Attached files

file filename
EX-32.1 - EX-32.1 - CNH Industrial Capital LLCcnhc-20170630ex3210a0058.htm
EX-31.2 - EX-31.2 - CNH Industrial Capital LLCcnhc-20170630ex3124156ec.htm
EX-31.1 - EX-31.1 - CNH Industrial Capital LLCcnhc-20170630ex311dfa941.htm
EX-12.1 - EX-12.1 - CNH Industrial Capital LLCcnhc-20170630ex121f2a299.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q


QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017

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: 000-55510

CNH INDUSTRIAL CAPITAL LLC

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)

 

39-1937630
(I.R.S. Employer
Identification Number)

5729 Washington Avenue
Racine, Wisconsin
(Address of principal
executive offices)

(262) 636-6011
(Registrant’s telephone number,
including area code)

53406
(Zip 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. ☒ Yes  ☐ 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). ☒ Yes  ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 ☒    (Do not check if a smaller reporting company)

Emerging growth company ☐

Smaller reporting 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. ☐

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

As of June 30, 2017, all of the limited liability company interests of the registrant were held by CNH Industrial America LLC, a wholly-owned subsidiary of CNH Industrial N.V.

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 certain reduced disclosures as permitted by those instructions.

 

 

 


 

TABLE OF CONTENTS

 

 

 

 

 

 

PAGE

PART I. FINANCIAL INFORMATION 

Item 1. 

Financial Statements

1

 

Consolidated Statements of Income for the Three and Six Months Ended June 30, 2017 and 2016 (Unaudited)

1

 

Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2017 and 2016 (Unaudited)

2

 

Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016 (Unaudited)

3

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016 (Unaudited)

5

 

Consolidated Statements of Changes in Stockholder’s Equity for the Six Months Ended June 30, 2017 and 2016 (Unaudited)

6

 

Condensed Notes to Consolidated Financial Statements (Unaudited)

7

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

35

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

*

Item 4. 

Controls and Procedures

43

PART II. OTHER INFORMATION 

Item 1. 

Legal Proceedings

44

Item 1A. 

Risk Factors

44

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

*

Item 3.

Defaults Upon Senior Securities

*

Item 4. 

Mine Safety Disclosures

44

Item 5. 

Other Information

44

Item 6. 

Exhibits

44

*This item has been omitted pursuant to the reduced disclosure format as set forth in General Instruction (H)(2) of Form 10‑Q

 

 


 

PART I. FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

CNH INDUSTRIAL CAPITAL LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2017 AND 2016

(Dollars in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

    

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

 

2017

    

2016

 

2017

    

2016

 

REVENUES

  

 

 

 

 

 

 

 

 

 

 

 

 

Interest income on retail notes and finance leases

 

$

48,378

 

$

52,729

 

$

99,191

 

$

106,732

 

Interest income on wholesale notes

 

 

16,039

 

 

18,468

 

 

32,055

 

 

33,484

 

Interest and other income from affiliates

 

 

97,800

 

 

102,677

 

 

194,263

 

 

202,703

 

Rental income on operating leases

 

 

62,531

 

 

60,177

 

 

125,725

 

 

119,459

 

Other income

 

 

5,115

 

 

6,588

 

 

11,463

 

 

12,179

 

Total revenues

  

 

229,863

 

 

240,639

 

 

462,697

 

 

474,557

 

EXPENSES

  

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense to third parties

 

 

76,134

 

 

76,578

 

 

146,389

 

 

147,662

 

Interest expense to affiliates

 

 

2,663

 

 

2,481

 

 

7,136

 

 

3,368

 

Total interest expense

  

 

78,797

 

 

79,059

 

 

153,525

 

 

151,030

 

Administrative and operating expenses:

  

 

 

 

 

 

 

 

 

 

 

 

 

Fees charged by affiliates

 

 

10,942

 

 

11,119

 

 

22,641

 

 

22,836

 

Provision for credit losses

 

 

10,617

 

 

7,260

 

 

23,098

 

 

13,657

 

Depreciation of equipment on operating leases

 

 

67,133

 

 

60,100

 

 

135,302

 

 

117,384

 

Other expenses

 

 

7,302

 

 

12,529

 

 

16,629

 

 

15,513

 

Total administrative and operating expenses

  

 

95,994

 

 

91,008

 

 

197,670

 

 

169,390

 

Total expenses

  

 

174,791

 

 

170,067

 

 

351,195

 

 

320,420

 

INCOME BEFORE TAXES

  

 

55,072

 

 

70,572

 

 

111,502

 

 

154,137

 

Income tax provision

 

 

16,885

 

 

24,143

 

 

34,922

 

 

50,487

 

NET INCOME

  

$

38,187

 

$

46,429

 

$

76,580

 

$

103,650

 

 

 

See the accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).

1


 

CNH INDUSTRIAL CAPITAL LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2017 AND 2016

(Dollars in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

    

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

 

2017

    

2016

    

2017

    

2016

 

NET INCOME

 

$

38,187

 

$

46,429

 

$

76,580

 

$

103,650

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

16,912

 

 

(626)

 

 

21,406

 

 

41,623

 

Pension liability adjustment

 

 

103

 

 

124

 

 

210

 

 

224

 

Change in derivative financial instruments

 

 

732

 

 

855

 

 

648

 

 

888

 

Total other comprehensive income

 

 

17,747

 

 

353

 

 

22,264

 

 

42,735

 

COMPREHENSIVE INCOME

 

$

55,934

 

$

46,782

 

$

98,844

 

$

146,385

 

 

 

See the accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).

2


 

CNH INDUSTRIAL CAPITAL LLC AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2017 AND DECEMBER 31, 2016

(Dollars in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

 

 

2017

 

2016

 

ASSETS

 

 

 

    

 

 

 

Cash and cash equivalents

 

$

158,753

 

$

164,247

 

Restricted cash

 

 

540,848

 

 

712,845

 

Receivables, less allowance for credit losses of $85,174 and $84,895, respectively

 

 

10,507,204

 

 

10,882,070

 

Affiliated accounts and notes receivable

 

 

50,354

 

 

83,843

 

Equipment on operating leases, net

 

 

1,861,178

 

 

1,858,443

 

Equipment held for sale

 

 

189,006

 

 

199,983

 

Goodwill

 

 

109,709

 

 

108,715

 

Other intangible assets, net

 

 

6,448

 

 

7,366

 

Other assets

 

 

30,488

 

 

25,747

 

TOTAL

 

$

13,453,988

 

$

14,043,259

 

LIABILITIES AND STOCKHOLDER’S EQUITY

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Short-term debt (including current maturities of long-term debt)

 

$

4,423,007

 

$

4,262,629

 

Accounts payable and other accrued liabilities

 

 

753,178

 

 

806,743

 

Affiliated debt

 

 

4,305

 

 

132,851

 

Long-term debt

 

 

6,948,049

 

 

7,474,318

 

Total liabilities

 

 

12,128,539

 

 

12,676,541

 

Commitments and contingent liabilities (Note 10)

 

 

 

 

 

 

 

Stockholder’s equity:

 

 

 

 

 

 

 

Member’s capital

 

 

 —

 

 

 —

 

Paid-in capital

 

 

843,987

 

 

844,100

 

Accumulated other comprehensive loss

 

 

(121,872)

 

 

(144,136)

 

Retained earnings

 

 

603,334

 

 

666,754

 

Total stockholder’s equity

 

 

1,325,449

 

 

1,366,718

 

TOTAL

 

$

13,453,988

 

$

14,043,259

 

 

 

See the accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).

3


 

CNH INDUSTRIAL CAPITAL LLC AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2017 AND DECEMBER 31, 2016

(Dollars in thousands)

(Unaudited)

 

 

The following table presents certain assets and liabilities of consolidated variable interest entities (“VIEs”), which are included in the consolidated balance sheets above. The assets in the table include only those assets that can be used to settle obligations of consolidated VIEs. The liabilities in the table include third-party liabilities of the consolidated VIEs, for which creditors do not have recourse to the general credit of CNH Industrial Capital LLC.

 

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

 

 

2017

 

2016

 

Restricted cash

 

$

540,748

 

$

712,745

 

Receivables, less allowance for credit losses of $65,017 and $66,084, respectively

 

 

7,468,967

 

 

7,682,488

 

TOTAL

 

$

8,009,715

 

$

8,395,233

 

Short-term debt (including current maturities of long-term debt)

 

$

3,675,064

 

$

3,717,340

 

Long-term debt

 

 

3,694,979

 

 

4,149,524

 

TOTAL

 

$

7,370,043

 

$

7,866,864

 

 

 

See the accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).

4


 

CNH INDUSTRIAL CAPITAL LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2017 AND 2016

(Dollars in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

    

2017

    

2016

 

CASH FLOWS FROM OPERATING ACTIVITIES

  

 

 

 

 

 

 

Net income

 

$

76,580

 

$

103,650

 

Adjustments to reconcile net income to net cash from (used in) operating activities:

 

 

 

 

 

 

 

Depreciation on property and equipment and equipment on operating leases

 

 

135,317

 

 

117,402

 

Amortization of intangibles

 

 

1,031

 

 

962

 

Provision for credit losses

 

 

23,098

 

 

13,657

 

Deferred income tax expense (benefit)

 

 

(2,595)

 

 

11,939

 

Stock compensation expense (income)

 

 

(113)

 

 

298

 

Changes in components of working capital:

 

 

 

 

 

 

 

Change in affiliated accounts and notes receivables

 

 

34,316

 

 

82,466

 

Change in other assets and equipment held for sale

 

 

(9,583)

 

 

18,687

 

Change in accounts payable and other accrued liabilities

 

 

(58,184)

 

 

2,326

 

Net cash from (used in) operating activities

  

 

199,867

 

 

351,387

 

CASH FLOWS FROM INVESTING ACTIVITIES

  

 

 

 

 

 

 

Cost of receivables acquired

 

 

(4,808,133)

 

 

(4,904,288)

 

Collections of receivables

 

 

5,232,321

 

 

5,223,286

 

Change in restricted cash

 

 

175,854

 

 

6,417

 

Purchase of equipment on operating leases

 

 

(342,871)

 

 

(322,704)

 

Proceeds from disposal of equipment on operating leases

 

 

234,816

 

 

170,565

 

Change in property and equipment and software, net

 

 

(113)

 

 

(182)

 

Net cash from (used in) investing activities

  

 

491,874

 

 

173,094

 

CASH FLOWS FROM FINANCING ACTIVITIES

  

 

 

 

 

 

 

Proceeds from issuance of affiliated debt

 

 

512,471

 

 

655,911

 

Payment of affiliated debt

 

 

(641,017)

 

 

(678,553)

 

Proceeds from issuance of long-term debt

 

 

1,901,883

 

 

2,609,372

 

Payment of long-term debt

 

 

(2,330,572)

 

 

(2,658,250)

 

Change in short- term borrowings, net

 

 

 —

 

 

(436,193)

 

Dividends paid to CNH Industrial America LLC

 

 

(140,000)

 

 

(150,000)

 

Net cash from (used in) financing activities

  

 

(697,235)

 

 

(657,713)

 

DECREASE IN CASH AND CASH EQUIVALENTS

  

 

(5,494)

 

 

(133,232)

 

CASH AND CASH EQUIVALENTS

  

 

 

 

 

 

 

Beginning of period

 

 

164,247

 

 

302,148

 

End of period

  

$

158,753

 

$

168,916

 

CASH PAID DURING THE PERIOD FOR INTEREST

  

$

154,208

 

$

145,764

 

CASH PAID (RECEIVED) DURING THE PERIOD FOR TAXES

  

$

44,661

 

$

(45,830)

 

 

See the accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).

 

 

5


 

CNH INDUSTRIAL CAPITAL LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER’S EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2017 AND 2016

(Dollars in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

Accumulated

    

 

 

    

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

Member’s

 

Paid-in

 

Comprehensive

 

Retained

 

 

 

 

 

 

Capital

 

Capital

 

Income (Loss)

 

Earnings

 

Total

 

BALANCE - January 1, 2016

  

$

 —

 

$

843,728

 

$

(161,538)

 

$

769,242

 

$

1,451,432

 

Net income

 

 

 —

 

 

 —

 

 

 —

 

 

103,650

 

 

103,650

 

Dividends paid to CNH Industrial America LLC

 

 

 —

 

 

 —

 

 

 —

 

 

(150,000)

 

 

(150,000)

 

Foreign currency translation adjustment

 

 

 —

 

 

 —

 

 

41,623

 

 

 —

 

 

41,623

 

Stock compensation

 

 

 —

 

 

298

 

 

 —

 

 

 —

 

 

298

 

Pension liability adjustment, net of tax

 

 

 —

 

 

 —

 

 

224

 

 

 —

 

 

224

 

Change in derivative financial instruments, net of tax

 

 

 —

 

 

 —

 

 

888

 

 

 —

 

 

888

 

BALANCE - June 30, 2016

 

$

 —

 

$

844,026

 

$

(118,803)

 

$

722,892

 

$

1,448,115

 

BALANCE - January 1, 2017

  

$

 —

 

$

844,100

 

$

(144,136)

 

$

666,754

 

$

1,366,718

 

Net income

 

 

 —

 

 

 —

 

 

 —

 

 

76,580

 

 

76,580

 

Dividends paid to CNH Industrial America LLC

 

 

 —

 

 

 —

 

 

 —

 

 

(140,000)

 

 

(140,000)

 

Foreign currency translation adjustment

 

 

 —

 

 

 —

 

 

21,406

 

 

 —

 

 

21,406

 

Stock compensation

 

 

 —

 

 

(113)

 

 

 —

 

 

 —

 

 

(113)

 

Pension liability adjustment, net of tax

 

 

 —

 

 

 —

 

 

210

 

 

 —

 

 

210

 

Change in derivative financial instruments, net of tax

 

 

 —

 

 

 —

 

 

648

 

 

 —

 

 

648

 

BALANCE - June 30, 2017

 

$

 —

 

$

843,987

 

$

(121,872)

 

$

603,334

 

$

1,325,449

 

 

 

 

See the accompanying Condensed Notes to Consolidated Financial Statements (Unaudited).

 

6


 

Table of Contents

CNH INDUSTRIAL CAPITAL LLC AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

(Unaudited)

 

 

NOTE 1: BASIS OF PRESENTATION

CNH Industrial Capital LLC and its primary operating subsidiaries, including New Holland Credit Company, LLC (“New Holland Credit”), CNH Industrial Capital America LLC (“CNH Industrial Capital America”), and CNH Industrial Capital Canada Ltd. (“CNH Industrial Capital Canada”) (collectively, “CNH Industrial Capital” or the “Company”), are each a subsidiary of CNH Industrial America LLC (“CNH Industrial America”), which is an indirect wholly-owned subsidiary of CNH Industrial N.V. (“CNHI” and, together with its consolidated subsidiaries, “CNH Industrial”). CNH Industrial America and CNH Industrial Canada Ltd. (collectively, “CNH Industrial North America”) design, manufacture, and sell agricultural and construction equipment. CNH Industrial Capital provides financial services for CNH Industrial North America dealers and end-use customers primarily located in the United States and Canada.

CNHI is incorporated in and under the laws of The Netherlands. CNHI has its corporate seat in Amsterdam, The Netherlands, and its principal office in London, England. The common shares of CNHI are listed on the New York Stock Exchange under the symbol “CNHI,” as well as on the Mercato Telematico Azionario managed by Borsa Italiana S.p.A.

The Company has prepared the accompanying consolidated financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information, which should be read in conjunction with the audited financial statements in its Annual Report on Form 10-K for the year ended December 31, 2016. Certain financial information that is normally included in annual financial statements prepared in conformity with U.S. GAAP, which is not required for interim reporting purposes, has been condensed or omitted. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of our interim unaudited financial statements have been reflected.

The consolidated financial statements include the Company and its consolidated subsidiaries. The consolidated financial statements are expressed in U.S. dollars. The consolidated financial statements include the accounts of the Company’s subsidiaries in which the Company has a controlling financial interest and reflect the noncontrolling interests of the minority owners of the subsidiaries that are not fully owned for the periods presented, as applicable. A controlling financial interest may exist based on ownership of a majority of the voting interest of a subsidiary, or based on the Company’s determination that it is the primary beneficiary of a variable interest entity (“VIE”). The primary beneficiary of a VIE is the party that has the power to direct the activities that most significantly impact the economic performance of the entity and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the entity. The Company assesses whether it is the primary beneficiary on an ongoing basis, as prescribed by the accounting guidance on the consolidation of VIEs. The consolidated status of the VIEs with which the Company is involved may change as a result of such reassessments.

The preparation of consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities and reported amounts of revenues and expenses. Significant estimates in these consolidated financial statements include the allowance for credit losses and residual values of equipment on operating leases. Actual results could differ from those estimates.

NOTE 2: NEW ACCOUNTING PRONOUNCEMENTS

New Accounting Pronouncements Adopted in 2017

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships (“ASU 2016-05”) and ASU No. 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments (“ASU 2016-06”). ASU 2016-05 clarifies that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument does not, in and of itself, require designation of that hedging relationship if all other hedge accounting criteria continue to be met. ASU 2016-

7


 

Table of Contents

CNH INDUSTRIAL CAPITAL LLC AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands)

(Unaudited)

 

 

06 clarifies the steps required to determine bifurcation of an embedded derivative. Both ASU 2016-05 and ASU 2016-06 have been adopted and neither had a material effect on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test of Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 simplifies the subsequent measurement of goodwill by removing the second step of the two-step impairment test. The amendment requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The Company elected to early adopt ASU 2017-04 on a prospective basis as of January 1, 2017, which did not have a material impact on its consolidated financial statements.

New Accounting Pronouncements Not Yet Adopted

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (ASC 606) (“ASU 2014-09”), which supersedes existing revenue recognition guidance under current U.S. GAAP. The new standard requires an entity to recognize revenue upon transfer of control of goods or services to a customer at an amount that reflects the consideration that the entity expects to receive. This new revenue recognition model defines a five-step process to achieve this objective. The new standard also requires additional disclosures to enable users to understand the nature, amount, timing and uncertainty of revenue and cash flow arising from contracts with customers. In August 2015, the FASB amended the effective date to be the first quarter of fiscal year 2018 with early adoption permitted in 2017. The FASB subsequently issued several amendments in 2016 clarifying various aspects of ASU 2014-09, including revenue transactions that involve a third party, goods or services that are immaterial in the context of the contract, licensing arrangements, certain transition practical expedients, disclosure of performance obligation and provisions for losses on construction-type and production-type contracts. Entities have the option to apply the new guidance under a retrospective approach to each prior reporting period presented, or a modified retrospective approach with the cumulative effect of initially applying the new guidance recognized at the date of initial application within the consolidated statement of changes in equity.

The Company is still evaluating the overall effect of the adoption of this standard. Based upon the implementation efforts to date, the Company has not identified any matters that it currently believes would result in a material effect on its consolidated financial statements. The Company expects to make additional disclosures related to the revenues arising from contracts with customers as required by the new standard. The Company currently plans to adopt the new standard effective January 1, 2018 using the retrospective approach.

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”), which amends ASC 825-10, Financial Instruments – Overall. This ASU changes the treatment for available-for-sale equity investments by recognizing unrealized fair value changes directly in net income, and no longer in other comprehensive income. The ASU is effective January 1, 2018, with the cumulative-effect adjustment from initially applying the new standard recognized in the consolidated statement of financial position as of January 1, 2018. The impact of the adjustments on the Company’s consolidated financial statements is expected to be immaterial.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which supersedes ASC 840, Leases. The ASU’s most prominent change is the requirement for lessees to recognize leased assets and liabilities classified as operating leases under previous GAAP. The ASU does not significantly change the lessee’s recognition, measurement and presentation of expenses and cash flows from the previous accounting standard. Lessors’ accounting under the ASC is largely unchanged from the previous accounting standard. ASU 2016-02 also will require disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. It is effective for annual reporting periods beginning after December 15, 2018

8


 

Table of Contents

CNH INDUSTRIAL CAPITAL LLC AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands)

(Unaudited)

 

 

including interim periods within those fiscal years, but early adoption is permitted. The ASU requires a modified retrospective transition approach and provides certain optional transition relief. The Company is currently evaluating the impact the adoption of this standard will have on its consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which establishes ASC 326, Financial Instruments – Credit Losses. The ASU introduced a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. Additional disclosures about significant estimates and credit quality are also required. The ASU is effective for annual periods beginning after December 15, 2019, with early adoption permitted for annual periods beginning after December 15, 2018. The Company is currently evaluating the impact the adoption of this standard will have on its consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). This standard provides guidance clarification to reduce diversity in classification of certain cash flow payments and receipts in the statement of cash flows. ASU 2016-15 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017 on a retrospective transition basis to each period presented, and may be early adopted. The Company does not believe the adoption of this standard will have a material impact on its consolidated financial statements.

In October 2016, the FASB issued ASU No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”), which amends ASC 740, Income Taxes. The ASU requires that the income tax consequences of an intra-entity asset transfer other than inventory are recognized at the time of transfer. The ASU is effective for annual reporting periods, and interim periods within those annual reporting periods, beginning after December 15, 2017 and early adoption is permitted. The amendments will be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the impact the adoption of this standard will have on its consolidated financial statements.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”) that changes the presentation of restricted cash and cash equivalents on the statement of cash flows. Restricted cash and restricted cash equivalents will be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statement of cash flows. ASU 2016-18 is effective for annual reporting periods beginning after December 15, 2017, and early adoption is permitted. The Company is currently evaluating the impact the adoption of this standard will have on its consolidated financial statements.

NOTE 3: ACCUMULATED OTHER COMPREHENSIVE INCOME

Accumulated other comprehensive income (“AOCI”) is comprised of net income and other adjustments, including foreign currency translation adjustments, pension plan adjustments, changes in fair value of the retained interests in the off-book retail transactions and changes in the fair value of certain derivative financial instruments qualifying as cash flow hedges. The Company does not provide income taxes on currency translation adjustments (“CTA”), as the historical earnings from the Company’s foreign subsidiaries are considered to be permanently reinvested.

9


 

Table of Contents

CNH INDUSTRIAL CAPITAL LLC AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands)

(Unaudited)

 

 

The following table summarizes the change in the components of the Company’s AOCI balance and related tax effects for the three months ended June 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency

 

 

 

 

Unrealized

 

 

 

 

 

 

Translation

 

Pension

 

Losses on

 

 

 

 

 

    

Adjustment

    

Liability

    

Derivatives

    

Total

 

Beginning balance, gross

 

$

(135,091)

 

$

(5,598)

 

$

(1,328)

 

$

(142,017)

 

Tax asset

 

 

 —

 

 

2,044

 

 

354

 

 

2,398

 

Beginning balance, net of tax

 

 

(135,091)

 

 

(3,554)

 

 

(974)

 

 

(139,619)

 

Other comprehensive income (loss) before reclassifications

 

 

16,912

 

 

(67)

 

 

823

 

 

17,668

 

Amounts reclassified from accumulated other comprehensive income (loss)

 

 

 —

 

 

232

 

 

173

 

 

405

 

Tax effects

 

 

 —

 

 

(62)

 

 

(264)

 

 

(326)

 

Net current-period other comprehensive income (loss)

 

 

16,912

 

 

103

 

 

732

 

 

17,747

 

Total

 

$

(118,179)

 

$

(3,451)

 

$

(242)

 

$

(121,872)

 

The following table summarizes the change in the components of the Company’s AOCI balance and related tax effects for the six months ended June 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency

 

 

 

 

Unrealized

 

 

 

 

 

 

Translation

 

Pension

 

Losses on

 

 

 

 

 

    

Adjustment

    

Liability

    

Derivatives

    

Total

 

Beginning balance, gross

 

$

(139,585)

 

$

(5,768)

 

$

(1,213)

 

$

(146,566)

 

Tax asset

 

 

 —

 

 

2,107

 

 

323

 

 

2,430

 

Beginning balance, net of tax

 

 

(139,585)

 

 

(3,661)

 

 

(890)

 

 

(144,136)

 

Other comprehensive income (loss) before reclassifications

 

 

21,406

 

 

(128)

 

 

542

 

 

21,820

 

Amounts reclassified from accumulated other comprehensive income (loss)

 

 

 —

 

 

463

 

 

340

 

 

803

 

Tax effects

 

 

 —

 

 

(125)

 

 

(234)

 

 

(359)

 

Net current-period other comprehensive income (loss)

 

 

21,406

 

 

210

 

 

648

 

 

22,264

 

Total

 

$

(118,179)

 

$

(3,451)

 

$

(242)

 

$

(121,872)

 

10


 

Table of Contents

CNH INDUSTRIAL CAPITAL LLC AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands)

(Unaudited)

 

 

The following table summarizes the change in the components of the Company’s AOCI balance and related tax effects for the three months ended June 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency

 

 

 

 

Unrealized

 

 

 

 

 

 

Translation

 

Pension

 

Losses on

 

 

 

 

 

    

Adjustment

    

Liability

    

Derivatives

    

Total

 

Beginning balance, gross

 

$

(113,092)

 

$

(5,917)

 

$

(3,139)

 

$

(122,148)

 

Tax asset

 

 

 —

 

 

2,159

 

 

833

 

 

2,992

 

Beginning balance, net of tax

 

 

(113,092)

 

 

(3,758)

 

 

(2,306)

 

 

(119,156)

 

Other comprehensive income (loss) before reclassifications

 

 

(626)

 

 

(56)

 

 

1,000

 

 

318

 

Amounts reclassified from accumulated other comprehensive income (loss)

 

 

 —

 

 

254

 

 

163

 

 

417

 

Tax effects

 

 

 —

 

 

(74)

 

 

(308)

 

 

(382)

 

Net current-period other comprehensive income (loss)

 

 

(626)

 

 

124

 

 

855

 

 

353

 

Total

 

$

(113,718)

 

$

(3,634)

 

$

(1,451)

 

$

(118,803)

 

The following table summarizes the change in the components of the Company’s AOCI balance and related tax effects for the six months ended June 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency

 

 

 

 

Unrealized

 

 

 

 

 

 

Translation

 

Pension

 

Losses on

 

 

 

 

 

    

Adjustment

    

Liability

    

Derivatives

    

Total

 

Beginning balance, gross

 

$

(155,341)

 

$

(6,084)

 

$

(3,184)

 

$

(164,609)

 

Tax asset

 

 

 —

 

 

2,226

 

 

845

 

 

3,071

 

Beginning balance, net of tax

 

 

(155,341)

 

 

(3,858)

 

 

(2,339)

 

 

(161,538)

 

Other comprehensive income (loss) before reclassifications

 

 

41,623

 

 

(141)

 

 

881

 

 

42,363

 

Amounts reclassified from accumulated other comprehensive income (loss)

 

 

 —

 

 

506

 

 

327

 

 

833

 

Tax effects

 

 

 —

 

 

(141)

 

 

(320)

 

 

(461)

 

Net current-period other comprehensive income (loss)

 

 

41,623

 

 

224

 

 

888

 

 

42,735

 

Total

 

$

(113,718)

 

$

(3,634)

 

$

(1,451)

 

$

(118,803)

 

11


 

Table of Contents

CNH INDUSTRIAL CAPITAL LLC AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands)

(Unaudited)

 

 

The reclassifications out of AOCI and the location on the consolidated statements of income for the three and six months ended June 30, 2017 and 2016 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

    

Six Months Ended

    

 

 

 

 

June 30, 

 

June 30, 

 

 

 

 

    

2017

    

2016

    

2017

    

2016

    

Affected Line Item

 

Amortization of defined benefit  pension items:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(232)

 

$

(254)

 

$

(463)

 

$

(506)

 

Various line items individually insignificant

 

 

 

 

(232)

 

 

(254)

 

 

(463)

 

 

(506)

 

Income before taxes

 

 

 

 

87

 

 

94

 

 

173

 

 

195

 

Income tax benefit

 

 

 

$

(145)

 

$

(160)

 

$

(290)

 

$

(311)

 

Net of tax  

 

Unrealized losses on derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(173)

 

$

(163)

 

$

(340)

 

$

(327)

 

Interest expense to third parties

 

 

 

 

(173)

 

 

(163)

 

 

(340)

 

 

(327)

 

Income before taxes

 

 

 

 

45

 

 

43

 

 

90

 

 

87

 

Income tax benefit

 

 

 

$

(128)

 

$

(120)

 

$

(250)

 

$

(240)

 

Net of tax  

 

 

 

 

 

 

 

 

 

NOTE 4: RECEIVABLES

A summary of receivables included in the consolidated balance sheets as of June 30, 2017 and December 31, 2016 is as follows:

 

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

 

 

2017

 

2016

 

Retail note receivables

 

$

671,886

 

$

854,777

 

Wholesale receivables

 

 

672,140

 

 

677,371

 

Finance lease receivables

 

 

48,120

 

 

42,291

 

Restricted receivables

 

 

9,200,232

 

 

9,392,526

 

Gross receivables

 

 

10,592,378

 

 

10,966,965

 

Less: Allowance for credit losses

 

 

(85,174)

 

 

(84,895)

 

Total receivables, net

 

$

10,507,204

 

$

10,882,070

 

Restricted Receivables and Securitization

As part of its overall funding strategy, the Company periodically transfers certain receivables into VIEs that are special purpose entities (“SPEs”) as part of its asset-backed securitization (“ABS”) programs.

SPEs utilized in the securitization programs differ from other entities included in the Company’s consolidated financial statements because the assets they hold are legally isolated from the Company’s assets. For bankruptcy analysis purposes, the Company has sold the receivables to the SPEs in a true sale and the SPEs are separate legal entities. Upon transfer of the receivables to the SPEs, the receivables and certain cash flows derived from them become restricted for use in meeting obligations to the SPEs’ creditors. The SPEs have ownership of cash balances that also have restrictions for the benefit of the SPEs’ investors. The Company’s interests in the SPEs’ receivables are subordinate to the interests of third-party investors. None of the receivables that are directly or indirectly sold or transferred in any of these transactions are available to pay the Company’s creditors until all obligations of the SPE have been fulfilled or the receivables are removed from the SPE.

12


 

Table of Contents

CNH INDUSTRIAL CAPITAL LLC AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands)

(Unaudited)

 

 

The secured borrowings related to the restricted receivables are obligations that are payable as the receivables are collected. The following table summarizes the restricted receivables as of June 30, 2017 and December 31, 2016:

 

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

 

 

2017

 

2016

 

Retail note receivables

 

$

6,361,591

 

$

6,500,949

 

Wholesale receivables

 

 

2,838,641

 

 

2,891,577

 

Total restricted receivables

 

$

9,200,232

 

$

9,392,526

 

Within the U.S. retail receivables securitization programs, qualifying retail receivables are sold to limited purpose, bankruptcy remote SPEs. In turn, these SPEs establish separate trusts to which the receivables are transferred in exchange for proceeds from asset backed securities issued by the trusts. In Canada, the receivables are transferred directly to the trusts. These trusts were determined to be VIEs. In its role as servicer, the Company has the power to direct the trusts’ activities. Through its retained interests, the Company has an obligation to absorb certain losses, or the right to receive certain benefits, that could potentially be significant to the trusts. Consequently, the Company has consolidated these retail trusts.

With regard to the wholesale receivable securitization programs, the Company sells eligible receivables on a revolving basis to structured master trust facilities, which are limited-purpose, bankruptcy-remote SPEs. These trusts were determined to be VIEs. In its role as servicer, CNH Industrial Capital has the power to direct the trusts’ activities. Through its retained interests, the Company provides security to investors in the event that cash collections from the receivables are not sufficient to make principal and interest payments on the securities. Consequently, CNH Industrial Capital has consolidated these wholesale trusts.

Allowance for Credit Losses

The allowance for credit losses is the Company’s estimate of losses for receivables owned by the Company and consists of two components, depending on whether the receivable has been individually identified as being impaired. The first component of the allowance for credit losses covers the receivables specifically reviewed by management for which the Company has determined it is probable that it will not collect all the principal and interest payments as per the terms of the contract. Receivables are individually reviewed for impairment based on, among other items, amounts outstanding, days past due and prior collection history. These receivables are subject to impairment measurement at the loan level based either on the fair value of the collateral for collateral-dependent receivables or on the present value of expected future cash flows discounted at the receivables’ effective interest rate.

The second component of the allowance for credit losses covers all receivables that have not been individually reviewed for impairment. The allowance for these receivables is based on aggregated portfolio evaluations, generally by financial product. The allowance for retail and wholesale credit losses is based on loss forecast models that consider a variety of factors that include, but are not limited to, historical loss experience, portfolio balance and delinquency. The loss forecast models are updated on a quarterly basis. In addition, qualitative factors that are not fully captured in the loss forecast models, including industry trends, and macroeconomic factors are considered in the evaluation of the adequacy of the allowance for credit losses. These qualitative factors are subjective and require a degree of management judgment.

Charge-offs of principal amounts of receivables outstanding are deducted from the allowance at the point when it is estimated that amounts due are deemed uncollectible.

The Company’s allowance for credit losses is segregated into two portfolio segments: retail and wholesale. A portfolio segment is the level at which the Company develops a systematic methodology for determining its allowance for credit losses. The retail segment includes retail notes and finance lease receivables. The wholesale segment includes wholesale financing to CNH Industrial North America dealers.

13


 

Table of Contents

CNH INDUSTRIAL CAPITAL LLC AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands)

(Unaudited)

 

 

Further, the Company evaluates its portfolio segments by class of receivable: United States and Canada. Typically, the Company’s receivables within a geographic area have similar risk profiles and methods for assessing and monitoring risk. These classes align with management reporting.

Allowance for credit losses activity for the three months ended June 30, 2017 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

    

Retail

    

Wholesale

    

Total

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

79,859

 

$

5,317

 

$

85,176

 

Charge-offs

 

 

(10,184)

 

 

(1,228)

 

 

(11,412)

 

Recoveries

 

 

962

 

 

 1

 

 

963

 

Provision

 

 

9,986

 

 

631

 

 

10,617

 

Foreign currency translation and other

 

 

(183)

 

 

13

 

 

(170)

 

Ending balance

 

$

80,440

 

$

4,734

 

$

85,174

 

Allowance for credit losses activity for the six months ended June 30, 2017 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

    

Retail

    

Wholesale

    

Total

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

78,047

 

$

6,848

 

$

84,895

 

Charge-offs

 

 

(22,275)

 

 

(2,016)

 

 

(24,291)

 

Recoveries

 

 

1,996

 

 

 8

 

 

2,004

 

Provision (benefit)

 

 

23,221

 

 

(123)

 

 

23,098

 

Foreign currency translation and other

 

 

(549)

 

 

17

 

 

(532)

 

Ending balance

 

$

80,440

 

$

4,734

 

$

85,174

 

Ending balance: individually evaluated for impairment

 

$

21,708

 

$

2,170

 

$

23,878

 

Ending balance: collectively evaluated for impairment

 

$

58,732

 

$

2,564

 

$

61,296

 

Receivables:

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

7,081,597

 

$

3,510,781

 

$

10,592,378

 

Ending balance: individually evaluated for impairment

 

$

42,225

 

$

34,160

 

$

76,385

 

Ending balance: collectively evaluated for impairment

 

$

7,039,372

 

$

3,476,621

 

$

10,515,993

 

Allowance for credit losses activity for the three months ended June 30, 2016 is as follows:

 

 

 

 

 

 

 

 

 

 

 

    

Retail

    

Wholesale

    

Total

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

86,667

 

$

6,569

 

$

93,236

Charge-offs

 

 

(13,513)

 

 

 —

 

 

(13,513)

Recoveries

 

 

568

 

 

513

 

 

1,081

Provision (benefit)

 

 

7,424

 

 

(164)

 

 

7,260

Foreign currency translation and other

 

 

(460)

 

 

32

 

 

(428)

Ending balance

 

$

80,686

 

$

6,950

 

$

87,636

 

14


 

Table of Contents

CNH INDUSTRIAL CAPITAL LLC AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands)

(Unaudited)

 

 

Allowance for credit losses activity for the six months ended June 30, 2016 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

    

Retail

    

Wholesale

    

Total

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

88,405

 

$

6,319

 

$

94,724

 

Charge-offs

 

 

(22,897)

 

 

(1)

 

 

(22,898)

 

Recoveries

 

 

1,518

 

 

517

 

 

2,035

 

Provision

 

 

13,641

 

 

16

 

 

13,657

 

Foreign currency translation and other

 

 

19

 

 

99

 

 

118

 

Ending balance

 

$

80,686

 

$

6,950

 

$

87,636

 

Ending balance: individually evaluated for impairment

 

$

17,812

 

$

3,728

 

$

21,540

 

Ending balance: collectively evaluated for impairment

 

$

62,874

 

$

3,222

 

$

66,096

 

Receivables:

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

7,739,799

 

$

3,780,577

 

$

11,520,376

 

Ending balance: individually evaluated for impairment

 

$

61,724

 

$

60,801

 

$

122,525

 

Ending balance: collectively evaluated for impairment

 

$

7,678,075

 

$

3,719,776

 

$

11,397,851

 

Allowance for credit losses activity for the year ended December 31, 2016 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

    

Retail

    

Wholesale

    

Total

 

Allowance for credit losses:

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

88,405

 

$

6,319

 

$

94,724

 

Charge-offs

 

 

(42,949)

 

 

(1)

 

 

(42,950)

 

Recoveries

 

 

3,228

 

 

522

 

 

3,750

 

Provision (benefit)

 

 

30,915

 

 

(69)

 

 

30,846

 

Foreign currency translation and other

 

 

(1,552)

 

 

77

 

 

(1,475)

 

Ending balance

 

$

78,047

 

$

6,848

 

$

84,895

 

Ending balance: individually evaluated for impairment

 

$

18,113

 

$

4,250

 

$

22,363

 

Ending balance: collectively evaluated for impairment

 

$

59,934

 

$

2,598

 

$

62,532

 

Receivables:

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

7,398,017

 

$

3,568,948

 

$

10,966,965

 

Ending balance: individually evaluated for impairment

 

$

31,383

 

$

43,659

 

$

75,042

 

Ending balance: collectively evaluated for impairment

 

$

7,366,634

 

$

3,525,289

 

$

10,891,923

 

 

Utilizing an internal credit scoring model, which considers customers’ attributes, prior credit history and each retail transaction’s attributes, the Company assigns a credit quality rating to each retail customer, by specific transaction, as part of the retail underwriting process. This rating is used in setting the terms on the transaction, including the interest rate. A description of the general characteristics of the customers’ risk grades is as follows:

Titanium—Customers from whom the Company expects no collection or loss activity.

Platinum—Customers from whom the Company expects minimal, if any, collection or loss activity.

Gold, Silver, Bronze—Customers defined as those with the potential for collection or loss activity.

15


 

Table of Contents

CNH INDUSTRIAL CAPITAL LLC AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands)

(Unaudited)

 

 

A breakdown of the retail portfolio by the customer’s risk grade at the time of origination as of June 30, 2017 and December 31, 2016 is as follows:

 

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

 

 

2017

 

2016

 

Titanium

 

$

3,929,883

 

$

4,117,736

 

Platinum

 

 

1,983,892

 

 

2,045,684

 

Gold

 

 

990,541

 

 

1,042,918

 

Silver

 

 

144,467

 

 

157,170

 

Bronze

 

 

32,814

 

 

34,509

 

Total

 

$

7,081,597

 

$

7,398,017

 

As part of the ongoing monitoring of the credit quality of the wholesale portfolio, the Company utilizes an internal credit-scoring model that assigns a risk grade for each dealer. The scoring model considers the strength of the dealer’s financial condition and payment history. The Company considers the dealers’ ratings in the quarterly credit allowance analysis. A description of the general characteristics of the dealer risk grades is as follows:

Grades A and B – Includes receivables due from dealers that have significant capital strength, moderate leverage, stable earnings and growth, and excellent payment performance.

Grade C – Includes receivables due from dealers with moderate credit risk. Dealers of this grade are differentiated from higher grades on a basis of leverage or payment performance.

Grade D – Includes receivables due from dealers with additional credit risk. These dealers require additional monitoring due to their weaker financial condition or payment performance.

A breakdown of the wholesale portfolio by its credit quality grades as of June 30, 2017 and December 31, 2016 is as follows:

 

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

 

 

2017

 

2016

 

A

 

$

1,246,559

 

$

1,330,159

 

B

 

 

1,484,736

 

 

1,603,893

 

C

 

 

441,296

 

 

322,652

 

D

 

 

338,190

 

 

312,244

 

Total

 

$

3,510,781

 

$

3,568,948

 

16


 

Table of Contents

CNH INDUSTRIAL CAPITAL LLC AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands)

(Unaudited)

 

 

The following tables present information at the level at which management assesses and monitors its credit risk. Receivables are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Delinquency is reported on receivables greater than 30 days past due.

The aging of receivables as of June 30, 2017 and December 31, 2016 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment

 

 

 

 

 

 

 

 

 

Greater

 

 

 

 

 

 

 

 

 

 

> 90 Days

 

 

 

31 – 60 Days

 

61 – 90 Days

 

Than

 

Total

 

 

 

 

Total

 

and

 

 

 

Past Due

 

Past Due

 

90 Days

 

Past Due

 

Current

 

Receivables

 

Accruing

 

Retail

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

26,454

 

$

8,196

 

$

36,044

 

$

70,694

 

$

5,804,519

 

$

5,875,213

 

$

4,268

 

Canada

 

$

3,399

 

$

1,865

 

$

2,483

 

$

7,747

 

$

1,198,637

 

$

1,206,384

 

$

878

 

Wholesale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

562

 

$

251

 

$

284

 

$

1,097

 

$

2,778,938

 

$

2,780,035

 

$

23

 

Canada

 

$

 —

 

$

 —

 

$

 8

 

$

 8

 

$

730,738

 

$

730,746

 

$

 —

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

29,853

 

$

10,061

 

$

38,527

 

$

78,441

 

$

7,003,156

 

$

7,081,597

 

$

5,146

 

Wholesale

 

$

562

 

$

251

 

$

292

 

$

1,105

 

$

3,509,676

 

$

3,510,781

 

$

23

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Recorded

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment

 

 

 

 

 

 

 

 

 

Greater

 

 

 

 

 

 

 

 

 

 

> 90 Days

 

 

 

31 – 60 Days

 

61 – 90 Days

 

Than

 

Total

 

 

 

 

Total

 

and

 

 

 

Past Due

 

Past Due

 

90 Days

 

Past Due

 

Current

 

Receivables

 

Accruing

 

Retail

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

25,416

 

$

6,743

 

$

40,500

 

$

72,659

 

$

6,146,129

 

$

6,218,788

 

$

7,377

 

Canada

 

$

2,828

 

$

765

 

$

1,038

 

$

4,631

 

$

1,174,598

 

$

1,179,229

 

$

736

 

Wholesale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

823

 

$

88

 

$

444

 

$

1,355

 

$

2,862,222

 

$

2,863,577

 

$

 —

 

Canada

 

$

 —

 

$

 1

 

$

 4

 

$

 5

 

$

705,366

 

$

705,371

 

$

 —

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

28,244

 

$

7,508

 

$

41,538

 

$

77,290

 

$

7,320,727

 

$

7,398,017

 

$

8,113

 

Wholesale

 

$

823

 

$

89

 

$

448

 

$

1,360

 

$

3,567,588

 

$

3,568,948

 

$

 —

 

17


 

Table of Contents

CNH INDUSTRIAL CAPITAL LLC AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands)

(Unaudited)

 

 

Impaired receivables are receivables for which the Company has determined it will not collect all the principal and interest payments as per the terms of the contract. As of June 30, 2017 and December 31, 2016, the Company’s recorded investment in impaired receivables individually evaluated for impairment and the related unpaid principal balances, allowances and average recorded investment (based on a seven-month average and thirteen-month average, respectively) are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

 

    

 

 

    

Unpaid

    

 

 

    

Average

    

 

 

Recorded

 

Principal

 

Related

 

Recorded

 

 

 

Investment

 

Balance

 

Allowance

 

Investment

 

Retail

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

41,883

 

$

39,955

 

$

21,499

 

$

44,925

 

Canada

 

$

342

 

$

330

 

$

209

 

$

331

 

Wholesale

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

34,160

 

$

33,893

 

$

2,170

 

$

38,411

 

Canada

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

42,225

 

$

40,285

 

$

21,708

 

$

45,256

 

Wholesale

 

$

34,160

 

$

33,893

 

$

2,170

 

$

38,411

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

    

 

 

    

Unpaid

    

 

 

    

Average

 

 

 

Recorded

 

Principal

 

Related

 

Recorded

 

 

 

Investment

 

Balance

 

Allowance

 

Investment

 

Retail

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

31,360

 

$

30,031

 

$

18,102

 

$

31,268

 

Canada

 

$

23

 

$

23

 

$

11

 

$

28

 

Wholesale

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

43,659

 

$

43,369

 

$

4,250

 

$

46,482

 

Canada

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

31,383

 

$

30,054

 

$

18,113

 

$

31,296

 

Wholesale

 

$

43,659

 

$

43,369

 

$

4,250

 

$

46,482

 

As of June 30, 2017 and December 31, 2016, the Company’s impaired receivables individually evaluated for impairment without an allowance were immaterial. Interest income recognized for the three and six months ended June 30, 2017 and 2016 was immaterial.

18


 

Table of Contents

CNH INDUSTRIAL CAPITAL LLC AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands)

(Unaudited)

 

 

Recognition of income is generally suspended when management determines that collection of future finance income is not probable or when an account becomes 120 days delinquent, whichever occurs first. Interest accrual is resumed if the receivable becomes contractually current and collection becomes probable. Previously suspended income is recognized at that time. The receivables on nonaccrual status as of June 30, 2017 and December 31, 2016 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

December 31, 2016

 

 

    

Retail

    

Wholesale

    

Total

    

Retail

    

Wholesale

    

Total

 

United States

 

$

37,798

 

$

33,893

 

$

71,691

 

$

49,998

 

$

43,369

 

$

93,367

 

Canada

 

$

1,623

 

$

 —

 

$

1,623

 

$

325

 

$

 —

 

$

325

 

Troubled Debt Restructurings

A restructuring of a receivable constitutes a troubled debt restructuring (“TDR”) when the lender grants a concession it would not otherwise consider to a borrower experiencing financial difficulties. As a collateral-based lender, the Company typically will repossess collateral in lieu of restructuring receivables. As such, for retail receivables, concessions are typically provided based on bankruptcy court proceedings. For wholesale receivables, concessions granted may include extended contract maturities, inclusion of interest-only periods, modification of a contractual interest rate to a below market interest rate and waiving of interest and principal.

TDRs are reviewed along with other receivables as part of management’s ongoing evaluation of the adequacy of the allowance for credit losses. The allowance for credit losses attributable to TDRs is based on the most probable source of repayment, which is normally the liquidation of collateral. In determining collateral value, the Company estimates the current fair market value of the equipment collateral and considers credit enhancements such as additional collateral and third-party guarantees.

As of June 30, 2017, the Company had 243 retail and finance lease contracts classified as TDRs where a court has determined the concession. The pre-modification value of these contracts was $5,512 and the post-modification value was $4,816. Additionally, the Company had 455 accounts with a balance of $26,304 undergoing bankruptcy proceedings where a concession has not yet been determined. As of June 30, 2016, the Company had 256 retail and finance lease contracts classified as TDRs where a court has determined the concession. The pre-modification value of these contracts was $3,897 and the post-modification value was $3,212. Additionally, the Company had 492 accounts with a balance of $33,913 undergoing bankruptcy proceedings where a concession has not yet been determined. As the outcome of the bankruptcy cases is determined by a court based on available assets, subsequent re-defaults are unusual and were not material for retail and finance lease contracts that were modified in a TDR during the previous 12 months ended June 30, 2017 and 2016.

As of June 30, 2017 and 2016, the Company’s wholesale TDRs were immaterial.

NOTE 5: CREDIT FACILITIES AND DEBT

In April 2017, the Company repaid $100,000 under its U.S. wholesale committed asset-backed facility, decreased the facility limit to $300,000 and renewed the facility with an automatic renewal every three months.

On May 18, 2017, the Company renewed its $500,000 U.S. wholesale committed asset-backed facility, with a final maturity in May 2018.

On June 26, 2017, the Company repaid its $100,000 unsecured term loan. Also on that date, the Company entered into a $100,000 unsecured revolving credit facility, with a final maturity in June 2020, and a $100,000 uncommitted credit line, with a final maturity in June 2018. As of June 30, 2017, the uncommitted credit line was fully drawn.

19


 

Table of Contents

CNH INDUSTRIAL CAPITAL LLC AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands)

(Unaudited)

 

 

On June 27, 2017, the Company replaced its undrawn $100,000 unsecured revolving credit facility with a C$200,000 ($151,602) unsecured revolving credit facility, with a final maturity in June 2020. The facility was fully drawn as of June 30, 2017.

NOTE 6: INCOME TAXES

The effective tax rates for the three months ended June 30, 2017 and 2016 were 30.7% and 34.2%, respectively. The effective tax rate was 31.3% for the six-month period ended June 30, 2017, compared to 32.8% for the same period in 2016. The Company’s provision for income taxes is based on an estimated tax rate for the year applied to the year-to-date federal, state and foreign income. The 2017 estimated annual tax rate is expected to be lower than the U.S. federal corporate income tax rate of 35% primarily due to profits in tax jurisdictions with lower rates, including Canada.

NOTE 7: FINANCIAL INSTRUMENTS

The Company may elect to measure many financial instruments and certain other items at fair value. This fair value option must be applied on an instrument-by-instrument basis with changes in fair value reported in earnings. The election can be made at the acquisition of an eligible financial asset, financial liability, or firm commitment or when certain specified reconsideration events occur. The fair value election may not be revoked once made. The Company did not elect the fair value measurement option for eligible items.

Fair-Value Hierarchy

U.S. GAAP specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s internally-developed market assumptions. These two types of inputs have created the following fair-value hierarchy:

Level 1—Quoted prices for identical instruments in active markets.

Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

Level 3—Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

This hierarchy requires the use of observable market data when available.

Determination of Fair Value

When available, the Company uses quoted market prices to determine fair value and classifies such items in Level 1. In some cases where a market price is not available, the Company will make use of observable market-based inputs to calculate fair value, in which case the items are classified in Level 2.

If quoted or observable market prices are not available, fair value is based upon internally developed valuation techniques that use, where possible, current market-based or independently sourced market parameters such as interest rates, currency rates, or yield curves. Items valued using such internally generated valuation techniques are classified according to the lowest level input or value driver that is significant to the valuation. Thus, an item may be classified in Level 3 even though there may be some significant inputs that are readily observable.

The following section describes the valuation methodologies used by the Company to measure various financial instruments at fair value, including an indication of the level in the fair value hierarchy in which each instrument is

20


 

Table of Contents

CNH INDUSTRIAL CAPITAL LLC AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands)

(Unaudited)

 

 

generally classified. Where appropriate, the description includes details of the valuation models and the key inputs to those models, as well as any significant assumptions.

Derivatives

The Company utilizes derivative instruments to mitigate its exposure to interest rate and foreign currency exposures. Derivatives used as hedges are effective at reducing the risk associated with the exposure being hedged and are designated as a hedge at the inception of the derivative contract. The Company does not hold or issue derivative or other financial instruments for speculative purposes. The credit risk for the interest rate hedges is reduced through diversification among counterparties, utilizing mandatory termination clauses and/or collateral support agreements. Derivative instruments are generally classified in Level 2 or 3 of the fair value hierarchy. The cash flows underlying all derivative contracts were recorded in operating activities in the consolidated statements of cash flows.

Interest Rate Derivatives

The Company has entered into interest rate derivatives in order to manage interest rate exposures arising in the normal course of business. Interest rate derivatives that have been designated in cash flow hedging relationships are being used by the Company to mitigate the risk of rising interest rates related to debt and anticipated issuance of fixed-rate debt in future periods. Gains and losses on these instruments, to the extent that the hedge relationship has been effective, are deferred in accumulated other comprehensive income (loss) and recognized in interest expense over the period in which the Company recognizes interest expense on the related debt. Ineffectiveness recognized related to these hedging relationships was not significant for the three and six months ended June 30, 2017 and 2016. These amounts are recorded in “Other expenses” in the consolidated statements of income. As of June 30, 2017, the after-tax losses deferred in accumulated other comprehensive income (loss) that will be recognized in interest expense over the next 12 months are approximately $518.

The Company also enters into interest rate derivatives with substantially similar economic terms that are not designated as hedging instruments to mitigate interest rate risk related to the Company’s committed asset-backed facilities. These facilities require the Company to enter into interest rate derivatives. To ensure that these transactions do not result in the Company being exposed to this risk, the Company enters into an offsetting position. Unrealized and realized gains and losses resulting from fair value changes in these instruments are recognized directly in income and were insignificant for the three and six months ended June 30, 2017 and 2016.

Most of the Company’s interest rate derivatives are considered Level 2. The fair market value of these derivatives is calculated using market data input for forecasted benchmark interest rates and can be compared to actively traded derivatives. If the future notional amount of the Company’s interest rate derivatives is not known in advance, the derivatives are considered Level 3 derivatives. The fair market value of these derivatives is calculated using market data input and a forecasted future notional balance. The total notional amount of the Company’s interest rate derivatives was approximately $3,426,412 and $2,954,424 at June 30, 2017 and December 31, 2016, respectively. The seven-month average notional amounts for the six months ended June 30, 2017 and 2016 were $3,188,873 and $3,168,190, respectively.

Foreign Exchange Contracts

The Company uses forward contracts to hedge certain assets and liabilities denominated in foreign currencies. Such derivatives are considered economic hedges and are not designated as hedging instruments. The changes in the fair value of these instruments are recognized directly as income in “Other expenses” and are expected to offset the foreign exchange gains or losses on the exposures being managed.

21


 

Table of Contents

CNH INDUSTRIAL CAPITAL LLC AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands)

(Unaudited)

 

 

All of the Company’s foreign exchange derivatives are considered Level 2 as the fair value is calculated using market data input and can be compared to actively traded derivatives.

Financial Statement Impact of the Company’s Derivatives

The fair values of the Company’s derivatives as of June 30, 2017 and December 31, 2016 in the consolidated balance sheets are recorded as follows:

 

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

 

 

2017

 

2016

 

Derivatives Designated as Hedging Instruments

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

 

 

Interest rate derivatives

 

$

2,489

 

$

1,631

 

Accounts payable and other accrued liabilities:

 

 

 

 

 

 

 

Interest rate derivatives

 

$

4,908

 

$

5,646

 

Derivatives Not Designated as Hedging Instruments

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

 

 

Interest rate derivatives

 

$

3,632

 

$

3,977

 

Foreign exchange contracts

 

 

 —

 

 

58

 

Total

 

$

3,632

 

$

4,035

 

Accounts payable and other accrued liabilities:

 

 

 

 

 

 

 

Interest rate derivatives

 

$

3,632

 

$

3,977

 

Foreign exchange contracts

 

 

660

 

 

1,183

 

Total

 

$

4,292

 

$

5,160

 

Pre-tax gains (losses) on the consolidated statements of income and comprehensive income related to the Company’s derivatives for the three and six months ended June 30, 2017 and 2016 are recorded in the following accounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

 

2017

    

2016

    

2017

    

2016

 

Cash Flow Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

Recognized in accumulated other comprehensive income (loss) (effective portion):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate derivatives

 

$

823

 

$

1,000

 

$

542

 

$

881

 

Reclassified from accumulated other comprehensive income (loss) (effective portion):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate derivatives—Interest expense to third parties

 

 

(173)

 

 

(163)

 

 

(340)

 

 

(327)

 

Not Designated as Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange contracts—Other expenses

 

$

660

 

$

1,721

 

$

1,014

 

$

1,877

 

22


 

Table of Contents

CNH INDUSTRIAL CAPITAL LLC AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands)

(Unaudited)

 

 

Items Measured at Fair Value on a Recurring Basis

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2017 and December 31, 2016, all of which are classified as Level 2:

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

    

2017

    

2016

 

Assets

 

 

 

 

 

 

 

Interest rate derivatives

 

$

6,121

 

$

5,608

 

Foreign exchange contracts

 

 

 —

 

 

58

 

Total assets

 

$

6,121

 

$

5,666

 

Liabilities

 

 

 

 

 

 

 

Interest rate derivatives

 

$

8,540

 

$

9,623

 

Foreign exchange contracts

 

 

660

 

 

1,183

 

Total liabilities

 

$

9,200

 

$

10,806

 

There were no transfers between Level 1, Level 2 and Level 3 hierarchy levels during the periods presented.

 

Fair Value of Other Financial Instruments

The carrying amount of cash and cash equivalents, restricted cash, floating-rate affiliated accounts and notes receivable, floating-rate short-term debt, interest payable and short-term affiliated debt was assumed to approximate its fair value. Under the fair value hierarchy, cash and cash equivalents and restricted cash are classified as Level 1 and the remainder of the financial instruments listed is classified as Level 2.

Financial Instruments Not Carried at Fair Value

The carrying amount and estimated fair value of assets and liabilities considered financial instruments as of June 30, 2017 and December 31, 2016 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

December 31, 2016

 

 

    

Carrying

    

Estimated

    

Carrying

    

Estimated

 

 

 

Amount

 

Fair Value *

 

Amount

 

Fair Value *

 

Receivables

 

$

10,507,204

 

$

10,456,958

 

$

10,882,070

 

$

10,885,595

 

Long-term debt

 

$

6,948,049

 

$

6,945,359

 

$

7,474,318

 

$

7,364,581

 

______________

*Under the fair value hierarchy, receivables measurements are classified as Level 3 and long‑term debt measurements are classified as Level 2.

Financial Assets

The fair value of receivables was determined by discounting the estimated future payments using a discount rate, which includes an estimate for credit risk.

Financial Liabilities

The fair values of long-term debt were based on current market quotes for identical or similar borrowings and credit risk.

23


 

Table of Contents

CNH INDUSTRIAL CAPITAL LLC AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands)

(Unaudited)

 

 

NOTE 8: SEGMENT AND GEOGRAPHICAL INFORMATION

The Company’s segment data is based on disclosure requirements of accounting guidance on segment reporting, which requires financial information be reported on the basis that is used internally for measuring segment performance. The Company’s reportable segments are strategic business units that are organized around differences in geographic areas. Each segment is managed separately as they require different knowledge of regulatory environments and marketing strategies. The operating segments offer primarily the same services within each of the respective segments.

A summary of the Company’s reportable segment information is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

   

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

 

2017

    

2016

 

2017

   

2016

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

188,680

 

$

196,830

 

$

378,668

 

$

392,103

 

Canada

 

 

42,140

 

 

44,840

 

 

86,028

 

 

84,487

 

Eliminations

 

 

(957)

 

 

(1,031)

 

 

(1,999)

 

 

(2,033)

 

Total

 

$

229,863

 

$

240,639

 

$

462,697

 

$

474,557

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

68,703

 

$

69,299

 

$

133,136

 

$

133,403

 

Canada

 

 

11,051

 

 

10,791

 

 

22,388

 

 

19,660

 

Eliminations

 

 

(957)

 

 

(1,031)

 

 

(1,999)

 

 

(2,033)

 

Total

 

$

78,797

 

$

79,059

 

$

153,525

 

$

151,030

 

Segment net income

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

24,102

 

$

28,958

 

$

48,332

 

$

69,851

 

Canada

 

 

14,085

 

 

17,471

 

 

28,248

 

 

33,799

 

Total

 

$

38,187

 

$

46,429

 

$

76,580

 

$

103,650

 

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

56,780

 

$

50,360

 

$

114,496

 

$

98,924

 

Canada

 

 

10,880

 

 

10,235

 

 

21,852

 

 

19,440

 

Total

 

$

67,660

 

$

60,595

 

$

136,348

 

$

118,364

 

Expenditures for equipment on operating leases

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

150,994

 

$

124,820

 

$

286,999

 

$

248,247

 

Canada

 

 

31,094

 

 

48,624

 

 

55,872

 

 

74,457

 

Total

 

$

182,088

 

$

173,444

 

$

342,871

 

$

322,704

 

Provision for credit losses

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

10,993

 

$

8,823

 

$

22,917

 

$

16,806

 

Canada

 

 

(376)

 

 

(1,563)

 

 

181

 

 

(3,149)

 

Total

 

$

10,617

 

$

7,260

 

$

23,098

 

$

13,657

 

 

24


 

Table of Contents

CNH INDUSTRIAL CAPITAL LLC AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

   

As of

    

As of

 

 

 

June 30, 

 

December 31, 

 

 

 

2017

    

2016

 

Segment assets

 

 

 

 

 

 

 

United States

 

$

11,171,744

 

$

12,016,606

 

Canada

 

 

2,496,251

 

 

2,400,814

 

Eliminations

 

 

(214,007)

 

 

(374,161)

 

Total

 

$

13,453,988

 

$

14,043,259

 

Managed receivables

 

 

 

 

 

 

 

United States

 

$

8,655,248

 

$

9,082,365

 

Canada

 

 

1,937,130

 

 

1,884,600

 

Total

 

$

10,592,378

 

$

10,966,965

 

 

NOTE 9: RELATED-PARTY TRANSACTIONS

The Company receives compensation from CNH Industrial North America for retail, wholesale and operating lease sales programs offered by CNH Industrial North America on which finance charges are waived or below market rate financing programs are offered. The Company receives compensation from CNH Industrial North America based on the Company’s estimated costs and a targeted return on equity. The Company is also compensated for lending funds to CNH Industrial North America.

The summary of sources included in “Interest and other income from affiliates” in the accompanying consolidated statements of income for the three and six months ended June 30, 2017 and 2016 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

Three Months Ended

   

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

 

2017

   

2016

 

2017

   

2016

 

Subsidy from CNH Industrial North America:

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

38,286

 

$

44,723

 

$

77,160

 

$

88,732

 

Wholesale

 

 

42,644

 

 

39,909

 

 

82,930

 

 

78,384

 

Operating lease

 

 

16,846

 

 

17,789

 

 

34,107

 

 

34,954

 

Income from affiliated receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

CNH Industrial North America

 

 

24

 

 

256

 

 

66

 

 

633

 

Total interest and other income from affiliates

 

$

97,800

 

$

102,677

 

$

194,263

 

$

202,703

 

Fees charged by affiliates represent payroll and other human resource services CNH Industrial America performs on behalf of the Company.

25


 

Table of Contents

CNH INDUSTRIAL CAPITAL LLC AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands)

(Unaudited)

 

 

As of June 30, 2017 and December 31, 2016, the Company had various accounts and notes receivable and debt with the following affiliates:

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

 

2017

 

2016

 

Affiliated receivables from:

 

 

 

 

 

 

 

CNH Industrial America

 

$

15,967

 

$

49,526

 

CNH Industrial Canada Ltd.

 

 

22,085

 

 

21,398

 

Other affiliates

 

 

12,302

 

 

12,919

 

Total affiliated receivables

 

$

50,354

 

$

83,843

 

Affiliated debt owed to:

 

 

 

 

 

 

 

CNH Industrial America

 

$

4,305

 

$

132,851

 

Accounts payable and other accrued liabilities, including tax payables, of $24,138 and $3,792, respectively, as of June 30, 2017 and December 31, 2016, were payable to related parties. Interest expense to affiliates was $2,663 and $2,481, respectively, for the three months ended June 30, 2017 and 2016 and $7,136 and $3,368, respectively, for the six months ended June 30, 2017 and 2016.

NOTE 10: COMMITMENTS AND CONTINGENCIES

Legal Matters

The Company is party to various litigation matters and claims arising from its operations. Management believes that the outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on the Company’s financial position or results of operations.

Commitments

The Company has various agreements to extend credit for the wholesale and dealer financing managed portfolio. At June 30, 2017, the total credit limit available was $6,351,234, of which $3,452,183 was utilized.

 

 

NOTE 11: SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION

CNH Industrial Capital America and New Holland Credit, which are 100%-owned subsidiaries of CNH Industrial Capital LLC (the “Guarantor Entities”), guarantee certain indebtedness of CNH Industrial Capital LLC. As the guarantees are full, unconditional, and joint and several and because the Guarantor Entities are 100%-owned by CNH Industrial Capital LLC, the Company has included the following condensed consolidating financial information as of June 30, 2017 and December 31, 2016 and for the three and six months ended June 30, 2017 and 2016. The condensed consolidating financial information reflects investments in consolidated subsidiaries under the equity method of accounting.

26


 

Table of Contents

CNH INDUSTRIAL CAPITAL LLC AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Statements of Comprehensive Income for the

 

 

 

Three Months Ended June 30, 2017

 

 

    

CNH

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

Industrial

 

Guarantor

 

All Other

 

 

 

 

 

 

 

 

 

Capital LLC

 

Entities

 

Subsidiaries

 

Eliminations

 

Consolidated

 

REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income on retail notes and finance leases

 

$

 —

 

$

3,962

 

$

44,416

 

$

 —

 

$

48,378

 

Interest income on wholesale notes

 

 

 —

 

 

(278)

 

 

16,317

 

 

 —

 

 

16,039

 

Interest and other income from affiliates

 

 

25,783

 

 

61,306

 

 

79,962

 

 

(69,251)

 

 

97,800

 

Rental income on operating leases

 

 

 —

 

 

49,506

 

 

13,025

 

 

 —

 

 

62,531

 

Other income

 

 

 —

 

 

23,612

 

 

423

 

 

(18,920)

 

 

5,115

 

Total revenues

 

 

25,783

 

 

138,108

 

 

154,143

 

 

(88,171)

 

 

229,863

 

EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense to third parties

 

 

38,945

 

 

1,861

 

 

35,328

 

 

 —

 

 

76,134

 

Interest expense to affiliates

 

 

 —

 

 

60,476

 

 

11,438

 

 

(69,251)

 

 

2,663

 

Total interest expense

 

 

38,945

 

 

62,337

 

 

46,766

 

 

(69,251)

 

 

78,797

 

Administrative and operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fees charged by affiliates

 

 

 —

 

 

10,577

 

 

19,285

 

 

(18,920)

 

 

10,942

 

Provision for credit losses

 

 

 —

 

 

1,219

 

 

9,398

 

 

 —

 

 

10,617

 

Depreciation of equipment on operating leases

 

 

 —

 

 

56,256

 

 

10,877

 

 

 —

 

 

67,133

 

Other expenses

 

 

 —

 

 

4,652

 

 

2,650

 

 

 —

 

 

7,302

 

Total administrative and operating expenses

 

 

 —

 

 

72,704

 

 

42,210

 

 

(18,920)

 

 

95,994

 

Total expenses

 

 

38,945

 

 

135,041

 

 

88,976

 

 

(88,171)

 

 

174,791

 

Income (loss) before income taxes and equity in income of consolidated subsidiaries accounted for under the equity method

 

 

(13,162)

 

 

3,067

 

 

65,167

 

 

 —

 

 

55,072

 

Income tax provision (benefit)

 

 

(4,912)

 

 

1,186

 

 

20,611

 

 

 —

 

 

16,885

 

Equity in income of consolidated subsidiaries accounted for under the equity method

 

 

46,437

 

 

44,556

 

 

 —

 

 

(90,993)

 

 

 —

 

NET INCOME

 

$

38,187

 

$

46,437

 

$

44,556

 

$

(90,993)

 

$

38,187

 

COMPREHENSIVE INCOME

 

$

55,934

 

$

64,184

 

$

59,732

 

$

(123,916)

 

$

55,934

 

 

27


 

Table of Contents

CNH INDUSTRIAL CAPITAL LLC AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Statements of Comprehensive Income for the 

 

 

 

Six Months Ended June 30, 2017

 

 

    

CNH

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

Industrial

 

Guarantor

 

All Other

 

 

 

 

 

 

 

 

 

Capital LLC

 

Entities

 

Subsidiaries

 

Eliminations

 

Consolidated

 

REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income on retail notes and finance leases

 

$

 —

 

$

7,662

 

$

91,529

 

$

 —

 

$

99,191

 

Interest income on wholesale notes

 

 

 —

 

 

(574)

 

 

32,629

 

 

 —

 

 

32,055

 

Interest and other income from affiliates

 

 

48,450

 

 

121,060

 

 

158,557

 

 

(133,804)

 

 

194,263

 

Rental income on operating leases

 

 

 —

 

 

99,730

 

 

25,995

 

 

 —

 

 

125,725

 

Other income

 

 

 —

 

 

48,884

 

 

705

 

 

(38,126)

 

 

11,463

 

Total revenues

 

 

48,450

 

 

276,762

 

 

309,415

 

 

(171,930)

 

 

462,697

 

EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense to third parties

 

 

78,673

 

 

(671)

 

 

68,387

 

 

 —

 

 

146,389

 

Interest expense to affiliates

 

 

 —

 

 

118,166

 

 

22,774

 

 

(133,804)

 

 

7,136

 

Total interest expense

 

 

78,673

 

 

117,495

 

 

91,161

 

 

(133,804)

 

 

153,525

 

Administrative and operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fees charged by affiliates

 

 

 —

 

 

21,749

 

 

39,018

 

 

(38,126)

 

 

22,641

 

Provision for credit losses

 

 

 —

 

 

5,996

 

 

17,102

 

 

 —

 

 

23,098

 

Depreciation of equipment on operating leases

 

 

 —

 

 

113,456

 

 

21,846

 

 

 —

 

 

135,302

 

Other expenses

 

 

 —

 

 

12,528

 

 

4,101

 

 

 —

 

 

16,629

 

Total administrative and operating expenses

 

 

 —

 

 

153,729

 

 

82,067

 

 

(38,126)

 

 

197,670

 

Total expenses

 

 

78,673

 

 

271,224

 

 

173,228

 

 

(171,930)

 

 

351,195

 

Income (loss) before income taxes and equity in income of consolidated subsidiaries accounted for under the equity method

 

 

(30,223)

 

 

5,538

 

 

136,187

 

 

 —

 

 

111,502

 

Income tax provision (benefit)

 

 

(11,279)

 

 

2,166

 

 

44,035

 

 

 —

 

 

34,922

 

Equity in income of consolidated subsidiaries accounted for under the equity method

 

 

95,524

 

 

92,152

 

 

 —

 

 

(187,676)

 

 

 —

 

NET INCOME

 

$

76,580

 

$

95,524

 

$

92,152

 

$

(187,676)

 

$

76,580

 

COMPREHENSIVE INCOME

 

$

98,844

 

$

117,788

 

$

111,024

 

$

(228,812)

 

$

98,844

 

 

28


 

Table of Contents

CNH INDUSTRIAL CAPITAL LLC AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Balance Sheets as of June 30, 2017

 

 

   

CNH

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

Industrial

 

Guarantor

 

All Other

 

 

 

 

 

 

 

 

 

Capital LLC

 

Entities

 

Subsidiaries

 

Eliminations

 

Consolidated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 —

 

$

67,823

 

$

90,930

 

$

 —

 

$

158,753

 

Restricted cash

 

 

 —

 

 

100

 

 

540,748

 

 

 —

 

 

540,848

 

Receivables, less allowance for credit losses

 

 

 —

 

 

1,310,545

 

 

9,196,659

 

 

 —

 

 

10,507,204

 

Affiliated accounts and notes receivable

 

 

2,981,452

 

 

2,204,091

 

 

1,909,147

 

 

(7,044,336)

 

 

50,354

 

Equipment on operating leases, net

 

 

 —

 

 

1,505,934

 

 

355,244

 

 

 —

 

 

1,861,178

 

Equipment held for sale

 

 

 —

 

 

172,631

 

 

16,375

 

 

 —

 

 

189,006

 

Investments in consolidated subsidiaries accounted for under the equity method

 

 

2,404,253

 

 

2,443,692

 

 

 —

 

 

(4,847,945)

 

 

 —

 

Goodwill and intangible assets, net

 

 

 —

 

 

88,020

 

 

28,137

 

 

 —

 

 

116,157

 

Other assets

 

 

1,748

 

 

(9,992)

 

 

42,505

 

 

(3,773)

 

 

30,488

 

TOTAL

 

$

5,387,453

 

$

7,782,844

 

$

12,179,745

 

$

(11,896,054)

 

$

13,453,988

 

LIABILITIES AND STOCKHOLDER’S EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term debt, including current maturities of long-term debt

 

$

700,610

 

$

47,333

 

$

3,675,064

 

$

 —

 

$

4,423,007

 

Accounts payable and other accrued liabilities

 

 

293,791

 

 

2,661,704

 

 

1,241,040

 

 

(3,443,357)

 

 

753,178

 

Affiliated debt

 

 

 —

 

 

2,638,383

 

 

970,674

 

 

(3,604,752)

 

 

4,305

 

Long-term debt

 

 

3,067,603

 

 

31,171

 

 

3,849,275

 

 

 —

 

 

6,948,049

 

Total liabilities

 

 

4,062,004

 

 

5,378,591

 

 

9,736,053

 

 

(7,048,109)

 

 

12,128,539

 

Stockholder’s equity

 

 

1,325,449

 

 

2,404,253

 

 

2,443,692

 

 

(4,847,945)

 

 

1,325,449

 

TOTAL

 

$

5,387,453

 

$

7,782,844

 

$

12,179,745

 

$

(11,896,054)

 

$

13,453,988

 

 

29


 

Table of Contents

CNH INDUSTRIAL CAPITAL LLC AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Statements of Cash Flows for the

 

 

 

Six Months Ended June 30, 2017

 

 

   

CNH

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

Industrial

 

Guarantor

 

All Other

 

 

 

 

 

 

 

 

 

Capital LLC

 

Entities

 

Subsidiaries

 

Eliminations

 

Consolidated

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash from (used in) operating activities

 

$

138,595

 

$

177,932

 

$

198,702

 

$

(315,362)

 

$

199,867

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of receivables acquired

 

 

 —

 

 

(3,776,561)

 

 

(4,239,265)

 

 

3,207,693

 

 

(4,808,133)

 

Collections of receivables

 

 

 —

 

 

3,913,846

 

 

4,526,691

 

 

(3,208,216)

 

 

5,232,321

 

Change in restricted cash

 

 

 —

 

 

 —

 

 

175,854

 

 

 —

 

 

175,854

 

Purchase of equipment on operating leases, net

 

 

 —

 

 

(75,969)

 

 

(32,086)

 

 

 —

 

 

(108,055)

 

Change in property and equipment and software, net

 

 

 —

 

 

(113)

 

 

 —

 

 

 —

 

 

(113)

 

Net cash from (used in) investing activities

 

 

 —

 

 

61,203

 

 

431,194

 

 

(523)

 

 

491,874

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intercompany activity

 

 

 —

 

 

(298,095)

 

 

(146,336)

 

 

315,885

 

 

(128,546)

 

Net change in indebtedness

 

 

1,405

 

 

(24,770)

 

 

(405,324)

 

 

 —

 

 

(428,689)

 

Dividends paid to CNH Industrial America LLC

 

 

(140,000)

 

 

 —

 

 

 —

 

 

 —

 

 

(140,000)

 

Net cash from (used in) financing activities

 

 

(138,595)

 

 

(322,865)

 

 

(551,660)

 

 

315,885

 

 

(697,235)

 

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

 —

 

 

(83,730)

 

 

78,236

 

 

 —

 

 

(5,494)

 

CASH AND CASH EQUIVALENTS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning of period

 

 

 —

 

 

151,553

 

 

12,694

 

 

 —

 

 

164,247

 

End of period

 

$

 —

 

$

67,823

 

$

90,930

 

$

 —

 

$

158,753

 

 

30


 

Table of Contents

CNH INDUSTRIAL CAPITAL LLC AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Statements of Comprehensive Income for the

 

 

 

Three Months Ended June 30, 2016

 

 

    

CNH

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

Industrial

 

Guarantor

 

All Other

 

 

 

 

 

 

 

 

 

Capital LLC

 

Entities

 

Subsidiaries

 

Eliminations

 

Consolidated

 

REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income on retail notes and finance leases

 

$

 —

 

$

4,014

 

$

48,715

 

$

 —

 

$

52,729

 

Interest income on wholesale notes

 

 

 —

 

 

30

 

 

18,438

 

 

 —

 

 

18,468

 

Interest and other income from affiliates

 

 

24,203

 

 

57,907

 

 

83,967

 

 

(63,400)

 

 

102,677

 

Rental income on operating leases

 

 

 —

 

 

48,443

 

 

11,734

 

 

 —

 

 

60,177

 

Other income

 

 

 —

 

 

26,729

 

 

706

 

 

(20,847)

 

 

6,588

 

Total revenues

 

 

24,203

 

 

137,123

 

 

163,560

 

 

(84,247)

 

 

240,639

 

EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense to third parties

 

 

43,562

 

 

1,398

 

 

31,618

 

 

 —

 

 

76,578

 

Interest expense to affiliates

 

 

 —

 

 

56,442

 

 

9,439

 

 

(63,400)

 

 

2,481

 

Total interest expense

 

 

43,562

 

 

57,840

 

 

41,057

 

 

(63,400)

 

 

79,059

 

Administrative and operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fees charged by affiliates

 

 

 —

 

 

10,657

 

 

21,309

 

 

(20,847)

 

 

11,119

 

Provision for credit losses

 

 

 —

 

 

3,845

 

 

3,415

 

 

 —

 

 

7,260

 

Depreciation of equipment on operating leases

 

 

 —

 

 

49,870

 

 

10,230

 

 

 —

 

 

60,100

 

Other expenses

 

 

 —

 

 

9,783

 

 

2,746

 

 

 —

 

 

12,529

 

Total administrative and operating expenses

 

 

 —

 

 

74,155

 

 

37,700

 

 

(20,847)

 

 

91,008

 

Total expenses

 

 

43,562

 

 

131,995

 

 

78,757

 

 

(84,247)

 

 

170,067

 

Income (loss) before income taxes and equity in income of consolidated subsidiaries accounted for under the equity method

 

 

(19,359)

 

 

5,128

 

 

84,803

 

 

 —

 

 

70,572

 

Income tax provision (benefit)

 

 

(6,976)

 

 

3,650

 

 

27,469

 

 

 —

 

 

24,143

 

Equity in income of consolidated subsidiaries accounted for under the equity method

 

 

58,812

 

 

57,334

 

 

 —

 

 

(116,146)

 

 

 —

 

NET INCOME

 

$

46,429

 

$

58,812

 

$

57,334

 

$

(116,146)

 

$

46,429

 

COMPREHENSIVE INCOME

 

$

46,782

 

$

59,165

 

$

57,640

 

$

(116,805)

 

$

46,782

 

31


 

Table of Contents

CNH INDUSTRIAL CAPITAL LLC AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Statements of Comprehensive Income for the

 

 

 

Six Months Ended June 30, 2016

 

 

    

CNH

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

Industrial

 

Guarantor

 

All Other

 

 

 

 

 

 

 

 

 

Capital LLC

 

Entities

 

Subsidiaries

 

Eliminations

 

Consolidated

 

REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income on retail notes and finance leases

 

$

 —

 

$

7,558

 

$

99,174

 

$

 —

 

$

106,732

 

Interest income on wholesale notes

 

 

 —

 

 

24

 

 

33,460

 

 

 —

 

 

33,484

 

Interest and other income from affiliates

 

 

44,844

 

 

114,135

 

 

166,336

 

 

(122,612)

 

 

202,703

 

Rental income on operating leases

 

 

 —

 

 

97,260

 

 

22,199

 

 

 —

 

 

119,459

 

Other income

 

 

 —

 

 

52,863

 

 

1,322

 

 

(42,006)

 

 

12,179

 

Total revenues

 

 

44,844

 

 

271,840

 

 

322,491

 

 

(164,618)

 

 

474,557

 

EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense to third parties

 

 

84,023

 

 

(1,097)

 

 

64,736

 

 

 —

 

 

147,662

 

Interest expense to affiliates

 

 

 —

 

 

109,089

 

 

16,891

 

 

(122,612)

 

 

3,368

 

Total interest expense

 

 

84,023

 

 

107,992

 

 

81,627

 

 

(122,612)

 

 

151,030

 

Administrative and operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fees charged by affiliates

 

 

 —

 

 

21,921

 

 

42,921

 

 

(42,006)

 

 

22,836

 

Provision for credit losses

 

 

 —

 

 

3,696

 

 

9,961

 

 

 —

 

 

13,657

 

Depreciation of equipment on operating leases

 

 

 —

 

 

97,952

 

 

19,432

 

 

 —

 

 

117,384

 

Other expenses

 

 

 —

 

 

10,580

 

 

4,933

 

 

 —

 

 

15,513

 

Total administrative and operating expenses

 

 

 —

 

 

134,149

 

 

77,247

 

 

(42,006)

 

 

169,390

 

Total expenses

 

 

84,023

 

 

242,141

 

 

158,874

 

 

(164,618)

 

 

320,420

 

Income (loss) before income taxes and equity in income of consolidated subsidiaries accounted for under the equity method

 

 

(39,179)

 

 

29,699

 

 

163,617

 

 

 —

 

 

154,137

 

Income tax provision (benefit)

 

 

(14,621)

 

 

11,256

 

 

53,852

 

 

 —

 

 

50,487

 

Equity in income of consolidated subsidiaries accounted for under the equity method

 

 

128,208

 

 

109,765

 

 

 —

 

 

(237,973)

 

 

 —

 

NET INCOME

 

$

103,650

 

$

128,208

 

$

109,765

 

$

(237,973)

 

$

103,650

 

COMPREHENSIVE INCOME

 

$

146,385

 

$

170,943

 

$

146,586

 

$

(317,529)

 

$

146,385

 

 

32


 

Table of Contents

CNH INDUSTRIAL CAPITAL LLC AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Balance Sheets as of December 31, 2016

 

 

    

CNH

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

Industrial

 

Guarantor

 

All Other

 

 

 

 

 

 

 

 

 

Capital LLC

 

Entities

 

Subsidiaries

 

Eliminations

 

Consolidated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 —

 

$

151,553

 

$

12,694

 

$

 —

 

$

164,247

 

Restricted cash

 

 

 —

 

 

100

 

 

712,745

 

 

 —

 

 

712,845

 

Receivables, less allowance for credit losses

 

 

 —

 

 

1,453,303

 

 

9,428,767

 

 

 —

 

 

10,882,070

 

Affiliated accounts and notes receivable

 

 

3,138,443

 

 

2,293,055

 

 

1,878,093

 

 

(7,225,748)

 

 

83,843

 

Equipment on operating leases, net

 

 

 —

 

 

1,526,746

 

 

331,697

 

 

 —

 

 

1,858,443

 

Equipment held for sale

 

 

 —

 

 

182,636

 

 

17,347

 

 

 —

 

 

199,983

 

Investments in consolidated subsidiaries accounted for under the equity method

 

 

2,286,578

 

 

2,332,668

 

 

 —

 

 

(4,619,246)

 

 

 —

 

Goodwill and intangible assets, net

 

 

 —

 

 

88,938

 

 

27,143

 

 

 —

 

 

116,081

 

Other assets

 

 

3,870

 

 

(14,344)

 

 

40,517

 

 

(4,296)

 

 

25,747

 

TOTAL

 

$

5,428,891

 

$

8,014,655

 

$

12,449,003

 

$

(11,849,290)

 

$

14,043,259

 

LIABILITIES AND STOCKHOLDER’S EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term debt, including current maturities of long-term debt

 

$

500,000

 

$

45,289

 

$

3,717,340

 

$

 —

 

$

4,262,629

 

Accounts payable and other accrued liabilities

 

 

295,365

 

 

2,688,323

 

 

1,132,462

 

 

(3,309,407)

 

 

806,743

 

Affiliated debt

 

 

 —

 

 

2,936,479

 

 

1,117,009

 

 

(3,920,637)

 

 

132,851

 

Long-term debt

 

 

3,266,808

 

 

57,986

 

 

4,149,524

 

 

 —

 

 

7,474,318

 

Total liabilities

 

 

4,062,173

 

 

5,728,077

 

 

10,116,335

 

 

(7,230,044)

 

 

12,676,541

 

Stockholder’s equity

 

 

1,366,718

 

 

2,286,578

 

 

2,332,668

 

 

(4,619,246)

 

 

1,366,718

 

TOTAL

 

$

5,428,891

 

$

8,014,655

 

$

12,449,003

 

$

(11,849,290)

 

$

14,043,259

 

 

33


 

Table of Contents

CNH INDUSTRIAL CAPITAL LLC AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Statements of Cash Flows for the

 

 

 

Six Months Ended June 30, 2016

 

 

    

CNH

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

Industrial

 

Guarantor

 

All Other

 

 

 

 

 

 

 

 

 

Capital LLC

 

Entities

 

Subsidiaries

 

Eliminations

 

Consolidated

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash from (used in) operating activities

 

$

(349,422)

 

$

(263,783)

 

$

584,004

 

$

380,588

 

$

351,387

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of receivables acquired

 

 

 —

 

 

(3,939,125)

 

 

(4,324,298)

 

 

3,359,135

 

 

(4,904,288)

 

Collections of receivables

 

 

 —

 

 

3,970,019

 

 

4,612,278

 

 

(3,359,011)

 

 

5,223,286

 

Change in restricted cash

 

 

 —

 

 

 —

 

 

6,417

 

 

 —

 

 

6,417

 

Purchase of equipment on operating leases, net

 

 

 —

 

 

(107,175)

 

 

(44,964)

 

 

 —

 

 

(152,139)

 

Change in property and equipment and software, net

 

 

 —

 

 

(180)

 

 

(2)

 

 

 —

 

 

(182)

 

Net cash from (used in) investing activities

 

 

 —

 

 

(76,461)

 

 

249,431

 

 

124

 

 

173,094

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intercompany activity

 

 

 —

 

 

315,294

 

 

42,777

 

 

(380,712)

 

 

(22,641)

 

Net change in indebtedness

 

 

499,422

 

 

(11,121)

 

 

(973,373)

 

 

 —

 

 

(485,072)

 

Dividends paid to CNH Industrial America LLC

 

 

(150,000)

 

 

 —

 

 

 —

 

 

 —

 

 

(150,000)

 

Net cash from (used in) financing activities

 

 

349,422

 

 

304,173

 

 

(930,596)

 

 

(380,712)

 

 

(657,713)

 

DECREASE IN CASH AND CASH EQUIVALENTS

 

 

 —

 

 

(36,071)

 

 

(97,161)

 

 

 —

 

 

(133,232)

 

CASH AND CASH EQUIVALENTS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning of period

 

 

 —

 

 

181,740

 

 

120,408

 

 

 —

 

 

302,148

 

End of period

 

$

 —

 

$

145,669

 

$

23,247

 

$

 —

 

$

168,916

 

 

 

NOTE 12: SUBSEQUENT EVENTS

On July 25, 2017, the Company, through a bankruptcy-remote trust, issued $747,560 of amortizing asset-backed notes securitized by U.S. retail note receivables.

 

 

 

 

34


 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Organization

We offer a range of financial products and services to the dealers and customers of CNH Industrial North America. The principal products offered are retail financing for the purchase or lease of new and used CNH Industrial North America equipment and wholesale financing to CNH Industrial North America dealers. Wholesale financing consists primarily of floor plan financing as well as financing equipment used in dealer‑owned rental yards, parts inventory and working capital needs. In addition, we purchase equipment from dealers that is leased to retail customers under operating lease agreements.

Trends and Economic Conditions

Our business is closely related to the agricultural and construction equipment industries because we offer financing products for such equipment. For the three months ended June 30, 2017, CNH Industrial’s net sales of agricultural equipment and net sales of construction equipment generated in NAFTA were $948 million and $364 million, respectively, representing a decrease of 4.3% and an increase of 13.8% from the same period in 2016. For the six months ended June 30, 2017, CNH Industrial’s net sales of agricultural equipment and net sales of construction equipment generated in NAFTA were $1,715 million and $644 million, respectively, representing a decrease of 2.6% and an increase of 6.6% from the same period in 2016.

In general, our receivable mix between agricultural and construction equipment financing directionally reflects the mix of equipment sales by CNH Industrial North America. As such, changes in the agricultural industry or with respect to our agricultural equipment borrowers (“farmers”) may affect the majority of our portfolio.

Net income was $38.2 million for the three months ended June 30, 2017, compared to $46.4 million for the three months ended June 30, 2016. The decrease in net income was primarily due to a reduced net interest margin and increased depreciation of equipment on operating leases from updated depreciation estimates, partially offset by lower losses on equipment held for sale. Net income was $76.6 million and $103.7 million for the six months ended June 30, 2017 and 2016, respectively, primarily due to a reduced net interest margin, increased depreciation of equipment on operating leases from updated depreciation estimates and higher provisions for credit losses in the agricultural equipment sector. The receivables balance greater than 30 days past due as a percentage of managed receivables was 0.8% at June 30, 2017 and 0.7% at December 31, 2016 and June 30, 2016.

Macroeconomic issues for us include the uncertainty of governmental actions in respect to monetary, fiscal and legislative policies, the global economic recovery, changes in demand and pricing for used equipment, capital market disruptions, trade agreements and financial regulatory reform. Significant volatility in the price of certain commodities could also impact CNH Industrial North America’s and our results.

35


 

Results of Operations

Three and Six Months Ended June 30, 2017 Compared to Three and Six Months Ended June 30, 2016

Revenues

Revenues for the three and six months ended June 30, 2017 and 2016 were as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

    

 

 

    

 

 

 

 

 

June 30, 

 

 

 

 

 

 

 

 

 

2017

    

2016

    

$ Change

    

% Change

 

    

Interest income on retail notes and finance leases

 

$

48,378

 

$

52,729

 

$

(4,351)

 

(8.3)

%

 

Interest income on wholesale notes

 

 

16,039

 

 

18,468

 

 

(2,429)

 

(13.2)

 

 

Interest and other income from affiliates

 

 

97,800

 

 

102,677

 

 

(4,877)

 

(4.7)

 

 

Rental income on operating leases

 

 

62,531

 

 

60,177

 

 

2,354

 

3.9

 

 

Other income

 

 

5,115

 

 

6,588

 

 

(1,473)

 

(22.4)

 

 

Total revenues

 

$

229,863

 

$

240,639

 

$

(10,776)

 

(4.5)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Six Months Ended

    

 

 

    

 

 

 

 

 

June 30, 

 

 

 

 

 

 

 

 

 

2017

    

2016

    

$ Change

    

% Change

 

    

Interest income on retail notes and finance leases

 

$

99,191

 

$

106,732

 

$

(7,541)

 

(7.1)

%

 

Interest income on wholesale notes

 

 

32,055

 

 

33,484

 

 

(1,429)

 

(4.3)

 

 

Interest and other income from affiliates

 

 

194,263

 

 

202,703

 

 

(8,440)

 

(4.2)

 

 

Rental income on operating leases

 

 

125,725

 

 

119,459

 

 

6,266

 

5.2

 

 

Other income

 

 

11,463

 

 

12,179

 

 

(716)

 

(5.9)

 

 

Total revenues

 

$

462,697

 

$

474,557

 

$

(11,860)

 

(2.5)

%

 

Revenues totaled $229.9 million and $462.7 million for the three and six months ended June 30, 2017, respectively, compared to $240.6 million and $474.6 million for the same periods in 2016. Both the quarter-over-quarter and year-over-year decreases were driven by a lower average portfolio, partially offset by a higher average yield and a favorable product mix. The average yield for the managed portfolio was 7.2% and 7.0% for the three months ended June 30, 2017 and 2016, respectively, and 7.2% and 6.9% for the six months ended June 30, 2017 and 2016, respectively.

Interest income on retail notes and finance leases for the three and six months ended June 30, 2017 was $48.4 million and $99.2 million, respectively, representing a decrease of $4.4 million and $7.5 million from the same periods in 2016. For the second quarter, the decrease was primarily due to a $4.8 million unfavorable impact from lower average earning assets, partially offset by a $0.4 million favorable impact from higher interest rates. For the six months ended June 30, 2017, compared to the same period in 2016, the decrease was primarily due to a $9.3 million unfavorable impact from lower average earning assets, partially offset by a $1.8 million favorable impact from higher interest rates.

Interest income on wholesale notes for the three and six months ended June 30, 2017 was $16.0 million and $32.1 million, respectively, representing a decrease of $2.4 million and $1.4 million from the same periods in 2016. For the second quarter, the decrease was primarily due to the unfavorable impact from lower average earning assets. For the six months ended June 30, 2017, compared to the same period in 2016, the decrease was primarily due to a $4.2 million unfavorable impact from lower average earning assets, partially offset by a $2.8 million favorable impact from higher interest rates.

Interest and other income from affiliates for the three and six months ended June 30, 2017 was $97.8 million and $194.3 million, respectively, compared to $102.7 million and $202.7 million, respectively, for the three and six months ended June 30, 2016. For the three and six months ended June 30, 2017, compensation from CNH Industrial North America for retail low‑rate financing programs and interest waiver programs offered to customers was $38.3 million and $77.2 million, respectively, a decrease of $6.4 million and $11.6 million from the same periods in 2016, respectively. The decreases were primarily due to lower average retail receivables. For the three and six months ended June 30, 2017, compensation from CNH Industrial North America for wholesale marketing programs was $42.6 million and $82.9 million, respectively, an increase of $2.7 million and $4.5 million from the same periods in

36


 

2016, respectively. The increases were primarily due to the mix of programs and products. For select operating leases, compensation from CNH Industrial North America for the difference between market rental rates and the amounts paid by customers was $16.8 million and $34.1 million for the three and six months ended June 30, 2017, a decrease of $0.9 million and $0.8 million from the same periods in 2016, respectively.

Rental income on operating leases for the three and six months ended June 30, 2017 was $62.5 million and $125.7 million, representing an increase of $2.4 million and $6.3 million from the same periods in 2016, respectively. The second quarter increase was primarily due to the favorable impacts of $1.7 million from higher rates and $0.7 million from higher average earning assets. For the six months ended June 30, 2017, compared to the same period in 2016, the increase was primarily due to the favorable impacts of $4.0 million from higher rates and $2.3 million from higher average earning assets.

Other income for the three and six months ended June 30, 2017 was $5.1 million and $11.5 million, representing a decrease of $1.5 million and $0.7 million from the same periods in 2016, respectively.

Expenses

Expenses for the three and six months ended June 30, 2017 and 2016 were as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

    

 

 

    

 

 

 

 

 

June 30, 

 

 

 

 

 

 

 

 

 

2017

    

2016

    

$ Change

    

% Change

    

    

Total interest expense

 

$

78,797

 

$

79,059

 

$

(262)

 

(0.3)

%

 

Fees charged by affiliates

 

 

10,942

 

 

11,119

 

 

(177)

 

(1.6)

 

 

Provision for credit losses

 

 

10,617

 

 

7,260

 

 

3,357

 

46.2

 

 

Depreciation of equipment on operating leases

 

 

67,133

 

 

60,100

 

 

7,033

 

11.7

 

 

Other expenses

 

 

7,302

 

 

12,529

 

 

(5,227)

 

(41.7)

 

 

Total expenses

 

$

174,791

 

$

170,067

 

$

4,724

 

2.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Six Months Ended

    

 

 

    

 

 

 

 

 

June 30, 

 

 

 

 

 

 

 

 

 

2017

    

2016

    

$ Change

    

% Change

    

    

Total interest expense

 

$

153,525

 

$

151,030

 

$

2,495

 

1.7

%

 

Fees charged by affiliates

 

 

22,641

 

 

22,836

 

 

(195)

 

(0.9)

 

 

Provision for credit losses

 

 

23,098

 

 

13,657

 

 

9,441

 

69.1

 

 

Depreciation of equipment on operating leases

 

 

135,302

 

 

117,384

 

 

17,918

 

15.3

 

 

Other expenses

 

 

16,629

 

 

15,513

 

 

1,116

 

7.2

 

 

Total expenses

 

$

351,195

 

$

320,420

 

$

30,775

 

9.6

%

 

Interest expense totaled $78.8 million and $153.5 million for the three and six months ended June 30, 2017, respectively, compared to $79.1 million and $151.0 million for the same periods in 2016. For the second quarter, the decrease was due to a $5.9 million favorable impact from lower average total debt, partially offset by a $5.6 million unfavorable impact from higher average interest rates. For the six months, the increase was primarily due to a $13.9 million unfavorable impact from higher average interest rates, partially offset by a $11.5 million favorable impact from lower average total debt. The average debt cost was 2.7% for the six months ended June 30, 2017 compared to 2.4% for the six months ended June 30, 2016.

The provision for credit losses was $10.6 million and $23.1 million for the three and six months ended June 30, 2017, respectively, compared to $7.3 million and $13.7 million for the same periods in 2016. The increases in 2017 were primarily due to higher retail losses.

Depreciation of equipment on operating leases increased by $7.0 million and $17.9 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in 2016, primarily due to updated depreciation estimates.

Other expenses decreased by $5.2 million for the three months ended June 30 2017 and increased by $1.1 million for the six months ended June 30, 2017, compared to the same periods in 2016. The second quarter decrease was primarily due to lower losses on equipment held for sale.

37


 

The effective tax rates for the three months ended June 30, 2017 and 2016 were 30.7% and 34.2%, respectively. The effective tax rate was 31.3% for the six-month period ended June 30, 2017, compared to 32.8% for the same period in 2016. The decreases in the effective tax rates were primarily due to profits in tax jurisdictions with lower rates, including Canada.

Receivables and Equipment on Operating Leases Originated and Held

Receivables and equipment on operating lease originations for the three and six months ended June 30, 2017 and 2016 were as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

 

 

 

 

 

 

 

 

June 30, 

 

 

 

 

 

 

 

 

 

2017

    

2016

    

$ Change

    

% Change

 

 

Retail receivables

 

$

648,676

 

$

705,003

 

$

(56,327)

 

(8.0)

%

 

Wholesale receivables

 

 

1,936,282

 

 

1,770,818

 

 

165,464

 

9.3

 

 

Equipment on operating leases

 

 

182,088

 

 

173,444

 

 

8,644

 

5.0

 

 

Total originations

 

$

2,767,046

 

$

2,649,265

 

$

117,781

 

4.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Six Months Ended

 

 

 

 

 

 

 

 

 

June 30, 

 

 

 

 

 

 

 

 

 

2017

    

2016

    

$ Change

    

% Change

 

 

Retail receivables

 

$

1,256,022

 

$

1,347,433

 

$

(91,411)

 

(6.8)

%

 

Wholesale receivables

 

 

3,552,111

 

 

3,556,855

 

 

(4,744)

 

(0.1)

 

 

Equipment on operating leases

 

 

342,871

 

 

322,704

 

 

20,167

 

6.2

 

 

Total originations

 

$

5,151,004

 

$

5,226,992

 

$

(75,988)

 

(1.5)

%

 

Retail originations decreased in the three and six months ended June 30, 2017 compared to the same periods in 2016, primarily due to a decrease in unit sales of CNH Industrial North America equipment. For the same periods, the increase in equipment on operating lease originations was primarily due to an increased customer preference for leasing products. Wholesale originations increased in the three months ended June 30, 2017, primarily due to the timing of dealers’ orders.

Total receivables and equipment on operating leases held as of June 30, 2017, December 31, 2016 and June 30, 2016 were as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

    

June 30, 

 

December 31, 

 

June 30, 

 

 

 

2017

    

2016

    

2016

 

Retail receivables

 

$

7,081,597

 

$

7,398,017

 

$

7,739,799

 

Wholesale receivables

 

 

3,510,781

 

 

3,568,948

 

 

3,780,577

 

Equipment on operating leases

 

 

1,861,178

 

 

1,858,443

 

 

1,840,569

 

Total receivables and equipment on operating leases

 

$

12,453,556

 

$

12,825,408

 

$

13,360,945

 

The total retail receivables balance 30 days or more past due as a percentage of the retail receivables was 1.1% at June 30, 2017 and 1.0% at December 31, 2016 and June 30, 2016. The total wholesale receivables balance 30 days or more past due as a percentage of the wholesale receivables was not significant at June 30, 2017, December 31, 2016 or June 30, 2016. Total retail receivables on nonaccrual status, which represent receivables for which we have ceased accruing finance income, were $39.4 million, $50.3 million and $46.9 million at June 30, 2017, December 31, 2016 and June 30, 2016, respectively. Total wholesale receivables on nonaccrual status were $33.9 million, $43.4 million and $50.6 million at June 30, 2017, December 31, 2016 and June 30, 2016, respectively.

38


 

Total receivable write‑off amounts and recoveries, by product, for the three and six months ended June 30, 2017 and 2016 were as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

 

2017

    

2016

    

2017

    

2016

 

Write-offs:

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

10,184

 

$

13,513

 

$

22,275

 

$

22,897

 

Wholesale

 

 

1,228

 

 

 —

 

 

2,016

 

 

 1

 

Total write-offs

 

 

11,412

 

 

13,513

 

 

24,291

 

 

22,898

 

Recoveries:

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

 

(962)

 

 

(568)

 

 

(1,996)

 

 

(1,518)

 

Wholesale

 

 

(1)

 

 

(513)

 

 

(8)

 

 

(517)

 

Total recoveries

 

 

(963)

 

 

(1,081)

 

 

(2,004)

 

 

(2,035)

 

Write-offs, net of recoveries:

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

 

9,222

 

 

12,945

 

 

20,279

 

 

21,379

 

Wholesale

 

 

1,227

 

 

(513)

 

 

2,008

 

 

(516)

 

Total write-offs, net of recoveries

 

$

10,449

 

$

12,432

 

$

22,287

 

$

20,863

 

Our allowance for credit losses on all receivables financed totaled $85.2 million at June 30, 2017, $84.9 million at December 31, 2016 and $87.6 million at June 30, 2016.

The allowance is subject to a quarterly evaluation based on many quantitative and qualitative factors, including historical loss experience by product category, portfolio duration, delinquency trends, economic conditions (in particular, those conditions directly affecting the profitability and financial strength of our customers), collateral value and credit risk quality. No single factor determines the adequacy of the allowance. Different assumptions or changes in economic conditions would result in changes to the allowance for credit losses and the provision for credit losses. These qualitative factors are subjective and require a degree of management judgment.

We believe our allowance is sufficient to provide for losses in our receivable portfolio as of June 30, 2017.

Liquidity and Capital Resources

The following discussion of liquidity and capital resources principally focuses on our statements of cash flows, balance sheets and capitalization. CNH Industrial Capital’s current funding strategy is to maintain sufficient liquidity and flexible access to a wide variety of financial instruments and funding options.

In the past, securitization has been one of our most economical sources of funding and, therefore, the majority of our originated receivables are securitized, with the cash generated from such receivables utilized to repay the related debt or, in the case of wholesale receivables, to purchase new receivables. We expect securitization to continue to represent a substantial portion of our liquidity plan.

In addition, we have committed secured and unsecured facilities, unsecured bonds, affiliate borrowings and cash to fund our liquidity needs. We have accessed the unsecured bond market in order to add more diversity to our funding sources. As of June 30, 2017, our outstanding unsecured senior notes totaled $3.7 billion. We expect continued changes to our funding profile, with less reliance on the securitization market.

39


 

Cash Flows

For the six months ended June 30, 2017 and 2016, our cash flows were as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

    

2017

    

2016

 

Cash flows from (used in):

 

 

 

    

 

 

 

Operating activities

 

$

199,867

 

$

351,387

 

Investing activities

 

 

491,874

 

 

173,094

 

Financing activities

 

 

(697,235)

 

 

(657,713)

 

Net cash decrease

 

$

(5,494)

 

$

(133,232)

 

Operating activities in the six months ended June 30, 2017 generated cash of $200 million, resulting primarily from net income of $77 million, adjusted by depreciation and amortization of $136 million and provision for credit losses of $23 million, partially offset by changes in working capital of $33 million and deferred income tax benefit of $3 million. The decrease in cash provided by operating activities for the six months ended June 30, 2017 compared to the same period in 2016 was primarily due to a $137 million reduction in cash from changes in working capital, a $27 million decrease in net income and a $15 million decrease in deferred income tax expense, partially offset by a $18 million increase in depreciation and amortization expense and a $9 million increase in the provision for credit losses.

Investing activities in the six months ended June 30, 2017 generated cash of $492 million, resulting primarily from a net reduction in receivables of $424 million and a decrease in restricted cash of $176 million, partially offset by $108 million in net expenditures for equipment on operating leases. The increase in cash provided by investing activities for the six months ended June 30, 2017 compared to the same period in 2016 was primarily due to a $169 million increase from the change in restricted cash, a $105 million net decrease in receivables acquired and a $44 million reduction in net expenditures for equipment on operating leases.

Financing activities in the six months ended June 30, 2017 used cash of $697 million, resulting primarily from net cash paid on long-term debt of $429 million, net cash paid on affiliated debt of $128 million and $140 million in dividends paid to CNH Industrial America. The increase in cash used in financing activities in the six months ended June 30, 2017 compared to the same period in 2016 was primarily due to a $380 million increase in net cash paid on long-term debt and a $106 million increase in net cash paid on affiliated debt, partially offset by a $436 million decrease in net cash paid on short-term borrowings and a $10 million decrease in dividends paid to CNH Industrial America.

Securitization

CNH Industrial Capital and its predecessor entities have been securitizing receivables since 1992. Because this market generally remains a cost‑effective financing source and allows access to a wide investor base, we expect to continue utilizing securitization as one of our core sources of funding in the near future. CNH Industrial Capital has completed public and private issuances of asset‑backed securities in both the U.S. and Canada and, as of June 30, 2017, the amounts outstanding were approximately $5.2 billion. Our securitizations are treated as financing arrangements for accounting purposes.

Effective in December 2016, credit risk retention requirements of Regulation RR under the United States Securities Exchange Act of 1934 require us to retain not less than five percent of the credit risk of the assets collateralizing the asset-backed securities.

Committed Asset‑Backed Facilities

CNH Industrial Capital has committed asset‑backed facilities with several banks or through their commercial paper conduit programs. Committed asset‑backed facilities for the U.S. and Canada totaled $2.8 billion at June 30, 2017, with original borrowing maturities of up to two years. The unused availability under the facilities varies during the year, depending on origination volume and the refinancing of receivables with term securitization transactions and/or other financing. At June 30, 2017, approximately $0.6 billion of funding was available for use under these facilities.

40


 

Unsecured Facilities and Debt

As of June 30, 2017, our outstanding unsecured senior notes were as follows (dollars in thousands):

 

 

 

 

3.625% notes, due 2018

 

$

600,000

3.875% notes, due 2018

 

 

600,000

3.375% notes, due 2019

 

 

500,000

4.375% notes, due 2020

 

 

600,000

4.875% notes, due 2021

 

 

500,000

3.875% notes, due 2021

 

 

400,000

4.375% notes, due 2022

 

 

500,000

Hedging effects, discounts and unamortized issuance costs

 

 

(30,608)

Total

 

$

3,669,392

On April 10, 2017, we completed an offering of $500 million in aggregate principal amount of our 4.375% unsecured notes due 2022, priced at par.

These notes, which are senior unsecured obligations of CNH Industrial Capital LLC, are guaranteed by CNH Industrial Capital America and New Holland Credit.

On June 26, 2017, we repaid our $100 million unsecured term loan.

As of June 30, 2017, we had bank arrangements that included a $100 million uncommitted credit line with a final maturity in June 2018. These bank arrangements also included a fully-drawn C$200 million ($154 million) unsecured revolving credit facility with a final maturity in June 2020 and undrawn, unsecured revolving credit facilities of $300 million, $100 million and $100 million, with final maturities in June 2019, March 2020 and June 2020, respectively.

On June 15, 2017, S&P Global Ratings raised its long-term corporate credit rating on both CNH Industrial N.V. and CNH Industrial Capital LLC from “BB+” to “BBB-” with stable outlook.  The issue-level ratings of both CNH Industrial N.V. and CNH Industrial Capital LLC were also raised to “BBB-”.

Subsequent to the upgrade by S&P Global Ratings, financial covenants contained in two revolving credit facilities that required we maintain an EBITDA coverage ratio will no longer be applicable.

Affiliate Sources

CNH Industrial Capital borrows, as needed, from CNH Industrial. This source of funding is primarily used to finance various assets and provides additional flexibility when evaluating market conditions and potential third‑party financing options. We have obtained financing from CNHI treasury subsidiaries and, from time to time, have entered into term loan agreements. We had affiliated debt of $4 million and $133 million as of June 30, 2017 and December 31, 2016, respectively.

Equity Position

Our equity position also supports our ability to access various funding sources. Our stockholder’s equity at June 30, 2017 and December 31, 2016 was $1.3 billion and $1.4 billion, respectively.

For the six months ended June 30, 2017, CNH Industrial Capital LLC paid cash dividends of $140 million to CNH Industrial America.

Liquidity

The majority of CNH Industrial Capital’s debt is self-liquidating from the cash generated by the underlying receivables. Normally, additional liquidity should not be necessary for the repayment of such debt. New originations of retail receivables are usually warehoused in committed asset-backed facilities until being refinanced in the term ABS market or with other third party debt. The majority of new wholesale receivables are financed through a master trust and funded by variable funding notes.

41


 

Our liquidity available for use as of June 30, 2017 is as follows (dollars in thousands):

 

 

 

 

Cash, cash equivalents and restricted cash

 

$

699,601

Committed asset-backed facilities

 

 

2,838,051

Committed unsecured facilities

 

 

654,373

Total cash and facilities

 

 

4,192,025

Less: restricted cash

 

 

(540,848)

Less: committed asset-backed facilities utilization

 

 

(2,266,679)

Less: committed unsecured facilities utilization

 

 

(154,373)

Total available for use

 

$

1,230,125

The liquidity available for use varies due to: (a) changes in origination volumes, reflecting the financing needs of our customers, and is influenced by the timing of any refinancing of underlying receivables; and (b) the execution of our funding strategy of maintaining a sufficient level of liquidity and flexible access to a wide variety of financial instruments including both committed and uncommitted, unsecured facilities.

Other Data

 

 

 

 

 

 

 

 

 

 

As of or for the Six Months

 

 

Ended June 30,

 

 

2017

 

2016

 

 

 

(Dollars in thousands)

Ratio of earnings to fixed charges (1)

 

 

1.73

    

 

2.02

 

Total managed receivables

 

$

10,592,378

 

$

11,520,376

 

Operating lease equipment

 

 

1,861,178

 

 

1,840,569

 

Total managed portfolio

 

$

12,453,556

 

$

13,360,945

 

Delinquency (2)

 

 

0.75

%  

 

0.67

%

Average managed receivables

 

$

10,944,185

 

$

11,823,964

 

Net credit loss (3)

 

 

0.37

%  

 

0.27

%

Profitability: (4):

 

 

  

 

 

 

 

Return on average managed portfolio (5)

 

 

1.22

%  

 

1.55

%

Asset Quality:

 

 

  

 

 

 

 

Allowance for credit losses/total receivables

 

 

0.80

%  

 

0.76

%


(1)

For purposes of determining the ratio of earnings to fixed charges, earnings are defined as the sum of (i) income before income taxes, (ii) fixed charges and (iii) amortization of capitalized interest, less (i) interest capitalized and (ii) noncontrolling interest in pretax income of subsidiaries that have not incurred fixed charges. Fixed charges consist of (i) interest expense, including amortization of premiums, discounts and capitalized expenses related to indebtedness, (ii) interest capitalized and (iii) an estimate of the interest component of rental expense.

(2)

Delinquency means managed receivables that are past due over 30 days, expressed as a percentage of the managed receivables as of the end of the respective period.

(3)

Net credit losses on the managed receivables means write‑offs, net of recoveries, for the preceding 12 months expressed as a percentage of the respective average managed receivables.

(4)

Six months ended June 30, 2017 and 2016 annualized.

(5)

Net income for the period expressed as a percentage of the respective average managed portfolio.

Cautionary Note Regarding Forward‑Looking Statements

All statements other than statements of historical fact contained in this quarterly report, including statements regarding our competitive strengths; business strategy; future financial position or operating results; budgets; projections with respect to revenue, income, capital expenditures, dividends, capital structure or other financial items; costs; and plans and objectives of management regarding operations, products and services, are forward-looking statements. These statements may include terminology such as “may,” “will,” “expect,” “could,” “should,” “intend,” “estimate,” “anticipate,” “believe,” “outlook,” “continue,” “remain,” “on track,” “design,” “target,” “objective,” “goal,” “forecast,” “projection,” “prospects,” “plan,” or similar terminology. Forward-looking statements are not guarantees of future performance. Rather, they are based on current views and assumptions and involve known and

42


 

unknown risks, uncertainties and other factors, many of which are outside our control and are difficult to predict. If any of these risks and uncertainties materialize or other assumptions underlying any of the forward-looking statements prove to be incorrect, the actual results or developments may differ materially from any future results or developments expressed or implied by the forward-looking statements.

Factors, risks and uncertainties that could cause actual results to differ materially from those contemplated by the forward-looking statements include, among others: the many interrelated factors that affect customer confidence and demand for our financing products and services; general economic conditions; changes in government policies regarding banking, monetary and fiscal policies; legislation, particularly relating to capital goods-related issues such as agriculture, the environment, debt relief and subsidy program policies, trade and commerce and infrastructure development; government policies on international trade and investment, including sanctions, import quotas, capital controls and tariffs; actions of competitors in the various industries in which CNH Industrial North America competes; interest rates and currency exchange rates; inflation and deflation; energy prices; prices for agricultural commodities; housing starts and other construction activity; our ability to obtain financing or to refinance existing debt; restrictive covenants in our debt agreements; actions by rating agencies concerning the ratings on our debt and asset-backed securities and the credit rating of CNHI; a decline in the price of used equipment; political and civil unrest; volatility and deterioration of capital and financial markets, including further deterioration of the Eurozone sovereign debt crisis, other similar risks and uncertainties and our success, and CNH Industrial North America’s success, in managing the risks involved in the foregoing.

Forward‑looking statements speak only as of the date on which such statements are made.

Furthermore, in light of difficult macroeconomic conditions, both globally and in the industries in which we operate, it is particularly difficult to forecast our results and any estimates or forecasts of particular periods that we provide are uncertain. Accordingly, investors should not place undue reliance on such forward-looking statements. We can give no assurance that the expectations reflected in our forward-looking statements will prove to be correct. Our outlook is based upon assumptions, which are sometimes based upon estimates and data received from third parties. Such estimates and data are often revised. Our actual results could differ materially from those anticipated in such forward-looking statements. We undertake no obligation to update or revise publicly any forward-looking statements.

Additional factors which could cause actual results and developments to differ from those expressed or implied by the forward‑looking statements are included in the section “Item 1A. Risk Factors” in our most recent annual report on Form 10‑K.

Critical Accounting Policies and Estimates

See our critical accounting policies and estimates discussed in our annual report for the year ended December 31, 2016 under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 2 to our audited consolidated financial statements included in such annual report. There were no material changes to these policies or estimates during the three months ended June 30, 2017.

New Accounting Pronouncements Not Yet Adopted

See Note 2: New Accounting Pronouncements to this Form 10-Q.

Item 4.  Controls and Procedures

Disclosure Controls and Procedures

Under the supervision, and with the participation, of our management, including our President and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a‑15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of June 30, 2017. Based on that evaluation, our President and Chief Financial Officer concluded that the disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in our Exchange Act filings is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

43


 

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during the three months ended June 30, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings

CNH Industrial Capital is party to various litigation matters and claims arising from its operations. Management believes that the outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on CNH Industrial Capital’s financial position or results of operations.

Item 1A.  Risk Factors

See our most recent annual report on Form 10‑K (Part I, Item 1A). There was no material change in our risk factors during the six months ended June 30, 2017.

Item 4.  Mine Safety Disclosures

Not applicable.

Item 5.  Other Information

None.

Item 6.  Exhibits

 

 

 

Exhibit

 

Description

12.1

 

Statement regarding computation of ratio of earnings to fixed charges.

31.1

 

Certifications of President Pursuant to Exchange Act Rule 13a‑14(a), as Adopted Pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002.

31.2

 

Certifications of Chief Financial Officer Pursuant to Exchange Act Rule 13a‑14(a), as Adopted Pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002.

32.1†

 

Certification required by Exchange Act Rule 13a‑14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).

101

 

Interactive data files pursuant to Rule 405 of Regulation S‑T: (i) Consolidated Statements of Income for the three and six months ended June 30, 2017 and 2016, (ii) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2017 and 2016, (iii) Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016, (iv) Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016, (v) Consolidated Statements of Changes in Stockholder’s Equity for the six months ended June 30, 2017 and 2016 and (vi) Condensed Notes to Consolidated Financial Statements.


These certifications are deemed not filed for purposes of section 18 of the Exchange Act, or otherwise subject to the liability of that section; nor shall they be deemed incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act.

 

 

44


 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

 

 

 

CNH INDUSTRIAL CAPITAL LLC

Date: August 4, 2017

By:

/s/ BRETT D. DAVIS

 

 

 

 

 

 

Name:

Brett D. Davis

 

 

Title:

Chairman and President

 

45