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 5. Other Information.
Item 6. Exhibits.
Exhibits
EX-31.1
fmcc06302019ex311.htm
EX-31.2
fmcc06302019ex312.htm
EX-32.1
fmcc06302019ex321.htm
EX-32.2
fmcc06302019ex322.htm
Ford Motor Credit Earnings 2019-06-30
FMCC 10Q Quarterly Report
Balance Sheet
Income Statement
Cash Flow
Document
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None of the Shares are publicly traded.60 months or 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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________
FORM 10-Q
(Mark One)
☑
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2019
or
☐
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ____________________ to ____________________
Commission file 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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
3.588% Notes due June 2, 2020
F/20S
New York Stock Exchange
0.623% Notes due June 28, 2023*
F/23E
New York Stock Exchange
1.355% Notes due February 7, 2025*
F/25I
New York Stock Exchange
4.125% Notes due on June 20, 2024
F/24O
New York Stock Exchange
3.021% Notes due March 6, 2024
F/24M
New York Stock Exchange
4.535% Notes due March 6, 2025*
F/25K
New York Stock Exchange
3.350% Notes due Nine Months or More from the Date of Issue due August 20, 2026
F/26N
New York Stock Exchange
1.514% Notes due February 17, 2023
F/23G
New York Stock Exchange
2.386% Notes due February 17, 2026
F/26AB
New York Stock Exchange
Floating Rate Notes due December 12, 2019*
F/19A
New York Stock Exchange
Floating Rate Notes due December 16, 2019*
F/19C
New York Stock Exchange
Floating Rate Notes due May 14, 2021*
F/21C
New York Stock Exchange
Floating Rate Notes due December 1, 2021*
F/21AQ
New York Stock Exchange
Floating Rate Notes due December 7, 2022*
F/22T
New York Stock Exchange
Floating Rate Notes due November 15, 2023*
F/23D
New York Stock Exchange
Floating Rate Notes due December 1, 2024*
F/24L
New York Stock Exchange
*Issued under Euro Medium Term Notes due Nine Months or More from The Date of Issue Program
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. þYeso 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). þYeso 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 oNon-accelerated filerþ 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).
☐
Yes
☑
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
(986
)
(894
)
(2,039
)
(1,818
)
Interest expense
(997
)
(1,114
)
(1,909
)
(2,235
)
Net financing margin
1,008
1,073
1,964
2,121
Other revenue
Insurance premiums earned
43
46
84
93
Fee based revenue and other
65
61
123
115
Total financing margin and other revenue
1,116
1,180
2,171
2,329
Expenses
Operating expenses
357
350
702
714
Provision for credit losses (Note 6)
69
63
163
96
Insurance expenses
46
60
58
70
Total expenses
472
473
923
880
Other income, net (Note 13)
1
124
38
183
Income before income taxes
645
831
1,286
1,632
Provision for / (Benefit from) income taxes
166
218
106
416
Net income
$
479
$
613
$
1,180
$
1,216
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in millions)
For the periods ended June 30,
2018
2019
2018
2019
Second Quarter
First Half
(unaudited)
Net income
$
479
$
613
$
1,180
$
1,216
Other comprehensive income / (loss), net of tax (Note 12)
Foreign currency translation
(364
)
8
(251
)
28
Comprehensive income / (loss)
$
115
$
621
$
929
$
1,244
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
June 30, 2019
(unaudited)
ASSETS
Cash and cash equivalents (Note 3)
$
9,607
$
12,618
Marketable securities (Note 3)
1,308
2,247
Finance receivables, net
Retail installment contracts, dealer financing, and other financing
110,388
107,119
Finance leases
8,426
8,622
Total finance receivables, net (Note 4)
118,814
115,741
Net investment in operating leases (Note 5)
27,449
27,738
Notes and accounts receivable from affiliated companies
905
935
Derivative financial instruments (Note 9)
670
1,186
Other assets (Note 10)
3,456
3,553
Total assets
$
162,209
$
164,018
LIABILITIES
Accounts payable
Customer deposits, dealer reserves, and other
$
1,097
$
1,067
Affiliated companies
426
885
Total accounts payable
1,523
1,952
Debt (Note 11)
140,146
141,470
Deferred income taxes
2,595
2,669
Derivative financial instruments (Note 9)
663
477
Other liabilities and deferred revenue (Note 10)
2,307
2,556
Total liabilities
147,234
149,124
SHAREHOLDER’S INTEREST
Shareholder’s interest
5,227
5,227
Accumulated other comprehensive income / (loss) (Note 12)
(829
)
(801
)
Retained earnings
10,577
10,468
Total shareholder’s interest
14,975
14,894
Total liabilities and shareholder’s interest
$
162,209
$
164,018
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
June 30, 2019
(unaudited)
ASSETS
Cash and cash equivalents
$
2,728
$
3,719
Finance receivables, net
58,662
58,118
Net investment in operating leases
16,332
13,986
Derivative financial instruments
27
8
LIABILITIES
Debt
$
53,269
$
51,791
Derivative financial instruments
24
62
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
Net income
—
—
479
479
Other comprehensive income / (loss), net of tax
—
(364
)
—
(364
)
Distributions declared
—
—
(450
)
(450
)
Balance at June 30, 2018
$
5,227
$
(670
)
$
10,793
$
15,350
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
Net income
—
—
613
613
Other comprehensive income / (loss), net of tax
—
8
—
8
Distributions declared
—
—
(650
)
(650
)
Balance at June 30, 2019
$
5,227
$
(801
)
$
10,468
$
14,894
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 June 30,
2018
2019
First Half
(unaudited)
Cash flows from operating activities
Net cash provided by / (used in) operating activities
$
2,986
$
2,909
Cash flows from investing activities
Purchases of finance receivables
(22,494
)
(17,770
)
Principal collections of finance receivables
21,659
20,888
Purchases of operating lease vehicles
(7,537
)
(6,500
)
Proceeds from termination of operating lease vehicles
4,816
4,734
Net change in wholesale receivables and other short-duration receivables
(130
)
896
Purchases of marketable securities
(2,821
)
(2,099
)
Proceeds from sales and maturities of marketable securities
3,368
1,183
Settlements of derivatives
156
23
All other investing activities
131
(24
)
Net cash provided by / (used in) investing activities
(2,852
)
1,331
Cash flows from financing activities
Proceeds from issuances of long-term debt
27,959
24,983
Principal payments on long-term debt
(24,792
)
(24,298
)
Change in short-term debt, net
(2,093
)
(565
)
Cash distributions to parent
(1,463
)
(1,325
)
All other financing activities
(50
)
(64
)
Net cash provided by / (used in) financing activities
(439
)
(1,269
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(152
)
24
Net increase / (decrease) in cash, cash equivalents and restricted cash
$
(457
)
$
2,995
Cash, cash equivalents and restricted cash at beginning of period (Note 3)
$
9,682
$
9,747
Net increase / (decrease) in cash, cash equivalents and restricted cash
(457
)
2,995
Cash, cash equivalents and restricted cash at end of period (Note 3)
$
9,225
$
12,742
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
During the first six months of 2019, we continued to execute 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 amendments 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
June 30, 2019
Cash and cash equivalents
U.S. government
1
$
139
$
575
U.S. government and agencies
2
25
849
Non-U.S. government and agencies
2
114
875
Corporate debt
2
884
907
Total marketable securities classified as cash equivalents
1,162
3,206
Cash, time deposits and money market funds
8,445
9,412
Total cash and cash equivalents
$
9,607
$
12,618
Marketable securities
U.S. government
1
$
289
$
338
U.S. government and agencies
2
65
135
Non-U.S. government and agencies
2
610
1,349
Corporate debt
2
198
200
Other marketable securities
2
146
225
Total marketable securities
$
1,308
$
2,247
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
June 30, 2019
Cash and cash equivalents
$
9,607
$
12,618
Restricted cash included in other assets (a)
140
124
Total cash, cash equivalents, and restricted cash
$
9,747
$
12,742
__________
(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
June 30, 2019
Consumer
Retail installment contracts, gross
$
70,999
$
68,846
Finance leases, gross
8,748
8,984
Retail financing, gross
79,747
77,830
Unearned interest supplements from Ford and affiliated companies
(3,508
)
(3,512
)
Consumer finance receivables
76,239
74,318
Non-Consumer
Dealer financing
40,996
40,144
Other financing
2,168
1,792
Non-Consumer finance receivables
43,164
41,936
Total recorded investment
$
119,403
$
116,254
Recorded investment in finance receivables
$
119,403
$
116,254
Allowance for credit losses
(589
)
(513
)
Finance receivables, net
$
118,814
$
115,741
Net finance receivables subject to fair value (a)
$
110,388
$
107,119
Fair value (b)
109,794
107,251
__________
(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.
AtDecember 31, 2018 and June 30, 2019, accrued uncollected interest was $264 million and $263 million, respectively, which we report in Other assets on our balance sheet.
Included in recorded investment in finance receivables at December 31, 2018 and June 30, 2019 were consumer receivables of $40.7 billion and $39.3 billion, respectively, and non-consumer receivables of $25.7 billion and $25.1 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 7 for additional information).
Finance Leases
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 finance lease receivables were as follows (in millions):
June 30, 2019
Within one year
$
2,075
After one year and within two years
2,006
After two years and within three years
1,599
After three years and within four years
708
After four years and within five years
120
After five years
2
Total future cash payments
6,510
Less: Present value discount
(313
)
Finance lease receivables
$
6,197
The reconciliation from finance lease receivables to finance leases, gross and finance leases, net is as follows (in millions):
June 30, 2019
Finance lease receivables
$
6,197
Unguaranteed residual assets
2,661
Initial direct costs
126
Finance leases, gross
8,984
Unearned interest supplements from Ford and affiliated companies
(345
)
Allowance for credit losses
(17
)
Finance leases, net
$
8,622
Financing revenue from finance leases for the second quarter of 2018 and 2019 was $95 million and $97 million, respectively, and for the first half of 2018 and 2019 was $190 million and $189 million, respectively. Financing revenue from finance leases 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 June 30, 2019, there were no balances greater than 90 days past due for which we are still accruing interest.
The aging analysis of our finance receivables balances was as follows (in millions):
December 31, 2018
June 30, 2019
Consumer
31-60 days past due
$
859
$
662
61-90 days past due
123
103
91-120 days past due
39
31
Greater than 120 days past due
39
39
Total past due
1,060
835
Current
75,179
73,483
Consumer finance receivables
76,239
74,318
Non-Consumer
Total past due
76
70
Current
43,088
41,866
Non-Consumer finance receivables
43,164
41,936
Total recorded investment
$
119,403
$
116,254
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 dealer financing receivables was as follows (in millions):
December 31, 2018
June 30, 2019
Dealer financing
Group I
$
33,656
$
32,541
Group II
5,635
6,020
Group III
1,576
1,468
Group IV
129
115
Total recorded investment
$
40,996
$
40,144
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 June 30, 2019 was $370 million and $337 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 June 30, 2019 was $129 million and $115 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 consists 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, with the associated depreciation expense recognized on a straight-line basis over the term 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 is 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 $23 million and $48 million, for the second quarter of 2018 and first half of 2018, respectively.
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
June 30, 2019
Vehicles, at cost (a)
$
33,593
$
33,632
Accumulated depreciation
(6,144
)
(5,894
)
Net investment in operating leases
$
27,449
$
27,738
__________
(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 June 30, 2019, Net investment in operating leases includes $16.3 billion and $14.0 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 June 30, 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
$
4,746
$
2,940
$
1,029
$
73
$
5
$
8,793
Operating leases are generally pre-payable without penalty and may cause actual paid 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 June 30 was as follows (in millions):
Second Quarter 2018
Consumer
Non-Consumer
Total Allowance
Allowance for credit losses
Beginning balance
$
584
$
16
$
600
Charge-offs
(123
)
(1
)
(124
)
Recoveries
47
1
48
Provision for credit losses
72
(2
)
70
Other
(7
)
—
(7
)
Ending balance
$
573
$
14
$
587
First Half 2018
Consumer
Non-Consumer
Total Allowance
Allowance for credit losses
Beginning balance
$
582
$
15
$
597
Charge-offs
(254
)
(3
)
(257
)
Recoveries
86
2
88
Provision for credit losses
164
—
164
Other
(5
)
—
(5
)
Ending balance
$
573
$
14
$
587
Analysis of ending balance of allowance for credit losses
Collective impairment allowance
$
552
$
13
$
565
Specific impairment allowance
21
1
22
Ending balance
573
14
587
Analysis of ending balance of finance receivables
Collectively evaluated for impairment
$
75,338
$
40,668
$
116,006
Specifically evaluated for impairment
378
96
474
Recorded investment
75,716
40,764
116,480
Ending balance, net of allowance for credit losses