other
20
27
Total other income, net
$
37
$
59
NOTE 14. SEGMENT INFORMATION
We conduct our financing operations directly and indirectly through our subsidiaries and affiliates. We offer substantially similar products and services throughout many different regions, subject to local legal restrictions and market conditions. We segment our business based on geographic regions: the Americas, Europe, and Asia Pacific. Items excluded in assessing segment performance because they are managed at the corporate level, including market valuation adjustments to derivatives and exchange-rate fluctuations on foreign currency-denominated transactions, are reflected in Unallocated Other. The following is a brief description of our segments:
•
Americas Segment – United States, Canada, Mexico, Brazil, and Argentina
•
Europe Segment – European region and South Africa
•
Asia Pacific Segment – China and India
Key financial information for our business segments for the periods ended or at March 31 were as follows (in millions):
Americas
Europe
Asia Pacific
Total
Segments
Unallocated Other (a)
Total
First Quarter 2018
Total revenue
$
2,581
$
295
$
144
$
3,020
$
—
$
3,020
Income before income taxes
515
111
46
672
(31
)
641
Other disclosures:
Depreciation on vehicles subject to operating leases
1,048
5
—
1,053
—
1,053
Interest expense
752
72
91
915
(3
)
912
Provision for credit losses
86
5
3
94
—
94
Net finance receivables and net investment in operating leases
120,392
27,702
7,574
155,668
(8,017
)
147,651
Total assets
127,013
30,109
7,961
165,083
—
165,083
First Quarter 2019
Total revenue
$
2,793
$
303
$
98
$
3,194
$
—
$
3,194
Income before income taxes
644
116
34
794
7
801
Other disclosures:
Depreciation on vehicles subject to operating leases
912
12
—
924
—
924
Interest expense
972
80
61
1,113
8
1,121
Provision for credit losses
38
5
(10
)
33
—
33
Net finance receivables and net investment in operating leases