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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________
FORM 10-Q
(Mark One)
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| ☑ | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
For the quarterly period ended September 30, 2020
or
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| ☐ | 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)
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| Delaware | | | 38-1612444 |
(State of organization) | | | (I.R.S. employer identification no.) |
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| 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:
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| Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
| 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 |
| 1.744% Notes due July 19, 2024* | | F/24R | | New York Stock Exchange |
| 2.330% Notes due on November 25, 2025* | | F/25L | | New York Stock Exchange |
| 3.683% Notes due on December 3, 2024* | | F/24Q | | New York Stock Exchange |
| 3.250% Notes due September 15, 2025* | | F/25M | | 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. 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 ☐ Accelerated filer ☐ Non-accelerated filer þ Smaller reporting company ☐
Emerging growth company ☐
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. ☐
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| 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.
FORD MOTOR CREDIT COMPANY LLC
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended September 30, 2020
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| Table of Contents | | Page |
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| Part I. Financial Information | | |
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| Part II. Other Information | | |
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.
FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(in millions)
| | | | | | | | | | | | | | | | | | | | | | | |
| For the periods ended September 30, |
| 2019 | | 2020 | | 2019 | | 2020 |
| Third Quarter | | First Nine Months |
| (unaudited) |
| Financing revenue | | | | | | | |
| Operating leases | $ | 1,480 | | | $ | 1,407 | | | $ | 4,429 | | | $ | 4,267 | |
| Retail financing | 987 | | | 1,008 | | | 2,958 | | | 2,925 | |
| Dealer financing | 534 | | | 345 | | | 1,738 | | | 1,171 | |
| Other financing | 23 | | | 22 | | | 73 | | | 71 | |
| Total financing revenue | 3,024 | | | 2,782 | | | 9,198 | | | 8,434 | |
| Depreciation on vehicles subject to operating leases | (894) | | | (537) | | | (2,712) | | | (2,579) | |
| Interest expense | (1,081) | | | (792) | | | (3,316) | | | (2,615) | |
| Net financing margin | 1,049 | | | 1,453 | | | 3,170 | | | 3,240 | |
| Other revenue | | | | | | | |
| Insurance premiums earned | 43 | | | 32 | | | 136 | | | 113 | |
| Fee based revenue and other | 60 | | | 41 | | | 175 | | | 133 | |
| Total financing margin and other revenue | 1,152 | | | 1,526 | | | 3,481 | | | 3,486 | |
| Expenses | | | | | | | |
| Operating expenses | 350 | | | 311 | | | 1,064 | | | 978 | |
| Provision for credit losses (Note 4) | 93 | | | 86 | | | 189 | | | 765 | |
| Insurance expenses | 33 | | | 16 | | | 103 | | | 82 | |
| Total expenses | 476 | | | 413 | | | 1,356 | | | 1,825 | |
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| Other income / (loss), net (Note 10) | 60 | | | 10 | | | 243 | | | 35 | |
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| Income before income taxes | 736 | | | 1,123 | | | 2,368 | | | 1,696 | |
| Provision for / (Benefit from) income taxes | 165 | | | 264 | | | 581 | | | 409 | |
| Net income | $ | 571 | | | $ | 859 | | | $ | 1,787 | | | $ | 1,287 | |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
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| For the periods ended September 30, |
| 2019 | | 2020 | | 2019 | | 2020 |
| Third Quarter | | First Nine Months |
| (unaudited) |
| Net income | $ | 571 | | | $ | 859 | | | $ | 1,787 | | | $ | 1,287 | |
| Other comprehensive income / (loss), net of tax | | | | | | | |
| Foreign currency translation | (210) | | | 238 | | | (182) | | | (23) | |
| Comprehensive income / (loss) | $ | 361 | | | $ | 1,097 | | | $ | 1,605 | | | $ | 1,264 | |
The accompanying notes are part of the financial statements.
Item 1. Financial Statements (Continued)
FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions)
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| December 31,
2019 | | September 30,
2020 |
| (unaudited) |
| ASSETS | | | |
| Cash and cash equivalents (Note 3) | $ | 9,067 | | | $ | 11,078 | |
| Marketable securities (Note 3) | 3,296 | | | 4,248 | |
| Finance receivables, net | | | |
| Retail installment contracts, dealer financing, and other financing | 106,131 | | | 97,021 | |
| Finance leases | 8,186 | | | 7,843 | |
Total finance receivables, net of allowance for credit losses of $513 and $1,314 (Note 4) | 114,317 | | | 104,864 | |
| Net investment in operating leases (Note 5) | 27,659 | | | 26,617 | |
| Notes and accounts receivable from affiliated companies | 863 | | | 1,017 | |
| Derivative financial instruments (Note 7) | 1,128 | | | 2,524 | |
| Assets held-for-sale (Note 1 and Note 4) | 1,698 | | | 38 | |
| Other assets (Note 8) | 3,398 | | | 4,132 | |
| Total assets | $ | 161,426 | | | $ | 154,518 | |
| | | |
| LIABILITIES | | | |
| Accounts payable | | | |
| Customer deposits, dealer reserves, and other | $ | 1,002 | | | $ | 1,064 | |
| Affiliated companies | 421 | | | 687 | |
| Total accounts payable | 1,423 | | | 1,751 | |
| Debt (Note 9) | 140,029 | | | 133,073 | |
| Deferred income taxes | 2,593 | | | 2,731 | |
| Derivative financial instruments (Note 7) | 356 | | | 582 | |
| Liabilities held-for-sale (Note 1) | 45 | | | — | |
| Other liabilities and deferred revenue (Note 8) | 2,633 | | | 2,097 | |
| Total liabilities | 147,079 | | | 140,234 | |
| | | |
| SHAREHOLDER’S INTEREST | | | |
| Shareholder’s interest | 5,227 | | | 5,227 | |
| Accumulated other comprehensive income / (loss) | (785) | | | (808) | |
| Retained earnings | 9,905 | | | 9,865 | |
| Total shareholder’s interest | 14,347 | | | 14,284 | |
| Total liabilities and shareholder’s interest | $ | 161,426 | | | $ | 154,518 | |
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 sheets above.
| | | | | | | | | | | |
| December 31,
2019 | | September 30,
2020 |
| (unaudited) |
| ASSETS | | | |
| Cash and cash equivalents | $ | 3,202 | | | $ | 2,905 | |
| Finance receivables, net | 58,478 | | | 48,490 | |
| Net investment in operating leases | 14,883 | | | 14,613 | |
| Derivative financial instruments | 12 | | | — | |
| LIABILITIES | | | |
| Debt | $ | 50,865 | | | $ | 44,766 | |
| Derivative financial instruments | 19 | | | 69 | |
The accompanying notes are part of the financial statements.
Item 1. Financial Statements (Continued)
FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER’S INTEREST
(in millions, unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Shareholder’s Interest | | Accumulated Other Comprehensive Income / (Loss) | | Retained Earnings | | Total Shareholder’s Interest |
| 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 | |
| | | | | | | | |
| Net income | | $ | — | | | $ | — | | | $ | 571 | | | $ | 571 | |
| Other comprehensive income / (loss), net of tax | | — | | | (210) | | | — | | | (210) | |
| Distributions declared | | — | | | — | | | (1,100) | | | (1,100) | |
| Balance at September 30, 2019 | | $ | 5,227 | | | $ | (1,011) | | | $ | 9,939 | | | $ | 14,155 | |
| | | | | | | | |
| Balance at December 31, 2019 | | $ | 5,227 | | | $ | (785) | | | $ | 9,905 | | | $ | 14,347 | |
| Net income | | — | | | — | | | 21 | | | 21 | |
| Other comprehensive income / (loss), net of tax | | — | | | (348) | | | — | | | (348) | |
| Adoption of accounting standard (Note 2) | | — | | | — | | | (202) | | | (202) | |
| Distributions declared | | — | | | — | | | (275) | | | (275) | |
| Balance at March 31, 2020 | | $ | 5,227 | | | $ | (1,133) | | | $ | 9,449 | | | $ | 13,543 | |
| | | | | | | | |
| Net income | | $ | — | | | $ | — | | | $ | 407 | | | $ | 407 | |
| Other comprehensive income / (loss), net of tax | | — | | | 87 | | | — | | | 87 | |
| Distributions declared | | — | | | — | | | (275) | | | (275) | |
| Balance at June 30, 2020 | | $ | 5,227 | | | $ | (1,046) | | | $ | 9,581 | | | $ | 13,762 | |
| | | | | | | | |
| Net income | | $ | — | | | $ | — | | | $ | 859 | | | $ | 859 | |
| Other comprehensive income / (loss), net of tax | | — | | | 238 | | | — | | | 238 | |
| Distributions declared | | — | | | — | | | (575) | | | (575) | |
| Balance at September 30, 2020 | | $ | 5,227 | | | $ | (808) | | | $ | 9,865 | | | $ | 14,284 | |
The accompanying notes are part of the financial statements.
Item 1. Financial Statements (Continued)
FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
| | | | | | | | | | | |
| For the periods ended September 30, |
| 2019 | | 2020 |
| First Nine Months |
| (unaudited) |
| Cash flows from operating activities | | | |
| Net Income | $ | 1,787 | | | $ | 1,287 | |
| Adjustments to reconcile net income to net cash provided in operations | | | |
| Provision for credit losses | 189 | | | 765 | |
| Depreciation and amortization | 3,306 | | | 3,150 | |
| Amortization of upfront interest supplements | (1,605) | | | (1,634) | |
| Net change in finance receivables held-for-sale | — | | | (74) | |
| Net change in deferred income taxes | 137 | | | 234 | |
| Net change in other assets | 58 | | | (1,235) | |
| Net change in other liabilities | 228 | | | (205) | |
| All other operating activities | 109 | | | 159 | |
| Net cash provided by / (used in) operating activities | 4,209 | | | 2,447 | |
| | | |
| Cash flows from investing activities | | | |
| Purchases of finance receivables | (28,449) | | | (32,145) | |
| Principal collections of finance receivables | 31,628 | | | 30,006 | |
| Purchases of operating lease vehicles | (9,728) | | | (8,523) | |
| Proceeds from termination of operating lease vehicles | 7,135 | | | 7,227 | |
| Net change in wholesale receivables and other short-duration receivables | 2,822 | | | 11,758 | |
| Proceeds from sale of business | — | | | 1,340 | |
| Purchases of marketable securities | (4,438) | | | (6,957) | |
| Proceeds from sales and maturities of marketable securities | 2,322 | | | 6,029 | |
| Settlements of derivatives | 87 | | | (107) | |
| All other investing activities | (41) | | | 81 | |
| Net cash provided by / (used in) investing activities | 1,338 | | | 8,709 | |
| | | |
| Cash flows from financing activities | | | |
| Proceeds from issuances of long-term debt | 33,423 | | | 30,168 | |
| Principal payments on long-term debt | (33,216) | | | (34,807) | |
| Change in short-term debt, net | (1,190) | | | (3,331) | |
| Cash distributions to parent | (2,425) | | | (1,125) | |
| All other financing activities | (87) | | | (79) | |
| Net cash provided by / (used in) financing activities | (3,495) | | | (9,174) | |
| | | |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (93) | | | 2 | |
| | | |
| Net increase / (decrease) in cash, cash equivalents and restricted cash | $ | 1,959 | | | $ | 1,984 | |
| | | |
| Cash, cash equivalents and restricted cash at beginning of period (Note 3) | $ | 9,747 | | | $ | 9,268 | |
| Net increase / (decrease) in cash, cash equivalents and restricted cash | 1,959 | | | 1,984 | |
| Cash, cash equivalents and restricted cash at end of period (Note 3) | $ | 11,706 | | | $ | 11,252 | |
The accompanying notes are part of the financial statements.
Item 1. Financial Statements (Continued)
FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
Table of Contents
| | | | | | | | |
| Footnote | | Page |
| Presentation | |
| Accounting Policies | |
| Cash, Cash Equivalents, and Marketable Securities | |
| Finance Receivables and Allowance for Credit Losses | |
| Net Investment in Operating Leases | |
| Transfers of Receivables and Variable Interest Entities | |
| Derivative Financial Instruments and Hedging Activities | |
| Other Assets and Other Liabilities and Deferred Revenue | |
| Debt | |
| | |
| | |
| Other Income / (Loss) | |
| | |
| Segment Information | |
| | |
| Commitments and Contingencies | |
Item 1. Financial Statements (Continued)
FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1. PRESENTATION
Principles of Consolidation
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 Current Report on Form 8-K filed on April 29, 2020 (“April 29, 2020 Form 8-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.
Global Pandemic
On March 11, 2020, the World Health Organization characterized the outbreak of COVID-19 as a global pandemic and recommended containment and mitigation measures. As a result, extraordinary actions were taken by international, federal, state, and local public health and governmental authorities to contain and combat the outbreak and spread of COVID-19 in regions throughout the world. These actions included travel bans, quarantines, “stay-at-home” orders, and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations.
Consistent with the actions taken by governmental authorities, by late March 2020, nearly all of our employees, other than in China, began working remotely in order to reduce the spread of COVID-19. Our remote work arrangements have been designed to allow for continued operation of business functions, including originating and servicing customer contracts, financial reporting, and internal control.
Our results include adjustments due to the impact of COVID-19, the most significant of which was a charge to the provision for credit losses. The majority of this adjustment was recorded in the first quarter and there were no material adjustments related to COVID-19 in the third quarter. See Note 4 for additional information.
Restructuring Actions
Beginning in the fourth quarter of 2019, we determined that it was not probable that we would hold certain assets and liabilities for more than the following twelve months, and these assets and liabilities were reported as held-for-sale. The total value of our Assets held-for-sale presented at fair value at December 31, 2019 and September 30, 2020 were $1,698 million and $38 million, respectively, and Liabilities held-for-sale presented at fair value at December 31, 2019 were $45 million. There were no Liabilities held-for-sale at September 30, 2020.
Item 1. Financial Statements (Continued)
FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
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”) 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments. On January 1, 2020, we adopted the new credit loss standard and all of the related amendments, which replaced the incurred loss impairment method with a method that reflects lifetime expected credit losses. We adopted the changes in accounting for credit losses by recognizing the cumulative effect of initially applying the new credit loss standard as an adjustment to the opening balance of Retained earnings. The comparative information has not been restated and continues to be reported under the accounting standard in effect for those periods.
The cumulative effect of the changes made to our consolidated balance sheet at January 1, 2020 for the adoption of ASU 2016-13 was as follows (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | Balance at
December 31, 2019 | | Adjustments
due to
ASU 2016-13 | | Balance at
January 1, 2020 |
| Assets | | | | | | |
| Retail installment contracts, dealer financing, and other financing | | $ | 106,131 | | | $ | (230) | | | $ | 105,901 | |
| Finance leases | | 8,186 | | | (22) | | | 8,164 | |
| Other assets | | 3,398 | | | (8) | | | 3,390 | |
| Liabilities | | | | | | |
| Deferred income taxes | | 2,593 | | | (58) | | | 2,535 | |
| Equity | | | | | | |
| Retained earnings | | 9,905 | | | (202) | | | 9,703 | |
| | | | | | |
ASU 2020-04, Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting.
On April 1, 2020, we adopted the new standard, which provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform (e.g., discontinuation of LIBOR), if certain criteria are met. As of September 30, 2020, we have not yet elected any optional expedients provided in the standard. We will apply the accounting relief as relevant contract and hedge accounting relationship modifications are made during the reference rate reform transition period. We do not expect the standard to have a material impact on our consolidated financial statements.
We also adopted the following ASUs during 2020, none of which had a material impact to our financial statements or financial statement disclosures:
| | | | | | | | | | | |
| ASU | | | Effective Date |
| 2020-01 | Clarifying the Interaction between Equity Securities, Equity Method and Joint Ventures, and Derivatives and Hedging | | January 1, 2020 |
| 2018-18 | Clarifying the Interaction between Collaborative Arrangements and Revenue from Contracts with Customers | | January 1, 2020 |
| 2018-15 | Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract | | January 1, 2020 |
| | | |
Accounting Standards Issued But Not Yet Adopted
The Company considers the applicability and impacts of all ASUs. ASUs were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial statements.
Item 1. Financial Statements (Continued)
FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 3. CASH, CASH EQUIVALENTS, AND MARKETABLE SECURITIES
The following table categorizes the fair values of cash, cash equivalents, and marketable securities measured at fair value on a recurring basis (in millions):
| | | | | | | | | | | | | | | | | |
| Fair Value Level | | December 31,
2019 | | September 30,
2020 |
| Cash and cash equivalents | | | | | |
| U.S. government | 1 | | $ | — | | | $ | 1,217 | |
| U.S. government agencies | 2 | | — | | | 850 | |
| Non-U.S. government and agencies | 2 | | 350 | | | 1,105 | |
| Corporate debt | 2 | | 604 | | | 900 | |
| Total marketable securities classified as cash equivalents | | | 954 | | | 4,072 | |
| Cash, time deposits and money market funds | | | 8,113 | | | 7,006 | |
| Total cash and cash equivalents | | | $ | 9,067 | | | $ | 11,078 | |
| | | | | |
| Marketable securities | | | | | |
| U.S. government | 1 | | $ | 195 | | | $ | 1,275 | |
| U.S. government agencies | 2 | | 210 | | | 235 | |
| Non-U.S. government and agencies | 2 | | 2,408 | | | 2,111 | |
| Corporate debt | 2 | | 193 | | | 313 | |
| Other marketable securities | 2 | | 290 | | | 314 | |
| Total marketable securities | | | $ | 3,296 | | | $ | 4,248 | |
Cash, Cash Equivalents, and Restricted Cash
Cash, cash equivalents, and restricted cash, as reported in the statements of cash flows, are presented separately on our consolidated balance sheets as follows (in millions):
| | | | | | | | | | | |
| December 31,
2019 | | September 30,
2020 |
| Cash and cash equivalents | $ | 9,067 | | | $ | 11,078 | |
| Restricted cash included in other assets (a) | 139 | | | 174 | |
| Cash, cash equivalents and restricted cash in assets held-for-sale | 62 | | | — | |
| Total cash, cash equivalents, and restricted cash | $ | 9,268 | | | $ | 11,252 | |
__________
(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.
Item 1. Financial Statements (Continued)
FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 4. FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES
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 are recorded at the time of origination or purchase at fair value and are subsequently reported at amortized cost, net of any allowance for credit losses.
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.
Total Finance Receivables, Net
Total finance receivables, net were as follows (in millions):
| | | | | | | | | | | |
| December 31,
2019 | | September 30,
2020 |
| Consumer | | | |
| Retail installment contracts, gross | $ | 68,998 | | | $ | 73,336 | |
| Finance leases, gross | 8,566 | | | 8,244 | |
| Retail financing, gross | 77,564 | | | 81,580 | |
| Unearned interest supplements from Ford and affiliated companies | (3,589) | | | (4,091) | |
| Consumer finance receivables | 73,975 | | | 77,489 | |
| | | |
| Non-Consumer | | | |
| Dealer financing | 38,910 | | | 26,992 | |
| Other financing | 1,945 | | | 1,697 | |
| Non-Consumer finance receivables | 40,855 | | | 28,689 | |
| Total recorded investment | $ | 114,830 | | | $ | 106,178 | |
| | | |
| Recorded investment in finance receivables | $ | 114,830 | | | $ | 106,178 | |
| Allowance for credit losses | (513) | | | (1,314) | |
| Total finance receivables, net | $ | 114,317 | | | $ | 104,864 | |
| | | |
| Net finance receivables subject to fair value (a) | $ | 106,131 | | | $ | 97,021 | |
| Fair value (b) | 106,260 | | | 98,426 | |
__________
(a)Net finance receivables subject to fair value exclude finance leases.
(b)The fair value of finance receivables is categorized within Level 3 of the fair value hierarchy.
Finance leases are comprised of sales-type and direct financing leases. Financing revenue from finance leases for the third quarter of 2019 and 2020 was $90 million and $96 million, respectively, and for the first nine months of 2019 and 2020 was $279 million and $268 million, respectively, and is included in Retail financing on the consolidated income statements.
At December 31, 2019 and September 30, 2020, accrued interest was $253 million and $185 million, respectively, which we report in Other assets on the consolidated balance sheets.
Included in recorded investment in finance receivables were consumer and non-consumer receivables that have been sold for legal purposes in securitization transactions but continue to be reported in our consolidated financial statements. See Note 6 for additional information.
The value of finance receivables considered held-for-sale at December 31, 2019 was $1.5 billion, primarily made up of $1.2 billion of Forso Nordic AB related finance receivables. At September 30, 2020, there were $38 million of certain wholesale finance receivables specifically identified as held-for-sale. These held-for-sale values are reported in Assets held-for-sale on the consolidated balance sheets. See Note 1 for additional information.
Item 1. Financial Statements (Continued)
FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 4. FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES (Continued)
Credit Quality
Consumer Portfolio
Credit quality ratings for consumer receivables are based on aging. 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.
The credit quality analysis of consumer receivables at December 31, 2019 was as follows (in millions):
| | | | | |
| Consumer | |
| 31-60 days past due | $ | 839 | |
| 61-120 days past due | 166 | |
| Greater than 120 days past due | 35 | |
| Total past due | 1,040 | |
| Current | 72,935 | |
| Total | $ | 73,975 | |
The credit quality analysis of consumer receivables at September 30, 2020 was as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Amortized Cost Basis by Origination Year | | |
| | Prior to 2016 | | 2016 | | 2017 | | 2018 | | 2019 | | 2020 | | Total |
| Consumer | | | | | | | | | | | | | | |
| 31-60 days past due | | $ | 45 | | | $ | 58 | | | $ | 99 | | | $ | 141 | | | $ | 141 | | | $ | 76 | | | $ | 560 | |
| 61-120 days past due | | 7 | | | 14 | | | 28 | | | 45 | | | 48 | | | 22 | | | 164 | |
| Greater than 120 days past due | | 13 | | | 7 | | | 7 | | | 8 | | | 7 | | | 1 | | | 43 | |
| Total past due | | 65 | | | 79 | | | 134 | | | 194 | | | 196 | | | 99 | | | 767 | |
| Current | | 1,141 | | | 3,292 | | | 8,011 | | | 15,466 | | | 22,526 | | | 26,286 | | | 76,722 | |
| Total | | $ | 1,206 | | | $ | 3,371 | | | $ | 8,145 | | | $ | 15,660 | | | $ | 22,722 | | | $ | 26,385 | | | $ | 77,489 | |
Item 1. Financial Statements (Continued)
FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 4. FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES (Continued)
Non-Consumer Portfolio
We use a proprietary model to assign each dealer a risk rating. This model uses historical dealer performance data to identify key factors about a dealer that we consider most significant in predicting a dealer’s ability to meet its financial obligations. We also consider numerous other financial and qualitative factors of the dealer’s operations, including capitalization and leverage, liquidity and cash flow, profitability, and credit history with ourselves and other creditors. The credit quality of dealer financing receivables is evaluated based on our internal dealer risk rating analysis.
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 at December 31, 2019 was as follows (in millions):
| | | | | |
| Dealer financing | |
| Group I | $ | 31,206 | |
| Group II | 5,407 | |
| Group III | 2,108 | |
| Group IV | 189 | |
| Total (a) | $ | 38,910 | |
__________
(a)Total past due dealer financing receivables at December 31, 2019 were $62 million.
The credit quality analysis of dealer financing receivables at September 30, 2020 was as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amortized Cost Basis by Origination Year | | | | |
| Dealer Loans | | | | |
| Prior to 2016 | | 2016 | | 2017 | | 2018 | | 2019 | | 2020 | | Total | | Wholesale Loans | | Total |
| Group I | $ | 528 | | | $ | 130 | | | $ | 142 | | | $ | 132 | | | $ | 72 | | | $ | 301 | | | $ | 1,305 | | | $ | 19,394 | | | $ | 20,699 | |
| Group II | 46 | | | 21 | | | 15 | | | 35 | | | 4 | | | 89 | | | 210 | | | 4,520 | | | 4,730 | |
| Group III | 9 | | | — | | | 3 | | | 17 | | | 3 | | | 41 | | | 73 | | | 1,356 | | | 1,429 | |
| Group IV | 2 | | | 3 | | | — | | | — | | | 2 | | | 5 | | | 12 | | | 122 | | | 134 | |
| Total (a) | $ | 585 | | | $ | 154 | | | $ | 160 | | | $ | 184 | | | $ | 81 | | | $ | 436 | | | $ | 1,600 | | | $ | 25,392 | | | $ | 26,992 | |
__________
(a)Total past due dealer financing receivables at September 30, 2020 were $126 million.
Non-Accrual of Revenue. The accrual of financing revenue is discontinued at the time a receivable is determined to be uncollectible or when it is 90 days past due. 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.
Item 1. Financial Statements (Continued)
FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 4. FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES (Continued)
Troubled Debt Restructuring (“TDR”). 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.
We have offered various programs to provide relief to customers and dealers impacted by COVID-19. These programs, which were broadly available to our customers and dealers during the first half of 2020, included payment extensions. We concluded that these programs did not meet TDR criteria. As of September 30, 2020, in the United States, we have received payments on nearly all the pandemic extensions offered to our customers, and no dealers were delinquent on their payments. The volume of payment extensions has returned to pre-COVID-19 levels and we continue to grant payment extensions to customers and dealers under our normal business practices.
Allowance for Credit Losses
The allowance for credit losses represents our estimate of the lifetime expected credit losses inherent in finance receivables as of the balance sheet date.
Additions to the allowance for credit losses are made by recording charges to the Provision for credit losses on our consolidated income statements. The uncollectible portion of a finance receivable is charged to the allowance for credit losses at the earlier of when an account is deemed to be uncollectible or when an account is 120 days delinquent, taking into consideration the financial condition of the customer or borrower, the value of the collateral, recourse to guarantors, and other factors.
Charge-offs on finance receivables include uncollected amounts related to principal, interest, late fees, and other allowable charges. Recoveries on finance receivables previously charged off as uncollectible are credited to the allowance for credit losses. In the event we repossess the collateral, the receivable is charged off and we record the collateral at its estimated fair value less costs to sell and report it in Other assets on the consolidated balance sheets.
Consumer Portfolio
Receivables in this portfolio include products offered to individuals and businesses that finance the acquisition of Ford and Lincoln vehicles from dealers for personal or commercial use. Retail financing includes retail installment contracts for new and used vehicles and finance leases with retail customers, government entities, daily rental companies, and fleet customers.
For consumer receivables that share similar risk characteristics such as product type, initial credit risk, term, vintage, geography, and other relevant factors, we estimate the lifetime expected credit loss allowance based on a collective assessment using measurement models and management judgment. The lifetime expected credit losses for the receivables is determined by applying probability of default and loss given default models to monthly expected exposures, then discounting these cash flows to present value using the receivable’s original effective interest rate or the current effective interest rate for a variable rate receivable. Probability of default models are developed from internal risk scoring models taking into account the expected probability of payment and time to default, adjusted for macroeconomic outlook and recent performance. The models consider factors such as risk evaluation at the time of origination, historical trends in credit losses (which include the impact of TDRs), and the composition and recent performance of the present portfolio (including vehicle brand, term, risk evaluation, and new / used vehicles). The loss given default is the percentage of the expected balance due at default that is not recoverable, taking into account the expected collateral value and trends in recoveries (including key metrics such as delinquencies, repossessions, and bankruptcies). Monthly exposures are equal to the receivables’ expected outstanding principal and interest balance.
Item 1. Financial Statements (Continued)
FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 4. FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES (Continued)
The loss allowance incorporates forward-looking macroeconomic conditions for baseline, upturn, and downturn scenarios. Three separate credit loss allowances are calculated from these scenarios. They are then probability-weighted to determine the credit loss allowance recognized in the financial statements. We use forecasts from a third party that revert to a long-term historical average after a reasonable and supportable forecasting period, which is specific to the particular macroeconomic variable and which varies by market. We update the forward-looking macroeconomic forecasts quarterly.
If management does not believe the models reflect lifetime expected credit losses for the portfolio, an adjustment is made to reflect management judgment regarding observable changes in recent or expected economic trends and conditions, portfolio composition, and other relevant factors.
On an ongoing basis, we review our models, including macroeconomic factors, the selection of macroeconomic scenarios, and their weighting to ensure they reflect the risk of the portfolio.
Non-Consumer Portfolio
Dealer financing includes wholesale loans to dealers to finance vehicle inventory, also known as floorplan financing, as well as loans to dealers to finance working capital, improvements to dealership facilities, the purchase of dealership real estate, and other dealer programs.
Dealer financing is evaluated on an individual dealer basis by segmenting dealers by risk characteristics (such as the amount of the loans, the nature of the collateral, the financial status of the dealer, and any TDR modifications) to determine if an individual dealer requires a specific allowance for credit loss. If required, the allowance is based on the present value of the expected future cash flows of the dealer’s receivables discounted at the loans’ original effective interest rate or the fair value of the collateral adjusted for estimated costs to sell.
For the remaining dealer financing, we estimate an allowance for credit losses on a collective basis.
Wholesale Loans. We estimate the allowance for credit losses for wholesale loans based on historical loss-to-receivable (“LTR”) ratios, expected future cash flows, and the fair value of collateral. For wholesale loans with similar risk characteristics, the allowance for credit losses is estimated on a collective basis using the LTR model and management judgment. The LTR model is based on the most recent years of history. An LTR is calculated by dividing credit losses (i.e., charge-offs net of recoveries) by average net finance receivables, excluding unearned interest supplements and allowance for credit losses. The average LTR is multiplied by the end-of-period balances, representing the lifetime expected credit loss reserve.
Dealer Loans. We use a weighted-average remaining maturity method to estimate the lifetime expected credit loss reserve for dealer loans. The loss model is based on the industry-wide commercial real estate credit losses, adjusted to factor in the historical credit losses for our dealer loans portfolio. The expected credit loss is calculated under different economic scenarios that are weighted to provide the total lifetime expected credit loss.
After establishing the collective and specific allowance for credit losses, if management believes the allowance does not reflect all losses inherent in the portfolio due to changes in recent economic trends and conditions, or other relevant forward-looking economic factors, an adjustment is made based on management judgment.
Item 1. Financial Statements (Continued)
FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 4. FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES (Continued)
An analysis of the allowance for credit losses related to finance receivables for the periods ended September 30 was as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter 2019 (a) | | First Nine Months 2019 (a) |
| Consumer | | Non-Consumer | | Total | | Consumer | | Non-Consumer | | Total |
| Allowance for credit losses | | | | | | | | | | | |
| Beginning balance | $ | 496 | | | $ | 17 | | | $ | 513 | | | $ | 566 | | | $ | 23 | | | $ | 589 | |
| Charge-offs | (129) | | | (1) | | | (130) | | | (383) | | | (18) | | | (401) | |
| Recoveries | 41 | | | — | | | 41 | | | 129 | | | 8 | | | 137 | |
| Provision for credit losses | 93 | | | — | | | 93 | | | 187 | | | 2 | | | 189 | |
| Other (b) | (3) | | | (1) | | | (4) | | | (1) | | | — | | | (1) | |
| Ending balance | $ | 498 | | | $ | 15 | | | $ | 513 | | | $ | 498 | | | $ | 15 | | | $ | 513 | |
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| Third Quarter 2020 | | First Nine Months 2020 |
| Consumer | | Non-Consumer | | Total | | Consumer | | Non-Consumer | | Total |
| Allowance for credit losses | | | | | | | | | | | |
| Beginning balance | $ | 1,211 | | | $ | 74 | | | $ | 1,285 | | | $ | 496 | | | $ | 17 | | | $ | 513 | |
| Adoption of ASU 2016-13 (c) | — | | | — | | | — | | | 247 | | | 5 | | | 252 | |
| Charge-offs | (104) | | | (5) | | | (109) | | | (329) | | | (6) | | | (335) | |
| Recoveries | 41 | | | 2 | | | 43 | | | 117 | | | 5 | | | 122 | |
| Provision for credit losses | 95 | | | (9) | | | 86 | | | 723 | | | 42 | | | 765 | |
| Other (b) | 8 | | | 1 | | | 9 | | | (3) | | | — | | | (3) | |
| Ending balance | $ | 1,251 | | | $ | 63 | | | $ | 1,314 | | | $ | 1,251 | | | $ | 63 | | | $ | 1,314 | |
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__________
(a)The comparative information has not been restated and continues to be reported under the accounting standard in effect during 2019.
(b)Primarily represents amounts related to translation adjustments.
(c)Cumulative pre-tax adjustments recorded to retained earnings as of January 1, 2020. See Note 2 for additional information.
During the third quarter and first nine months of 2020, the allowance for credit losses increased $29 million and $801 million, respectively. The change in the third quarter of 2020 reflects an increase to the reserve of $20 million associated with higher balances in our finance receivables portfolio, as well as an increase for translation adjustments. The relatively moderate reserve increase in the third quarter also reflects our view that future economic conditions are largely unchanged from our assumptions at June 30, 2020. The change in the first nine months of 2020 reflects an increase to the reserve of $252 million related to the adoption of ASU 2016-13, with the remainder primarily related to economic conditions attributable to the COVID-19 pandemic.
The change to the reserve due to the impact of COVID-19 reflects economic uncertainty which, along with the expectation of continued higher unemployment, has increased the probability of default and loss given default rates used in our estimate of the lifetime expected credit losses for our consumer portfolio, especially in the United States. These economic trends and conditions are also expected to negatively impact our dealers. Although net charge-offs during the third quarter and first nine months of 2020 remained low, reflecting government relief programs and our customer payment deferral programs, the future impact of COVID-19 on credit losses is expected to be adverse.
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. Included in Net investment in operating leases are net investment in operating leases that have been sold for legal purposes in securitization transactions but continue to be reported in our consolidated financial statements. See Note 6 for additional information.
Net investment in operating leases was as follows (in millions):
| | | | | | | | | | | |
| December 31,
2019 | | September 30,
2020 |
| Vehicles, at cost (a) | $ | 33,431 | | | $ | 32,457 | |
| Accumulated depreciation | (5,772) | | | (5,840) | |
| Net investment in operating leases | $ | 27,659 | | | $ | 26,617 | |
__________
(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 evaluate the carrying value of held-and-used long-lived asset groups (such as vehicles subject to operating leases) for potential impairment when we determine a triggering event has occurred. When a triggering event occurs, a test for recoverability is performed by comparing projected undiscounted future cash flows to the carrying value of the asset group. If the test for recoverability identifies a possible impairment, the asset group’s fair value is measured in accordance with the fair value measurement framework. An impairment charge is recognized for the amount by which the carrying value of the asset group exceeds its estimated fair value. For the periods presented, we have not recorded any impairment charges.
NOTE 6. TRANSFERS OF RECEIVABLES AND VARIABLE INTEREST ENTITIES
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. The debt is the obligation of our consolidated securitization entities and not the obligation of Ford Credit or our other subsidiaries.
We use special purpose entities to issue asset-backed securities in our securitization transactions. 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 investment 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.
Item 1. Financial Statements (Continued)
FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 6. TRANSFERS OF RECEIVABLES AND VARIABLE INTEREST ENTITIES (Continued)
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.
Securitization transactions that are exposed to interest rate or currency risk may reduce their risks by entering into derivative transactions. In certain instances, we have entered into derivative transactions with the counterparty to protect the counterparty from risks absorbed through its derivative transactions with the securitization entities. See Note 7 for additional information regarding derivatives.
Most of these securitization transactions utilize 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, 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 | $ | 1.8 | | | $ | 32.6 | | | $ | 0.2 | | | $ | 32.4 | | | $ | 28.0 | |
| Wholesale financing | 0.9 | | | 26.1 | | | — | | | 26.1 | | | 13.4 | |
| Finance receivables | 2.7 | | | 58.7 | | | 0.2 | | | 58.5 | | | 41.4 | |
| Net investment in operating leases | 0.5 | | | 14.9 | | | — | | | 14.9 | | | 9.5 | |
| Total VIE | $ | 3.2 | | | $ | 73.6 | | | $ | 0.2 | | | $ | 73.4 | | | $ | 50.9 | |
| | | | | | | | | |
| Non-VIE | | | | | | | | | |
| Retail financing | $ | 0.3 | | | $ | 5.7 | | | $ | — | | | $ | 5.7 | | | $ | 5.1 | |
| Wholesale financing | — | | | 0.7 | | | — | | | 0.7 | | | 0.6 | |
| Finance receivables | 0.3 | | | 6.4 | | | — | | | 6.4 | | | 5.7 | |
| Net investment in operating leases | — | | | — | | | — | | | — | | | — | |
| Total Non-VIE | $ | 0.3 | | | $ | 6.4 | | | $ | — | | | $ | 6.4 | | | $ | 5.7 | |
| | | | | | | | | |
| Total securitization transactions | | | | | | | | | |
| Retail financing | $ | 2.1 | | | $ | 38.3 | | | $ | 0.2 | | | $ | 38.1 | | | $ | 33.1 | |
| Wholesale financing (d) | 0.9 | | | 26.8 | | | — | | | 26.8 | | | 14.0 | |
| Finance receivables | 3.0 | | | 65.1 | | | 0.2 | | | 64.9 | | | 47.1 | |
| Net investment in operating leases | 0.5 | | | 14.9 | | | — | | | 14.9 | | | 9.5 | |
| Total securitization transactions | $ | 3.5 | | | $ | 80.0 | | | $ | 0.2 | | | $ | 79.8 | | | $ | 56.6 | |
__________
(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.
(d)The adjusted pool balance of the wholesale finance receivables owned by the securitization trusts was $26.8 billion and the required pool balance was $18.1 billion. As of December 31, 2019, the adjusted pool balance was $8.7 billion higher than the required pool balance.
Item 1. Financial Statements (Continued)
FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 6. TRANSFERS OF RECEIVABLES AND VARIABLE INTEREST ENTITIES (Continued)
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| September 30, 2020 |
| 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 | | | $ | 32.0 | | | $ | 0.4 | | | $ | 31.6 | | | $ | 25.2 | |
| Wholesale financing | 0.2 | | | 16.9 | | | — | | | 16.9 | | | 10.4 | |
| Finance receivables | 2.1 | | | 48.9 | | | 0.4 | | | 48.5 | | | 35.6 | |
| Net investment in operating leases | 0.8 | | | 14.6 | | | — | | | 14.6 | | | 9.2 | |
| Total VIE | $ | 2.9 | | | $ | 63.5 | | | $ | 0.4 | | | $ | 63.1 | | | $ | 44.8 | |
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| Non-VIE | | | | | | | | | |
| Retail financing | $ | 0.4 | | | $ | 9.1 | | | $ | 0.1 | | | $ | 9.0 | | | $ | 8.3 | |
| Wholesale financing | — | | | 0.5 | | | — | | | 0.5 | | | 0.1 | |
| Finance receivables | 0.4 | | | 9.6 | | | 0.1 | | | 9.5 | | | 8.4 | |
| Net investment in operating leases | — | | | — | | | — | | | — | | | — | |
| Total Non-VIE | $ | 0.4 | | | $ | 9.6 | | | $ | 0.1 | | | $ | 9.5 | | | $ | 8.4 | |
| | | | | | | | | |
| Total securitization transactions | | | | | | | | | |
| Retail financing | $ | 2.3 | | | $ | 41.1 | | | $ | 0.5 | | | $ | 40.6 | | | $ | 33.5 | |
| Wholesale financing (d) | 0.2 | | | 17.4 | | | — | | | 17.4 | | | 10.5 | |
| Finance receivables | 2.5 | | | 58.5 | | | 0.5 | | | 58.0 | | | 44.0 | |
| Net investment in operating leases | 0.8 | | | 14.6 | | | — | | | 14.6 | | | 9.2 | |
| Total securitization transactions | $ | 3.3 | | | $ | 73.1 | | | $ | 0.5 | | | $ | 72.6 | | | $ | 53.2 | |
__________
(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.
(d)The adjusted pool balance of the wholesale finance receivables owned by the securitization trusts was $17.4 billion and the required pool balance was $13.5 billion. As of September 30, 2020, the adjusted pool balance was $3.9 billion higher than the required pool balance.
Item 1. Financial Statements (Continued)
FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 7. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
In the normal course of business, our operations are exposed to global market risks, including the effect of changes in interest rates and foreign currency exchange rates. To manage these risks, we enter into highly effective derivative contracts. We have elected to apply hedge accounting to certain derivatives. Derivatives that are designated in hedging relationships are evaluated for effectiveness using regression analysis at the time they are designated and throughout the hedge period. Some derivatives do not qualify for hedge accounting; for others, we elect not to apply hedge accounting.
Income Effect of Derivative Financial Instruments
The gains / (losses), by hedge designation, reported in income for the periods ended September 30 were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter | | First Nine Months |
| 2019 | | 2020 | | 2019 | | 2020 |
| Fair value hedges | | | | | | | |
| Interest rate contracts | | | | | | | |
| Net interest settlements and accruals on hedging instruments | $ | — | | | $ | 94 | | | $ | (32) | | | $ | 190 | |
| Fair value changes on hedging instruments | 203 | | | (103) | | | 927 | | | 1,119 | |
| Fair value changes on hedged debt | (194) | | | 96 | | | (910) | | | (1,095) | |
| Cross-currency interest rate swap contracts (a) | | | | | | | |
| Net interest settlements and accruals on hedging instruments | — | | | (1) | | | — | | | (1) | |
| Fair value changes on hedging instruments | — | | | (10) | | | — | | | (10) | |
| Fair value changes on hedged debt | — | | | 6 | | | — | | | 6 | |
| Derivatives not designated as hedging instruments | | | | | | | |
| Interest rate contracts | 18 | | | (4) | | | (12) | | | (90) | |
| Foreign currency exchange contracts (b) | 154 | | | (106) | | | 188 | | | 60 | |
| Cross-currency interest rate swap contracts | (257) | | | 210 | | | (261) | | | 213 | |
| Total | $ | (76) | | | $ | 182 | | | $ | (100) | | | $ | 392 | |
__________
(a)During the third quarter of 2020, we began designating cross-currency interest rate swap contracts. We enter into cross-currency interest rate swaps to hedge our exposure to interest rate risk and foreign currency risk associated with the issuance of foreign denominated long-term debt. We report the change in fair value of the hedged debt and hedging instrument related to the change in the benchmark interest rate in Interest expense. We report the change in fair value of the hedged debt and hedging instrument related to foreign currency in Other income / (loss), net.
(b)Reflects forward contracts between Ford Credit and an affiliated company.
Item 1. Financial Statements (Continued)
FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 7. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES (Continued)
Balance Sheet Effect of Derivative Financial Instruments
Derivative assets and liabilities are reported on the balance sheets at fair value and are presented on a gross basis. The notional amounts of the derivative instruments do not necessarily represent amounts exchanged by the parties and are not a direct measure of our financial exposure. We also enter into master agreements with counterparties that may allow for netting of exposures in the event of default or breach of the counterparty agreement. Collateral represents cash received or paid under reciprocal arrangements that we have entered into with our derivative counterparties, which we do not use to offset our derivative assets and liabilities.
The fair value of our derivative instruments and the associated notional amounts were as follows (in millions):
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| December 31, 2019 | | September 30, 2020 |
| Notional | | Fair Value of Assets | | Fair Value of Liabilities | | Notional | | Fair Value of Assets | | Fair Value of Liabilities |
| Fair value hedges | | | | | | | | | | | |
| Interest rate contracts | $ | 26,577 | | | $ | 702 | | | $ | 19 | | | $ | 23,224 | | | $ | 1,417 | | | $ | 1 | |
| Cross-currency interest rate swap contracts | — | | | — | | | — | | | 885 | | — | | | 11 |
| Derivatives not designated as hedging instruments | | | | | | | | | | | |
| Interest rate contracts | 68,914 | | | 275 | | | 191 | | | 71,071 | | | 675 | | | 510 | |
| Foreign currency exchange contracts | 5,540 | | | 17 | | | 79 | | | 5,313 | | | 55 | | | 40 | |
| Cross-currency interest rate swap contracts | 5,849 | | | 134 | | | 67 | | | 6,285 | | | 377 | | | 20 | |
| Total derivative financial instruments, gross (a) (b) | $ | 106,880 | | | $ | 1,128 | | | $ | 356 | | | $ | 106,778 | | | $ | 2,524 | | | $ | 582 | |
__________
(a)At December 31, 2019 and September 30, 2020, we held collateral of $18 million and $11 million, respectively, and we posted collateral of $78 million and $103 million, respectively.
(b)At December 31, 2019 and September 30, 2020, the fair value of assets and liabilities available for counterparty netting was $169 million and $300 million, respectively. All derivatives are categorized within Level 2 of the fair value hierarchy.
Item 1. Financial Statements (Continued)
FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 8. 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,
2019 | | September 30,
2020 |
| Accrued interest and other non-finance receivables (a) | $ | 898 | | | $ | 1,799 | |
| Prepaid reinsurance premiums and other reinsurance recoverables | 687 | | | 705 | |
| Collateral held for resale, at net realizable value | 843 | | | 623 | |
| Property and equipment, net of accumulated depreciation (b) | 212 | | | 213 | |
Deferred charges - income taxes | 171 | | | 151 | |
| Investment in non-consolidated affiliates (c) | 132 | | | 132 | |
| Operating lease assets | 108 | | | 100 | |
| Other | 347 | | | 409 | |
| Total other assets | $ | 3,398 | | | $ | 4,132 | |
__________
(a)Includes income tax receivable from affiliated companies of $0 and $959 million at December 31, 2019 and September 30, 2020, respectively.
(b)Accumulated depreciation was $393 million and $412 million at December 31, 2019 and September 30, 2020, respectively.
(c)Adoption of ASU 2016-13 reduced investment in non-consolidated affiliates by $8 million. See Note 2 for additional information.
Other liabilities and deferred revenue were as follows (in millions):
| | | | | | | | | | | |
| December 31,
2019 | | September 30,
2020 |
| Unearned insurance premiums and fees | $ | 806 | | | $ | 822 | |
| Interest payable | 888 | | | 670 | |
| Income tax and related interest (a) | 433 | | | 144 | |
| Operating lease liabilities | 110 | | | 102 | |
| Deferred revenue | 110 | | | 91 | |
| Other | 286 | | | 268 | |
| Total other liabilities and deferred revenue | $ | 2,633 | | | $ | 2,097 | |
__________
(a)Includes income tax and interest payable to affiliated companies of $294 million and $15 million at December 31, 2019 and September 30, 2020, respectively.
Item 1. Financial Statements (Continued)
FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 9. DEBT
Debt outstanding and interest rates were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Interest Rates |
| Debt | | Average Contractual | | Average Effective |
| | December 31,
2019 | | September 30,
2020 | | 2019 | | 2020 | | 2019 | | 2020 |
| Short-term debt | | | | | | | | | | | |
| Unsecured debt | | | | | | | | | | | |
| Floating rate demand notes | $ | 6,545 | | | $ | 5,907 | | | | | | | | | |
| Commercial paper | 3,560 | | | 870 | | | | | | | | | |
| Other short-term debt | 2,731 | | | 3,170 | | | | | | | | | |
| Asset-backed debt (a) | 881 | | | 284 | | | | | | | | | |
Total short-term debt | 13,717 | | | 10,231 | | | 2.8 | % | | 1.7 | % | | 2.8 | % | | 1.7 | % |
| Long-term debt | | | | | | | | | | | |
| Unsecured debt | | | | | | | | | | | |
| Notes payable within one year | 15,062 | | | 18,568 | | | | | | | | | |
| Notes payable after one year | 55,148 | | | 49,946 | | | | | | | | | |
| Asset-backed debt (a) | | | | | | | | | | | |
| Notes payable within one year | 23,609 | | | 20,619 | | | | | | | | | |
| Notes payable after one year | 32,162 | | | 32,326 | | | | | | | | | |
| Unamortized (discount) / premium | 7 | | | 2 | | | | | | | | | |
| Unamortized issuance costs | (214) | | | (220) | | | | | | | | | |
| Fair value adjustments (b) | 538 | | | 1,601 | | | | | | | | | |
| Total long-term debt | 126,312 | | | 122,842 | | | 3.0 | % | | 2.7 | % | | 3.0 | % | | 2.7 | % |
| Total debt | $ | 140,029 | | | $ | 133,073 | | | 2.9 | % | | 2.6 | % | | 3.0 | % | | 2.6 | % |
| | | | | | | | | | | |
| Fair value of debt (c) | $ | 141,678 | | | $ | 132,647 | | | | | | | | | |
__________
(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 fair value hedges. The carrying value of hedged debt was $39.4 billion and $42.8 billion at December 31, 2019 and September 30, 2020, respectively.
(c)The fair value of debt includes $12.8 billion and $9.9 billion of short-term debt at December 31, 2019 and September 30, 2020, respectively, carried at cost, which approximates fair value. All other debt is categorized within Level 2 of the fair value hierarchy.
NOTE 10. OTHER INCOME / (LOSS)
Other income / (loss) consists of various line items that are combined on the income statements due to their respective materiality compared with other individual income and expense items.
The amounts included in Other income / (loss), net for the periods ended September 30 were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter | | First Nine Months |
| 2019 | | 2020 | | 2019 | | 2020 |
| Gains / (Losses) on derivatives | $ | (85) | | | $ | 93 | | | $ | (85) | | | $ | 176 | |
| Currency revaluation gains / (losses) | 52 | | | (90) | | | 36 | | | (259) | |
| Interest and investment income | 88 | | | 13 | | | 250 | | | 103 | |
| Other | 5 | | | (6) | | | 42 | | | 15 | |
| Total other income / (loss), net | $ | 60 | | | $ | 10 | | | $ | 243 | | | $ | 35 | |
Item 1. Financial Statements (Continued)
FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 11. 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. As of January 1, 2020, we updated our reportable segments in our consolidated financial statements to align with our new management reporting structure and reflect the manner in which our Chief Operating Decision Maker manages our business, including resource allocation and performance assessment. These segments are: the United States and Canada, Europe, and All Other. Our All Other segment includes China, India, Mexico, Brazil, Argentina, and our joint venture in South Africa. 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.
Item 1. Financial Statements (Continued)
FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 11. SEGMENT INFORMATION (Continued)
Key financial information for our business segments for the periods ended or at September 30 was as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| United States and Canada | | Europe | | All Other | | Total
Segments | | Unallocated Other (a) | | Total |
| Third Quarter 2019 (b) | | | | | | | | | | | |
| Total revenue | $ | 2,678 | | | $ | 286 | | | $ | 163 | | | $ | 3,127 | | | $ | — | | | $ | 3,127 | |
| Income before income taxes | 583 | | | 78 | | | 20 | | | 681 | | | 55 | | | 736 | |
Depreciation on vehicles subject to operating leases | 884 | | | 10 | | | — | | | 894 | | | — | | | 894 | |
| Interest expense | 912 | | | 86 | | | 82 | | | 1,080 | | | 1 | | | 1,081 | |
| Provision for credit losses | 80 | | | 6 | | | 7 | | | 93 | | | — | | | 93 | |
| | | | | | | | | | | |
| Third Quarter 2020 | | | | | | | | | | | |
| Total revenue | $ | 2,510 | | | $ | 245 | | | $ | 100 | | | $ | 2,855 | | | $ | — | | | $ | 2,855 | |
| Income before income taxes | 932 | | | 73 | | | 14 | | | 1,019 | | | 104 | | | 1,123 | |
Depreciation on vehicles subject to operating leases | 549 | | | (12) | | | — | | | 537 | | | — | | | 537 | |
| Interest expense | 666 | | | 87 | | | 49 | | | 802 | | | (10) | | | 792 | |
| Provision for credit losses | 79 | | | 1 | | | 6 | | | 86 | | | — | | | 86 | |
| | | | | | | | | | | |
| First Nine Months 2019 (b) | | | | | | | | | | | |
| Total revenue | $ | 8,105 | | | $ | 896 | | | $ | 508 | | | $ | 9,509 | | | $ | — | | | $ | 9,509 | |
| Income before income taxes | 1,794 | | | 305 | | | 115 | | | 2,214 | | | 154 | | | 2,368 | |
Depreciation on vehicles subject to operating leases | 2,681 | | | 31 | | | — | | | 2,712 | | | — | | | 2,712 | |
| Interest expense | 2,782 | | | 252 | | | 275 | | | 3,309 | | | 7 | | | 3,316 | |
| Provision for credit losses | 168 | | | 18 | | | 3 | | | 189 | | | — | | | 189 | |
| Net finance receivables and net investment in operating leases | 118,065 | | | 25,518 | | | 5,135 | | | 148,718 | | | (8,417) | | | 140,301 | |
| Total assets | 126,831 | | | 28,185 | | | 5,867 | | | 160,883 | | | — | | | 160,883 | |
| | | | | | | | | | | |
| First Nine Months 2020 | | | | | | | | | | | |
| Total revenue | $ | 7,589 | | | $ | 770 | | | $ | 321 | | | $ | 8,680 | | | $ | — | | | $ | 8,680 | |
| Income before income taxes | 1,399 | | | 155 | | | 38 | | | 1,592 | | | 104 | | | 1,696 | |
Depreciation on vehicles subject to operating leases | 2,578 | | | 1 | | | — | | | 2,579 | | | — | | | 2,579 | |
| Interest expense | 2,237 | | | 259 | | | 169 | | | 2,665 | | | (50) | | | 2,615 | |
| Provision for credit losses | 675 | | | 68 | | | 22 | | | 765 | | | — | | | 765 | |
| Net finance receivables and net investment in operating leases (c) | 114,266 | | | 22,023 | | | 4,329 | | | 140,618 | | | (9,137) | | | 131,481 | |
| Total assets | 123,939 | | | 25,720 | | | 4,859 | | | 154,518 | | | — | | | 154,518 | |
__________
(a)Finance receivables, net and Net investment in operating leases includes unearned interest supplements and residual support, allowance for credit losses, and other (primarily accumulated supplemental depreciation).
(b)Comparative information has been updated to reflect the reportable segments as of January 1, 2020.
(c)Excludes held-for-sale finance receivables.
Item 1. Financial Statements (Continued)
FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 12. COMMITMENTS AND CONTINGENCIES
Commitments and contingencies primarily consist of lease commitments, guarantees and indemnifications, and litigation and claims.
Lease Commitments
We lease various land, buildings, and equipment under agreements that expire over various contractual periods ranging from less than one year to 30 years. Many of our leases contain one or more options to extend. We include options that we are reasonably certain to exercise in our evaluation of the lease term after considering all relevant economic and financial factors. The leased assets and liabilities are reported in Other assets and Other liabilities and deferred revenue, respectively, on our consolidated balance sheets.
Guarantees and Indemnifications
Guarantees and indemnifications are recorded at fair value at their inception. For financial guarantees, subsequent to initial recognition, the guarantee liability is adjusted at each reporting period to reflect the current estimate of expected payments resulting from possible default events over the remaining life of the guarantee. The probability of default is applied to the expected exposure at the time of default less recoveries to determine the expected payments. Factors to consider when estimating the probability of default include the obligor’s financial position, forecasted economic environment, historical loss rates, and other communications. For non-financial guarantees, 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.
The maximum potential payments under these guarantees and limited indemnities totaled $53 million and $144 million at December 31, 2019 and September 30, 2020, respectively. Of these values, $48 million and $61 million at December 31, 2019 and September 30, 2020, respectively, were counter-guaranteed by Ford to us. There were no recorded liabilities related to guarantees and limited indemnities at December 31, 2019 or September 30, 2020.
In some cases, we have guaranteed debt and other financial obligations of outside third parties and unconsolidated affiliates, including Ford. Expiration dates vary, and guarantees will terminate on payment and / or cancellation of the underlying obligation. A payment by us would be triggered by failure of the guaranteed party to fulfill its obligation covered by the guarantee. In some circumstances, we are entitled to recover from a third party amounts paid by us under the guarantee. However, our ability to enforce these rights is sometimes stayed until the guaranteed party is paid in full and may be limited in the event of insolvency of the third party or other circumstances.
In the ordinary course of business, we execute contracts involving indemnifications standard in the industry and indemnifications specific to a transaction. These indemnifications might include and are not limited to claims relating to any of the following: environmental, tax, and shareholder matters; intellectual property rights; governmental regulations and employment-related matters; dealer and other commercial contractual relationships; and financial matters, such as securitizations. Performance under these indemnities generally would be triggered by a breach of terms of the contract or 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.
Item 1. Financial Statements (Continued)
FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 12. COMMITMENTS AND CONTINGENCIES (Continued)
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.
For nearly all matters where our historical experience with similar matters is of limited value (i.e., “non-pattern matters”), we evaluate the matters primarily based on the individual facts and circumstances. For non-pattern matters, we evaluate whether there is a reasonable possibility of a material loss in excess of any accrual that can be estimated. It is reasonably possible that some of the matters for which accruals have not been established could be decided unfavorably and could require us to pay damages or make other expenditures. On January 9, 2019, FCE Bank plc (“FCE”) received a decision from the Italian Competition Authority, which included an assessment of a fine against FCE in the amount of €42 million (equivalent to $48.6 million at September 30, 2020). On March 8, 2019, FCE appealed the decision and the fine. A hearing on our appeal was held on October 21, 2020, and a decision from the court is pending. The ultimate resolution of the matter could potentially take several years. While we have determined that an adverse outcome is not probable, the reasonably possible loss could be up to the fine amount.
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.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Recent Developments
The impact of COVID-19 has created significant volatility in the global economy and led to reduced economic activity. There have been extraordinary actions taken by international, federal, state, and local public health and governmental authorities to contain and combat the outbreak and spread of COVID-19 in regions throughout the world, including travel bans, quarantines, “stay-at-home” orders, and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations. Although restrictions have been eased in many locations, some areas that had previously eased restrictions have reverted to more stringent limitations on daily activities, which presently includes areas within Mexico and Europe.
Remote Work Arrangements and Business Operations
The remote work arrangements that we implemented in the first quarter remain in place in most locations. Our remote work arrangements have been designed to allow for continued operation of business functions, including originating and servicing customer contracts, financial reporting, and internal control. Our controls and procedures have incorporated remote work arrangements using appropriate digital tools.
COVID-19 has had a significant negative impact on many businesses and unemployment rates have increased sharply from pre-COVID-19 levels. We expect the economic uncertainty and higher unemployment to result in higher defaults in our consumer portfolio. Additionally, prolonged unemployment could have a negative impact on both new and used vehicle demand. A sustained decline in sales could have a significant adverse effect on dealer profitability and creditworthiness.
Liquidity
At the end of the third quarter of 2020, our liquidity was $31.3 billion. COVID-19 created significant volatility in the global economy and credit markets, and lower originations as a result of COVID-19 are projected to decrease the size of the balance sheet and our funding requirements in 2020. For additional information refer to the Funding and Liquidity section.
Enhanced Safety Standards
When we returned to work, we established new protocols to help protect the health and safety of our workforce. Those measures remain in place today, including a daily, online health self-certification, a no-touch temperature scan upon entering our facilities, a policy requiring the use of face masks in our facilities, and measures to provide additional personal protective equipment, including face shields when employees’ jobs do not allow them to socially distance. We have also enhanced our cleaning protocols.
Forward Looking Information
The full impact of COVID-19 on our future results depends on future developments, such as the ultimate duration and scope of the outbreak, its impact on our customers, dealers, and suppliers, Ford’s operations, customer demand for Ford’s products, and the rate at which economic conditions return to pre-COVID-19 levels. For additional information on the impact and potential impact of COVID-19 on us, see Item 1A. Risk Factors.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Definitions and Information Regarding Causal Factors
In general, we measure year-over-year changes in EBT using the causal factors listed below:
•Volume and Mix – Volume and Mix are primarily reflected within Net financing margin on the income statements.
◦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 vehicles sold and leased, the extent to which we purchase retail financing and operating 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.
◦Mix primarily measures changes in net financing margin driven by period-over-period changes in the composition of our average managed receivables by product within each region.
•Financing Margin – Financing Margin is reflected within Net financing margin on the income statements.
◦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 Provision for credit losses on the income statements.
◦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 forward looking macroeconomic conditions. For additional information, refer to the Critical Accounting Estimates section.
•Lease Residual – Lease Residual is reflected within Depreciation on vehicles subject to operating leases on the income statements.
◦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. Depreciation on vehicles subject to operating leases reflects early termination losses on operating leases due to customer default events for all periods presented. For additional information, refer to the “Critical Accounting Estimates” section of Item 7 of Exhibit 99 of our Current Report on Form 8-K filed April 29, 2020 (“April 29, 2020 Form 8-K Report”).
•Exchange – Reflects changes in EBT driven by the effects of converting functional currency income to U.S. dollars.
•Other – Primarily includes Operating expenses, Other revenue, Insurance expenses, and Other income / (Loss), net on the income statements at prior period exchange rates.
◦Changes in operating expenses are primarily driven by salaried personnel costs, facilities costs, and costs associated with the origination and servicing of customer contracts.
◦In general, other income / (loss) 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.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
In addition, the following definitions and calculations apply to the tables contained in Item 2 of this report:
• Cash (as shown in the Funding Structure, Liquidity, and Leverage tables) – Cash and cash equivalents and Marketable securities reported on Ford Credit’s balance sheets, excluding amounts related to insurance activities.
• Debt (as shown in the Key Metrics and Leverage tables) – Debt on Ford Credit’s balance sheets. Includes debt issued in securitizations and payable only out of collections on the underlying securitized assets and related enhancements. Ford Credit holds the right to receive the excess cash flows not needed to pay the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions.
• Earnings Before Taxes (“EBT”) – Reflects Income before income taxes as reported on Ford Credit’s income statements.
• Return on Equity (“ROE”) (as shown in the Key Metrics table) – Reflects return on equity calculated by annualizing net income for the period and dividing by monthly average equity for the period.
•Securitization Cash (as shown in the Liquidity table) – Cash held for the benefit of the securitization investors (for example, a reserve fund).
• Securitizations (as shown in the Public Term Funding Plan table) – Public securitization transactions, Rule 144A offerings sponsored by Ford Credit, and widely distributed offerings by Ford Credit Canada.
• Term Asset-Backed Securities (as shown in the Funding Structure table) – Obligations issued in securitization transactions that are payable only out of collections on the underlying securitized assets and related enhancements.
•Total Net Receivables (as shown in the Key Metrics and Financial Condition tables) – Includes finance receivables (retail financing and wholesale) sold for legal purposes and net investment in operating leases included in securitization transactions that do not satisfy the requirements for accounting sale treatment. These receivables and operating leases are reported on Ford Credit’s balance sheets and 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 of Ford Credit or the claims of Ford Credit’s other creditors.
• Unallocated Other (as shown in the Segment Results table) – 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.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Results of Operations
Key Metrics
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter | | First Nine Months |
| GAAP Financial Measures | 2019 | | 2020 | | H / (L) | | 2019 | | 2020 | | H / (L) |
| Total Net Receivables (billions) | $ | 140 | | | $ | 131 | | | (6) | % | | $ | 140 | | | $ | 131 | | | (6) | % |
| Loss-to-Receivables (bps) (a) | 51 | | | 30 | | | (21) | | | 48 | | | 35 | | | (13) | |
| Auction Values (b) | $ | 20,130 | | | $ | 21,045 | | | 5 | % | | $ | 19,525 | | | $ | 19,890 | | | 2 | % |
| EBT (millions) | $ | 736 | | | $ | 1,123 | | | $ | 387 | | | $ | 2,368 | | | $ | 1,696 | | | $ | (672) | |
| ROE | 15 | % | | 24 | % | | 9 ppts | | 16 | % | | 12 | % | | (4) ppts |
| | | | | | | | | | | |
| Other Balance Sheet Metrics | | | | | | | | | | | |
| Debt (billions) | | | | | | | $ | 139 | | | $ | 133 | | | (4) | % |
| Net Liquidity (billions) | | | | | | | $ | 35 | | | $ | 31 | | | (11) | % |
| Financial Statement Leverage (to 1) | | | | | | 9.8 | | | 9.3 | | | (0.5) | |
__________
(a)U.S. retail financing only.
(b)U.S. 36-month off-lease third quarter auction values at Q3 2020 mix and YTD amounts at 2020 YTD mix.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Non-GAAP Financial Measures | | | | | | | September 30,
2019 | | September 30,
2020 | | H / (L) |
| Managed Receivables (billions) (a) | | | | | | | $ | 149 | | | $ | 141 | | | (5) | % |
| Managed Leverage (to 1) (b) | | | | | | | 8.8 | | | 8.2 | | | (0.6) | |
__________
(a)See “Financial Condition” section for reconciliation to GAAP.
(b)See “Leverage” section for reconciliation to GAAP.
Third Quarter 2020 Compared with Third Quarter 2019
The following table shows the factors that contributed to the third quarter 2020 EBT (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Change in EBT by Causal Factor | | | | | | | | | |
| Third Quarter 2019 EBT | | | | | | | | | | $ | 736 | |
| Volume / Mix | | | | | | | | | | (49) | |
| Financing Margin | | | | | | | | | | 3 | |
| Credit Loss | | | | | | | | | | 6 | |
| Lease Residual | | | | | | | | | | 344 | |
| Exchange | | | | | | | | | | (2) | |
| Other | | | | | | | | | | 85 | |
| Third Quarter 2020 EBT | | | | | | | | | | $ | 1,123 | |
Our third quarter 2020 EBT was $1,123 million, $387 million higher than a year ago, primarily reflecting favorable auction performance on off-lease vehicles, a higher gain in market valuation adjustments to derivatives, and lower operating costs, partially offset by unfavorable volume resulting from lower receivables. ROE was 24%, 9 percentage points higher compared with a year ago as a result of higher EBT. Total Net receivables were $9 billion lower than a year ago, a 6% decline. The loss-to-receivables ratio remained at a low level in the third quarter, at 0.30%, 21 basis points lower than a year ago. Third quarter 2020 U.S. auction values were 5% higher than a year ago.
Our balance sheet is strong and inherently liquid reflecting cumulative debt maturities having a longer tenor than asset maturities. This means we generate liquidity as our balance sheet size declines because of lower Ford volume. Managed receivables of $141 billion at quarter end were $8 billion lower year-over-year and $11 billion lower than at December 31, 2019. At the end of the third quarter, we had $31.3 billion in liquidity.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Segment Results
As of January 1, 2020, we updated our reportable segments in our consolidated financial statements to align with our new management reporting structure and reflect the manner in which our Chief Operating Decision Maker manages our business, including resource allocation and performance assessment. These segments are: United States and Canada, Europe, and All Other. Items excluded in assessing segment performance, because they are managed at the corporate level, are reflected in Unallocated Other. Results of operations by segment and Unallocated Other for the periods ended September 30 are shown below (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter | | First Nine Months |
| 2019 | | 2020 | | H / (L) | | 2019 | | 2020 | | H / (L) |
| Results | | | | | | | | | | | |
| U.S. and Canada segment | $ | 583 | | | $ | 932 | | | $ | 349 | | | $ | 1,794 | | | $ | 1,399 | | | $ | (395) | |
| Europe segment | 78 | | | 73 | | | (5) | | | 305 | | | 155 | | | (150) | |
| All Other segment | 20 | | | 14 | | | (6) | | | 115 | | | 38 | | | (77) | |
| Total segments earnings before taxes | $ | 681 | | | $ | 1,019 | | | $ | 338 | | | $ | 2,214 | | | $ | 1,592 | | | $ | (622) | |
| Unallocated other | 55 | | | 104 | | | 49 | | | 154 | | | 104 | | | (50) | |
| Earnings before taxes | $ | 736 | | | $ | 1,123 | | | $ | 387 | | | $ | 2,368 | | | $ | 1,696 | | | $ | (672) | |
| Taxes | (165) | | | (264) | | | (99) | | | (581) | | | (409) | | | 172 | |
| Net Income | $ | 571 | | | $ | 859 | | | $ | 288 | | | $ | 1,787 | | | $ | 1,287 | | | $ | (500) | |
For additional information, see Note 11 of our Notes to the Financial Statements.
U.S. and Canada segment
The U.S. and Canada segment third quarter 2020 EBT of $932 million was $349 million higher compared with third quarter 2019, explained primarily by favorable auction performance on off-lease vehicles and lower borrowing costs. U.S. and Canada segment EBT of $1.4 billion for the first nine months of 2020 was $395 million lower compared with a year ago, explained primarily by an increase to the credit loss reserve due to COVID-19 and higher supplemental depreciation on operating leases, partially offset by favorable auction performance on off-lease vehicles, lower borrowing costs, and lower year-over-year credit losses.
Europe segment
The Europe segment third quarter 2020 EBT of $73 million was $5 million lower compared with third quarter 2019, explained primarily by lower receivables resulting from both the impact of COVID-19 and the effect of restructuring our European business, partially offset by lower operating costs, which primarily reflect the non-recurrence of 2019 restructuring costs. Europe segment EBT of $155 million for the first nine months of 2020 was $150 million lower than a year ago, explained primarily by the impact of COVID-19, which has resulted in lower receivables, increased credit loss reserves, and reduced margins, as well as the effect of restructuring the European business.
All Other segment
The All Other segment third quarter 2020 EBT of $14 million was $6 million lower compared with third quarter 2019, explained primarily by lower receivables. All Other segment EBT of $38 million for the first nine months of 2020 was $77 million lower compared with a year ago, explained primarily by lower receivables, weakening currency exchange in Argentina and Brazil, and unfavorable credit loss performance.
Unallocated Other
Unallocated Other was a $104 million gain for third quarter 2020, a $49 million increase compared with third quarter 2019, reflecting a larger gain in market valuation adjustments to derivatives. Unallocated Other was a $104 million gain for the first nine months of 2020, reflecting a $50 million lower gain in market valuation adjustments to derivatives compared with a year ago.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Financing Shares and Contract Placement Volume
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 period to period as Ford’s marketing programs change.
The following table shows our retail financing and operating lease share of new Ford and Lincoln brand sales, wholesale financing share of new Ford and Lincoln brand vehicles acquired by dealers (in percent), and contract placement volume for new and used vehicles (in thousands) in several key markets:
| | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter | | First Nine Months |
| 2019 | | 2020 | | 2019 | | 2020 |
| Share of Ford and Lincoln Sales (a) | | | | | | | |
| United States | 57 | % | | 55 | % | | 52 | % | | 63 | % |
| Canada | 57 | | | 75 | | | 63 | | | 69 | |
| U.K. | 40 | | | 40 | | | 39 | | | 42 | |
| Germany | 44 | | | 39 | | | 47 | | | 39 | |
| China | 35 | | | 40 | | | 34 | | | 37 | |
| | | | | | | |
| Wholesale Share | | | | | | | |
| United States | 76 | % | | 74 | % | | 76 | % | | 74 | % |
| Canada | 57 | | | 30 | | | 57 | | | 42 | |
| U.K. | 100 | | | 100 | | | 100 | | | 100 | |
| Germany | 93 | | | 93 | | | 93 | | | 93 | |
| China | 59 | | | 64 | | | 61 | | | 60 | |
| | | | | | | |
| Contract Placement Volume - New and Used (000) | | | | | | | |
| United States | 277 | | | 259 | | | 697 | | | 761 | |
| Canada | 36 | | | 53 | | | 106 | | | 101 | |
| U.K | 37 | | | 37 | | | 111 | | | 80 | |
| Germany | 38 | | | 28 | | | 126 | | | 76 | |
| China | 25 | | | 33 | | | 80 | | | 77 | |
| | | | | | | |
__________
(a)United States and Canada exclude Fleet sales, other markets include Fleet.
U.S. contract placement volume in the third quarter of 2020 was lower compared with a year ago, explained by lower industry volume and lower financing share, partially offset by higher Ford share. For the first nine months of 2020, U.S. contract placement volumes were up compared with a year ago, reflecting increased share as the result of Ford marketing programs and increased Ford share, partially offset by lower industry volume. Outside of the United States, contract placement volumes for the first nine months of 2020 were lower than a year ago due to a combination of lower share as well as lower Ford sales.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Financial Condition
Our receivables, including finance receivables and operating leases, were as follows (in billions):
| | | | | | | | | | | | | | | | | | | |
| | | September 30,
2019 | | December 31,
2019 | | September 30,
2020 |
| Net Receivables | | | | | | | |
| U.S. and Canada Segment | | | | | | | |
| Consumer financing | | | $ | 54.6 | | | $ | 55.4 | | | $ | 58.7 | |
| Non-Consumer financing | | | 28.9 | | | 29.4 | | | 21.0 | |
| Net investment in operating leases | | | 27.0 | | | 27.3 | | | 26.3 | |
| Total U.S. and Canada Segment | | | $ | 110.5 | | | $ | 112.1 | | | $ | 106.0 | |
| | | | | | | |
| Europe Segment | | | | | | | |
| Consumer financing | | | $ | 15.4 | | | $ | 14.8 | | | $ | 14.5 | |
| Non-Consumer financing | | | 9.0 | | | 9.8 | | | 6.5 | |
| Net investment in operating leases | | | 0.5 | | | 0.4 | | | 0.3 | |
| Total Europe Segment | | | $ | 24.9 | | | $ | 25.0 | | | $ | 21.3 | |
| | | | | | | |
| All Other Segment | | | | | | | |
| Consumer financing | | | $ | 3.4 | | | $ | 3.3 | | | $ | 3.0 | |
| Non-Consumer financing | | | 1.5 | | | 1.6 | | | 1.2 | |
| Net investment in operating leases | | | — | | | — | | | — | |
| Total Other Segment | | | $ | 4.9 | | | $ | 4.9 | | | $ | 4.2 | |
| | | | | | | |
| Total net receivables | | | $ | 140.3 | | | $ | 142.0 | | | $ | 131.5 | |
| | | | | | | |
| Managed Receivables | | | | | | | |
| Total net receivables (GAAP) | | | $ | 140.3 | | | $ | 142.0 | | | $ | 131.5 | |
| Held-for-sale receivables (GAAP) | | | — | | | 1.5 | | | 0.0 | |
| Unearned interest supplements and residual support | | | 6.8 | | | 6.7 | | | 6.7 | |
| Allowance for credit losses | | | 0.5 | | | 0.5 | | | 1.3 | |
| Other, primarily accumulated supplemental depreciation | | | 1.1 | | | 1.0 | | | 1.1 | |
| Total managed receivables (Non-GAAP) | | | $ | 148.7 | | | $ | 151.7 | | | $ | 140.6 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| U.S. and Canada Segment Lease Mix | | | | | | | |
| SUV / CUV | | | 57 | % | | 56 | % | | 58 | % |
| Truck | | | 30 | | | 27 | | | 32 | |
| Car | | | 13 | | | 17 | | | 10 | |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Financial Condition (Continued)
At September 30, 2019, December 31, 2019, and September 30, 2020, total net receivables includes consumer receivables before allowance for credit losses of $37.8 billion, $38.3 billion, and $41.1 billion, respectively, and non-consumer receivables before allowance for credit losses of $24.0 billion, $26.8 billion, and $17.4 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 September 30, 2019, December 31, 2019, and September 30, 2020, total net receivables includes net investment in operating leases of $12.7 billion, $14.9 billion, and $14.6 billion, respectively, that have been included in securitization transactions but continue to be reported in our consolidated financial statements. The receivables and net investment in operating leases are available only for payment of the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions; they are not available to pay the other obligations or the claims of Ford Credit’s other creditors. Ford Credit holds the right to receive the excess cash flows not needed to pay the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions. For additional information on our securitization transactions, refer to the “Securitization Transactions” and “On-Balance Sheet Arrangements” sections of Item 7 of Exhibit 99 of our April 29, 2020 Form 8-K Report and Note 6 of our Notes to the Financial Statements for the period ended September 30, 2020.
Total net receivables at September 30, 2020 were $8.8 billion lower compared with September 30, 2019 and $10.5 billion lower compared with December 31, 2019, primarily reflecting lower wholesale receivables.
Our operating lease portfolio was 20% of total net receivables at September 30, 2020. Leasing is an important product, and our leasing strategy balances sales, share, residuals, and long-term profitability. Operating leases in the United States and Canada represent 99% of our total operating lease portfolio.
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 manage the credit risk of our consumer (retail financing) 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 expected credit losses inherent in our finance receivables for the lifetime of those receivables 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, receivable levels, and forward-looking economic scenarios. The adequacy of our allowance for credit losses is assessed quarterly and the assumptions and models used in establishing the allowance are evaluated regularly.
Most of our charge-offs are related to retail financing. 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 financing.
In purchasing retail financing contracts, we use a proprietary scoring system that measures credit quality using information in the credit application, proposed contract terms, credit bureau data, and other information. After a proprietary risk score is generated, we decide whether to purchase a contract using a decision process based on a judgmental evaluation of the applicant, the credit application, the proposed contract terms, credit bureau information (e.g., FICO score), proprietary risk score, and other information. Our evaluation emphasizes the applicant’s ability to pay and creditworthiness focusing on payment, affordability, applicant credit history, and stability as key considerations. While FICO is a part of our scoring system, our models enable us to more effectively determine the probability that a customer will pay than using credit scores alone. When we originate business, our models project expected losses and we price accordingly. We ensure the business fits our risk appetite.
For additional information on our allowance for credit losses, the quality of our receivables, and COVID-19 impacts, see Note 4 of our Notes to the Financial Statements.
U.S. Origination Metrics
The following table shows U.S. retail financing and operating lease average placement FICO and higher risk portfolio mix metrics. Also shown are extended term mix and U.S. retail financing average placement terms.
| | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter | | First Nine Months |
| 2019 | | 2020 | | 2019 | | 2020 |
| Origination Metrics | | | | | | | |
| Average placement FICO | 750 | | | 738 | | | 746 | | | 740 | |
| Higher risk portfolio mix | 6 | % | | 6 | % | | 6 | % | | 6 | % |
| Greater than or equal to 84 months placement mix | 3 | % | | 4 | % | | 4 | % | | 9 | % |
| Average placement term (months) | 66 | | | 67 | | | 65 | | | 69 | |
Our third quarter 2020 average placement FICO score decreased compared with the same period a year ago. We support customers across the credit spectrum. Our higher risk business, as classified at contract inception, consistently represents 6% of our portfolio and has been stable for over 10 years.
During the third quarter of 2020, our average retail financing placement term increased by one month from a year ago, and retail financing contracts of 84 months and longer returned to normal levels and continue to be a small part of our business. Ford Credit remains focused on managing the trade cycle—building customer relationships and loyalty while offering financing products and terms customers want. Ford Credit origination and risk management processes deliver robust portfolio performance.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
U.S. Retail Financing Credit Losses
The following table shows the primary drivers of credit losses in the U.S. retail financing business, which comprised 65% of our worldwide consumer finance receivables at September 30, 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter | | First Nine Months |
| | 2019 | | 2020 | | 2019 | | 2020 |
| Credit Loss Drivers | | | | | | | | |
| Over-60-Day delinquencies (excl. bankruptcies) | | 0.14 | % | | 0.13 | % | | 0.12 | % | | 0.15 | % |
| Repossessions (000) | | 7 | | | 5 | | | 20 | | | 15 | |
| Repossession ratio | | 1.32 | % | | 1.04 | % | | 1.23 | % | | 0.93 | % |
| Loss severity (000) (a) | | $ | 10.3 | | | $ | 9.8 | | | $ | 10.5 | | | $ | 10.7 | |
| Charge-offs (millions) | | $ | 61 | | | $ | 39 | | | $ | 171 | | | $ | 131 | |
| LTR ratio (b) | | 0.51 | % | | 0.30 | % | | 0.48 | % | | 0.35 | % |
__________
(a)The expected difference between the amount a customer owes when the finance contract is charged off and the amount received, net of expenses, from selling the repossessed vehicle.
(b) Loss-to-Receivables (“LTR”) ratios are charge-offs divided by average managed receivables.
Delinquencies and charge-offs remained at low levels in the quarter. The third quarter 2020 repossession ratio and LTR ratio were lower compared with a year ago.
To help our existing customers, we implemented various retail financing and lease extension programs including payment deferrals, due date changes, and lease-end extensions. From mid-March through May 31, 2020, for customers who requested assistance, we granted payment extensions on about 10% of our global retail financing and operating lease contracts. To date, 99% of the customers receiving these extensions have made at least one payment following their extension. Requests for contract extensions have now returned to pre-pandemic levels.
Worldwide Credit Losses
The following table shows key metrics related to worldwide credit losses:
| | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter | | First Nine Months |
| 2019 | | 2020 | | 2019 | | 2020 |
| Charge-offs (millions) | $ | 89 | | | $ | 67 | | | $ | 264 | | | $ | 213 | |
| LTR ratio | 0.30 | % | | 0.24 | % | | 0.29 | % | | 0.25 | % |
| Credit loss reserve (millions) | $ | 513 | | | $ | 1,314 | | | $ | 513 | | | $ | 1,314 | |
| Reserve as percent of EOP Managed Receivables | 0.44 | % | | 1.19 | % | | 0.44 | % | | 1.19 | % |
Our worldwide charge-offs and LTR ratio were both lower than a year ago. Our credit loss reserve is based on such factors as historical loss performance, portfolio quality, receivables level, and forward-looking economic scenarios. The credit loss reserve and the reserve as a percent of managed receivables were both higher than a year ago, reflecting a $252 million increase to account for the Current Expected Credit Losses (“CECL”) adoption, with the remainder primarily related to a reserve increase driven by a higher probability of default reflecting an increase in unemployment outlook as a result of COVID-19. Our credit loss reserve reflects lifetime losses at about the same level as the second quarter. See Note 4 of our Notes to the Financial Statements for more information.
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 operating 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 leasing 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, industry wide used vehicle prices, marketing incentive plans, and vehicle quality data. For operating leases, changes in expected residual values impact depreciation expense, which is recognized on a straight-line basis over the life of the lease.
For additional information on our residual risk on operating leases, refer to the “Critical Accounting Estimates – Accumulated Depreciation on Vehicles Subject to Operating Leases” section of Item 7 of Exhibit 99 of our April 29, 2020 Form 8-K Report.
U.S. Ford and Lincoln Brand Operating Leases
The following table shows share of Ford and Lincoln brand retail financing and operating lease sales, placement volume, and residual performance metrics for our U.S. operating lease portfolio, which represents 88% of our total net investment in operating leases at September 30, 2020.
| | | | | | | | | | | | | | | | | | | | | | | |
| Third Quarter | | First Nine Months |
| 2019 | | 2020 | | 2019 | | 2020 |
| Lease Share of Retail Sales | | | | | | | |
| Ford Credit | 19 | % | | 18 | % | | 20 | % | | 18 | % |
| Industry (a) | 29 | % | | 27 | % | | 30 | % | | 29 | % |
| | | | | | | |
| Placement Volume (000) | | | | | | | |
| 24-Month | 11 | | | 12 | | | 29 | | | 32 | |
| 36-Month | 68 | | | 59 | | | 172 | | | 133 | |
| 39-Month / Other | 4 | | | 4 | | | 46 | | | 32 | |
| Total | 83 | | | 75 | | | 247 | | | 197 | |
| | | | | | | |
| Residual Performance | | | | | | | |
| Return rates | 76 | % | | 63 | % | | 78 | % | | 71 | % |
| Return volume (000) | 70 | | | 65 | | | 220 | | | 190 | |
| Off-lease auction values (b) | $ | 20,130 | | | $ | 21,045 | | | $ | 19,525 | | | $ | 19,890 | |
__________
(a)Source: J.D. Power PIN.
(b)36-month off-lease auction values; quarterly amounts at Q3 2020 mix and YTD amounts at 2020 YTD mix.
Ford Credit’s U.S. operating lease share of retail sales in the third quarter of 2020 was lower compared with a year ago and remains well below the industry average, reflecting the Ford sales mix. Our third quarter 2020 total lease placement volume was down compared with a year ago, primarily reflecting lower industry volume and lower lease share, partially offset by higher Ford share.
Lease return volume and return rate in the third quarter of 2020 were down from a year ago, reflecting improved auction values. Our third quarter 2020 36-month off-lease auction values were up 5% year-over-year, and up 7% compared with second quarter 2020, performing better than expected. Auction operations have resumed to pre-COVID-19 levels including both online and in-person attendance. We are now forecasting full-year 2020 36-month off-lease auction values to be up about 2%, consistent with third party estimates.
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, Fitch, Moody’s, and S&P.
In several markets, locally recognized rating agencies also rate us. A credit rating reflects an assessment by the rating agency of the credit risk associated with a corporate entity or particular securities issued by that entity. Rating agencies’ ratings of us are based on information provided by us and other sources. Credit ratings assigned to us from all of the NRSROs are closely associated with their opinions on Ford. Credit ratings are not recommendations to buy, sell, or hold securities and are subject to revision or withdrawal at any time by the assigning rating agency. Each rating agency may have different criteria for evaluating company risk and, therefore, ratings should be evaluated independently for each rating agency.
The following rating actions were taken by these NRSROs since the filing of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2020:
•On August 11, 2020, S&P affirmed the credit rating for Ford Credit at BB+, removed the rating from CreditWatch with negative implications, and revised the outlook to negative.
The following table 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 | | BB (high) | | | | R-4 | | | | Negative | | | | BBB (low) | |
| Fitch | | BB+ | | | | B | | | | Negative | | | | BBB- | |
| Moody’s | | Ba2 | | | | NP | | | | Negative | | | | Baa3 | |
| S&P | | BB+ | | | | B | | | | Negative | | | | BBB- | |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Funding and Liquidity
We ended the third quarter of 2020 with $31.3 billion of liquidity. During the quarter, we completed $7 billion of public term funding. Lower expected originations as a result of COVID-19 are projected to decrease the size of the balance sheet and reduce our funding requirements in 2020. We expect to modestly increase ABS mix and prudently issue unsecured debt going forward.
Key elements of our funding strategy include:
•Maintain strong liquidity; continue to renew and expand committed ABS capacity
•Prudently access public markets
•Flexibility to increase ABS mix as needed; preserving assets and committed capacity
•Target managed leverage of 8:1 to 9:1
•Maintain self-liquidating balance sheet
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.
The following table shows funding for our managed receivables (in billions):
| | | | | | | | | | | | | | | | | |
| Funding Structure | September 30,
2019 | | December 31,
2019 | | September 30,
2020 |
| Term Debt (incl. Bank Borrowings) | $ | 74 | | | $ | 73 | | | $ | 73 | |
| Term Asset-Backed Securities | 55 | | | 57 | | | 53 | |
| Commercial Paper | 4 | | | 4 | | | 1 | |
| Ford Interest Advantage / Deposits | 7 | | | 7 | | | 6 | |
| Other | 9 | | | 9 | | | 9 | |
| Equity | 14 | | | 14 | | | 14 | |
| Adjustments for Cash | (14) | | | (12) | | | (15) | |
| Total Managed Receivables (a) | $ | 149 | | | $ | 152 | | | $ | 141 | |
| | | | | |
| Securitized Funding as a percent of Managed Receivables | 37 | % | | 38 | % | | 38 | % |
__________
(a)Reconciliation to GAAP provided in the Financial Condition section.
Managed receivables of $141 billion as of September 30, 2020, were funded primarily with term debt and term asset-backed securities. Securitized funding as a percent of managed receivables was 38% at the end of the third quarter. We expect ABS mix to increase modestly going forward. The calendarization of the funding plan will result in quarterly fluctuations of the securitized funding percentage.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Public Term Funding Plan
The following table shows our issuances for full year 2018 and 2019, planned issuances for full year 2020, and our global public term funding issuances through October 27, 2020, excluding short-term funding programs (in billions):
| | | | | | | | | | | | | | | | | | | | | | | |
| 2018 Actual | | 2019 Actual | | 2020 Forecast | | Through
October 27 |
| Unsecured | $ | 13 | | | $ | 17 | | | $ 8 - 11 | | $ | 8 | |
| Securitizations | 14 | | | 14 | | | 12 - 13 | | 11 | |
| Total public | $ | 27 | | | $ | 31 | | | 21 - 24 | | $ | 20 | |
__________
Note: Numbers may not sum due to rounding
For 2020, we now project full year public term funding in the range of $21 billion to $24 billion. Through October 27, 2020, we have completed $20 billion of public term issuances.
Liquidity
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. Net liquidity available for use is defined as gross liquidity less certain adjustments as described below. While not included in available liquidity, these adjustments represent additional funding sources for future originations.
The following table shows our liquidity sources and utilization (in billions):
| | | | | | | | | | | | | | | | | | | |
| September 30,
2019 | | December 31,
2019 | | | | September 30,
2020 |
| Liquidity Sources | | | | | | | |
| Cash | $ | 14.3 | | | $ | 11.7 | | | | | $ | 14.6 | |
| Committed asset-backed facilities | 35.2 | | | 36.6 | | | | | 37.4 | |
| Other unsecured credit facilities | 2.6 | | | 3.0 | | | | | 2.4 | |
| Ford corporate credit facility allocation | 3.0 | | | 3.0 | | | | | — | |
| Total liquidity sources | $ | 55.1 | | | $ | 54.3 | | | | | $ | 54.4 | |
| | | | | | | |
| Utilization of Liquidity | | | | | | | |
| Securitization cash | $ | (2.9) | | | $ | (3.5) | | | | | $ | (3.3) | |
| Committed asset-backed facilities | (14.4) | | | (17.3) | | | | | (17.4) | |
| Other unsecured credit facilities | (0.5) | | | (0.8) | | | | | (0.5) | |
| Ford corporate credit facility allocation | — | | | — | | | | | — | |
| Total utilization of liquidity | $ | (17.8) | | | $ | (21.6) | | | | | $ | (21.2) | |
| | | | | | | |
| Gross liquidity | $ | 37.3 | | | $ | 32.7 | | | | | $ | 33.2 | |
| Adjustments (a) | (1.9) | | | 0.4 | | | | | (1.9) | |
| Net liquidity available for use | $ | 35.4 | | | $ | 33.1 | | | | | $ | 31.3 | |
__________
(a)Includes 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.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Liquidity (Continued)
Our net liquidity available for use will fluctuate quarterly based on factors including near-term debt maturities, receivable growth, and timing of funding transactions. At September 30, 2020, our net liquidity available for use was $31.3 billion, $1.8 billion lower than year-end 2019. Our sources of liquidity include cash, committed asset-backed facilities, and unsecured credit facilities. At September 30, 2020, our liquidity sources including cash totaled $54.4 billion, up $0.1 billion from year-end 2019.
Cash, Cash Equivalents, and Marketable Securities. At September 30, 2020, our cash, cash equivalents, and marketable securities (excluding amounts related to insurance activities) totaled $14.6 billion, compared with $11.7 billion at year-end 2019. In the normal course of our funding activities, we may generate more proceeds than are required for our immediate funding needs. These excess amounts are held primarily in highly liquid investments, which provide liquidity for our anticipated and unanticipated cash needs and give us flexibility in the use of our other funding programs. Our cash, cash equivalents, and marketable securities (excluding amounts related to insurance activities) primarily include U.S. Department of Treasury obligations, federal agency securities, bank time deposits with investment-grade institutions, investment-grade commercial paper, debt obligations of a select group of non-U.S. governments, non-U.S. governmental agencies, supranational institutions, non-U.S. central banks, and money market funds that carry the highest possible ratings.
The average maturity of these investments ranges from approximately three to six months and is adjusted based on market conditions and liquidity needs. We monitor our cash levels and average maturity on a daily basis. Cash, cash equivalents, and marketable securities included amounts to be used only to support our securitization transactions of $3.5 billion and $3.3 billion at December 31, 2019 and September 30, 2020, respectively.
Committed Capacity. At September 30, 2020, our committed capacity totaled $39.8 billion, compared with $42.6 billion at December 31, 2019. Our committed capacity is primarily comprised of committed ABS facilities from bank-sponsored commercial paper conduits and other financial institutions and unsecured credit facilities with financial institutions.
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 financing receivables or to purchase or make advances under asset-backed securities backed by retail financing or wholesale finance receivables or operating leases for proceeds of up to $37.4 billion ($21.3 billion of retail financing, $4.8 billion of wholesale financing, and $11.3 billion of operating leases) at September 30, 2020. In the United States, we are able to obtain funding within two days of our unutilized capacity in some of our committed asset-backed facilities. These committed facilities have varying maturity dates, with $28.4 billion having maturities within the next twelve months and the remaining balance having maturities through third quarter 2022. We plan capacity renewals to protect our global funding needs and to optimize capacity utilization.
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, 2020, $17.4 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.
As of September 30, 2020, Ford Bank GmbH had liquidity in the form of €430 million (equivalent to $503 million) of senior ABS notes eligible for collateral in the European Central Bank’s monetary policy programs.
Unsecured Credit Facilities. At September 30, 2020, we and our majority-owned subsidiaries had $2.4 billion of contractually committed unsecured credit facilities with financial institutions, including the FCE Credit Agreement and the Ford Bank Agreement. At September 30, 2020, $1.9 billion was available for use.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Liquidity (Continued)
FCE’s £745 million (equivalent to $955 million at September 30, 2020) syndicated credit facility (the “FCE Credit Agreement”) and Ford Bank GmbH’s €240 million (equivalent to $281 million at September 30, 2020) syndicated credit facility (the “Ford Bank Credit Agreement”) both mature in 2022. At September 30, 2020, all £745 million under the FCE Credit Agreement and all €240 million under the Ford Bank Credit Agreement were available for use.
Both the FCE Credit Agreement and Ford Bank Credit Agreement contain certain covenants, including an obligation for FCE and Ford Bank to maintain their ratio of regulatory capital to risk-weighted assets at no less than the applicable regulatory minimum. The FCE Credit Agreement requires the support agreement between FCE and Ford Credit to remain in effect (and enforced by FCE to ensure that its net worth is maintained at no less than $500 million). The Ford Bank Credit Agreement requires a guarantee of Ford Bank’s obligations under the agreement, provided by Ford Credit, to remain in effect.
Balance Sheet Liquidity Profile
We define our balance sheet liquidity profile as the cumulative maturities, including the impact of expected prepayments and allowance for credit losses, of our finance receivables, investment in operating leases, and cash, less the cumulative debt maturities over upcoming annual periods. Our balance sheet is inherently liquid because of the short-term nature of our finance receivables, investment in operating leases, and cash. We ensure our cumulative debt maturities have a longer tenor than our cumulative asset maturities. This positive maturity profile is intended to provide additional liquidity after all of our assets have been funded and is in addition to our liquidity stress test.
The following table shows our cumulative maturities for assets and total debt for the periods presented and unsecured long-term debt maturities in the individual periods presented (in billions):
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| October - December 2020 | | 2021 | | 2022 | | 2023 & Beyond |
| Balance Sheet Liquidity Profile | | | | | | | |
| Assets (a) | $ | 49 | | | $ | 84 | | | $ | 112 | | | $ | 153 | |
| Total debt (b) | 21 | | | 67 | | | 90 | | | 132 | |
| Memo: Unsecured Long-Term Debt Maturities | 4 | | | 17 | | | 14 | | | 34 | |
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(a)Includes gross finance receivables less the allowance for credit losses, investment in operating leases net of accumulated depreciation, cash and cash equivalents, and marketable securities (excluding amounts related to insurance activities). Amounts shown include the impact of expected prepayments.
(b)Excludes unamortized debt (discount) / premium, unamortized issuance costs, and fair value adjustments.
Maturities of investment in operating leases consist primarily of the portion of rental payments attributable to depreciation over the remaining life of the lease and the expected residual value at lease termination. Maturities of finance receivables and investment in operating leases in the table above include expected prepayments for our retail installment sale contracts and investment in operating leases. The table above also reflects adjustments to debt maturities to match the asset-backed debt maturities with the underlying asset maturities. All wholesale securitization transactions and wholesale receivables are shown maturing in the next 12 months, even if the maturities extend beyond third quarter 2021. The retail securitization transactions under certain committed asset-backed facilities are assumed to amortize immediately rather than amortizing after the expiration of the commitment period. As of September 30, 2020, we had $153 billion of assets, $77 billion of which were unencumbered. For additional information on finance receivables, investment in operating leases, and debt, see Notes 4, 5, and 9 of our Notes to the Financial Statements.
Funding and Liquidity Risks
Our funding plan is subject to risks and uncertainties, many of which are beyond our control, including disruption in the capital markets (such as from the impact of COVID-19), and the effects of regulatory changes on the financial markets. Refer to the “Funding and Liquidity Risks” section of Item 7 of Exhibit 99 of our April 29, 2020 Form 8-K Report for more information.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Leverage
We use leverage, or the debt-to-equity ratio, to make various business decisions, including evaluating and establishing pricing for finance receivable and operating lease financing, and assessing our capital structure. We refer to our shareholder’s interest as equity.
The following table shows the calculation of our financial statement leverage and managed leverage (in billions):
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| September 30,
2019 | | December 31,
2019 | | | | September 30,
2020 |
| Leverage Calculation | | | | | | | |
| Debt | $ | 139.3 | | | $ | 140.0 | | | | | $ | 133.1 | |
| Adjustments for cash | (14.3) | | | (11.7) | | | | | (14.6) | |
| Adjustments for derivative accounting | (0.8) | | | (0.5) | | | | | (1.6) | |
| Total adjusted debt | $ | 124.2 | | | $ | 127.8 | | | | | $ | 116.9 | |
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| Equity | $ | 14.2 | | | $ | 14.3 | | | | | $ | 14.3 | |
| Adjustments for derivative accounting | — | | | — | | | | | 0.1 | |
| Total adjusted equity | $ | 14.2 | | | $ | 14.3 | | | | | $ | 14.4 | |
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| Financial statement leverage (to 1) (GAAP) | 9.8 | | | 9.8 | | | | | 9.3 | |
| Managed leverage (to 1) (Non-GAAP) | 8.8 | | | 8.9 | | | | | 8.2 | |
We plan our managed leverage by considering market conditions and the risk characteristics of our business. At September 30, 2020, our financial statement leverage was 9.3:1, and managed leverage was 8.2:1. We target managed leverage in the range of 8:1 to 9:1.
Outlook
We expect EBT in the fourth quarter of 2020 to be lower than the third quarter, driven by strong but lower auction values and lower disposals at auction, but higher than a year ago.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Cautionary Note on Forward-Looking Statements
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:
•Ford and Ford Credit’s financial condition and results of operations have been and may continue to be adversely affected by public health issues, including epidemics or pandemics such as COVID-19;
•Ford’s long-term competitiveness depends on the successful execution of global redesign and fitness actions;
•Ford’s vehicles could be affected by defects that result in delays in new model launches, recall campaigns, or increased warranty costs;
•Ford may not realize the anticipated benefits of existing or pending strategic alliances, joint ventures, acquisitions, divestitures, or new business strategies;
•Operational systems, security systems, and vehicles could be affected by cyber incidents;
•Ford’s production, as well as Ford’s suppliers’ production, could be disrupted by labor issues, natural or man-made disasters, financial distress, production difficulties, or other factors;
•Ford’s ability to maintain a competitive cost structure could be affected by labor or other constraints;
•Ford’s ability to attract and retain talented, diverse, and highly skilled employees is critical to its success and competitiveness;
•Ford’s new and existing products and mobility services are subject to market acceptance;
•Ford’s results are dependent on sales of larger, more profitable vehicles, particularly in the United States;
•With a global footprint, Ford’s results could be adversely affected by economic, geopolitical, protectionist trade policies, or other events, including tariffs and Brexit;
•Industry sales volume in any of our key markets can be volatile and could decline if there is a financial crisis, recession, or significant geopolitical event;
•Ford may face increased price competition or a reduction in demand for its products resulting from industry excess capacity, currency fluctuations, competitive actions, or other factors;
•Fluctuations in commodity prices, foreign currency exchange rates, interest rates, and market value of our investments can have a significant effect on results;
•Ford and Ford Credit’s access to debt, securitization, or derivative markets around the world at competitive rates or in sufficient amounts could be affected by credit rating downgrades, market volatility, market disruption, regulatory requirements, or other factors;
•Ford’s receipt of government incentives could be subject to reduction, termination, or clawback;
•Ford Credit could experience higher-than-expected credit losses, lower-than-anticipated residual values, or higher-than-expected return volumes for leased vehicles;
•Economic and demographic experience for pension and other postretirement benefit plans (e.g., discount rates or investment returns) could be worse than Ford has assumed;
•Pension and other postretirement liabilities could adversely affect Ford’s liquidity and financial condition;
•Ford could experience unusual or significant litigation, governmental investigations, or adverse publicity arising out of alleged defects in products, perceived environmental impacts, or otherwise;
•Ford may need to substantially modify its product plans to comply with safety, emissions, fuel economy, autonomous vehicle, and other regulations that may change in the future;
•Ford and Ford Credit could be affected by the continued development of more stringent privacy, data use, and data protection laws and regulations as well as consumer expectations for the safeguarding of personal information; and
•Ford Credit could be subject to new or increased credit regulations, consumer protection regulations, or other regulations.
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 2019 Form 10-K Report, as updated by our subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Critical Accounting Estimates
As a result of the January 1, 2020 adoption of the CECL standard (ASU 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments), we updated our Critical Accounting Estimates disclosure. For additional information on our Allowance for Credit Losses Critical Accounting Estimates, see “Critical Accounting Estimates” in Item 2 of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.
Accounting Standards Issued But Not Yet Adopted
The Financial Accounting Standards Board (“FASB”) has issued the following Accounting Standards Updates (“ASU”), which are not expected to have a material impact to our financial statements or financial statement disclosures. For additional information, see Note 2 of our Notes to the Financial Statements.
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| ASU | | | Effective Date (a) |
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| 2019-12 | Simplifying the Accounting for Income Taxes | | January 1, 2021 |
| 2020-06 | Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity | | January 1, 2022 |
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(a)Early adoption is permitted.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
In our Annual Report on Form 10-K for the year ended December 31, 2019, 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, 2020, all else constant, such an increase in interest rates would increase our pre-tax cash flow by $4 million over the next 12 months, compared with a decrease of $26 million at December 31, 2019. In reality, interest rate changes are rarely instantaneous or parallel and rates could move more or less than the one percentage point assumed in our analysis. As a result, the actual impact to pre-tax cash flow could be higher or lower than the results detailed above.
ITEM 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. Marion B. Harris, our President and Chief Executive Officer (“CEO”), and Brian E. Schaaf, 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, 2020, 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, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1A. Risk Factors.
The following risk factor supplements the risk factors described in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 and should be read in conjunction with the risk factors described in our 2019 Form 10-K Report, as updated by our subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K:
Ford and Ford Credit’s financial condition and results of operations have been and may continue to be adversely affected by public health issues, including epidemics or pandemics such as COVID-19. Ford and Ford Credit face various risks related to public health issues, including epidemics, pandemics, and other outbreaks, including the deadly global outbreak of COVID-19. The impact of COVID-19, including changes in consumer behavior, pandemic fears and market downturns, and restrictions on business and individual activities, has created significant volatility in the global economy and led to reduced economic activity. There have been extraordinary actions taken by international, federal, state, and local public health and governmental authorities to contain and combat the outbreak and spread of COVID-19 in regions throughout the world, including travel bans, quarantines, “stay-at-home” orders, and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations. To the extent cases surge in any locations, stringent limitations on daily activities that may have been eased previously could be reinstated in those areas.
Consistent with the actions taken by governmental authorities, in late March 2020, Ford idled its manufacturing operations in regions around the world other than China, where manufacturing operations were suspended in January and February before beginning to resume operations in March. By May 2020, taking a phased approach and after introducing new safety protocols at its plants, Ford resumed manufacturing operations around the world.
The economic slowdown attributable to COVID-19 led to a global decrease in vehicle sales in markets around the world. As described in more detail under “Industry sales volume in any of our key markets can be volatile and could decline if there is a financial crisis, recession, or significant geopolitical event” in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019, a sustained decline in vehicle sales would have a substantial adverse effect on Ford’s financial condition, results of operations, and cash flow.
The predominant share of Ford Credit’s business consists of financing Ford and Lincoln vehicles, and the duration or reemergence of COVID-19 or similar public health issues may negatively impact the level of originations at Ford Credit. For example, Ford’s suspension of manufacturing operations, a significant decline in dealer showroom traffic, and / or a reduction of operations at dealers may lead to a significant decline in Ford Credit’s consumer and non-consumer originations. Moreover, a sustained decline in sales could have a significant adverse effect on dealer profitability and creditworthiness. Further, COVID-19 has had a significant negative impact on many businesses and unemployment rates have increased sharply from pre-COVID-19 levels. Ford Credit expects the economic uncertainty and higher unemployment to result in higher defaults in its consumer portfolio, and prolonged unemployment is expected to have a negative impact on both new and used vehicle demand.
The global economic slowdown and stay-at-home orders enacted across the United States disrupted auction activity in many locations, which adversely impacted and caused delays in realizing the resale value for off-lease and repossessed vehicles. Although auction performance has improved, future or additional restrictions could have a similar adverse impact on Ford Credit. For more information about the impact of higher credit losses and lower residual values on Ford Credit’s business, see “Ford Credit could experience higher-than-expected credit losses, lower-than-anticipated residual values, or higher-than-expected return volumes for leased vehicles” in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019.
As described in more detail under “Ford and Ford Credit’s access to debt, securitization, or derivative markets around the world at competitive rates or in sufficient amounts could be affected by credit rating downgrades, market volatility, market disruption, regulatory requirements, or other factors” in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019, the volatility created by COVID-19 adversely affected Ford Credit’s access to the debt and securitization markets and its cost of funding, and any volatility in the capital markets as a result of a surge in cases of COVID-19 or for any other reason could have an adverse impact on Ford Credit’s access to those markets and its cost of funding.
ITEM 1A. Risk Factors. (Continued)
The full impact of COVID-19 on Ford and Ford Credit’s financial condition and results of operations will depend on future developments, such as the ultimate duration and scope of the outbreak (including any potential second wave or future waves), its impact on customers, dealers, and suppliers, how quickly normal economic conditions, operations, and the demand for Ford’s products can resume, the duration and severity of the current recession, and any permanent behavioral changes that the pandemic may cause. For example, in the event manufacturing operations are again suspended, fully ramping up Ford’s production schedule to prior levels may take longer than the prior resumption and will depend, in part, on whether Ford’s suppliers and dealers have resumed normal operations. Ford’s automotive operations generally do not realize revenue while its manufacturing operations are suspended, but Ford continues to incur operating and non-operating expenses, resulting in a deterioration of its cash flow. Accordingly, any significant future disruption to Ford’s production schedule, whether as a result of Ford’s or a supplier’s suspension of operations, could have a substantial adverse effect on its financial condition, liquidity, and results of operations. Further, government-sponsored liquidity or stimulus programs in response to COVID-19 may not be available to Ford or Ford Credit or their customers, suppliers, or dealers, and if available, may nevertheless be insufficient to address the impacts of COVID-19. Moreover, Ford’s supply and distribution chains may be disrupted by supplier or dealer bankruptcies or their permanent discontinuation of operations. Ford continues to expect its full year 2020 results of operations to be adversely affected by COVID-19.
The COVID-19 pandemic may also exacerbate other risks disclosed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019, including, but not limited to, Ford’s competitiveness, demand or market acceptance for its products, and shifting consumer preferences.
ITEM 5. Other Information.
None.
ITEM 6. Exhibits.
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| Designation | | Description | | Method of Filing |
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| | Rule 15d-14(a) Certification of CEO. | | Filed with this Report. |
| | Rule 15d-14(a) Certification of CFO. | | Filed with this Report. |
| | Section 1350 Certification of CEO. | | Furnished with this Report. |
| | Section 1350 Certification of CFO. | | Furnished with this Report. |
| Exhibit 101.INS | | Interactive Data Files pursuant to Rule 405 of Regulation S-T formatted in Inline Extensible Business Reporting Language (“Inline XBRL”). | | * |
| Exhibit 101.SCH | | XBRL Taxonomy Extension Schema Document. | | * |
| Exhibit 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. | | * |
| Exhibit 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. | | * |
| Exhibit 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. | | * |
| Exhibit 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. | | * |
| Exhibit 104 | | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101). | | * |
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*Submitted electronically with this Report in accordance with the provisions of Regulation S-T.
Instruments defining the rights of holders of certain issues of long-term debt of Ford Credit have not been filed as exhibits to this Report because the authorized principal amount of any one of such issues does not exceed 10% of the total assets of Ford Credit. Ford Credit will furnish a copy of each such instrument to the SEC upon request.
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.
FORD MOTOR CREDIT COMPANY LLC
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| By: | /s/ Brian E. Schaaf |
| | Brian E. Schaaf |
| | Chief Financial Officer and Treasurer |
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| Date: | October 28, 2020 |