FORD MOTOR CREDIT CO LLC - FORM 10-Q - October 27, 2015

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________
FORM 10-Q
(Mark One)
R
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 
For the quarterly period ended September 30, 2015
 

or
£
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 
For the transition period from ____________________ to ____________________
 
 
Commission file number 1-6368
 



Ford Motor Credit Company LLC
(Exact name of registrant as specified in its charter)
Delaware
38-1612444
(State of organization)
(I.R.S. employer identification no.)
One American Road, Dearborn, Michigan
48126
(Address of principal executive offices)
(Zip code)

(313) 322-3000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes  o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer o
Non-accelerated filer þ
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes  þ No

All of the limited liability company interests in the registrant (“Shares”) are held by an affiliate of the registrant. None of the Shares are publicly traded.

REDUCED DISCLOSURE FORMAT
The registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced disclosure format.

 
Exhibit Index begins on page 44 




FORD MOTOR CREDIT COMPANY LLC
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended September 30, 2015
 
 
 
 
 
Table of Contents
 
Page
 
 
 
 
 
Part I. Financial Information
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Part II. Other Information
 
 
 
 
 
 
 
 
 


i

PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.


FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENT
(in millions)

 
For the periods ended September 30,
 
2015
 
2014
 
2015
 
2014
 
Third Quarter
 
First Nine Months
 
 
 
(unaudited)
 
 
Financing revenue
 
 
 
 
 
 
 
Operating leases
$
1,256

 
$
1,062

 
$
3,560

 
$
3,029

Retail financing
717

 
708

 
2,087

 
2,095

Dealer financing
383

 
424

 
1,131

 
1,241

Other
12

 
20

 
44

 
62

Total financing revenue
2,368

 
2,214

 
6,822

 
6,427

Depreciation on vehicles subject to operating leases
(956
)
 
(801
)
 
(2,630
)
 
(2,248
)
Interest expense
(582
)
 
(663
)
 
(1,819
)
 
(2,002
)
Net financing margin
830

 
750

 
2,373

 
2,177

Other revenue
 

 
 

 
 
 
 
Insurance premiums earned
32

 
31

 
97

 
94

Other income, net (Note 11)
78

 
67

 
179

 
184

Total financing margin and other revenue
940

 
848

 
2,649

 
2,455

Expenses
 

 
 

 
 
 
 
Operating expenses
279

 
276

 
820

 
807

Provision for credit losses (Note 4)
100

 
57

 
239

 
115

Insurance expenses
20

 
17

 
60

 
102

Total expenses
399

 
350

 
1,119

 
1,024

Income before income taxes
541

 
498

 
1,530

 
1,431

Provision for/(Benefit from) income taxes
176

 
(220
)
 
519

 
137

Net income
$
365

 
$
718

 
$
1,011

 
$
1,294



CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in millions)

 
For the periods ended September 30,
 
2015
 
2014
 
2015
 
2014
 
Third Quarter
 
First Nine Months
 
 
 
(unaudited)
 
 
Net income
$
365

 
$
718

 
$
1,011

 
$
1,294

Other comprehensive income/(loss), net of tax (Note 10)
 
 
 
 
 
 
 
Foreign currency translation
(275
)
 
(335
)
 
(561
)
 
(332
)
Total other comprehensive income/(loss), net of tax
(275
)
 
(335
)
 
(561
)
 
(332
)
Comprehensive income/(loss)
90

 
383

 
450

 
962

Less: Comprehensive income/(loss) attributable to noncontrolling interests
—

 
—

 
1

 
—

Comprehensive income/(loss) attributable to Ford Motor Credit Company
$
90

 
$
383

 
$
449

 
$
962


The accompanying notes are part of the financial statements.




1
Item 1. Financial Statements (Continued)



FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in millions)

 
September 30,
2015
 
December 31,
2014
 
(unaudited)
ASSETS
 
 
 
Cash and cash equivalents
$
6,913

 
$
6,179

Marketable securities
2,757

 
3,258

Finance receivables, net (Note 2)
92,680

 
86,915

Net investment in operating leases (Note 3)
24,510

 
21,518

Notes and accounts receivable from affiliated companies
968

 
778

Derivative financial instruments (Note 7)
1,168

 
859

Other assets (Note 8)
2,494

 
2,601

Total assets
$
131,490

 
$
122,108

 
 
 
 
LIABILITIES
 
 
 
Accounts payable
 
 
 
Customer deposits, dealer reserves, and other
$
1,290

 
$
1,148

Affiliated companies
539

 
330

Total accounts payable
1,829

 
1,478

Debt (Note 9)
113,309

 
105,037

Deferred income taxes
2,662

 
1,849

Derivative financial instruments (Note 7)
280

 
167

Other liabilities and deferred income (Note 8)
1,649

 
2,210

Total liabilities
119,729

 
110,741

 
 
 
 
SHAREHOLDER’S INTEREST
 
 
 
Shareholder’s interest
5,227

 
5,227

Accumulated other comprehensive income (Note 10)
(402
)
 
160

Retained earnings
6,935

 
5,980

Total shareholder’s interest attributable to Ford Motor Credit Company
11,760

 
11,367

Shareholder’s interest attributable to noncontrolling interests
1

 
—

Total shareholder’s interest
11,761

 
11,367

Total liabilities and shareholder’s interest
$
131,490

 
$
122,108



The following table includes assets to be used to settle the liabilities of the consolidated variable interest entities (“VIEs”).  These assets and liabilities are included in the consolidated balance sheet above.  See Notes 5 and 6 for additional information on our VIEs.
 
September 30,
2015
 
December 31,
2014
 
(unaudited)
ASSETS
 
 
 
Cash and cash equivalents
$
2,443

 
$
2,094

Finance receivables, net
44,036

 
39,522

Net investment in operating leases
11,266

 
9,631

Derivative financial instruments
64

 
27

 
 
 
 
LIABILITIES
 
 
 
Debt
$
41,712

 
$
37,156

Derivative financial instruments
30

 
22


The accompanying notes are part of the financial statements.

2
Item 1. Financial Statements (Continued)


FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDER’S INTEREST
(in millions, unaudited)

 
 
Shareholder’s Interest Attributable to Ford Motor Credit Company
 
 
 
 
 
 
Shareholder’s Interest
 
Accumulated Other Comprehensive Income
(Note 10)
 
Retained Earnings
 
Total
 
Shareholder’s Interest Attributable to Non-Controlling Interests
 
Total Shareholder’s Interest
Balance at December 31, 2014
 
$
5,227

 
$
160

 
$
5,980

 
$
11,367

 
$
—

 
$
11,367

Net income
 
—

 
—

 
1,011

 
1,011

 
—

 
1,011

Other comprehensive income/(loss), net of tax
 
—

 
(562
)
 
—

 
(562
)
 
1

 
(561
)
Distributions to parent
 
—

 
—

 
(56
)
 
(56
)
 
—

 
(56
)
Balance at September 30, 2015
 
$
5,227

 
$
(402
)
 
$
6,935

 
$
11,760

 
$
1

 
$
11,761

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2013
 
$
5,217

 
$
717

 
$
4,670

 
$
10,604

 
$
—

 
$
10,604

Net income
 
—

 
—

 
1,294

 
1,294

 
—

 
1,294

Other comprehensive income/(loss), net of tax
 
—

 
(332
)
 
—

 
(332
)
 
—

 
(332
)
Distributions to parent
 
—

 
—

 
(244
)
 
(244
)
 
—

 
(244
)
Balance at September 30, 2014
 
$
5,217

 
$
385

 
$
5,720

 
$
11,322

 
$
—

 
$
11,322




The accompanying notes are part of the financial statements.


3
Item 1. Financial Statements (Continued)



FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)

 
For the periods ended September 30,
 
2015
 
2014
 
First Nine Months
 
(unaudited)
Cash flows from operating activities
 
 
 
Net income
$
1,011

 
$
1,294

Adjustments to reconcile net income to net cash provided by operations
 
 
 
Provision for credit losses
239

 
115

Depreciation and amortization
3,256

 
2,842

Amortization of upfront interest supplements
(786
)
 
(756
)
Net change in deferred income taxes
860

 
2

Net change in other assets
(280
)
 
222

Net change in other liabilities
(88
)
 
13

All other operating activities
110

 
43

Net cash provided by/(used in) operating activities
4,322

 
3,775

 
 
 
 
Cash flows from investing activities
 
 
 
Purchases of finance receivables (excluding wholesale and other)
(30,275
)
 
(27,082
)
Collections of finance receivables (excluding wholesale and other)
23,745

 
22,755

Purchases of operating lease vehicles
(10,902
)
 
(9,815
)
Liquidations of operating lease vehicles
4,887

 
4,849

Net change in wholesale receivables and other
(1,521
)
 
(589
)
Net change in notes receivable from affiliated companies
(1
)
 
30

Purchases of marketable securities
(7,745
)
 
(10,952
)
Proceeds from sales and maturities of marketable securities
8,238

 
9,092

Settlements of derivatives
116

 
(161
)
All other investing activities
22

 
54

Net cash provided by/(used in) investing activities
(13,436
)
 
(11,819
)
 
 
 
 
Cash flows from financing activities
 
 
 
Proceeds from issuances of long-term debt
35,366

 
30,951

Principal payments on long-term debt
(25,693
)
 
(21,630
)
Change in short-term debt, net
634

 
(2,822
)
Cash distributions to parent
(56
)
 
(244
)
All other financing activities
(84
)
 
(86
)
Net cash provided by/(used in) financing activities
10,167

 
6,169

Effect of exchange rate changes on cash and cash equivalents
(319
)
 
(220
)
 
 
 
 
Net increase/(decrease) in cash and cash equivalents
$
734

 
$
(2,095
)
 
 
 
 
Cash and cash equivalents at January 1
$
6,179

 
$
9,424

Net increase/(decrease) in cash and cash equivalents
734

 
(2,095
)
Cash and cash equivalents at September 30
$
6,913

 
$
7,329


The accompanying notes are part of the financial statements.


4
Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS


Table of Contents

Footnote
 
Page
Accounting Policies
Finance Receivables
Net Investment in Operating Leases
Allowance for Credit Losses
Transfers of Receivables
Variable Interest Entities
Derivative Financial Instruments and Hedging Activities
Other Assets and Other Liabilities and Deferred Income
Debt
Accumulated Other Comprehensive Income
Other Income
Fair Value Measurements
Segment Information
Commitments and Contingencies




5
Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS


NOTE 1. ACCOUNTING POLICIES

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 Annual Report on Form 10-K for the year ended December 31, 2014 (“2014 Form 10-K Report”). We are an indirect, wholly owned subsidiary of Ford Motor Company (“Ford”).

We reclassified certain prior period amounts in our consolidated financial statements to conform to the presentation in our 2014 Form 10-K Report.

Provision for Income Taxes

For interim tax reporting we estimate one single effective tax rate, which is applied to the year-to-date ordinary income/(loss). Tax effects of significant unusual or extraordinary items are excluded from the estimated annual effective tax rate calculation and recognized in the interim period in which they occur.

During the third quarter of 2014, we completed a study that led to a change in our methodology for measuring currency gains and losses in computing the earnings of our European operations under U.S. tax law. Implementation of the new methodology substantially reduced the accumulated earnings of those operations under U.S. tax law and resulted in a tax benefit of $364 million in the third quarter of 2014 from the realization of additional foreign tax credits.

Adoption of New Accounting Standards
Accounting Standards Update (“ASU”) 2014-11, Transfers and Servicing - Repurchase-to-Maturity Transactions, Repurchase Financings and Disclosures. On January 1, 2015, we adopted the new accounting standard that changes the accounting for repurchase-to-maturity transactions and repurchase financing arrangements. The new standard also requires additional disclosures for certain transfers of financial assets with agreements that both entitle and obligate the transferor to repurchase the transferred assets from the transferee. The adoption of this accounting standard did not impact our financial statements or financial statement disclosures.

Accounting Standards Issued But Not Yet Adopted

ASU 2014-09, Revenue - Revenue from Contracts with Customers. In May 2014, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard that requires recognition of revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. The new standard supersedes virtually all present U.S. GAAP guidance on revenue recognition and requires the use of more estimates and judgments than the present standards, as well as additional disclosures. The FASB issued ASU 2015-14 to defer the original effective date from January 1, 2017 to January 1, 2018, while allowing for early adoption as of January 1, 2017. The new accounting standard is expected to have an impact to our income statement, balance sheet, and financial statement disclosures and we are reviewing our arrangements to evaluate the impact and method of adoption.


6
Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS


NOTE 1. ACCOUNTING POLICIES (Continued)

The FASB also issued the following standards, none of which are expected to have a material impact to our financial statements or financial statement disclosures.

Standard
 
 
Effective Date (a)
2015-16
Business Combinations - Simplifying the Accounting for Measurement-Period Adjustments
 
January 1, 2016
2015-09
Insurance - Disclosures about Short-Duration Contracts
 
January 1, 2016
2015-07
Fair Value Measurement - Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent)
 
January 1, 2016
2015-05
Internal-Use Software - Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement
 
January 1, 2016
2015-03
Imputation of Interest - Simplifying the Presentation of Debt Issuance Costs
 
January 1, 2016
2015-02
Consolidation - Amendments to the Consolidation Analysis
 
January 1, 2016
2015-01
Extraordinary and Unusual Items - Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items
 
January 1, 2016
2014-16
Derivatives and Hedging - Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity
 
January 1, 2016
2014-13
Consolidation - Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity
 
January 1, 2016
2014-12
Stock Compensation - Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period
 
January 1, 2016
2014-15
Going Concern - Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
 
December 31, 2016
__________
(a)
Early adoption for each of the standards is permitted.

7
Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS


NOTE 2. FINANCE RECEIVABLES

We segment finance receivables into “consumer” and “non-consumer” receivables. The receivables are generally secured by the vehicles, inventory, or other property being financed.

Finance receivables, net were as follows (in millions):
 
 
September 30,
2015
 
December 31,
2014
Consumer
 
 
 
Retail financing, gross
$
61,241

 
$
55,856

Less:  Unearned interest supplements (a)
(2,117
)
 
(1,760
)
Consumer finance receivables
59,124

 
54,096

 
 
 
 
Non-Consumer
 
 
 
Dealer financing (b)
32,722

 
31,875

Other financing
1,190

 
1,265

Non-Consumer finance receivables
33,912

 
33,140

 
 
 
 
Total recorded investment
$
93,036

 
$
87,236

 
 
 
 
Recorded investment in finance receivables
$
93,036

 
$
87,236

Less:  Allowance for credit losses
(356
)
 
(321
)
Finance receivables, net
$
92,680

 
$
86,915

 
 
 
 
Net finance receivables subject to fair value (c)
$
90,875

 
$
85,242

Fair value
92,560

 
86,715

__________
(a)
Ford-sponsored special financing programs attributable to retail financing.
(b)
At September 30, 2015 and December 31, 2014, includes $571 million and $535 million, respectively, of dealer financing receivables with entities (primarily dealers) that are reported as consolidated subsidiaries of Ford. The associated vehicles that are being financed by us are reported as inventory on Ford’s balance sheet.
(c)
At September 30, 2015 and December 31, 2014, excludes $1.8 billion and $1.7 billion, respectively, of certain receivables (primarily direct financing leases) that are not subject to fair value disclosure requirements.

Excluded from finance receivables at September 30, 2015 and December 31, 2014 was $184 million and $192 million, respectively, of accrued uncollected interest, which we report in Other assets on our balance sheet.

Included in recorded investment in finance receivables at September 30, 2015 and December 31, 2014 were consumer receivables of $27.7 billion and $24.4 billion, respectively, and non-consumer receivables of $23.1 billion and $21.8 billion, respectively, that have been sold for legal purposes in securitization transactions but continue to be reported in our consolidated financial statements. The receivables are available only for payment of the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions; they are not available to pay the other obligations or the claims of Ford Credit’s other creditors. Ford Credit holds the right to receive the excess cash flows not needed to pay the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions (see Note 5 for additional information).



 
 
 
 
 
 
 
 
 
 

8
Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS


NOTE 2. FINANCE RECEIVABLES (Continued)

Aging

For all finance receivables, we define “past due” as any payment, including principal and interest, that is at least 31 days past the contractual due date. The recorded investment of consumer receivables greater than 90 days past due and still accruing interest was $15 million and $17 million at September 30, 2015 and December 31, 2014, respectively. The recorded investment of non-consumer receivables greater than 90 days past due and still accruing interest was $3 million at September 30, 2015 and December 31, 2014.
 
The aging analysis of finance receivables balances was as follows (in millions):

 
September 30,
2015
 
December 31,
2014
Consumer
 
 
 
31-60 days past due
$
597

 
$
718

61-90 days past due
94

 
97

91-120 days past due
25

 
29

Greater than 120 days past due
39

 
52

Total past due
755

 
896

Current
58,369

 
53,200

Consumer finance receivables
59,124

 
54,096

 
 
 
 
Non-Consumer
 
 
 
Total past due
127

 
117

Current
33,785

 
33,023

Non-Consumer finance receivables
33,912

 
33,140

 
 
 
 
Total recorded investment
$
93,036

 
$
87,236


Credit Quality

Consumer Segment

Credit quality ratings for consumer receivables are based on our aging analysis. Refer to the aging table above.

Consumer receivables credit quality ratings are as follows:

•
Pass – current to 60 days past due
•
Special Mention – 61 to 120 days past due and in intensified collection status
•
Substandard – greater than 120 days past due and for which the uncollectible portion of the receivables has already been charged off, as measured using the fair value of collateral

Non-Consumer Segment

Dealers are assigned to one of four groups according to risk ratings as follows:

•
Group I – strong to superior financial metrics
•
Group II – fair to favorable financial metrics
•
Group III – marginal to weak financial metrics
•
Group IV – poor financial metrics, including dealers classified as uncollectible


9
Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS


NOTE 2. FINANCE RECEIVABLES (Continued)
 
The credit quality analysis of our dealer financing receivables was as follows (in millions):
 
September 30,
2015
 
December 31,
2014
Dealer financing
 
 
 
Group I
$
24,763

 
$
23,641

Group II
6,389

 
6,360

Group III
1,462

 
1,787

Group IV
108

 
87

Total recorded investment
$
32,722

 
$
31,875


Impaired Receivables

Impaired consumer receivables include accounts that have been rewritten or modified in reorganization proceedings pursuant to the U.S. Bankruptcy Code that are considered to be Troubled Debt Restructurings (“TDRs”), as well as all accounts greater than 120 days past due. Impaired non-consumer receivables represent accounts with dealers that have weak or poor financial metrics or dealer financing that has been modified in TDRs. The recorded investment of consumer receivables that were impaired at September 30, 2015 and December 31, 2014 was $375 million, or 0.6% of consumer receivables, and $415 million, or 0.8% of consumer receivables, respectively. The recorded investment of non-consumer receivables that were impaired at September 30, 2015 and December 31, 2014 was $129 million, or 0.4% of non-consumer receivables, and $110 million, or 0.3% of non-consumer receivables, respectively. Impaired finance receivables are evaluated both collectively and specifically.

The accrual of revenue is discontinued at the time a receivable is determined to be uncollectible. Accounts may be restored to accrual status only when a customer settles all past-due deficiency balances and future payments are reasonably assured. For receivables in non-accrual status, subsequent financing revenue is recognized only to the extent a payment is received. Payments are generally applied first to outstanding interest and then to the unpaid principal balance.

A restructuring of debt constitutes a TDR if we grant a concession to a debtor for economic or legal reasons related to the debtor’s financial difficulties that we otherwise would not consider. Consumer and non-consumer receivables that have a modified interest rate below market rate or that were modified in reorganization proceedings pursuant to the U.S. Bankruptcy Code, except non-consumer receivables that are current with minimal risk of loss, are considered to be TDRs. We do not grant concessions on the principal balance of our receivables. If a receivable is modified in a reorganization proceeding, all payment requirements of the reorganization plan need to be met before remaining balances are forgiven. Finance receivables involved in TDRs are specifically assessed for impairment.


10
Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS


NOTE 3. NET INVESTMENT IN OPERATING LEASES

Net investment in operating leases consist primarily of lease contracts for vehicles with retail customers, daily rental companies, government entities, and fleet customers with terms of 60 months or less.

Net investment in operating leases were as follows (in millions):
 
September 30,
2015
 
December 31,
2014
Vehicles, at cost (a)
$
28,674

 
$
24,952

Less: Accumulated depreciation
(4,117
)
 
(3,396
)
Net investment in operating leases before allowance for credit losses
24,557

 
21,556

Less: Allowance for credit losses
(47
)
 
(38
)
Net investment in operating leases
$
24,510

 
$
21,518

__________
(a)
Includes unearned interest supplements and residual support payments we receive on certain leasing transactions under agreements with Ford and affiliated companies, and other vehicle acquisition costs.

At September 30, 2015 and December 31, 2014, includes net investment in operating leases before allowance for credit losses of $11.3 billion and $9.6 billion, respectively, that have been included in securitization transactions but continue to be reported in our consolidated financial statements. These net investment in operating leases are available only for payment of the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions; they are not available to pay our other obligations or the claims of our other creditors. We hold the right to receive the excess cash flows not needed to pay the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions (see Note 5 for additional information).
 
 
 
 
 
 
 
 
 
 

11
Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS


NOTE 4. ALLOWANCE FOR CREDIT LOSSES

An analysis of the allowance for credit losses related to finance receivables and net investment in operating leases for the periods ended September 30 (in millions) was as follows:
 
Third Quarter 2015
 
Finance Receivables
 
Net Investment in Operating Leases
 
Total Allowance
 
Consumer
 
Non-Consumer
 
Total
 
 
Allowance for credit losses
 
 
 
 
 
 
 
 
 
Beginning balance
$
322

 
$
13

 
$
335

 
$
45

 
$
380

Charge-offs
(85
)
 
(2
)
 
(87
)
 
(31
)
 
(118
)
Recoveries
29

 
1

 
30

 
15

 
45

Provision for credit losses
80

 
2

 
82

 
18

 
100

Other (a)
(4
)
 
—

 
(4
)
 
—

 
(4
)
Ending balance
$
342

 
$
14

 
$
356

 
$
47

 
$
403

 
First Nine Months 2015
 
Finance Receivables
 
Net Investment in Operating Leases
 
Total Allowance
 
Consumer
 
Non-Consumer
 
Total
 
 
Allowance for credit losses
 
 
 
 
 
 
 
 
 
Beginning balance
$
305

 
$
16

 
$
321

 
$
38

 
$
359

Charge-offs
(235
)
 
(3
)
 
(238
)
 
(87
)
 
(325
)
Recoveries
90

 
4

 
94

 
46

 
140

Provision for credit losses
190

 
(2
)
 
188

 
51

 
239

Other (a)
(8
)
 
(1
)
 
(9
)
 
(1
)
 
(10
)
Ending balance
$
342

 
$
14

 
$
356

 
$
47

 
$
403

 
 
 
 
 
 
 
 
 
 
Analysis of ending balance of allowance for credit losses
 
 
 
 
 
 
 
 
 
Collective impairment allowance
$
323

 
$
12

 
$
335

 
$
47

 
$
382

Specific impairment allowance
19

 
2

 
21

 
—

 
21

Ending balance
342

 
14

 
356

 
47

 
$
403

 
 
 
 
 
 
 
 
 
 
Analysis of ending balance of finance receivables and net investment in operating leases
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment
58,749

 
33,783

 
92,532

 
24,557

 
 
Specifically evaluated for impairment
375

 
129

 
504

 
—

 
 
Recorded investment
59,124

 
33,912

 
93,036

 
24,557

 
 
 
 
 
 
 
 
 
 
 
 
Ending balance, net of allowance for credit losses
$
58,782

 
$
33,898

 
$
92,680

 
$
24,510

 
 
__________
(a)
Primarily represents amounts related to translation adjustments.


12
Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS


NOTE 4. ALLOWANCE FOR CREDIT LOSSES (Continued)
 
Third Quarter 2014
 
Finance Receivables
 
Net Investment in Operating Leases
 
Total Allowance
 
Consumer
 
Non-Consumer
 
Total
 
 
Allowance for credit losses
 
 
 
 
 
 
 
 
 
Beginning balance
$
303

 
$
24

 
$
327

 
$
26

 
$
353

Charge-offs
(68
)
 
(2
)
 
(70
)
 
(28
)
 
(98
)
Recoveries
33

 
2

 
35

 
15

 
50

Provision for credit losses
42

 
(3
)
 
39

 
18

 
57

Other (a)
(5
)
 
(1
)
 
(6
)
 
—

 
(6
)
Ending balance
$
305

 
$
20

 
$
325

 
$
31

 
$
356

 
First Nine Months 2014
 
Finance Receivables
 
Net Investment in Operating Leases
 
Total Allowance
 
Consumer
 
Non-Consumer
 
Total
 
 
Allowance for credit losses
 
 
 
 
 
 
 
 
 
Beginning balance
$
327

 
$
30

 
$
357

 
$
23

 
$
380

Charge-offs
(200
)
 
(7
)
 
(207
)
 
(82
)
 
(289
)
Recoveries
101

 
8

 
109

 
47

 
156

Provision for credit losses
82

 
(10
)
 
72

 
43

 
115

Other (a)
(5
)
 
(1
)
 
(6
)
 
—

 
(6
)
Ending balance
$
305

 
$
20

 
$
325

 
$
31

 
$
356

 
 
 
 
 
 
 
 
 
 
Analysis of ending balance of allowance for credit losses
 
 
 
 
 
 
 
 
 
Collective impairment allowance
$
283

 
$
19

 
$
302

 
$
31

 
$
333

Specific impairment allowance
22

 
1

 
23

 
—

 
23

Ending balance
305

 
20

 
325

 
31

 
$
356

 
 
 
 
 
 
 
 
 
 
Analysis of ending balance of finance receivables and net investment in operating leases
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment
53,150

 
31,815

 
84,965

 
20,947

 
 
Specifically evaluated for impairment
421

 
136

 
557

 
—

 
 
Recorded investment
53,571

 
31,951

 
85,522

 
20,947

 
 
 
 
 
 
 
 
 
 
 
 
Ending balance, net of allowance for credit losses
$
53,266

 
$
31,931

 
$
85,197

 
$
20,916

 
 
__________
(a)
Primarily represents amounts related to translation adjustments.

13
Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS


NOTE 5. TRANSFERS OF RECEIVABLES

We securitize finance receivables and net investment in operating leases through a variety of programs using amortizing, variable funding, and revolving structures. We also sell finance receivables in structured financing transactions. Due to the similarities between securitization and structured financing, we refer to structured financings as securitization transactions. Our securitization programs are targeted to institutional investors in both public and private transactions in capital markets including the United States, Canada, several European countries, Mexico, and China.

We engage in securitization transactions to fund operations and to maintain liquidity. Our securitization transactions are recorded as asset-backed debt and the associated assets are not derecognized and continue to be included in our financial statements.

The finance receivables sold for legal purposes and net investment in operating leases included in securitization transactions are available only for payment of the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions. They are not available to pay our other obligations or the claims of our other creditors. We hold the right to receive the excess cash flows not needed to pay the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions. The debt is the obligation of our consolidated securitization entities and not the obligation of Ford Credit or our other subsidiaries.

Most of these securitization transactions utilize VIEs. See Note 6 for more information concerning VIEs. The following tables show the assets and debt related to our securitization transactions that were included in our financial statements (in billions):
 
September 30, 2015
 
Cash and Cash Equivalents
 
Finance Receivables and Net Investment in Operating Leases (a)
 
Related Debt
 
Before Allowance
for Credit Losses
 
Allowance for
Credit Losses
 
After Allowance
for Credit Losses
 
VIE (b)
 
 
 
 
 
 
 
 
 
Retail financing
$
1.5

 
$
21.9

 
$
0.1

 
$
21.8

 
$
19.9

Wholesale financing
0.3

 
22.2

 
—

 
22.2

 
14.5

Finance receivables
1.8

 
44.1

 
0.1

 
44.0

 
34.4

Net investment in operating leases
0.6

 
11.3

 
—

 
11.3

 
7.3

Total VIE
$
2.4

 
$
55.4

 
$
0.1

 
$
55.3

 
$
41.7

 
 
 
 
 
 
 
 
 
 
Non-VIE
 
 
 
 
 
 
 
 
 
Retail financing
$
0.4

 
$
5.8

 
$
—

 
$
5.8

 
$
5.3

Wholesale financing
—

 
0.9

 
—

 
0.9

 
0.9

Finance receivables
0.4

 
6.7

 
—

 
6.7

 
6.2

Net investment in operating leases
—

 
—

 
—

 
—

 
—

Total Non-VIE
$
0.4

 
$
6.7

 
$
—

 
$
6.7

 
$
6.2

 
 
 
 
 
 
 
 
 
 
Total securitization transactions
 
 
 
 
 
 
 
 
 
Retail financing
$
1.9

 
$
27.7

 
$
0.1

 
$
27.6

 
$
25.2

Wholesale financing
0.3

 
23.1

 
—

 
23.1

 
15.4

Finance receivables
2.2

 
50.8

 
0.1

 
50.7

 
40.6

Net investment in operating leases
0.6

 
11.3

 
—

 
11.3

 
7.3

Total securitization transactions
$
2.8

 
$
62.1

 
$
0.1

 
$
62.0

 
$
47.9

__________
(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.

14
Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS


NOTE 5. TRANSFERS OF RECEIVABLES (Continued)

 
December 31, 2014
 
Cash and Cash Equivalents
 
Finance Receivables and Net Investment in Operating Leases (a)
 
Related Debt
 
Before Allowance
for Credit Losses
 
Allowance for
Credit Losses
 
After Allowance
for Credit Losses
 
VIE (b)
 
 
 
 
 
 
 
 
 
Retail financing
$
1.4

 
$
18.8

 
$
0.1

 
$
18.7

 
$
17.3

Wholesale financing
0.3

 
20.8

 
—

 
20.8

 
13.3

Finance receivables
1.7

 
39.6

 
0.1

 
39.5

 
30.6

Net investment in operating leases
0.4

 
9.6

 
—

 
9.6

 
6.6

Total VIE
$
2.1

 
$
49.2

 
$
0.1

 
$
49.1

 
$
37.2

 
 
 
 
 
 
 
 
 
 
Non-VIE
 
 
 
 
 
 
 
 
 
Retail financing
$
0.3

 
$
5.6

 
$
—

 
$
5.6

 
$
5.2

Wholesale financing
—

 
1.0

 
—

 
1.0

 
0.9

Finance receivables
0.3

 
6.6

 
—

 
6.6

 
6.1

Net investment in operating leases
—

 
—

 
—

 
—

 
—

Total Non-VIE
$
0.3

 
$
6.6

 
$
—

 
$
6.6

 
$
6.1

 
 
 
 
 
 
 
 
 
 
Total securitization transactions
 
 
 
 
 
 
 
 
 
Retail financing
$
1.7

 
$
24.4

 
$
0.1

 
$
24.3

 
$
22.5

Wholesale financing
0.3

 
21.8

 
—

 
21.8

 
14.2

Finance receivables
2.0

 
46.2

 
0.1

 
46.1

 
36.7

Net investment in operating leases
0.4

 
9.6

 
—

 
9.6

 
6.6

Total securitization transactions
$
2.4

 
$
55.8

 
$
0.1

 
$
55.7

 
$
43.3

__________
(a)
Unearned interest supplements and residual support are excluded from securitization transactions.
(b)
Includes assets to be used to settle the liabilities of the consolidated VIEs.

NOTE 6. VARIABLE INTEREST ENTITIES

VIEs of Which We Are the Primary Beneficiary

We use special purpose entities to issue asset-backed securities in transactions to public and private investors, bank conduits, and government-sponsored entities or others who obtain funding from government programs. We have deemed most of these special purpose entities to be VIEs as we have determined we have both the power to direct the activities of the entity that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits of the entity that could be significant. The asset-backed securities are backed by finance receivables and interests in net investments in operating leases. The assets continue to be consolidated by us. We retain interests in our securitization VIEs, including subordinated securities issued by the VIEs, rights to cash held for the benefit of the securitization investors, and rights to receive the excess cash flows not needed to pay the debt issued by, and other obligations of, the securitization entities that are parties to those securitization transactions.


15
Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS


NOTE 6. 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.

See Note 5 for information on the financial position and financial performance of our VIEs.

VIEs of Which We Are Not the Primary Beneficiary

We have an investment in Forso Nordic AB, a joint venture determined to be a VIE of which we are not the primary beneficiary. The joint venture provides retail and dealer financing in its local markets and is financed by external debt and additional subordinated debt provided by the joint venture partner. The operating agreement indicates that the power to direct economically significant activities is shared with the joint venture partner, and the obligation to absorb losses or right to receive benefits resides primarily with the joint venture partner. Our investment in the joint venture is accounted for as an equity method investment and is included in Other assets. Our maximum exposure to any potential losses associated with this VIE is limited to our equity investment and amounted to $66 million at September 30, 2015 and December 31, 2014.

NOTE 7. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

In the normal course of business, our operations are exposed to global market risks, including the effect of changes in interest rates and foreign currency exchange rates. To manage these risks, we enter into highly effective derivative contracts. We have elected to apply hedge accounting to certain derivatives. Derivatives that are designated in hedging relationships are evaluated for effectiveness using regression analysis at the time they are designated and throughout the hedge period. Some derivatives do not qualify for hedge accounting; for others, we elect not to apply hedge accounting.

Income Effect of Derivative Financial Instruments

The gains/(losses), by hedge designation, recorded in income for the periods ended September 30 were as follows (in millions):
 
Third Quarter
 
First Nine Months
 
2015
 
2014
 
2015
 
2014
Fair value hedges
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
 
Net interest settlements and accruals excluded from the assessment of hedge effectiveness
$
94

 
$
79

 
$
271

 
$
220

Ineffectiveness (a)
10

 
(2
)
 
6

 
8

Derivatives not designated as hedging instruments


 


 
 
 
 
Interest rate contracts
(22
)
 
(10
)
 
(83
)
 
(37
)
Foreign currency exchange contracts
40

 
52

 
40

 
22

Cross-currency interest rate swap contracts
63

 
118

 
75

 
102

Total
$
185

 
$
237

 
$
309

 
$
315

__________
(a)
For the third quarter and first nine months of 2015, hedge ineffectiveness reflects the net change in fair value on derivatives of $373 million gain and $345 million gain, respectively, and change in value on hedged debt attributable to the change in benchmark interest rates of $363 million loss and $339 million loss, respectively. For the third quarter and first nine months of 2014, hedge ineffectiveness reflects the net change in fair value on derivatives of $88 million loss and $179 million gain, respectively, and change in value on hedged debt attributable to the change in benchmark interest rates of $86 million gain and $171 million loss, respectively.


16
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 financial instruments are recorded on the balance sheet at fair value, presented on a gross basis, and include an adjustment for non-performance risk. Notional amounts are presented on a gross basis. The notional amounts of the derivative financial instruments do not necessarily represent amounts exchanged by the parties and, therefore, are not a direct measure of our financial risk exposure. We enter into master agreements with counterparties that may allow for netting of exposure in the event of default or termination of the counterparty agreement due to breach of contract.

The notional amount and estimated fair value of our derivative financial instruments were as follows (in millions):
 
September 30, 2015
 
December 31, 2014
 
Notional
 
Fair Value of Assets
 
Fair Value of Liabilities
 
Notional
 
Fair Value of Assets
 
Fair Value of Liabilities
Fair value hedges
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
$
26,323

 
$
848

 
$
4

 
$
23,203

 
$
602

 
$
38

Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
56,173

 
216

 
174

 
56,558

 
168

 
89

Foreign currency exchange contracts (a)
1,189

 
7

 
1

 
1,527

 
18

 
1

Cross-currency interest rate swap contracts
2,615

 
97

 
101

 
2,425

 
71

 
39

Total derivative financial instruments, gross
$
86,300

 
1,168

 
280

 
$
83,713

 
859

 
167

Counterparty netting and collateral (b)
 
 
(190
)
 
(190
)
 
 
 
(136
)
 
(136
)
Total derivative financial instruments, net


 
$
978

 
$
90

 


 
$
723

 
$
31

__________
(a)
Includes forward contracts between Ford Credit and an affiliated company.
(b)
At September 30, 2015 and December 31, 2014, we did not receive or pledge any cash collateral.

17
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 INCOME

Other assets and other liabilities and deferred income consist of various balance sheet items that are combined for financial statement presentation due to their respective materiality compared with other individual asset and liability items.

Other assets were as follows (in millions):
 
September 30,
2015
 
December 31,
2014
Accrued interest and other non-finance receivables
$
832

 
$
921

Collateral held for resale, at net realizable value
372

 
382

Restricted cash (a)
73

 
130

Deferred charges
280

 
268

Deferred charges – income taxes
164

 
185

Prepaid reinsurance premiums and other reinsurance receivables
435

 
401

Investment in non-consolidated affiliates
149

 
141

Property and equipment, net of accumulated depreciation (b)
134

 
120

Other
55

 
53

Total other assets
$
2,494

 
$
2,601

__________
(a)
Restricted cash primarily includes cash held to meet certain local governmental and regulatory reserve requirements and cash held under the terms of certain contractual agreements. Restricted cash does not include required minimum balances or cash securing debt issued through securitization transactions.
(b)
Accumulated depreciation was $335 million and $326 million at September 30, 2015 and December 31, 2014, respectively.

Other liabilities and deferred income were as follows (in millions):
 
September 30,
2015
 
December 31,
2014
Interest payable
$
486

 
$
587

Tax related payables to Ford and affiliated companies
138

 
625

Unrecognized tax benefits
99

 
91

Unearned insurance premiums
449

 
410

Other
477

 
497

Total other liabilities and deferred income
$
1,649

 
$
2,210



 


18
Item 1. Financial Statements (Continued)

FORD MOTOR CREDIT COMPANY LLC AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS


NOTE 9. DEBT

Interest rates and debt outstanding were as follows (in millions):
 
 
 
 
 
Interest Rates
 
Debt
 
Average Contractual
 
Average Effective
 
September 30,
2015
 
December 31,
2014
 
2015
 
2014
 
2015
 
2014
Short-term debt
 
 
 
 
 
 
 
 
 
 
 
Unsecured debt
 
 
 
 
 
 
 
 
 
 
 
Floating rate demand notes
$
5,854

 
$
5,559

 
 
 
 
 
 
 
 
Commercial paper
1,941

 
1,651

 
 
 
 
 
 
 
 
Other short-term debt
2,012

 
2,564

 
 
 
 
 
 
 
 
Asset-backed debt
1,877

 
1,377

 
 
 
 
 
 
 
 
Total short-term debt
11,684

 
11,151

 
1.5
%
 
1.9
%
 
1.5
%
 
1.9
%
Long-term debt
 
 
 
 
 
 
 
 
 
 
 
Unsecured debt
 
 
 
 
 
 
 
 
 
 
 
Notes payable within one year
7,899

 
9,102

 
 
 
 
 
 
 
 
Notes payable after one year
47,013

 
42,488

 
 
 
 
 
 
 
 
Asset-backed debt (a)
 
 
 
 
 
 
 
 
 
 
 
Notes payable within one year
18,462

 
16,722

 
 
 
 
 
 
 
 
Notes payable after one year
27,553

 
25,197

 
 
 
 
 
 
 
 
Unamortized discount
(37
)
 
(51
)
 
 
 
 
 
 
 
 
Fair value adjustments (b)
735

 
428

 
 
 
 
 
 
 
 
Total long-term debt
101,625

 
93,886

 
2.3
%
 
2.7
%
 
2.4
%
 
2.8
%
Total debt
$
113,309

 
$
105,037

 
2.2
%
 
2.6
%
 
2.3
%
 
2.7
%
 
 
 
 
 
 
 
 
 
 
 
 
Fair value of debt (c)
$
114,187