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
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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.
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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.
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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;
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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.
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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.
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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
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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
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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
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