Ford Motor Credit Company QUARTERLY REPORT ON FORM 10-Q for the quarter ended September 30, 2004 Filed pursuant to Section 13 of the Securities Exchange Act of 1934 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________________ to ____________________ Commission file number 1-6368 Ford Motor Credit Company (Exact name of registrant as specified in its charter) Delaware 38-1612444 (State of incorporation) (I.R.S. employer identification no.) One American Road, Dearborn, Michigan 48126 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (313) 322-3000 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 X No _____ ------ Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes _____ No X ----- As of November 1, 2004, the registrant had outstanding 250,000 shares of Common Stock. No voting stock of the registrant is held by non-affiliates of the registrant. REDUCED DISCLOSURE FORMAT The registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced disclosure format. ================================================================================ EXHIBIT INDEX APPEARS AT PAGE 37 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME For the Periods Ended September 30, 2004 and 2003 (in millions) Third Quarter Nine Months ------------------------ ------------------------ 2004 2003 2004 2003 ----------- ------------ ----------- ------------ (Unaudited) (Unaudited) Financing revenue Operating leases $ 1,406 $ 1,761 $ 4,429 $ 5,741 Retail 1,193 1,268 3,434 3,473 Interest supplements and other support costs earned from affiliated companies 792 851 2,464 2,548 Wholesale 238 168 700 591 Other 54 35 163 196 ------------- ---------- ------------ --------- Total financing revenue 3,683 4,083 11,190 12,549 Depreciation on vehicles subject to operating leases (1,133) (1,615) (3,682) (5,565) Interest expense (1,338) (1,430) (3,962) (4,428) ------------- ---------- ------------ --------- Net financing margin 1,212 1,038 3,546 2,556 Other revenue Investment and other income related to sales of receivables (Note 4) 506 576 1,636 2,139 Insurance premiums earned, net 46 54 167 179 Other income 271 230 786 736 ------------- ---------- ------------ --------- Total financing margin and revenue 2,035 1,898 6,135 5,610 Expenses Operating expenses 568 603 1,671 1,726 Provision for credit losses (Note 3) 264 446 641 1,509 Insurance expenses 36 41 147 179 ------------- ---------- ------------ --------- Total expenses 868 1,090 2,459 3,414 ------------- ---------- ------------ --------- Income from continuing operations before income taxes 1,167 808 3,676 2,196 Provision for income taxes 435 306 1,353 848 ------------- ---------- ------------ --------- Income from continuing operations before minority interests 732 502 2,323 1,348 Minority interests in net (loss)/income of subsidiaries - (1) 1 2 ------------- ---------- ------------ --------- Income from continuing operations 732 503 2,322 1,346 Income/(loss) from discontinued/held-for-sale operations (Note 8) 2 1 (3) 1 ------------- ---------- ------------ ---------- Net income $ 734 $ 504 $ 2,319 $ 1,347 ============= ========== ============ ========== The accompanying notes are an integral part of the financial statements. -1- Item 1. Financial Statements (Continued) FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (in millions) September 30, December 31, 2004 2003 -------------- ------------- (Unaudited) ASSETS Cash and cash equivalents (Note 1) $ 10,148 $ 15,688 Investments in securities 595 611 Finance receivables, net (Note 2) 110,544 108,912 Net investment in operating leases 21,448 23,164 Retained interest in securitized assets (Note 4) 9,473 13,017 Notes and accounts receivable from affiliated companies 1,516 2,060 Derivative financial instruments (Note 10) 5,741 9,842 Assets of discontinued/held-for-sale operations (Note 8) - 388 Other assets 4,674 5,530 ------------ ------------ Total assets $ 164,139 $ 179,212 ============ ============ LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities Accounts payable Trade, customer deposits, and dealer reserves $ 1,475 $ 1,535 Affiliated companies 1,758 1,258 ------------ ------------ Total accounts payable 3,233 2,793 Debt (Note 5) 135,336 149,652 Deferred income taxes, net 7,467 6,334 Derivative financial instruments (Note 10) 956 1,370 Liabilities of discontinued/held-for-sale operations (Note 8) - 37 Other liabilities and deferred income 5,705 6,533 ------------ ------------ Total liabilities 152,697 166,719 Minority interests in net assets of subsidiaries 12 19 Stockholder's equity Capital stock, par value $100 a share, 250,000 shares authorized, issued and outstanding 25 25 Paid-in surplus (contributions by stockholder) 5,117 5,117 Accumulated other comprehensive income (Note 7) 457 420 Retained earnings (Note 7) 5,831 6,912 ------------ ------------ Total stockholder's equity 11,430 12,474 ------------ ------------ Total liabilities and stockholder's equity $ 164,139 $ 179,212 ============ ============ The accompanying notes are an integral part of the financial statements. -2- Item 1. Financial Statements (Continued) FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FROM CONTINUING OPERATIONS For the Periods Ended September 30, 2004 and 2003 (in millions) Nine Months ------------------------- 2004 2003 ----------- ------------ (Unaudited) Cash flows from operating activities Income from continuing operations $ 2,322 $ 1,346 Adjustments to reconcile income from continuing operations to net cash provided by operating activities: Provision for credit losses 641 1,509 Depreciation and amortization 4,010 5,865 Gain on sales of finance receivables (150) (329) Increase in deferred income taxes 1,007 567 Decrease in other assets 4,021 2,099 (Decrease)/increase in other liabilities (664) 822 All other operating activities (146) (26) ----------- ---------- Net cash provided by operating activities 11,041 11,853 ----------- ---------- Cash flows from investing activities Purchase of finance receivables (other than wholesale) (39,450) (37,863) Collection of finance receivables (other than wholesale) 30,324 24,312 Purchase of operating lease vehicles (9,010) (7,822) Liquidation of operating lease vehicles 6,633 9,255 Decrease/(increase) in wholesale receivables 1,373 (894) Net change in retained interest (145) 4,419 (Increase)/decrease in note receivable with affiliate (27) 256 Proceeds from sale of receivables 9,154 15,781 Purchase of investment securities (622) (481) Proceeds from sale/maturity of investment securities 641 581 Proceeds from sale of businesses 412 1,421 All other investing activities (27) 42 ----------- ---------- Net cash (used in)/provided by investing activities (744) 9,007 ----------- ---------- Cash flows from financing activities Proceeds from issuance of long-term debt 9,077 14,776 Principal payments on long-term debt (26,668) (20,440) Change in short-term debt, net 5,136 957 Cash dividends paid (3,400) (2,900) ----------- ---------- Net cash used in financing activities (15,855) (7,607) Effect of exchange rate changes on cash and cash equivalents 18 247 ----------- ---------- Net change in cash and cash equivalents (5,540) 13,500 Cash and cash equivalents, beginning of period 15,688 6,793 ----------- ---------- Cash and cash equivalents, end of period $ 10,148 $ 20,293 =========== =========== Supplementary cash flow information Interest paid $ 4,612 $ 4,945 Taxes paid 104 122 The accompanying notes are an integral part of the financial statements. -3- Item 1. Financial Statements (Continued) FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS NOTE 1. ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include Ford Motor Credit Company, its controlled domestic and foreign subsidiaries and joint ventures, and variable interest entities ("VIEs") in which Ford Motor Credit Company is considered the primary beneficiary (collectively referred to herein as "Ford Credit", "we", "our" or "us"). We are an indirect, wholly owned subsidiary of Ford Motor Company ("Ford"). The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information, and instructions to the Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, these financial statements include all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of the results for interim periods. Results for interim periods should not be considered indicative of results for a full year. Reference should be made to the financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2003 (the "10-K Report"). Certain amounts in prior period financial statements have been reclassified to conform to current period presentation. Cash and Cash Equivalents At September 30, 2004 and December 31, 2003, approximately $800 million and $850 million, respectively, of our cash balance are legally isolated to primarily support our on-balance sheet securitization special purpose entities ("SPEs"). NOTE 2. FINANCE RECEIVABLES Net finance receivables at September 30, 2004 and December 31, 2003 were as follows (in millions): September 30, December 31, 2004 2003 -------------- -------------- (Unaudited) Retail (a) $ 84,133 $ 80,015 Wholesale (b) 21,347 22,618 Other (c) 7,270 8,661 -------------- -------------- Total finance receivables, net of unearned income 112,750 111,294 Less: Allowance for credit losses (2,206) (2,382) -------------- -------------- Finance receivables, net $ 110,544 $ 108,912 ============== ============== (a) At September 30, 2004 and December 31, 2003, includes about $13.2 billion and $14.3 billion, respectively, of retail receivables that have been sold for legal purposes to securitization SPEs and are available only for repayment of debt issued by those entities, and to pay other securitization investors and other participants. These receivables are not available to pay our obligations or the claims of our creditors. (b) At September 30, 2004 and December 31, 2003, includes about $1.3 billion and $800 million, respectively, of wholesale receivables primarily with dealers that are reported as consolidated subsidiaries of Ford effective July 1, 2003. Ford generally does not guarantee these receivables. (c) At September 30, 2004 and December 31, 2003, includes approximately $100 million of other receivables with dealers that are reported as consolidated subsidiaries of Ford effective July 1, 2003. Ford generally does not guarantee these receivables. -4- Item 1. Financial Statements (Continued) FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Continued) NOTE 3. ALLOWANCE FOR CREDIT LOSSES The following table summarizes the activity in the allowance for credit losses on finance receivables and operating leases for the periods ended September 30 (in millions): Third Quarter Nine Months 2004 2003 2004 2003 ---------- ---------- ----------- ---------- (Unaudited) (Unaudited) Allowance, beginning of period $ 2,651 $ 3,238 $ 3,006 $ 3,173 Provision for credit losses 264 446 641 1,509 Deductions Charge-offs 472 594 1,403 1,780 Recoveries (123) (128) (387) (370) ------------ ---------- ----------- ----------- Net charge-offs 349 466 1,016 1,410 Other changes, principally amounts related to finance receivables sold and translation adjustments (8) 4 57 58 ------------ ---------- ----------- ----------- Net deductions 341 470 1,073 1,468 ------------ ---------- ----------- ----------- Allowance, end of period (a) $ 2,574 $ 3,214 $ 2,574 $ 3,214 ============ ========== ========== =========== (a) At September 30, 2004, includes $2,206 million on finance receivables and $368 million on operating leases. At September 30, 2003, includes $2,690 million on finance receivables and $524 million on operating leases. NOTE 4. SALES OF RECEIVABLES Retained Interest Components of retained interest in receivables sold in securitization transactions at September 30, 2004 and December 31, 2003 were as follows (in millions): September 30, December 31, 2004 2003 -------------- ------------- (Unaudited) Wholesale receivables sold to securitization entities $ 6,571 $ 9,249 Subordinated securities 1,017 1,568 Interest-only strips 1,017 1,169 Restricted cash held for benefit of securitization entities 501 511 Senior securities 367 520 -------------- ------------- Retained interest in securitized assets $ 9,473 $ 13,017 ============== ============= Most of the retained interest in sold wholesale receivables ($5.0 billion and $8.0 billion at September 30, 2004 and December 31, 2003, respectively) represents our undivided interest in wholesale receivables that are available to support the issuance of additional securities by a securitization entity; the balance represents credit enhancements. Interest-only strips represent the present value of monthly collections on the sold finance receivables in excess of amounts needed by the SPE (securitization trust) to pay principal and interest to investors and servicing fees that will be realized by us. Investments in subordinated securities and restricted cash are senior to interest-only strips for credit enhancement purposes. -5- Item 1. Financial Statements (Continued) FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Continued) NOTE 4. SALES OF RECEIVABLES (Continued) Retained interests are recorded at fair value. For wholesale receivables, book value approximates fair value because of their short-term maturities. The fair values of senior and subordinated securities are estimated based on market prices. In determining the fair value of interest-only strips, we discount the present value of the projected cash flows retained at various discount rates based on economic factors in individual countries. Investment and Other Income The following table summarizes the activity related to off-balance sheet sales of receivables reported in investment and other income for the periods ended September 30 (in millions): Third Quarter Nine Months -------------------- --------------------- 2004 2003 2004 2003 --------- ---------- --------- ---------- (Unaudited) (Unaudited) Net gain on sales of receivables $ 20 $ 45 $ 150 $ 329 Interest income on sold wholesale receivables and retained securities 162 138 467 545 Servicing fees 99 152 329 528 Excess spread and other 225 241 690 737 --------- ---------- --------- --------- Investment and other income related to sales of $ 506 $ 576 $ 1,636 $ 2,139 receivables ========= ========== ========= ========= Securitization Special Purpose Entities We use SPEs, including on-balance sheet SPEs, in a variety of securitization transactions as a source of funds for our operations. At September 30, 2004, about $13.2 billion of retail installment receivables reported on our balance sheet have been sold for legal purposes to securitization SPEs and are available only for repayment of debt issued by those entities, and to pay other securitization investors and other participants. These receivables are not available to pay our obligations or the claims of our creditors. The debt issued by the SPEs includes both asset-backed commercial paper and medium-term notes, which is payable solely out of collections on these receivables and is not our legal obligation; these issuances, for financial statement reporting purposes, are reported as debt on our balance sheet. -6- Item 1. Financial Statements (Continued) FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Continued) NOTE 5. DEBT Debt at September 30, 2004 and December 31, 2003 was as follows (in millions): Interest Rates ---------------------------------- Average Weighted- Contractual (a) Average (b) September 30, December 31, ----------------- ---------------- 2004 2003 2004 2003 2004 2003 ------- --------- ------- -------- -------------- -------------- (Unaudited) Short-term debt Commercial paper 1.6% 1.9% $ 8,513 $ 6,095 Asset-backed commercial paper (c) 1.5% 1.2% 10,851 8,984 Floating rate demand notes 2.4% 2.8% 8,083 7,328 Other short-term debt (d) 5.5% 5.9% 2,404 2,290 -------------- -------------- Total short-term debt 2.1% 2.3% 2.3% 2.5% 29,851 24,697 -------------- -------------- Long-term debt Senior indebtedness Notes payable within one year (e) 31,667 29,534 Notes payable after one year (f) 73,875 95,474 Unamortized discount (57) (53) -------------- -------------- Total long-term debt (g) 5.9% 5.8% 4.5% 4.2% 105,485 124,955 -------------- -------------- Total debt 5.0% 5.2% 4.0% 3.9% $ 135,336 $ 149,652 ============== ============== (a) Third Quarter 2004 and Fourth Quarter 2003 average contractual rates excluding the effects of interest rate swap agreements and facility fees. (b) Third Quarter 2004 and Fourth Quarter 2003 weighted-average rates including the effect of interest rate swap agreements. (c) Amounts represent asset-backed commercial paper issued by FCAR which is payable solely out of collections on the receivables supporting FCAR's assets and is not our legal obligation. (d) Includes $15 million and $54 million with affiliated companies at September 30, 2004 and December 31, 2003, respectively. (e) Includes $54 million and $2 million with affiliated companies at September 30, 2004 and December 31, 2003, respectively. (f) Includes $54 million and $133 million with affiliated companies at September 30, 2004 and December 31, 2003, respectively. Also includes debt of $701 million at September 30, 2004 and $324 million at December 31, 2003, which is payable solely out of collections on receivables and is not our legal obligation. (g) The average contractual and weighted-average interest rates for total long-term debt represent the rates for both notes payable within one year and notes payable after one year. -7- Item 1. Financial Statements (Continued) FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Continued) NOTE 6. VARIABLE INTEREST ENTITIES Effective July 1, 2003, we adopted Financial Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, for VIEs formed prior to February 1, 2003. FIN 46 requires that once an entity is determined to be a VIE, the party with the controlling financial interest, the primary beneficiary, is required to consolidate it. FIN 46 also requires disclosures about VIEs that the company is not required to consolidate but in which it has a significant variable interest. Our adoption of FIN 46R, on December 15, 2003, did not impact our financial reporting. We have investments in certain joint ventures deemed to be VIEs of which we are not the primary beneficiary. The risks and rewards associated with our interests in these entities are based primarily on ownership percentages. Our maximum exposure (approximately $137 million at September 30, 2004) to any potential losses associated with these VIEs is limited to our equity investments and, where applicable, receivables due from the VIEs. On-balance sheet securitization SPEs, discussed in Note 4, are also considered VIEs under FIN 46R. We also sell receivables to bank-sponsored asset-backed commercial paper issuers that are SPEs of the sponsor bank and are not consolidated by us. At September 30, 2004, these SPEs held about $4.1 billion of retail installment sale contracts previously owned by us. NOTE 7. RETAINED EARNINGS AND COMPREHENSIVE INCOME The following table summarizes earnings retained for use in the business for the periods ended September 30 (in millions): Third Quarter Nine Months ------------------------- ------------------------- 2004 2003 2004 2003 ------------ ------------ ------------ ------------ (Unaudited) (Unaudited) Retained earnings, beginning balance $ 6,597 $ 7,738 $ 6,912 $ 8,795 Net income 734 504 2,319 1,347 Dividends (1,500) (1,000) (3,400) (2,900) ------------ ------------ ------------ ----------- Retained earnings, ending balance $ 5,831 $ 7,242 $ 5,831 $ 7,242 ============ ============ ============ =========== The following table summarizes comprehensive income for the periods ended September 30 (in millions): Third Quarter Nine Months ------------------------- ------------------------ 2004 2003 2004 2003 ------------ ------------ ------------ ----------- (Unaudited) (Unaudited) Net income $ 734 $ 504 $ 2,319 $ 1,347 Other comprehensive income 50 99 37 494 ------------ ------------ ------------ ---------- Total comprehensive income $ 784 $ 603 $ 2,356 $ 1,841 ============ ============ ============ ========== Comprehensive income includes foreign currency translation adjustments, unrealized gains and losses on investments in securities, unrealized gains and losses on certain derivative instruments, and unrealized gains and losses on retained interests in securitized assets (unrealized amounts are net of related tax effects). -8- Item 1. Financial Statements (Continued) FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Continued) NOTE 8. DISCONTINUED AND HELD-FOR-SALE OPERATIONS During the fourth quarter of 2003, management committed to a plan to sell AMI Leasing and Fleet Management Services ("AMI"), our operation in the U.S. that offers full service car and truck leasing. This business was reported as held-for-sale under Statement of Financial Accounting Standards No. 144 ("SFAS No. 144"), Accounting for the Impairment or Disposal of Long-lived Assets. We recognized an after-tax charge of $55 million in 2003 reflecting the anticipated loss on sale of these assets, which was reported in loss on disposal of discontinued/held-for-sale operations. This amount represented the difference between the anticipated selling price of these assets, less costs to sell them, and their recorded book value. During the third quarter of 2004, we completed the sale of AMI; the income statement impact related to the final disposition was not material. NOTE 9. GUARANTEES The fair values of guarantees and indemnifications issued since December 31, 2002 are recorded in the financial statements and are de minimis. At September 30, 2004, the following guarantees and indemnifications were issued and outstanding: Guarantees of certain obligations of unconsolidated and other affiliates: In some cases, we have guaranteed debt and other financial obligations of unconsolidated affiliates, including joint ventures and Ford. Expiration dates vary, and guarantees will terminate on payment and/or cancellation of the obligation. A payment would be triggered by failure of the guaranteed party to fulfill its obligation covered by the guarantee. In some circumstances, we are entitled to recover from Ford or an affiliate of Ford amounts paid by us under the guarantee. However, our ability to enforce these rights is sometimes stayed until the guaranteed party is paid in full. The maximum potential payments under these guarantees total approximately $177 million. Indemnifications: In the ordinary course of business, we execute contracts that include indemnifications typical in the industry, which are related to several types of transactions, such as debt funding, derivatives, the sale of receivables, and the sale of businesses. These indemnifications might include claims related to any of the following: intellectual property and privacy rights; governmental regulations and employment-related issues; dealer, supplier, and other commercial contractual relationships; financial status; tax related issues; securities law; and environmental related issues. Performance under these indemnities would generally be triggered by a breach of terms of a contract or by a third party claim. We regularly evaluate the probability of having to incur costs associated with indemnifications contained in contracts that we are a party to and have accrued for expected losses that are probable and for which a loss can be estimated. During the third quarter of 2004, there were no significant changes to our indemnifications. -9- Item 1. Financial Statements (Continued) FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Continued) NOTE 10. DERIVATIVE FINANCIAL INSTRUMENTS Income Statement Impact The following table presents, for the periods ended September 30, the ineffective portion of both fair value and cash flow hedges, amortization of mark-to-market adjustments associated with hedging relationships that have been terminated, and mark-to-market adjustments that reflect changes in interest rates for non-designated hedging activity (in millions): Third Quarter Nine Months ------------------ ------------------ 2004 2003 2004 2003 -------- --------- -------- --------- (Unaudited) (Unaudited) Income before income taxes $ 99 $ 58 $ 234 $ 178 Balance Sheet Impact The fair value of derivatives reflects the price that a third party would be willing to pay or receive in arm's length transactions for assuming our position in the derivatives transaction and includes mark-to-market adjustments to reflect the effects of changes in interest rates, accrued interest and, for derivatives with a foreign currency component, a revaluation adjustment. The following table summarizes, at September 30, 2004 and December 31, 2003, the estimated fair value of our derivative financial instruments, taking into consideration the effects of legally enforceable netting agreements, which allow us to settle positive and negative positions with the same counterparty on a net basis (in millions): September 30, 2004 December 31, 2003 --------------------------- --------------------------- Fair Value Fair Value Fair Value Fair Value Assets Liabilities Assets Liabilities ------------ ------------- ------------ ------------- (Unaudited) Foreign currency swaps $ 2,996 $ 846 $ 6,257 $ 1,119 Interest rate swaps 3,090 189 3,930 213 Foreign currency forwards and options (a) - 266 - 383 Impact of netting agreements (345) (345) (345) (345) ------------ ------------- ------------ ------------- Total derivative financial instruments $ 5,741 $ 956 $ 9,842 $ 1,370 ============ ============= ============ ============= (a) Includes internal forward contracts between Ford Credit and an affiliated company. Period-to-period changes in the derivative asset and liability amounts may be impacted by net interest or foreign currency settlements, changes in foreign exchange and interest rates, and the notional amount of derivatives outstanding. -10- Item 1. Financial Statements (Continued) FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Continued) NOTE 11. SEGMENT INFORMATION We divide our operating segments based on geographic regions: the North America Segment (includes operations in the United States and Canada) and the International Segment (includes operations in all other countries). We measure the performance of our segments primarily on an income before income taxes basis, after excluding the impact to earnings from hedge ineffectiveness, and other adjustments in applying Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"), Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted, on January 1, 2001. These adjustments are included in unallocated risk management and excluded in assessing segment performance because our risk management activities are carried out on a centralized basis at the corporate level, with only certain elements allocated to our two segments. The segments are presented on a managed basis (managed basis includes on-balance sheet receivables and securitized off-balance sheet receivables activity), and the effect of off-balance sheet securitizations is included in unallocated/eliminations. Certain amounts in prior year segment information have been reclassified to conform to current year presentation. Key operating data for our operating segments for the periods ended September 30 or at September 30 were as follows (in millions): Unallocated/Eliminations ------------------------------------- Ford North Unallocated Effect of Credit America International Risk Sales of Financial Segment Segment Management Receivables Total Statements ---------- --------------- ------------ ------------- ---------- ----------- (Unaudited) Third Quarter 2004 Revenue $ 3,786 $ 920 $ 99 $ (299) $ (200) $ 4,506 Income Income before income taxes 886 182 99 - 99 1,167 Provision for income taxes 332 64 39 - 39 435 Income from continuing operations 554 118 60 - 60 732 Other disclosures Depreciation on vehicles subject to operating leases 1,022 111 - - - 1,133 Interest expense 1,123 416 - (201) (201) 1,338 Provision for credit losses 233 31 - - - 264 Third Quarter 2003 Revenue $ 4,434 $ 909 $ 51 $ (451) $ (400) $ 4,943 Income Income before income taxes 562 188 58 - 58 808 Provision for income taxes 209 66 31 - 31 306 Income from continuing operations 353 122 28 - 28 503 Other disclosures Depreciation on vehicles subject to operating leases 1,465 150 - - - 1,615 Interest expense 1,343 420 (7) (326) (333) 1,430 Provision for credit losses 403 43 - - - 446 -11- Item 1. Financial Statements (Continued) FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Continued) NOTE 11. SEGMENT INFORMATION (Continued) Unallocated/Eliminations ------------------------------------- Ford North Unallocated Effect of Credit America International Risk Sales of Financial Segment Segment Management Receivables Total Statements ---------- --------------- ------------ ------------- ---------- ----------- (Unaudited) Nine Months 2004 Revenue $ 11,805 $ 2,881 $ 234 $ (1,141) $ (907) $ 13,779 Income Income before income taxes 2,814 628 234 - 234 3,676 Provision for income taxes 1,048 220 85 - 85 1,353 Income from continuing operations 1,766 408 148 - 148 2,322 Other disclosures Depreciation on vehicles subject to operating leases 3,317 365 - - - 3,682 Interest expense 3,362 1,314 - (714) (714) 3,962 Provision for credit losses 548 93 - - - 641 Finance receivables (including net investment in operating leases) 131,646 38,726 307 (38,687) (38,380) 131,992 Total assets 149,072 43,974 307 (29,214) (28,907) 164,139 Nine Months 2003 Revenue $ 14,321 $ 2,720 $ 178 $ (1,616) $ (1,438) $ 15,603 Income Income before income taxes 1,517 501 178 - 178 2,196 Provision for income taxes 606 176 66 - 66 848 Income from continuing operations 911 325 110 - 110 1,346 Other disclosures Depreciation on vehicles subject to operating leases 5,139 426 - - - 5,565 Interest expense 4,372 1,254 - (1,198) (1,198) 4,428 Provision for credit losses 1,361 148 - - - 1,509 Finance receivables (including net investment in operating leases) 143,360 37,136 628 (49,204) (48,576) 131,920 Total assets 172,970 43,784 628 (39,002) (38,374) 178,380 -12- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview We were incorporated in Delaware in 1959. We are an indirect, wholly owned subsidiary of Ford Motor Company ("Ford"). We provide automotive financing in 36 countries for Ford, Lincoln, Mercury, Aston Martin, Jaguar, Land Rover, Mazda and Volvo dealers and customers. Our principal executive offices are located at One American Road, Dearborn, Michigan 48126, and our telephone number is (313) 322-3000. Our North America segment includes our operations in the United States and Canada. Our International segment includes our operations in all other countries in which we do business directly and indirectly. Our International segment includes operations in three main regions: Europe, Asia-Pacific and Latin America. These operations offer substantially similar products and services, subject to local legal restrictions and market conditions. For a more detailed discussion of our business segments and the geographic scope of our operations, refer to the "Overview" section of Item 1 of our 10-K Report. We review our business performance from several perspectives, including: o On-balance sheet basis - includes receivables we own and receivables sold for legal purposes that remain on our balance sheet, o Securitized off-balance sheet basis - includes receivables sold in securitization transactions that are not reflected on our balance sheet, o Managed basis - includes on-balance sheet and securitized off-balance sheet receivables that we continue to service, and o Serviced basis - includes managed receivables and receivables sold in whole-loan sale transactions where we retain no interest in the sold receivables, but which we continue to service. We analyze our financial performance primarily on an on-balance sheet and managed basis. We retain interests in receivables sold in off-balance sheet securitizations, and with respect to subordinated retained interests, we have credit risk. As a result, we evaluate charge-offs, receivables and leverage on a managed basis as well as on an on-balance sheet basis. In contrast, we do not have the same financial interest in the performance of receivables sold in whole-loan sale transactions. As a result, we generally review the performance of our serviced portfolio only to evaluate the effectiveness of our origination and collection activities. To evaluate the performance of these activities, we monitor a number of serviced performance measures, such as repossession statistics, losses on repossessions and the number of bankruptcy filings. We measure the performance of our North America segment and our International segment primarily on an income before income taxes basis, after excluding the impact to earnings from hedge ineffectiveness, and other adjustments in applying Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"), Accounting for Derivative Instruments and Hedging Activities because our risk management activities are carried out on a centralized basis at the corporate level, with only certain elements allocated to our two segments. For further discussion regarding our segments, see Note 11 of our Notes to Financial Statements. -13- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Results of Operations Third Quarter 2004 Compared with Third Quarter 2003 In the third quarter of 2004, we earned $734 million, up $230 million or 46% compared with earnings of $504 million a year ago. Our consolidated pre-tax income from continuing operations was $1.2 billion, up $359 million or 44% from earnings of $808 million a year ago. The increase in earnings primarily resulted from improved credit loss performance ($182 million) and leasing results ($180 million), offset partially by the impact of lower receivables ($87 million). Results of our operations by business segment for the third quarter of 2004 and 2003 are shown below: Third Quarter -------------------------------------------------- 2004 Over/ (Under) 2003 ----------------------- 2004 2003 Amount Percentage ---------- --------- --------- ------------ (in millions) Income before income taxes North America segment ........................... $ 886 $ 562 $ 324 58% International segment............................ 182 188 (6) (3) Unallocated/eliminations ........................ 99 58 41 ---------- --------- --------- Pre-tax income from continuing operations .... 1,167 808 359 44 Provision for income taxes and minority interests . (435) (305) (130) Income from discontinued/held-for-sale operations . 2 1 1 ---------- --------- --------- Total net income ............................. $ 734 $ 504 $ 230 46% ========== ========= ========= North America segment income before income taxes in the third quarter of 2004 was up $324 million compared with the third quarter of 2003. This increase primarily reflected improved credit loss performance and leasing results. The improved credit loss performance primarily resulted from fewer repossessions and a lower average loss per repossession. The improvement in leasing results primarily reflected higher used vehicles prices and a reduction in the percentage of vehicles returned to us at lease termination. International segment income before income taxes in the third quarter of 2004 was down $6 million compared with the third quarter of 2003. This decrease was more than explained by the impact of lower income related to sales of receivables. Income before income taxes in the unallocated/eliminations category in the third quarter of 2004 was up $41 million compared with the third quarter of 2003. The increase primarily reflected the net favorable market valuation of derivative instruments and associated exposures. -14- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) First Nine Months 2004 Compared with First Nine Months 2003 In the first nine months of 2004, we earned $2.3 billion, up $972 million or 72% compared with earnings of $1.3 billion a year ago. Our consolidated pre-tax income from continuing operations was $3.7 billion, up $1.5 billion or 67% from earnings of $2.2 billion a year ago. The increase in earnings primarily resulted from improved credit loss performance and leasing results, offset partially by the impact of lower income related to sales of receivables. Results of our operations by business segment for the first nine months of 2004 and 2003 are shown below: First Nine Months -------------------------------------------------- 2004 Over/ (Under) 2003 ----------------------- 2004 2003 Amount Percentage ---------- --------- --------- ------------ (in millions) Income before income taxes North America segment ........................... $ 2,814 $ 1,517 $ 1,297 85% International segment............................ 628 501 127 25 Unallocated/eliminations ........................ 234 178 56 ---------- --------- --------- Pre-tax income from continuing operations .... 3,676 2,196 1,480 67 Provision for income taxes and minority interests . (1,354) (850) (504) Income from discontinued/held-for-sale operations . (3) 1 (4) ---------- --------- --------- Total net income ............................. $ 2,319 $ 1,347 $ 972 72% ========== ========= ========= North America segment income before income taxes in the first nine months of 2004 was up $1.3 billion compared with the first nine months of 2003. This increase primarily reflected improved credit loss performance and improved leasing results, offset partially by lower income related to sales of receivables. The improved credit loss performance primarily resulted from fewer repossessions and a lower average loss per repossession. The improvement in leasing results primarily reflected higher used vehicles prices and a reduction in the percentage of vehicles returned to us at lease termination. The lower income related to sales of receivables primarily reflected lower sales of receivables and the impact of lower outstanding off-balance sheet receivables. International segment income before income taxes in the first nine months of 2004 was up $127 million compared with the first nine months of 2003. This increase primarily reflected improved credit loss performance, favorable changes in currency exchange rates, and lower operating costs in Europe. Income before income taxes in the unallocated/eliminations category in the first nine months of 2004 was up $56 million compared with the first nine months of 2003. The improvement primarily reflected the net favorable market valuation of derivative instruments and associated exposures. -15- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Placement Volume and Financing Share Total worldwide financing contract placement volumes, excluding financing volumes for unconsolidated entities, for new and used vehicles are shown below: Third Quarter First Nine Months Full Year ------------- ----------------- --------------------------- 2004 2003 2004 2003 2003 2002 2001 2000 ----- ------ ------ ------- ------ ------ ----- ----- (in thousands) Worldwide Retail installment.............. 756 807 2,046 2,181 2,805 3,215 4,441 3,728 Operating and finance leases.... 129 110 388 389 487 775 1,050 1,228 ----- ------ ------- ------ ------ ----- ----- ----- Total financing volume........ 885 917 2,434 2,570 3,292 3,990 5,491 4,956 ===== ====== ====== ====== ====== ===== ===== ===== North America Segment United States................... 579 588 1,479 1,551 1,980 2,512 3,819 3,525 Canada.......................... 46 54 134 156 197 212 227 210 ----- ------ ------- ------ ------ ------ ------ ----- Total North America segment... 625 642 1,613 1,707 2,177 2,724 4,046 3,735 International Segment Europe.......................... 191 205 614 649 836 917 988 795 Other international............. 69 70 207 214 279 349 457 426 ----- ------ ------- ------ ------ ------ ----- ----- Total International segment... 260 275 821 863 1,115 1,266 1,445 1,221 ----- ------ ------- ------ ------ ------ ----- ----- Total financing volume........ 885 917 2,434 2,570 3,292 3,990 5,491 4,956 ===== ====== ======= ====== ====== ====== ===== ===== Shown below are our financing shares of new Ford, Lincoln and Mercury brand vehicles sold by dealers in the United States and Ford brand vehicles sold by dealers in Europe. Also shown below are our wholesale financing shares of new Ford, Lincoln and Mercury brand vehicles acquired by dealers in the United States and of new Ford brand vehicles acquired by dealers in Europe: Third Quarter First Nine Months Full Year ------------- ----------------- ----------------------------- 2004 2003 2004 2003 2003 2002 2001 2000 ----- ------ ------ ------- ------ ------ ------ ------ United States Financing share - Ford, Lincoln and Mercury Retail installment and lease..... 55% 48% 44% 39% 39% 41% 54% 51% Wholesale........................ 78 82 79 83 82 85 84 84 Europe Financing share - Ford Retail installment and lease..... 29% 31% 28% 31% 31% 34% 37% 32% Wholesale........................ 97 96 97 96 97 97 97 97 North America Segment. Our total financing contract placement volumes were 625,000 contracts in the third quarter of 2004, down 17,000 contracts or 3% compared with a year ago reflecting our reduction of used and non-Ford retail installment financing as a result of our continued focus on supporting Ford's brands. Financing share of new Ford, Lincoln and Mercury brand cars and light trucks sold by dealers in the United States was 55% in the third quarter of 2004 compared with 48% a year ago. This increase primarily reflected higher contract placement volumes involving favorable Ford-sponsored marketing programs. In the third quarter of 2004, wholesale market share was 78%, down four percentage points from a year ago. The decline primarily reflected the impact of pricing actions by competitor financing sources. In the third quarter of 2004, we continued our dealer loyalty programs intended to improve our wholesale market share. In the first nine months of 2004, our total financing contract placement volumes were 1,613,000 contracts, down 94,000 contracts or 6% compared with a year ago. This overall decrease reflected our reduction of used and non-Ford retail installment financing as a result of our continued focus on supporting Ford's brands. -16- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) International Segment. In the third quarter of 2004, our total financing contract placement volumes were 260,000, down 15,000 contracts or 5% compared with a year ago. This decline resulted from lower volumes in Britain, primarily from lower Ford-sponsored marketing incentives. In the first nine months of 2004, our total financing contract placement volumes were 821,000, down 42,000 contracts or 5% compared with a year ago. This overall decrease resulted primarily from the same factors described in the preceding paragraph. Financial Condition Finance Receivables and Operating Leases Our financial condition is impacted significantly by the level of our receivables, which are shown below: December 31, September 30, ---------------------------------------- Receivables 2004 2003 2002 2001 2000 ------------ ------- ------- ------- -------- (in billions) On-Balance Sheet (including on-balance sheet securitizations) Finance receivables Retail installment................... $ 82.1 $ 77.8 $ 68.4 $ 83.4 $ 79.9 Wholesale............................ 21.2 22.5 16.4 15.4 33.7 Other................................ 7.2 8.6 9.8 9.1 8.4 -------- ------- ------- ------- ------- Total finance receivables, net..... 110.5 108.9 94.6 107.9 122.0 Net investment in operating leases.... 21.5 23.2 31.3 37.2 36.5 -------- ------- ------- ------- ------- Total on-balance sheet............. $ 132.0 $ 132.1 $ 125.9 $ 145.1 $ 158.5 ======== ======= ======= ======= ======= Memo: Allowance for credit losses included above....................... $ 2.6 $ 3.0 $ 3.2 $ 2.8 $ 1.6 Securitized Off-Balance Sheet Finance receivables Retail installment................... $ 20.1 $ 29.1 $ 48.9 $ 41.2 $ 26.0 Wholesale............................ 18.6 20.3 22.5 17.5 2.3 Other................................ -- -- -- -- -- -------- ------- ------- ------- ------- Total finance receivables.......... 38.7 49.4 71.4 58.7 28.3 Net investment in operating leases.... -- -- -- -- 0.1 -------- ------- ------- ------- ------- Total securitized off-balance sheet.$ 38.7 $ 49.4 $ 71.4 $ 58.7 $ 28.4 ======== ======= ======= ======= ======= Managed Finance receivables Retail installment................... $ 102.2 $ 106.9 $ 117.3 $ 124.6 $ 105.9 Wholesale............................ 39.8 42.8 38.9 32.9 36.0 Other................................ 7.2 8.6 9.8 9.1 8.4 -------- ------- ------- ------- ------- Total finance receivables......... 149.2 158.3 166.0 166.6 150.3 Net investment in operating leases.... 21.5 23.2 31.3 37.2 36.6 -------- ------- ------- ------- ------- Total managed..................... $ 170.7 $ 181.5 $ 197.3 $ 203.8 $ 186.9 ======== ======= ======= ======= ======= Serviced.............................. $ 175.4 $ 188.8 $ 202.3 $ 203.8 $ 186.9 On-Balance Sheet Receivables. On-balance sheet net finance receivables and net investment in operating leases at September 30, 2004, were $132.0 billion, down $100 million from year-end 2003. At September 30, 2004 and December 31, 2003, on-balance sheet receivables included about $13.2 billion and $14.3 billion, respectively, of retail receivables that have been sold for legal purposes to securitization SPEs and are available only for repayment of debt issued by those entities, and to pay other securitization investors and other participants. These receivables are not available to pay our obligations or the claims of our creditors. -17- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Securitized Off-Balance Sheet Receivables. Total securitized off-balance sheet receivables at September 30, 2004, were $38.7 billion, down $10.7 billion from year-end 2003. The decrease primarily reflected lower funding requirements. Managed Receivables. Total managed receivables at September 30, 2004, were $170.7 billion, down $10.8 billion from year-end 2003. Serviced Receivables. Serviced receivables include our managed receivables and receivables that we sold in whole-loan sale transactions. We continue to service the receivables sold in whole-loan sale transactions. We retain no interest in the receivables, however, and all credit risk associated with the receivables is transferred to the buyer. Credit Risk Credit risk is the possibility of loss from a customer's failure to make payments according to contract terms. Credit risk has a significant impact on our business. We actively manage the credit risk of our consumer and non-consumer portfolios to balance our level of risk and return. The allowance for credit losses reflected on our balance sheet is our estimate of the probable credit losses for receivables and leases that are impaired at the points in time shown on our balance sheet. -18- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Credit Loss Metrics Worldwide The following table shows actual credit losses net of recoveries ("charge-offs") for our worldwide on-balance sheet, reacquired, securitized off-balance sheet and managed receivables, for the various categories of financing during the periods indicated. The loss-to-receivables ratios, which equal annualized charge-offs divided by the average amount of net receivables outstanding for the period, are shown for our on-balance sheet and managed portfolios. Third Quarter First Nine Months Full Year ----------------- ------------------ ------------------------ 2004 2003 2004 2003 2003 2002 2001 -------- -------- -------- -------- ------- ------ ------ Charge-offs (in millions) On-Balance Sheet Retail installment and lease................. $ 340 $ 443 $ 999 $1,356 $1,871 $2,292 $2,052 Wholesale.................................... 10 21 19 38 148 40 33 Other........................................ (1) 2 (2) 16 25 30 24 ------- ------- ------ ------ ------ ------ ------ Total on-balance sheet...................... 349 466 1,016 1,410 2,044 2,362 2,109 Reacquired Receivables (retail)............... 18 37 57 56 92 -- -- ------- ------- ------ ------ ------ ------ ------ Total on-balance sheet (including reacquired receivables).............................. $ 367 $ 503 $1,073 $1,466 $2,136 $2,362 $2,109 ======= ======= ====== ====== ====== ====== ====== Securitized Off-Balance Sheet Retail installment and lease................. $ 90 $ 167 $ 323 $ 510 $ 677 $ 448 $ 218 Wholesale.................................... 1 (2) 1 1 -- 6 1 Other........................................ -- -- -- -- -- -- -- ------- ------ ------ ------ ------ ------ ----- Total securitized off-balance sheet........ $ 91 $ 165 $ 324 $ 511 $ 677 $ 454 $ 219 ======= ====== ====== ====== ====== ====== ===== Managed Retail installment and lease.................. $ 448 $ 647 $1,379 $1,922 $2,640 $2,740 $2,270 Wholesale..................................... 11 19 20 39 148 46 34 Other......................................... (1) 2 (2) 16 25 30 24 ------- ------ ------ ------ ------ ------ ------ Total managed.............................. $ 458 $ 668 $1,397 $1,977 $2,813 $2,816 $2,328 ======= ====== ====== ====== ====== ====== ====== Loss-to-Receivables Ratios On-Balance Sheet (including reacquired receivables)* Retail installment and lease.................. 1.41% 1.83% 1.41% 1.89% 1.97% 2.05% 1.74% Wholesale..................................... 0.19 0.44 0.12 0.28 0.79 0.25 0.12 Total including other....................... 1.13% 1.52% 1.10% 1.54% 1.67% 1.72% 1.36% Memo: On-Balance Sheet (excluding reacquired receivables)................................... 1.07% 1.40% 1.05% 1.49% 1.60% 1.72% 1.36% Managed Retail installment and lease.................. 1.45% 1.88% 1.47% 1.85% 1.91% 1.73% 1.43% Wholesale..................................... 0.11 0.21 0.06 0.13 0.37 0.13 0.10% Total including other....................... 1.07% 1.45% 1.06% 1.41% 1.50% 1.39% 1.19% - - - - - - * We believe that the use of the on-balance sheet loss-to-receivables ratio that includes the charge-offs on reacquired receivables is useful to our investors because it provides a more complete presentation of our on-balance sheet charge-off performance. -19- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) On-Balance Sheet. In the third quarter of 2004, charge-offs for our on-balance sheet portfolio excluding charge-offs on reacquired receivables declined $117 million or 25% from a year ago, primarily reflecting lower repossessions and a lower average loss per repossession in our U.S. retail installment and operating lease portfolio. Our on-balance sheet loss-to-receivables ratio including reacquired receivables in the third quarter of 2004 was 1.13%, down from 1.52% in 2003. In the first nine months of 2004, charge-offs for our on-balance sheet portfolio excluding charge-offs on reacquired receivables were $1,016 million, down $394 million or 28% from a year ago for the same reasons stated above. The on-balance sheet loss-to-receivables ratio including reacquired receivables for the first nine months of 2004 was 1.10%, down from 1.54% in the first nine months of 2003. Securitized Off-Balance Sheet. In the third quarter of 2004, charge-offs for our securitized off-balance sheet portfolio decreased $74 million or 45% from a year ago, primarily reflecting lower repossessions and a lower average loss per repossession in our U.S. retail installment receivables and an overall lower level of securitized receivables resulting from lower securitization activity in the last year. In the first nine months of 2004, charge-offs for our securitized off-balance sheet portfolio declined $187 million or 37% from a year ago. Managed. In the third quarter of 2004, charge-offs for our managed portfolio decreased $210 million or 31% from a year ago primarily reflecting improved performance in our U.S. retail installment and operating lease portfolio and an overall lower level of receivables resulting from lower placement volumes. Our loss-to-receivables ratio was 1.07%, down from 1.45% a year ago. In the first nine months of 2004, charge-offs for our managed portfolio declined $580 million or 29% from a year ago. Ford Credit U.S. Retail and Operating Lease The following table shows the loss-to-receivables, repossession, bankruptcy and delinquency statistics for our Ford, Lincoln and Mercury brand U.S. retail installment sale and lease portfolio, which was approximately 60% of our worldwide-managed portfolio of retail receivables and net investment in operating leases at September 30, 2004. Third Quarter First Nine Months Full Year ----------------- ------------------ ------------------------------------- 2004 2003 2004 2003 2003 2002 2001 2000 -------- -------- -------- --------- -------- -------- -------- -------- On-Balance Sheet Charge-offs (in millions)......... $ 207 $ 271 $ 574 $ 784 $ 1,088 $ 1,180 $ 1,135 $ 806 Loss-to-receivables ratios (including reacquired receivables).................... 1.47% 1.91% 1.39% 1.99% 2.04% 1.87% 1.61% 1.12% Managed Charge-offs (in millions)......... $ 238 $ 372 $ 707 $ 1,125 $ 1,530 $ 1,520 $ 1,304 $ 865 Loss-to-receivables ratios........ 1.38% 1.86% 1.35% 1.81% 1.89% 1.50% 1.31% 0.98% Other Metrics - Serviced Repossessions (in thousands)...... 42 51 125 147 200 199 174 141 Repossession ratios............... 3.09% 3.44% 3.02% 3.12% 3.27% 2.79% 2.45% 2.19% Average loss per repossession..... $ 6,450 $ 7,200 $ 6,550 $ 7,400 $ 7,350 $ 6,960 $ 6,600 $5,800 New bankruptcy filings (in thousands)....................... 20 27 66 84 107 118 91 71 Over-60-day delinquency ratios.... 0.19% 0.38% 0.19% 0.38% 0.35% 0.36% 0.40% 0.30% On-Balance Sheet. Charge-offs declined $64 million in the third quarter of 2004 compared with a year ago, reflecting our emphasis on purchasing higher quality receivables and enhancements to our collection practices. These actions, along with improved economic conditions in the U.S., have contributed to lower delinquency ratios and lower repossessions in the third quarter. In addition, lower lease-end termination volumes have contributed to higher used vehicle prices, reducing the average loss per repossession. -20- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Managed. Charge-offs declined $134 million compared with a year ago reflecting lower repossessions and a lower average loss per repossession as described above and lower levels of managed receivables resulting from lower retail installment and lease placement volumes. Other Metrics - Serviced. Repossessions are shown in aggregate and as a percent of the average number of accounts outstanding during the relevant periods, defined as the repossession ratio. In the third quarter of 2004, the total number of repossessions decreased 9,000 units compared with a year ago. Our repossession ratio decreased 35 basis points reflecting a 13% reduction in the average number of outstanding contracts compared with 2003. Our average loss per repossession was $6,450, down $750 per unit or 10% from a year ago. In the first nine months of 2004, our total number of repossessions was 125,000, down 15% from a year ago. Our first nine months repossession ratio was 3.02%, down from 3.12% a year ago. The average loss per repossession for the first nine months was $6,550, down from $7,400 in 2003. In the third quarter of 2004, the over-60-day delinquency ratio was 0.19%, down from 0.38% a year ago. For quarterly ratios, delinquencies are expressed as a percent of the end-of-period accounts outstanding for non-bankrupt accounts. Full year delinquency ratios are expressed as an average of the quarterly ratios for non-bankrupt accounts. Allowance for Credit Losses Our allowance for credit losses and our allowance for credit losses as a percentage of end-of-period net receivables, for our on-balance sheet portfolio, are shown below: December 31, September 30, ---------------------------------- 2004 2003 2002 2001 2000 ------------ -------- -------- -------- ------ (in billions) Allowance for Credit Losses Retail installment and lease............ $ 2.5 $ 2.8 $ 2.9 $ 2.5 $ 1.5 Wholesale............................... 0.1 0.1 0.2 0.2 0.1 Other................................... 0.0 0.1 0.1 0.1 0.0 ------ ------- ------- ------- ------- Total allowance for credit losses.... $ 2.6 $ 3.0 $ 3.2 $ 2.8 $ 1.6 ====== ======= ======= ======= ======= As a Percentage of End-of-Period Net Receivables Retail installment and lease............ 2.34% 2.76% 2.92% 2.10% 1.28% Wholesale............................... 0.55 0.71 1.36 1.03 0.37 Other................................... 0.52 0.67 0.62 0.66 0.24 Total................................ 1.95% 2.28% 2.52% 1.89% 1.03% At September 30, 2004, our allowance for credit losses was down about $400 million compared with year-end 2003, primarily reflecting improved portfolio performance in the United States. -21- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Residual Risk We are exposed to residual risk on operating leases, Red Carpet Option contracts and similar balloon payment products where the customer has the right to return the financed vehicle to us. Our residual risk on retail lease and other contracts is composed of two types of risk: residual value risk and return rate risk. Residual value risk is the possibility that the actual net proceeds we realize upon the sale of returned vehicles at contract termination, which is referred to as the residual value of these vehicles, will be lower than our projection of these values. Return rate risk is the possibility that the percentage of vehicles returned to us at contract termination will be higher than we expect. Retail Operating Lease Experience We use various statistics to monitor our residual value risk and return rate risk. Placement volume measures the number of leases we purchase each year. Termination volume measures the number of vehicles for which the lease has ended in each year. Return rates are the percentage of vehicles that are returned to us at the end of the terminated lease and not purchased by either the customer or the dealer. The following table shows placement volumes, termination volumes and return rates for our North America segment, which accounted for 92% of our total net investment in operating leases at September 30, 2004: Third Quarter First Nine Months Full Year ----------------- ----------------- --------------------------------- 2004 2003 2004 2003 2003 2002 2001 2000 ------- ------- ------- -------- ------- -------- ------- ------- Placement Volume (in thousands) Ford, Lincoln and Mercury Cars 8 11 32 48 57 104 163 205 Ford, Lincoln and Mercury Trucks....................... 58 33 156 113 144 261 408 538 Jaguar, Land Rover and Volvo*. 13 16 38 38 48 95 90 53 Other......................... 12 10 32 18 25 9 17 23 -- -- -- -- -- -- -- -- Total North America segment 91 70 258 217 274 469 678 819 == == === === === === === === Termination Volume (in thousands) Ford, Lincoln and Mercury Cars 26 39 100 140 167 169 151 154 Ford, Lincoln and Mercury 67 104 209 341 412 486 366 360 Trucks....................... Jaguar, Land Rover and Volvo*. 17 16 45 43 55 48 34 28 Other......................... 4 5 12 16 20 34 80 87 -- -- -- -- -- -- -- -- Total North America segment 114 164 366 540 654 737 631 629 === === === === === === === === Return Rate Ford, Lincoln and Mercury Cars 70% 76% 75% 78% 78% 62% 58% 62% Ford, Lincoln and Mercury Trucks....................... 53 67 53 69 68 66 66 63 Jaguar, Land Rover and Volvo*. 59 46 57 51 54 43 45 51 Other......................... 58 57 55 55 55 50 60 69 Total North America segment 58% 67% 60% 70% 69% 63% 62% 63% ---------- * We first reported placement volumes for Land Rover in 2001. In the third quarter of 2004, placement volumes were up 21,000 units compared with a year ago. Termination volumes were down 50,000 units compared with a year ago, largely related to lower contract placement volumes in 2001 and 2002. In the third quarter of 2004, return rates were down 9 percentage points compared with a year ago, primarily reflecting higher used vehicle prices and lower contract lease-end values. Specifically, the return rate improvement largely was related to Ford, Lincoln and Mercury trucks, as the used vehicle prices of this segment improved more significantly than the other vehicle segments. -22- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Credit Ratings Our short- and long-term debt is rated by four credit rating agencies designated as nationally recognized statistical rating organizations ("NRSROs") by the SEC: o Dominion Bond Rating Service Limited ("DBRS"); o Fitch, Inc. ("Fitch"); o Moody's Investors Service, Inc. ("Moody's"); and o Standard & Poor's Rating Services, a division of McGraw-Hill Companies, Inc. ("S&P"). In several markets, locally recognized rating agencies also rate us. A credit rating reflects an assessment by the rating agency of the credit risk associated with particular securities we issue, based on information provided by Ford, other sources, and us. Credit ratings are not recommendations to buy, sell or hold securities and are subject to revision or withdrawal at any time by the assigning rating agency. Each rating agency may have different criteria for evaluating company risk and, therefore, ratings should be evaluated independently for each rating agency. Lower credit ratings generally result in higher borrowing costs and reduced access to capital markets. Our credit ratings from all of the NRSROs are closely associated with their opinions on Ford. Our lower ratings over the past several years are primarily a reflection of those opinions, including concerns regarding Ford's automotive cash flow and profitability, declining market share, excess industry capacity, industry pricing pressure and rising healthcare costs. In October 2004, DBRS, Fitch, Moody's and S&P each confirmed our long- and short-term debt ratings, and their outlook or trend. The following chart summarizes our credit ratings and the outlook assigned by the NRSROs since 2001: - ---------- -------------------------------- -------------------------- ---------------------- ------------------------- DBRS* Fitch Moody's S&P - ---------- ------------ ---------- -------- -------- ------- --------- ----- ------ --------- -------- ------ --------- Date Long-Term Short-Term Trend Long-Term Short- Outlook Long- Short- Outlook Long- Short- Outlook Term Term Term Term Term - ---------- ----------- ----------- ------- --------- ------- --------- ----- ------ -------- -------- ------ -------- Aug. 2001 A R-1 (low) Stable A+ F1 Negative A2 P-1 Negative A A-1 Negative - ---------- ----------- ---------- -------- -------- ------ -------- ----- ------ --------- -------- ------ --------- Sep. 2001 A R-1 (low) Stable A- F2 Negative A2 P-1 Negative A A-1 Negative - ---------- ----------- ---------- -------- -------- ------- -------- ----- ------ --------- -------- ------ --------- Oct. 2001 A (low) R-1 (low) Stable A- F2 Negative A2 P-1 Negative BBB+ A-2 Stable - ---------- ----------- ---------- -------- -------- ------- -------- ----- ------ --------- -------- ------ --------- Jan. 2002 A (low) R-1 (low) Stable BBB+ F2 Negative A3 P-2 Negative BBB+ A-2 Negative - ---------- ----------- ---------- -------- -------- ------- -------- ----- ------ --------- -------- ------ --------- Oct. 2002 A (low) R-1 (low) Negative BBB+ F2 Negative A3 P-2 Negative BBB A-2 Negative - ---------- ----------- ---------- -------- -------- ------- -------- ----- ------ --------- -------- ------ --------- Apr. 2003 BBB (high) R-1 (low) Stable BBB+ F2 Negative A3 P-2 Negative BBB A-2 Negative - ---------- ----------- ---------- -------- -------- ------- -------- ----- ------ --------- -------- ------ --------- Nov. 2003 BBB (high) R-1 (low) Stable BBB+ F2 Negative A3 P-2 Negative BBB- A-3 Stable - ---------- ----------- ---------- -------- -------- ------- -------- ----- ------ --------- -------- ------ --------- May 2004 BBB (high) R-1 (low) Stable BBB+ F2 Stable A3 P-2 Negative BBB- A-3 Stable - ---------- ----------- ---------- -------- -------- ------- -------- ----- ------ --------- -------- ------ --------- - ---------- * NRSRO designation granted on February 27, 2003 -23- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Funding Our outstanding debt and securitized off-balance sheet funding was as follows on the dates indicated: December 31, September 30, ------------------------------------------ 2004 2003 2002 2001 2000 ------------ -------- -------- ------- ------ (in billions) Debt Commercial paper - unsecured.............. $ 8.5 $ 6.1 $ 8.2 $ 15.7 $ 42.3 Asset-backed commercial paper (FCAR)...... 10.9 9.0 -- -- -- Floating rate demand notes................ 8.1 7.3 5.1 4.0 3.7 Other short-term debt..................... 2.4 2.3 2.9 2.9 3.9 -------- -------- -------- -------- -------- Total short-term debt................... 29.9 24.7 16.2 22.6 49.9 Long-term debt (including notes payable within One year.......................... 105.4 125.0 124.1 123.2 95.7 -------- -------- -------- -------- -------- Total debt.............................. 135.3 149.7 140.3 145.8 145.6 Securitized Off-Balance Sheet Funding Securitized off-balance sheet portfolio... 38.7 49.4 71.4 58.7 28.4 Retained interest......................... (9.5) (13.0) (17.6) (12.5) (3.7) -------- -------- -------- -------- -------- Total securitized off-balance sheet funding................................ 29.2 36.4 53.8 46.2 24.7 -------- -------- -------- -------- -------- Total debt plus securitized off-balance sheet funding.......................... $ 164.5 $ 186.1 $ 194.1 $ 192.0 $ 170.3 ======== ======== ======== ======== ======== Memo: Asset-backed commercial paper (FCAR) previously reported as securitized off-balance sheet funding.............................. -- -- $ 11.9 $ 12.1 $ 0.7 Ratios Credit lines to total unsecured commercial paper.................................... 86% > 100% > 100% 87% 57% Credit lines to total unsecured commercial paper (including Ford bank lines)........ > 100 > 100 > 100 > 100 78 Securitized funding to managed receivables. 24 25 27 23 13 Short-term debt and notes payable within one year to total debt.................... 45 36 28 30 43 Short-term debt and notes payable within one year to total capitalization.......... 42 33 25 28 40 At September 30, 2004, unsecured commercial paper was up $2.4 billion compared with year-end 2003, reflecting increased investor demand. At September 30, 2004, total debt plus securitized off-balance sheet funding was down $21.6 billion compared with year-end 2003, reflecting repayment of debt maturing in the first nine months of 2004 and lower asset levels, which reduced our funding needs. During the third quarter of 2004, we issued $3.4 billion of long-term debt with maturities of one to 10 years, including about $2.5 billion of unsecured institutional funding and about $900 million of unsecured retail bonds. In addition, we realized proceeds of about $3.8 billion from sales of receivables in off-balance sheet securitizations. We expect our full-year 2004 public term funding requirements to be between $13 billion and $18 billion. In the first nine months of 2004, we completed about $13 billion of public term funding transactions. Because of significant available liquidity and our relatively smaller balance sheet size, during the third quarter we purchased in open market transactions a small portion of our outstanding debt securities. Depending on market conditions, we may continue repurchasing a portion of our outstanding debt securities during the remainder of 2004. -24- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Liquidity Maintaining liquidity through access to diverse funding sources has always been a key factor in our funding strategy. We define liquidity as our ability to meet our funding needs, which include purchasing retail installment sale and lease contracts, funding other financing programs and repaying our debt obligations as they become due, or earlier under certain debt retirement programs. Our policy is to have sufficient cash and cash equivalents, unused conduit capacity, securitizable assets and back-up credit facilities to provide liquidity for all of our short-term funding obligations. In addition to unsecured debt offerings (discussed above) and sales of receivables (discussed below), we have access to the following other sources of liquidity: Cash and Cash Equivalents. At September 30, 2004, our cash and cash equivalents totaled $10.1 billion, compared with $15.7 billion at the end of 2003, down $5.6 billion, primarily reflecting debt maturities in excess of new debt issuances. In the normal course of our funding transactions, we may generate more proceeds than are necessary for our immediate funding needs. These excess amounts are maintained primarily as highly liquid investments, provide liquidity for our short-term funding obligations and give us flexibility in the use of our other funding programs. Our cash and cash equivalents include short-term U.S. Treasury bills, federal agency discount notes, A-1/P-1 (or higher) rated commercial paper, and bank time deposits with investment grade institutions. The average term of these investments is typically less than 60 days. We monitor our cash levels daily and adjust them as necessary to support our short-term liquidity needs. Conduit Program. We have entered into agreements with several bank-sponsored commercial paper issuers ("conduits") under which such conduits are contractually committed to purchase from us, at our option, up to $12.8 billion of receivables in the aggregate as of October 31, 2004. This is an extremely liquid funding source, as we are able to access funds in two days. These agreements have varying maturity dates between November 30, 2004 and October 13, 2005 and, in the past, have been renewed on an annual basis. As of October 31, 2004, we had utilized approximately $3.6 billion of these conduit commitments. These agreements do not contain restrictive financial covenants (for example, debt-to-equity limitations or minimum net worth requirements) or material adverse change clauses that would relieve the conduit of its obligation to purchase receivables. However, they do contain provisions that could terminate the unused portion of the purchase commitments if the performance of the sold receivables deteriorates beyond specified levels. Based on our experience, we do not expect any commitments to be terminated due to these performance requirements. None of these arrangements may be terminated based on a change in our credit rating. -25- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Back-up Credit Facilities Our back-up credit facilities were as follows on the dates indicated: September 30, December 31, --------------------- ------------------------------------- 2004 2003 2003 2002 2001 2000 --------- --------- --------- -------- -------- ------ (in billions) Back-up Credit Facilities Ford Motor Credit......................... $ 4.4 $ 6.4 $ 4.3 $ 8.6 $ 9.0 $ 20.0 FCE Bank plc.............................. 2.9 3.4 3.4 5.3 4.6 4.7 Ford bank lines (available at Ford's 6.9 6.7 6.8 7.6 8.4 8.4 option) ................................. Asset-backed commercial paper lines....... 18.9 16.4 18.6 13.6 12.5 1.4 ------ ------- ------- ------- ------- ------- Total back-up facilities............. 33.1 32.9 33.1 35.1 34.5 34.5 Drawn amounts............................. (0.7) (1.2) (1.0) (0.9) (0.7) (0.9) ------ ------- ------- ------- ------- ------- Total available back-up facilities..... $ 32.4 $ 31.7 $ 32.1 $ 34.2 $ 33.8 $ 33.6 ====== ======= ======= ======= ======= ======= For additional funding and to maintain liquidity, we and our majority-owned subsidiaries, including FCE Bank plc ("FCE"), have contractually committed credit facilities with financial institutions that totaled approximately $7.3 billion at September 30, 2004. This includes $4.4 billion of Ford Motor Credit facilities ($3.9 billion global and $0.5 billion non-global) and $2.9 billion of FCE facilities ($2.7 billion global and $0.2 billion non-global). Approximately $0.7 billion of our total facilities were in use at September 30, 2004. These facilities have various maturity dates. Of the $7.3 billion, about 38% of these facilities are committed through June 30, 2009. Our global credit facilities may be used at our option by any of our direct or indirect majority-owned subsidiaries. FCE's global credit facilities may be used at its option by any of its direct or indirect majority-owned subsidiaries. We or FCE, as the case may be, will guarantee any such borrowings. All of the global credit facilities have substantially identical contract terms (other than commitment amounts) and are free of material adverse change clauses and restrictive financial covenants (for example, debt-to-equity limitations, minimum net worth requirements and credit rating triggers) that would limit our ability to borrow. At Ford's option, approximately $6.9 billion of Ford's global lines of credit may be used by any of its direct or indirect majority-owned subsidiaries on a guaranteed basis. Ford also has the ability to transfer, on a non-guaranteed basis, $2.5 billion of such credit lines to us and $518 million to FCE. Additionally, at September 30, 2004, banks provided $18.9 billion of contractually committed liquidity facilities supporting two asset-backed commercial paper programs; $18.5 billion supported our FCAR program and $425 million supported our Motown NotesSM program. Unlike our other credit facilities described above, these facilities provide liquidity exclusively to each individual asset-backed commercial paper program. Utilization of these facilities is not at our discretion but is determined by and subject to conditions specific to each program. At September 30, 2004, about $16.5 billion of FCAR's bank credit facilities were available to support FCAR's asset-backed commercial paper or subordinated debt. Although not eligible to support commercial paper, the remaining $1.9 billion of available credit lines could be accessed for additional funding if additional subordinated debt is issued. -26- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Off-Balance Sheet Arrangements and Other Sales of Receivables Transactions Sales of Receivables Activity The following table illustrates our worldwide off-balance sheet receivables sales activity for the periods indicated: Third Quarter First Nine Months Full Year ----------------- ------------------ ------------------------------------ 2004 2003 2004 2003 2003 2002 2001 2000 -------- -------- -------- -------- -------- -------- -------- ------- (in billions) Net Proceeds from Receivable Sales North America Segment Public retail............................. $ -- $ -- $ 1.7 $ 5.6 $ 5.7 $ 15.5 $ 16.6 $ 18.8 Conduit................................... 0.5 -- 1.2 1.1 1.8 2.5 6.2 -- Triad..................................... -- -- 0.6 0.9 1.7 1.1 -- -- Motown NotesSM program.................... -- -- 1.0 1.0 1.0 4.8 -- -- FCAR...................................... -- -- -- -- -- 8.3 12.1 -- Public wholesale.......................... 3.0 -- 3.0 -- -- -- 5.0 -- Canada and other.......................... -- 1.0 -- 1.0 1.4 1.2 -- -- ------- ------ ------- ------- ------ ------- ------- ------- Total North America segment............. 3.5 1.0 7.5 9.6 11.6 33.4 39.9 18.8 International Segment Europe Public................................... 0.4 0.5 1.1 1.6 1.5 2.2 0.7 0.7 Conduit.................................. -- -- 0.2 0.4 1.1 0.3 -- -- ------- ------ ------- ------- ------ ------- ------- ------- Total Europe............................ 0.4 0.5 1.3 2.0 2.6 2.5 0.7 0.7 Asia Pacific.............................. -- 0.4 0.4 0.9 0.9 0.5 0.2 -- Latin America............................. -- 0.3 -- 0.3 0.6 -- -- -- ------- ------ ------- ------- ------ ------- ------- ------- Total International segment............. 0.4 1.2 1.7 3.2 4.1 3.0 0.9 0.7 ------- ------ ------- ------- ------ ------- ------- ------- Net proceeds.......................... 3.9 2.2 9.2 12.8 15.7 36.4 40.8 19.5 Whole-loan sales......................... -- -- -- 3.0 5.4 4.9 -- -- ------- ------ ------- ------- ------ ------- ------- ------- Total net proceeds...................... 3.9 2.2 9.2 15.8 21.1 41.3 40.8 19.5 Retained interest and other.................. (3.0) 0.2 (3.5) (0.2) 0.2 (0.6) 11.7 2.1 ------- ------ ------- ------- ------ ------- ------- ------- Total receivables sold.................. 0.9 2.4 5.7 15.6 21.3 40.7 52.5 21.6 Prior period sold receivables, net of paydown activity.................................. 42.5 52.6 37.7 39.4 35.4 35.7 6.2 6.8 ------- ------ ------- ------- ------ ------- ------- ------- Total sold receivables outstanding at the end of the relevant period........ 43.4 55.0 43.4 55.0 56.7 76.4 58.7 28.4 Memo: Less: Receivables outstanding in whole-loan sale transactions............................ (4.7) (5.8) (4.7) (5.8) (7.3) (5.0) -- -- ------- ------ ------- ------- ------ ------- ------- ------- Total securitized off-balance sheet receivables........................... $ 38.7 $ 49.2 $ 38.7 $ 49.2 $ 49.4 $ 71.4 $ 58.7 $ 28.4 ======= ====== ======= ======= ====== ======= ======= ======= At September 30, 2004, off-balance sheet receivables outstanding totaled $43.4 billion, down $11.6 billion or 21% compared with a year ago. This decrease primarily reflected our lower funding requirements and the use of on-balance sheet securitizations. In the third quarter of 2004, $900 million of receivables were sold in off-balance sheet transactions, down about $1.5 billion from the third quarter of 2003. In the first nine months of 2004, $5.7 billion of receivables were sold in off-balance sheet transactions, down $9.9 billion or 63% compared with the first nine months of 2003. Our worldwide proceeds from the sale of retail and wholesale finance receivables through off-balance sheet securitizations and whole-loan sale transactions are shown below for the periods indicated: Third Quarter First Nine Months Full Year -------------------- -------------------- ---------------------------------------- Receivable Type 2004 2003 2004 2003 2003 2002 2001 2000 - ----------------------------- ---------- --------- --------- ---------- --------- ---------- ---------- -------- (in billions) Retail....................... $ 0.9 $ 2.2 $ 5.2 $ 11.8 $ 14.7 $ 31.6 $ 32.3 $ 19.2 Wholesale.................... 3.0 -- 4.0 1.0 1.0 4.8 8.5 0.3 -------- -------- -------- -------- -------- -------- -------- -------- Net proceeds............... 3.9 2.2 9.2 12.8 15.7 36.4 40.8 19.5 Whole-loan................... -- -- -- 3.0 5.4 4.9 -- -- -------- -------- -------- -------- -------- -------- -------- -------- Total net proceeds...... $ 3.9 $ 2.2 $ 9.2 $ 15.8 $ 21.1 $ 41.3 $ 40.8 $ 19.5 ======== ======== ======== ======== ======== ======== ======== ======== -27- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) The Effect of Receivables Sales Activity on Financial Reporting We report the following items in Investment and other income related to sales of receivables on our income statement: o Gain on sales of finance receivables, o Interest income on sold wholesale receivables and retained securities, o Servicing fee income from sold receivables that we continue to service, and o Excess spread and other income. The following table summarizes activity related to off-balance sheet sales of receivables reported in Investment and other income related to sales of receivables for the periods indicated: Third Quarter First Nine Months Full Year --------------- ------------------ -------------------------------- 2004 2003 2004 2003 2003 2002 2001 2000 ------ ------ ------ ------ ------- ------ ------ ------ (in millions) Net gain on sales of receivables............ $ 20 $ 45 $ 150 $ 329 $ 436 $ 529 $ 412 $ 14 Interest income on sold wholesale receivables and retained securities........ 162 138 467 545 679 606 379 152 Servicing fees.............................. 99 152 329 528 677 700 456 190 Excess spread and other..................... 225 241 690 737 973 775 186 201 ------- ------ ------- ------- ------ ------ ------ ----- Investment and other income related to sales of receivables..................... 506 576 1,636 2,139 2,765 2,610 1,433 557 Less: Whole-loan income .................... (15) (35) (71) (144) (234) (79) -- -- ------- ------ -------- ------- ------ ------ ------ ----- Income related to off-balance sheet....... $ 491 $ 541 $ 1,565 $ 1,995 $2,531 $2,531 $1,433 $ 557 securitizations.......................... ======= ====== ======== ======= ====== ====== ====== ===== Memo: Finance receivables sold................... $ 881 $ 2,400 $ 5,687 $15,648 $21,321 $40,712 $52,533 $21,618 Servicing portfolio as of period-end....... 43,400 55,020 43,400 55,020 56,705 76,346 58,748 28,366 Pre-tax gain per dollar of retail receivables sold.......................... 2.3% 1.9% 2.6% 2.1% 2.0% 1.4% 1.2% 0.1% In the third quarter of 2004, investment and other income related to sales of receivables declined $70 million or 12% compared with a year ago. This decline resulted from lower levels of outstanding sold receivables, down about $11.6 billion compared with the third quarter of 2003, primarily reflecting our lower funding requirements and higher levels of on-balance sheet securitizations. Excluding the effects of whole-loan sale transactions, which totaled $10.4 billion in the 2002-2004 period, off-balance sheet securitization income declined $50 million compared with the third quarter of 2003. In the first nine months of 2004, off-balance sheet securitization income declined $430 million or 22% compared with the first nine months of 2003. The decline reflects primarily lower off-balance sheet retail receivables sales in 2004, and lower levels of outstanding sold receivables. The net impact of off-balance sheet securitizations on our earnings in a given period will vary depending on the amount and type of receivables sold and the timing of the transactions in the current period and the preceding two-to-three year period, as well as the interest rate environment at the time the finance receivables were originated and securitized. -28- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) The following table shows, on an analytical basis, the earnings impact of our off-balance sheet securitizations as if we had reported them on-balance sheet and funded them through asset-backed financings for the periods indicated: Third Quarter First Nine Months Full Year ------------------ -------------------- ------------------------------------- 2004 2003 2004 2003 2003 2002 2001 2000 -------- -------- -------- -------- ----- ------- -------- --------- (in millions) Financing revenue Retail revenue................. $ 524 $ 749 $ 1,889 $ 2,779 $ 3,580 $ 4,040 $ 2,954 $ 1,622 Wholesale revenue.............. 266 243 817 832 1,080 1,101 499 384 ------- ------- -------- -------- ------- ------- ------- -------- Total financing revenue...... 790 992 2,706 3,611 4,660 5,141 3,453 2,006 Borrowing cost................... (201) (326) (714) (1,198) (1,491) (2,205) (1,784) (1,242) ------- ------- -------- -------- ------- ------- ------- -------- Net financing margin......... 589 666 1,992 2,413 3,169 2,936 1,669 764 Net credit losses................ (91) (165) (324) (511) (677) (454) (219) (92) ------- ------- -------- -------- ------- ------- ------- -------- Income before income taxes. $ 498 $ 501 $ 1,668 $ 1,902 $ 2,492 $ 2,482 $ 1,450 $ 672 ======= ======= ======== ======== ======= ======= ======= ======== Memo: Income related to off-balance sheet securitizations.................. $ 491 $ 541 $ 1,565 $ 1,995 $ 2,531 $ 2,531 $ 1,433 $ 557 Recalendarization impact of off-balance sheet securitizations. $ (7) $ 40 $ (103) $ 93 $ 39 $ 49 $ (17) $ (115) In the third quarter of 2004, the impact to earnings of off-balance sheet securitizations was $7 million lower than had these transactions been structured as on-balance sheet securitizations. For the first nine months of 2004, the impact was $103 million lower than had these transactions been structured as on-balance sheet securitizations. These differences result from recalendarization effects caused by gain-on-sale accounting requirements. This effect will fluctuate as the amount of receivables sold in our off-balance sheet securitizations increases or decreases over time and with changes in market conditions. -29- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Leverage We use leverage, or the debt-to-equity ratio, to make various business decisions, including establishing pricing for retail, wholesale and lease financing, and assessing our capital structure. For a discussion of our capital structure, see "Capital Adequacy" in our 2003 10-K Report. We calculate leverage on a financial statement basis and on a managed basis using the following formulas: Financial Total Debt Statement = ---------- Leverage Equity Retained Interest in Securitized Securitized Off-balance Off-balance Cash SFAS No. 133 Sheet Sheet and Cash Adjustments Total + Receivables - Receivables - Equivalents - on Total Debt Debt Managed Leverage = _____________________________________________________________________________ SFAS No. 133 Equity + Minority - Adjustment Interest on Equity The following table shows the calculation of our financial statement leverage: December 31, September 30, ----------------------------------- 2004 2003 2002 2001 2000 ------------ -------- ------- -------- --------- (in billions) Total debt..................................... $ 135.3 $ 149.7 $ 140.3 $ 145.8 $ 145.6 Total stockholder's equity..................... 11.4 12.5 13.6 12.0 12.2 Financial statement leverage (to 1)............ 11.8 12.0 10.3 12.2 11.9 At September 30, 2004, our financial statement leverage was 11.8 to 1, compared with 12.0 to 1 at year-end 2003. This decrease in leverage resulted primarily from lower funding requirements. The following table shows the calculation of our managed leverage: December 31, September 30, ------------------------------------ 2004 2003 2002 2001 2000 ------------ ------ -------- -------- --------- (in billions) Total debt $ 135.3 $ 149.7 $ 140.3 $ 145.8 $ 145.6 Securitized off-balance sheet receivables outstanding................................. 38.7 49.4 71.4 58.7 28.4 Retained interest in securitized off-balance sheet receivables........................... (9.5) (13.0) (17.6) (12.5) (3.7) Adjustments for cash and cash equivalents.... (10.1) (15.7) (6.8) (2.9) (1.1) Adjustments for SFAS No. 133................. (3.6) (4.7) (6.2) (2.1) -- -------- ------- ------- ------- -------- Total adjusted debt....................... $ 150.8 $ 165.7 $ 181.1 $ 187.0 $ 169.2 ======== ======= ======== ======= ======== Total stockholder's equity (including minority interest).................................... $ 11.4 $ 12.5 $ 13.6 $ 12.0 $ 12.2 Adjustments for SFAS No. 133.................. 0.0 0.2 0.5 0.6 -- -------- ------- -------- ------- -------- Total adjusted equity...................... $ 11.4 $ 12.7 $ 14.1 $ 12.6 $ 12.2 ======== ======= ======== ======== ======== Managed leverage (to 1) ...................... 13.2 13.0 12.8 14.8 13.9 -30- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) We believe that managed leverage is useful to our investors because it reflects the way we manage our business. We retain interests in receivables sold in off-balance sheet securitization transactions and, with respect to subordinated retained interests, are exposed to credit risk. Accordingly, we consider securitization as an alternative source of funding and evaluate charge-offs, receivables and leverage on a managed as well as a financial statement basis. We also deduct cash and cash equivalents because they generally correspond to excess debt beyond the amount required to support our operations. In addition, we add our minority interests to our financial statement equity, because all of the debt of such consolidated entities is included in our total debt. SFAS No. 133 requires us to make fair value adjustments to our assets, debt and equity positions to reflect the impact of interest rate instruments we use in connection with our term debt issuances and securitizations. SFAS No. 133 adjustments vary over the term of the underlying debt and securitized funding obligations based on changes in market interest rates. We generally repay our debt obligations as they mature. As a result, we exclude the impact of SFAS No. 133 on both the numerator and denominator in order to exclude the interim effects of changes in market interest rates. For a discussion of our use of interest rate instruments and other derivatives, see Item 7A of our 10-K Report. We believe the managed leverage measure provides our investors with meaningful information regarding management's decision-making processes. Our managed leverage strategy involves establishing a leverage level that we believe reflects the risk characteristics of our underlying assets. In establishing a target leverage level, we consider the characteristics of the receivables in our managed portfolio and the prevailing market conditions. At September 30, 2004, our managed leverage was 13.2 to 1, up from 13.0 at year-end 2003. Our dividend policy is based in part on our strategy to maintain managed leverage in the lower end of the 13 - 14 to 1 range. Based on our profitability and managed receivable levels, we paid dividends of $3.4 billion in the first nine months of 2004. Changes in Accounting Standards The Financial Accounting Standards Board is expected to issue an exposure draft of an amendment to SFAS No. 140 that: (1) addresses the conditions under which a qualifying SPE is permitted to issue beneficial interests with maturities that are shorter than the maturities of the assets held by the qualifying SPE and roll over those beneficial interests at maturity; (2) amends other requirements related to commitments by transferors to provide additional assets to fulfill obligations to the beneficial interest holders; and (3) addresses other issues related to transfers of financial assets. We are continuing to assess the impact the expected exposure draft may have on our accounting for qualifying SPEs and certain securitization funding programs. Outlook For the full year, we expect our earnings to be significantly higher than our earnings a year ago primarily reflecting the impact of improved credit loss performance and leasing results, offset partially by the impact of a lower level of receivables. At year-end 2004, we expect our managed receivables to be about $170 billion. -31- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Cautionary Statement Regarding Forward Looking Statements Statements included in this Report or incorporated by reference into this Report may constitute "forward-looking statements" within the meaning of the federal securities laws, including the Private Securities Litigation Reform Act of 1995. The words "anticipate," "believe," "estimate," "expect," "intend," "may," "plan," "will," "project," "future" and "should" and similar expressions are intended to identify forward-looking statements, and these statements are based on our current expectations and assumptions concerning future events. These statements involve a number of risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed or implied by such statements, including the following: Automotive Related: o Greater price competition resulting from currency fluctuations, industry overcapacity or other factors; o Significant decline in automotive industry sales and our financing of those sales, particularly in the United States or Europe, resulting from slowing economic growth, geo-political events or other factors; o Lower-than-anticipated market acceptance of new or existing Ford products; o Economic distress of suppliers that may require Ford to provide financial support or take other measures to ensure supplies of materials; o Increased safety, emissions, fuel economy or other regulations resulting in higher costs and/or sales restrictions; o Work stoppages at Ford or supplier facilities or other interruptions of supplies; o Discovery of defects in Ford vehicles resulting in delays in new model launches, recall campaigns, increased warranty costs or litigation; o Unusual or significant litigation or governmental investigations arising out of alleged defects in Ford products or otherwise; o Reduced availability of or higher prices for or reduced availability fuel; o Market shift from truck sales in the United States; o Changes in Ford's requirements under long-term supply arrangements under which Ford is obligated to purchase minimum quantities or pay minimum amounts; o Change in the nature or mix of automotive marketing programs and incentives; Ford Motor Credit Related: o Inability to access debt or securitization markets around the world at competitive rates or in sufficient amounts; o Higher-than-expected credit losses; o Collection and servicing problems related to our finance receivables and net investment in operating leases; o Lower-than-anticipated residual values and higher-than-expected lease return rates; o New or increased credit, consumer protection or other regulations resulting in higher costs and/or additional financing restrictions; -32- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) o Changes in Ford's marketing programs that de-emphasize financing incentives, which could result in a decline in our share of financing Ford vehicles; General: o Ford's or our inability to implement the Revitalization Plan; o Credit rating downgrades; o Major capital market disruptions that could prevent Ford or us from having access to the capital markets or that would limit our liquidity; o Availability of securitization as a source of funding; o Labor or other constraints on Ford's or our ability to restructure Ford's or our business; o Increased price competition in the rental car industry and/or a general decline in business or leisure travel due to terrorist attacks, acts of war, epidemic diseases or measures taken by governments in response thereto that negatively affect the travel industry; o Worse-than-assumed economic and demographic experience for our post-retirement benefit plans (e.g., investment returns, interest rates, health care trends, benefit improvements); o Economic difficulties in any significant market; and o Currency, commodity or interest rate fluctuations, including rising steel prices. Other Financial Information PricewaterhouseCoopers LLP ("PwC") has not audited the interim financial information included in this 10-Q report. In reviewing such information, PwC has applied limited procedures in accordance with professional standards for reviews of interim financial information. Accordingly, you should restrict your reliance on their reports on such information. PwC is not subject to the liability provisions of Section 11 of the Securities Act of 1933 for their reports on the interim financial information because such reports do not constitute "reports" or "parts" of the registration statements prepared or certified by PwC within the meaning of Sections 7 and 11 of the Securities Act of 1933. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In our 10-K Report, we discuss in greater detail our market risk, counter-party risk, and operating risk. To provide a quantitative measure of the sensitivity of our pre-tax net interest income to changes in interest rates, we use interest rate scenarios that assume a hypothetical, instantaneous increase or decrease in interest rates of 100 basis points (or 1%) across all maturities, as well as a base case that assumes that interest rates remain constant at existing levels. These interest rate scenarios are purely hypothetical and do not represent our view of future interest rate movements. The differences in pre-tax net interest income between these scenarios and the base case over a twelve-month period represent an estimate of the sensitivity of our pre-tax net interest income. Under this model, we estimate that at September 30, 2004, all else constant, such an increase in interest rates would reduce our pre-tax net interest income by approximately $152 million over the next twelve months, compared with $179 million at December 31, 2003. The sensitivity analysis presented assumes interest rate changes are instantaneous, parallel shifts in the yield curve. In reality, interest rate changes are rarely instantaneous or parallel. Had the analysis assumed a gradual change in interest rates of 100 basis points, it would have resulted in a lower pre-tax net interest income impact. -33- ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Michael E. Bannister, our Chief Executive Officer, and David P. Cosper, our Vice Chairman, Chief Financial Officer and Treasurer, have performed an evaluation of the Company's disclosure controls and procedures, as that term is defined in Rule 13a-14 (c) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of September 30, 2004 and each has concluded that such disclosure controls and procedures are effective to ensure that information required to be disclosed in our periodic reports filed under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified by the Securities and Exchange Commission's rules and regulations. Changes in Internal Controls No changes in the Company's internal controls over financial reporting occurred during the quarter ended September 30, 2004, that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting. PART II. OTHER INFORMATION ITEM 5. OTHER INFORMATION As a result of Ford transferring its shares to Ford Holdings, LLC on July 1, 2004, we are now a wholly owned subsidiary of Ford Holdings, LLC. Ford Holdings, LLC is a wholly owned subsidiary of Ford. You can find additional information about Ford in Ford's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2004, which has been included as an exhibit to this Report (without Exhibits or Financial Statements). ITEM 6. EXHIBITS Exhibits: please refer to Exhibit Index on page 37. Instruments defining the rights of holders of certain issues of long-term debt of Ford Motor Credit have not been filed as exhibits to this Report because the authorized principal amount of any one of such issues does not exceed 10% of the total assets of Ford Motor Credit. Ford Motor Credit agrees to furnish a copy of each of such instruments to the Commission upon request. -34- SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Ford Motor Credit Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. FORD MOTOR CREDIT COMPANY By: /s/ David P. Cosper ---------------------------------------------------- (David P. Cosper) Vice Chairman, Chief Financial Officer and Treasurer Date: November 8, 2004 -35- Report of Independent Registered Public Accounting Firm ------------------------------------------------------- To the Board of Directors and Stockholders of Ford Motor Credit Company: We have reviewed the accompanying consolidated balance sheet of Ford Motor Credit Company and its subsidiaries as of September 30, 2004, and the related consolidated statements of income for each of the three-month and nine-month periods ended September 30, 2004 and 2003, and the consolidated statement of cash flows from continuing operations for the nine-month periods ended September 30, 2004 and 2003. These interim financial statements are the responsibility of the Company's management. We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We previously audited in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2003, and the related consolidated statements of income, stockholder's equity, and cash flows from continuing operations for the year then ended (not presented herein), and in our report dated January 21, 2004 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2003, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. /s/ PRICEWATERHOUSECOOPERS LLP Detroit, Michigan November 8, 2004 -36- FORD MOTOR CREDIT COMPANY EXHIBIT INDEX Designation Description Method of Filing - ------------- ------------------------------------ ---------------------- Exhibit 10 Amended and restated Support Filed with this Report Agreement dated as of September 20, 2004 between Ford Motor Credit Company and FCE Bank plc Exhibit 12 Ford Motor Credit Company Filed with this Report and Subsidiaries Calculation of Ratio of Earnings to Fixed Charges Exhibit 15 Letter of Filed with this Report PricewaterhouseCoopers LLP, dated November 8, 2004, relating to Financial Information Exhibit 31.1 Rule 15d-14(a) Certification of CEO Filed with this Report Exhibit 31.2 Rule 15d-14(a) Certification of CFO Filed with this Report Exhibit 32.1 Section 1350 Certification of CEO Furnished with this Report Exhibit 32.2 Section 1350 Certification of CFO Furnished with this Report Exhibit 99 Items 2 and 4 of Part I and Items 1, Filed with this Report 2 and 5 of Part II of Ford Motor Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2004 -37-