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Ford Motor Credit Company
QUARTERLY REPORT
ON FORM 10-Q
for the quarter ended
March 31, 2004
Filed pursuant to Section 13
of the Securities Exchange Act of 1934
====================================================================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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
Securities registered pursuant to Section 12(b) of the Act:
Name of each Exchange
Title of each class on which registered
--------------------------------------- ---------------------------
6 3/8% Notes due November 5, 2008 New York Stock Exchange
7 3/8% Notes due October 15, 2031 New York Stock Exchange
7.60% Notes due March 1, 2032 New York Stock Exchange
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 April 30, 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 I(1)(a)
and (b) of Form 10-Q and is therefore filing this Form with the reduced
disclosure format.
====================================================================================================================================
EXHIBIT INDEX APPEARS AT PAGE 33
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The consolidated financial statements include Ford Motor Credit Company and
its controlled domestic and foreign subsidiaries and joint ventures (referred to
herein as "Ford Credit", "we", "our" or "us"). The interim financial data
presented herein are unaudited, but in the opinion of management present in all
material respects the results of our operations and financial condition for the
periods and at the dates presented. 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"). We are not presenting
information relating to earnings per share because we are an indirect
wholly-owned subsidiary of Ford Motor Company ("Ford"). Certain amounts in prior
period's financial statements have been reclassified to conform to current
period presentation.
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
For the Periods Ended March 31, 2004 and 2003
(in millions)
First Quarter
----------------------------
2004 2003
------------ ------------
(Unaudited)
Financing revenue
Operating leases $ 1,490 $ 2,004
Retail 1,175 1,115
Interest supplements and other support costs earned
from affiliated companies 825 906
Wholesale 239 196
Other 49 89
------------ ------------
Total financing revenue 3,778 4,310
Depreciation on operating leases (1,307) (2,128)
Interest expense (1,329) (1,519)
------------ ------------
Net financing margin 1,142 663
Other revenue
Investment and other income related to sales of receivables 549 891
Insurance premiums earned, net 60 64
Other income 225 257
------------ ------------
Total financing margin and revenue 1,976 1,875
Expenses
Operating expenses 551 584
Provision for credit losses 301 521
Insurance expenses 37 43
------------ ------------
Total expenses 889 1,148
------------ ------------
Income from continuing operations before income taxes 1,087 727
Provision for income taxes 398 284
------------ ------------
Income from continuing operations before minority interests 689 443
Minority interests in net income of subsidiaries - 1
------------ ------------
Income from continuing operations 689 442
Loss from discontinued/held-for-sale operations (1) -
------------ ------------
Net income $ 688 $ 442
============ ============
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)
March 31, December 31,
2004 2003
-------------- --------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 12,488 $ 15,688
Investments in securities 574 611
Finance receivables, net 108,109 108,912
Net investment in operating leases 22,008 23,164
Retained interest in securitized assets 13,369 13,017
Notes and accounts receivable from affiliated companies 1,871 1,653
Derivative financial instruments 7,588 9,866
Assets of discontinued and held-for-sale operations 377 388
Other assets 4,899 5,530
-------------- --------------
Total assets $ 171,283 $ 178,829
============== ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Accounts payable
Trade, customer deposits, and dealer reserves $ 1,537 $ 1,535
Affiliated companies 1,548 1,258
-------------- --------------
Total accounts payable 3,085 2,793
Debt 142,441 149,652
Deferred income taxes, net 6,760 6,334
Derivative financial instruments 962 987
Liabilities of discontinued and held-for-sale operations 36 37
Other liabilities and deferred income 5,706 6,533
-------------- --------------
Total liabilities 158,990 166,336
Minority interests in net assets of subsidiaries 11 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 440 420
Retained earnings 6,700 6,912
-------------- --------------
Total stockholder's equity 12,282 12,474
-------------- --------------
Total liabilities and stockholder's equity $ 171,283 $ 178,829
============== ==============
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 March 31, 2004 and 2003
(in millions)
First Quarter
---------------------------
2004 2003
------------- -------------
(Unaudited)
Cash flows from operating activities
Income from continuing operations $ 688 $ 442
Adjustments to reconcile income from continuing operations
to net cash provided by operating activities:
Provision for credit losses 301 521
Depreciation and amortization 1,415 2,563
Gain on sales of finance receivables (61) (233)
Increase in deferred income taxes 396 228
Decrease in other assets 2,795 683
(Decrease)/increase in other liabilities (357) 351
All other operating activities (53) (11)
----------- -----------
Net cash provided by operating activities 5,124 4,544
----------- -----------
Cash flows from investing activities
Purchase of finance receivables (other than wholesale) (11,260) (12,231)
Collection of finance receivables (other than wholesale) 9,277 7,996
Purchase of operating lease vehicles (2,661) (2,538)
Liquidation of operating lease vehicles 2,101 2,617
Net change in wholesale receivables (155) (1,690)
Net change in retained interest (1,248) (1,034)
Net change in notes receivable with affiliates (24) 26
Proceeds from sales of receivables 3,248 10,966
Purchase of investment securities (147) (145)
Proceeds from sale/maturity of investment securities 192 204
Proceeds from debt repayments related to discontinued operations - 1,421
All other investing activities (20) 133
----------- -----------
Net cash (used in)/provided by investing activities (697) 5,725
----------- -----------
Cash flows from financing activities
Proceeds from issuance of long-term debt 3,414 3,701
Principal payments on long-term debt (12,354) (8,005)
Net change in short-term debt 2,257 (148)
Cash dividends paid (900) (1,000)
All other financing activities - (1)
----------- -----------
Net cash used in financing activities (7,583) (5,453)
Effect of exchange rate changes on cash and cash equivalents (44) 69
----------- -----------
Net change in cash and cash equivalents (3,200) 4,885
Cash and cash equivalents, beginning of period 15,688 6,793
----------- -----------
Cash and cash equivalents, end of period $ 12,488 $ 11,678
=========== ===========
Supplementary cash flow information
Interest paid $ 1,622 $ 2,796
Taxes paid ` 29 177
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. FINANCE RECEIVABLES
Net finance receivables at March 31, 2004 and December 31, 2003 were as
follows (in millions):
March 31, December 31,
2004 2003
-------------- --------------
(Unaudited)
Retail (a) $ 79,598 $ 80,015
Wholesale (b) 22,519 22,618
Other (c) 8,308 8,661
-------------- --------------
Total finance receivables, net of unearned income 110,425 111,294
Less: Allowance for credit losses (2,316) (2,382)
-------------- --------------
Finance receivables, net $ 108,109 $ 108,912
============== ==============
(a) At March 31, 2004 and December 31, 2003, includes about $12.9 billion
and $14.3 billion, respectively, of retail receivables that have been
sold for legal purposes to securitization special purpose entities
("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 March 31, 2004 and December 31, 2003, includes approximately
$800 million of wholesale receivables with dealers that are reported as
consolidated subsidiaries of Ford effective July 1, 2003. Ford generally
does not guarantee these receivables.
(c) At March 31, 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.
NOTE 2. SALES OF RECEIVABLES
Retained Interest
Components of retained interest in receivables sold in securitization
transactions at March 31, 2004 and December 31, 2003 were as follows (in
millions):
March 31, December 31,
2004 2003
------------ ------------
(Unaudited)
Wholesale receivables sold to securitization entities $ 9,958 $ 9,249
Subordinated securities 1,460 1,568
Interest-only strips 1,135 1,169
Restricted cash held for benefit of securitization entities 527 511
Senior securities 289 520
------------ ------------
Retained interest in securitized assets $ 13,369 $ 13,017
============ ============
-4-
ITEM 1. FINANCIAL STATEMENTS (Continued)
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
Most of the retained interest in sold wholesale receivables ($8.6 billion
and $8.0 billion at March 31, 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.
Retained interests are recorded at fair value. For wholesale receivables,
book value approximates fair value because of their short-term maturities. The
fair value 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 quarters
ended March 31, 2004 and 2003 (in millions):
First Quarter
--------------------
2004 2003
--------- ----------
(Unaudited)
Net gain on sales of receivables $ 61 $ 233
Interest income on sold wholesale receivables
and retained securities 139 210
Servicing fees 119 197
Excess spread and other 230 251
--------- ----------
Total investment income related to sales of receivables $ 549 $ 891
========= ==========
FCAR Owner Trust
We use a special purpose trust, FCAR Owner Trust ("FCAR"), as a source of
funds for our operations. FCAR's activities are limited to issuing asset-backed
commercial paper and other securities, borrowings from banks, and buying
highly-rated asset-backed securities issued by SPEs sponsored by us.
At March 31, 2004, about $12.4 billion of retail installment receivables
reported on our balance sheet have been sold for legal purposes to our sponsored
securitization SPEs that sell asset-backed securities to FCAR and are available
only to pay securitization investors and other participants and are not
available to pay our obligations or the claims of our creditors. At March 31,
2004, these finance receivables supported $10.2 billion of asset-backed
commercial paper issued by FCAR, which is payable solely out of collections on
these receivables and is not our legal obligation; however, for financial
statement reporting purposes, the outstanding asset-backed commercial paper
issued by FCAR is reported as debt on our balance sheet. At March 31, 2004, FCAR
had capacity to externally issue approximately $700 million of asset-backed
commercial paper, based on the existing amount of retail installment receivables
that supported the program.
-5-
ITEM 1. FINANCIAL STATEMENTS (Continued)
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 3. DEBT
Debt at March 31, 2004 and December 31, 2003 was as follows (in millions):
Interest Rates
----------------------------------
Average Weighted-
Contractual (a) Average (b) March 31, December 31,
----------------- ----------------
2004 2003 2004 2003 2004 2003
------- -------- ------ -------- ------------ -------------
(Unaudited)
Short-term debt
Commercial paper 1.5% 1.9% $ 6,761 $ 6,095
Asset-backed commercial paper (c) 1.1% 1.2% 10,176 8,984
Floating rate demand notes 2.4% 2.8% 7,703 7,328
Other short-term debt (d) 5.2% 5.9% 2,289 2,290
------------ -------------
Total short-term debt 1.9% 2.3% 2.3% 2.5% 26,929 24,697
------------ -------------
Long-term debt
Senior indebtedness
Notes payable within one year (e) 31,745 29,534
Notes payable after one year (f) 83,832 95,474
Unamortized discount (65) (53)
------------ -------------
Total long-term debt (g) 5.8% 5.8% 4.1% 4.2% 115,512 124,955
------------ -------------
Total debt 5.1% 5.2% 3.7% 3.9% $ 142,441 $ 149,652
============ =============
(a) First Quarter 2004 and Fourth Quarter 2003 average contractual rates
excluding the effect of interest rate swap agreements.
(b) First 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 $68 million and $54 million with affiliated companies at March
31, 2004 and December 31, 2003, respectively.
(e) Includes $52 million and $2 million with affiliated companies at March
31, 2004 and December 31, 2003, respectively.
(f) Includes $54 million and $133 million with affiliated companies at March
31, 2004 and December 31, 2003, respectively. Also includes debt of $871
million at March 31, 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.
-6-
ITEM 1. FINANCIAL STATEMENTS (Continued)
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 4. VARIABLE INTEREST ENTITIES
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest Entities,
an Interpretation of ARB No. 51, which expands upon and strengthens existing
accounting guidance concerning when a company should include in its financial
statements the assets, liabilities and activities of another entity. In December
2003, the FASB issued FIN 46R, which revised FIN 46, in order to clarify the
provisions of the original interpretation. A Variable Interest Entity ("VIE")
does not share economic risks and rewards through typical equity ownership
arrangements; instead, contractual or other relationships re-distribute economic
risks and rewards among equity holders and other parties. 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. Effective July 1, 2003, we adopted
FIN 46 for VIEs formed prior to February 1, 2003. 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 $129 million at March 31, 2004) to any potential
losses associated with these VIEs is limited to our equity investments and,
where applicable, receivables due from the VIEs.
FCAR, discussed in Note 2 above, is also considered a VIE 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
March 31, 2004, these SPEs held about $5.4 billion of retail installment sale
contracts previously owned by us.
NOTE 5. RETAINED EARNINGS AND COMPREHENSIVE INCOME
The following table summarizes earnings retained for use in the business for
the quarters ended March 31, 2004 and 2003 (in millions):
First Quarter
--------------------------
2004 2003
----------- ----------
(Unaudited)
Balance at January 1 $ 6,912 $ 8,795
Net income 688 442
Dividends (900) (1,000)
----------- -----------
Balance at March 31 $ 6,700 $ 8,237
=========== ===========
The following table summarizes comprehensive income for the quarters ended
March 31, 2004 and 2003 (in millions):
First Quarter
--------------------------
2004 2003
----------- -----------
(Unaudited)
Net income $ 688 $ 442
Other comprehensive income 20 201
----------- -----------
Total comprehensive income $ 708 $ 643
=========== ===========
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 (net of related tax effects).
-7-
ITEM 1. FINANCIAL STATEMENTS (Continued)
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 6. GUARANTEES
On November 26, 2002, FASB issued Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. For certain guarantees issued
after December 31, 2002, FIN 45 requires a guarantor to recognize, upon issuance
of a guarantee, a liability for the fair value of the guarantee. The fair value
of guarantees and indemnifications issued since December 31, 2002 are recorded
in the financial statements at amounts that are not material.
At March 31, 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 the third party amounts paid by us under the guarantee.
However, our ability to enforce these rights is sometimes stayed until the
guaranteed party is paid in full. The maximum potential payments under these
guarantees total approximately $122 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 against 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 the
contract or by a third party claim. We regularly evaluate the probability of
having to incur costs associated with these indemnifications and have accrued
for expected losses that are probable. We are party to numerous indemnifications
and many of these indemnities do not limit potential payment; therefore, we are
unable to estimate a maximum amount of potential future payments that could
result from claims made under these indemnities.
-8-
ITEM 1. FINANCIAL STATEMENTS (Continued)
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 7. DERIVATIVE FINANCIAL INSTRUMENTS
We adopted 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. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and requires
that all derivatives be recorded at fair value on the balance sheet, including
embedded derivatives.
Income Statement Impact
The following table presents 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):
First Quarter
--------------------
2004 2003
------- -------
(Unaudited)
Income before income taxes $ 47 $ 21
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 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):
March 31, 2004 December 31, 2003
--------------------------- ----------------------------
Fair Value Fair Value Fair Value Fair Value
Assets Liabilities Assets Liabilities
------------ ------------- ------------- -------------
(Unaudited)
Foreign currency swaps $ 3,813 $ 969 $ 6,257 $ 1,119
Interest rate swaps 4,052 270 3,930 213
Foreign currency forwards and options - - 24 -
Impact of netting agreements (277) (277) (345) (345)
------------ ------------ ------------- ------------
Total derivative financial instruments $ 7,588 $ 962 $ 9,866 $ 987
============ ============ ============= ============
-9-
ITEM 1. FINANCIAL STATEMENTS (Continued)
FORD MOTOR CREDIT COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 8. 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 SFAS No. 133. 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 with the current year presentation, primarily
reflecting allocations of previously unallocated gross revenue and finance
receivables.
Key operating data for our operating segments for the quarters ended
March 31 were as follows (in millions):
Unallocated/Eliminations
-------------------------------------
North Unallocated Effect of Ford Credit
America International Risk Sales of Financial
Segment Segment Management Receivables Total Statements
---------- --------------- ----------- ----------- ------------ ------------
(Unaudited)
2004
- ----
Revenue $ 4,045 $ 964 $ 47 $ (444) $ (397) $ 4,612
Income
Income before income taxes 814 226 47 - 47 1,087
Provision for income taxes 302 79 17 - 17 398
Income from continuing operations 512 147 30 - 30 689
Other Disclosures
Depreciation on operating leases 1,201 106 - - - 1,307
Interest expense 1,138 460 - (269) (269) 1,329
Provision for credit losses 260 41 - - - 301
Finance receivables (including net 138,362 39,716 447 (48,408) (47,961) 130,117
(investment in operating leases)
Total assets 160,865 45,010 447 (35,039) (34,592) 171,283
2003
- ----
Revenue $ 5,118 $ 917 $ 28 $ (541) $ (513) $ 5,522
Income
Income before income taxes 552 154 21 - 21 727
Provision for income taxes 224 54 6 - 6 284
Income from continuing operations 328 100 14 - 14 442
Other Disclosures
Depreciation on operating leases 1,994 134 - - - 2,128
Interest expense 1,574 420 7 (482) (475) 1,519
Provision for credit losses 473 48 - - - 521
Finance receivables (including net 154,783 36,852 684 (73,242) (72,558) 119,077
(investment in operating leases)
Total assets 180,833 39,384 684 (55,149) (54,465) 165,752
-10-
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. We provide vehicle and dealer financing in 36 countries to
nearly 11 million customers and more than 12,500 automotive dealers. 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. These operations primarily offer our financing products and services to
and through Ford, Lincoln, Mercury, Mazda, Jaguar, Land Rover, Volvo and Aston
Martin brand dealers. Our International Segment includes our operations in all
other countries in which we do business directly and indirectly. The Ford Credit
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 credit losses, 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 SFAS No. 133 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 8 of our Notes to Financial Statements.
-11-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations
First Quarter 2004 Compared with First Quarter 2003
In the first quarter of 2004, we earned $688 million, up $246 million or 56%
compared with earnings of $442 million a year ago. Our consolidated pre-tax
income from continuing operations was $1,087 million, up $360 million or 50%
from earnings of $727 million a year ago. The increase in earnings resulted
primarily from improved credit loss performance, higher auction values for used
vehicles, and the favorable impact of the low interest rate environment, offset
partially by the impact of lower off-balance sheet securitizations and
whole-loan sale transactions.
Results of our operations by business segment for the first quarter of 2004
and 2003 are shown below:
First Quarter
--------------------------------------------------
2004 Over/
(Under) 2003
-----------------------
2004 2003 Amount Percentage
--------- --------- ---------- ------------
(in millions)
Income before income taxes
North America Segment ........................... $ 814 $ 552 $ 262 47%
International Segment............................ 226 154 72 47
Unallocated/eliminations ........................ 47 21 26
---------- --------- ---------
Pre-tax income from continuing operations .... 1,087 727 360 50
Provision for income taxes and minority interests . (398) (285) 113
Loss from discontinued/held-for sale operations ... (1) 0 (1)
----------- ---------- ---------
Total net income ............................ $ 688 $ 442 $ 246 56%
=========== ========== =========
North America Segment income before income taxes in the first quarter of
2004 was up $262 million from the first quarter of 2003. This increase primarily
reflected improved margins, lower depreciation on operating leases and a lower
provision for credit losses offset partially by a reduction in income related to
off-balance sheet securitizations and whole-loan sale transactions. Improved
margins primarily reflected the favorable impact of the low interest rate
environment on our borrowing costs, while the decline in depreciation reflected
improved residual values and lower return rates. The reduction in credit losses
is described in more detail in the "Ford Credit U.S. Retail and Operating Lease"
section. The lower income related to off-balance sheet securitizations and
whole-loan sale transactions resulted from fewer sales and lower levels of sold
receivables outstanding compared with a year ago.
International Segment income before income taxes in the first quarter of
2004 was up $72 million from the first quarter of 2003. This increase primarily
reflected favorable changes in currency exchange rates in Europe and
Asia-Pacific and the sale of our full-service leasing portfolio in the United
Kingdom, which offered business lessees insurance and maintenance of vehicles in
conjunction with a vehicle lease.
Income before income taxes in the unallocated/eliminations category in the
first quarter of 2004 was up $26 million compared with the first quarter of
2003. The improvement primarily reflected the net favorable market valuation of
derivative instruments and associated exposures.
-12-
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:
First Quarter Full Year
---------------- -------------------------------
2004 2003 2003 2002 2001 2000
---- ---- ---- ---- ---- ----
(in thousands)
Worldwide
Retail installment.............. 636 678 2,805 3,215 4,441 3,728
Operating and finance leases.... 115 136 487 775 1,050 1,228
--- --- ----- ----- ----- -----
Total financing volume..... 751 814 3,292 3,990 5,491 4,956
=== === ===== ===== ===== =====
North America Segment
United States................... 428 472 1,980 2,512 3,819 3,525
Canada.......................... 36 42 197 212 227 210
--- --- ----- ----- ----- -----
Total North America Segment 464 514 2,177 2,724 4,046 3,735
International Segment
Europe.......................... 213 221 836 917 988 795
Other international............. 74 79 279 349 457 426
--- --- ----- ----- ----- -----
Total International Segment 287 300 1,115 1,266 1,445 1,221
--- --- ----- ----- ----- -----
Total financing volume..... 751 814 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:
First
Quarter Full Year
----------- ------------------------------
2004 2003 2003 2002 2001 2000
---- ---- ---- ---- ---- ----
United States
Financing share -- Ford, Lincoln and
Mercury
Retail installment and lease..... 38% 35% 39% 41% 54% 51%
Wholesale........................ 80 82 82 85 84 84
Europe
Financing share -- Ford
Retail installment and lease..... 28% 30% 31% 34% 37% 32%
Wholesale........................ 96 98 97 97 97 97
North America Segment
Our total financing contract placement volumes were 464,000 contracts in the
first quarter of 2004, down 50,000 contracts or 10% 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 38% in the first quarter of 2004 compared with 35% a year ago.
This increase primarily reflected our increase in Ford business not involving
Ford-sponsored special-rate financing programs, which we refer to as
non-subvened Ford business. Our increase in non-subvened Ford business was a
result of our additional marketing programs and competitive pricing actions
related to non-subvened Ford business.
International Segment
In the first quarter of 2004, our total financing contract placement volumes
were 287,000, down 13,000 contracts or 4% compared with a year ago, largely
reflecting lower contract volumes in Europe.
-13-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Financial Condition
Finance Receivables and Operating Leases
Our financial condition is impacted significantly by the level of our
receivables, which are shown below:
March 31, December 31,
--------------------------------------
Receivables 2004 2003 2002 2001 2000
------- ------- ------- ------- -------
(in billions)
On-Balance Sheet
(including on-balance sheet securitizations)
Finance receivables
Retail installment................. $ 77.4 $ 77.8 $ 68.4 $ 83.4 $ 79.9
Wholesale.......................... 22.4 22.5 16.4 15.4 33.7
Other.............................. 8.3 8.6 9.8 9.1 8.4
------- ------- ------- ------- -------
Total finance receivables, net.. 108.1 108.9 94.6 107.9 122.0
Net investment in operating leases.... 22.0 23.2 31.3 37.2 36.5
------- ------- ------- ------- -------
Total on-balance sheet.......... $ 130.1 $ 132.1 $ 125.9 $ 145.1 $ 158.5
======= ======= ======= ======= =======
Memo: Allowance for credit losses
included above $ 2.9 $ 3.0 $ 3.2 $ 2.8 $ 1.6
Securitized Off-Balance Sheet
Finance receivables
Retail installment................. $ 26.4 $ 29.1 $ 48.9 $ 41.2 $ 26.0
Wholesale.......................... 22.0 20.3 22.5 17.5 2.3
Other.............................. -- -- -- -- --
------- ------- ------- ------- -------
Total finance receivables....... 48.4 49.4 71.4 58.7 28.3
Net investment in operating leases.... -- -- -- -- 0.1
------- ------- ------- ------- -------
Total securitized off-balance
sheet....................... $ 48.4 $ 49.4 $ 71.4 $ 58.7 $ 28.4
======= ======= ======= ======= =======
Managed
Finance receivables
Retail installment................. $ 103.8 $ 106.9 $ 117.3 $ 124.6 $ 105.9
Wholesale.......................... 44.4 42.8 38.9 32.9 36.0
Other.............................. 8.3 8.6 9.8 9.1 8.4
------- ------- ------- ------- -------
Total finance receivables....... 156.5 158.3 166.0 166.6 150.3
Net investment in operating leases.... 22.0 23.2 31.3 37.2 36.6
------- ------- ------- ------- -------
Total managed................... $ 178.5 $ 181.5 $ 197.3 $ 203.8 $ 186.9
======= ======= ======= ======= =======
Serviced.............................. $ 184.9 $ 188.8 $ 202.3 $ 203.8 $ 186.9
On-Balance Sheet Receivables. On-balance sheet finance receivables and net
investment in operating leases, net of allowance for credit losses, at
March 31, 2004, were $130.1 billion, down $2 billion from year-end 2003. The
decrease primarily reflected the impact of lower lease and retail placement
volumes.
At March 31, 2004, on-balance sheet receivables included $12.9 billion 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 the obligations of Ford Credit or the claims of Ford Credit's
creditors.
Securitized Off-Balance Sheet Receivables. Total securitized off-balance
sheet receivables at March 31, 2004, were $48.4 billion, down $1 billion from
year-end 2003. The decrease primarily reflected the slower pace of off-balance
sheet securitizations.
Managed Receivables. Total managed receivables at March 31, 2004, were
$178.5 billion, down $3 billion from year-end 2003.
Serviced Receivables. Serviced receivables includes 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.
-14-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Credit Risk
Credit risk is the possibility of loss from a customer's 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.
Credit Loss Experience
Worldwide
The following table shows actual credit losses net of recoveries ("credit
losses") 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
credit losses divided by the average amount of net receivables outstanding for
the period, are shown for our on-balance sheet and managed portfolios.
First Quarter Full Year
---------------- -------------------------
2004 2003 2003 2002 2001
------- ------- ------- ------- -------
Credit Losses (in millions)
On-Balance Sheet
Retail installment and lease.................. $ 333 $ 493 $1,871 $2,292 $2,052
Wholesale..................................... 3 1 148 40 33
Other......................................... (1) (1) 25 30 24
------- ------- ------- ------- -------
Total on-balance sheet..................... 335 493 2,044 2,362 2,109
Reacquired Receivables (retail) ................. 25 -- 92 -- --
------- ------- ------- ------- -------
Total on-balance sheet (including reacquired $ 360 $ 493 $2,136 $2,362 $2,109
receivables) ................................ ======= ======= ======= ======= =======
Securitized Off-Balance Sheet
Retail installment and lease.................. $ 133 $ 193 $ 677 $ 448 $ 218
Wholesale..................................... -- -- -- 6 1
Other......................................... -- -- -- -- --
------- ------- ------- ------- -------
Total securitized off-balance sheet........ $ 133 $ 193 $ 677 $ 454 $ 219
======= ======= ======= ======= =======
Managed
Retail installment and lease.................. $ 491 $ 686 $2,640 $2,740 $2,270
Wholesale..................................... 3 1 148 46 34
Other......................................... (1) (1) 25 30 24
------- ------- ------- ------- -------
Total managed.............................. $ 493 $ 686 $2,813 $2,816 $2,328
======= ======= ======= ======= =======
Loss-to-Receivables Ratios
On-Balance Sheet (including reacquired receivables)*
Retail installment and lease.................. 1.44% 2.06% 1.97% 2.05% 1.74%
Wholesale..................................... 0.05 0.01 0.79 0.25 0.12
Total including other...................... 1.11% 1.61% 1.67% 1.72% 1.36%
Memo: On-Balance Sheet (excluding reacquired
receivables)............................... 1.03% 1.61% 1.60% 1.72% 1.36%
Managed
Retail installment and lease.................. 1.54% 1.91% 1.91% 1.73% 1.43%
Wholesale..................................... 0.03 0.01 0.37 0.13 0.10
Total including other...................... 1.10% 1.42% 1.50% 1.39% 1.19%
- - - - - -
* We believe that the use of the on-balance sheet loss-to-receivables ratio
that includes the credit losses on reacquired receivables is useful to our
investors because it provides a more complete presentation of our on-balance
sheet credit loss performance.
-15-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
First Quarter 2004 Compared with First Quarter 2003
Credit Losses -- On-Balance Sheet. In the first quarter of 2004, credit
losses for our on-balance sheet portfolio declined $158 million, or 32%, from a
year ago reflecting improved loss performance in our U.S. retail installment and
operating lease portfolio resulting from lower repossessions and lower average
loss per repossession. Lower on-balance sheet receivables at Fairlane Credit,
LLC ("Fairlane Credit") and Triad Financial Corporation ("Triad"), which
purchase primarily sub-prime finance contracts, also contributed to the decline
in credit losses. Our on-balance sheet loss-to-receivables ratio in the first
quarter of 2004 was 1.11%, down from 1.61% in 2003, reflecting improvements in
our credit loss performance.
Credit Losses -- Securitized Off-Balance Sheet. In the first quarter of
2004, credit losses for our securitized off-balance sheet portfolio decreased
$60 million, or 31% from a year ago, reflecting primarily improved loss
performance in our U.S. retail installment receivables and an overall lower
level of securitized receivables resulting from lower securitization volumes in
the last year.
Credit Losses -- Managed. In the first quarter of 2004, credit losses for
our managed portfolio decreased $193 million, or 28% 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 1.10%, down from 1.42% 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 March 31, 2004.
First Quarter Full Year
----------------- ---------------------------------------
2004 2003 2003 2002 2001 2000
------- ------- ------- ------- ------- -------
On-Balance Sheet
Credit losses (in millions) ................ $ 203 $ 258 $ 1,088 $ 1,180 $ 1,135 $ 806
Loss-to-receivables ratios ................. 1.49% 2.10% 2.04% 1.87% 1.61% 1.12%
Managed
Credit losses (in millions) ................ $ 269 $ 401 $ 1,530 $ 1,520 $ 1,304 $ 865
Loss-to-receivables ratios ................. 1.51% 1.85% 1.89% 1.50% 1.31% 0.98%
Other Metrics -- Serviced
Repossessions (in thousands) .............. 46 51 200 199 174 141
Repossession ratios ....................... 3.24% 3.12% 3.27% 2.79% 2.45% 2.19%
Average loss per repossession.............. $ 6,750 $ 7,500 $ 7,350 $ 6,960 $ 6,600 $ 5,800
New bankruptcy filings (in thousands) ..... 23 28 107 118 91 71
Over-60-day delinquency ratios............. 0.21% 0.42% 0.35% 0.36% 0.40% 0.30%
On-Balance Sheet. Credit losses declined $55 million in the first 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 first quarter. In addition,
lower lease-end termination volumes have contributed to higher used vehicle
prices, reducing the average loss per repossession.
Managed. Credit losses declined $132 million compared with a year ago,
reflecting our improved loss performance 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. While our total number of
repossessions decreased 5,000 units compared with a year ago, our repossession
ratio increased 12 basis points reflecting about a 14% reduction in the average
number of outstanding contracts compared with 2003. In the first quarter of
2004, our average loss per repossession was $6,750, down $750 per unit or 10%
from a year ago.
-16-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
In the first quarter of 2004, the over-60-day delinquency ratio was 0.21%,
down from 0.42% 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:
March 31, December 31,
---------------------------------
2004 2003 2002 2001 2000
--------- ------ ------ ------ ------
(in billions)
Allowance for Credit Losses
Retail installment and lease............. $ 2.8 $ 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... $ 2.9 $ 3.0 $ 3.2 $ 2.8 $ 1.6
=== === === === ===
As a Percentage of End-of-Period Net
Receivables
Retail installment and lease............. 2.79% 2.76% 2.92% 2.10% 1.28%
Wholesale................................ 0.48 0.71 1.36 1.03 0.37
Other.................................... 0.55 0.67 0.62 0.66 0.24
Total............................... 2.25% 2.28% 2.52% 1.89% 1.03%
At March 31, 2004, our allowance for credit losses was down about
$100 million compared with year-end 2003, reflecting primarily lower receivables
in our Triad and Fairlane Credit portfolios, and improving portfolio
performance, especially in the United States.
-17-
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
("RCO") 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 91% of our
total net investment in operating leases at March 31, 2004:
First Quarter Full Year
----------------------- ------------------------------------------
2004 2003 2003 2002 2001 2000
---------- ---------- ------ ------ ------ ------
Placement Volume (in thousands)
Ford, Lincoln and Mercury Cars..... 12 19 57 104 163 205
Ford, Lincoln and Mercury Trucks.. 44 42 144 261 408 538
Jaguar, Land Rover and Volvo*...... 10 9 48 95 90 53
Other.............................. 9 2 25 9 17 23
-- -- --- --- --- ---
Total North America Segment..... 75 72 274 469 678 819
== == === === === ===
Termination Volume (in thousands)
Ford, Lincoln and Mercury Cars..... 35 50 167 169 151 154
Ford, Lincoln and Mercury Trucks... 73 117 412 486 366 360
Jaguar, Land Rover and Volvo*...... 12 12 55 48 34 28
Other.............................. 4 5 20 34 80 87
-- -- --- --- --- ---
Total North America Segment..... 124 184 654 737 631 629
=== === === === === ===
Return Rate
Ford, Lincoln and Mercury Cars..... 79% 80% 78% 62% 58% 62%
Ford, Lincoln and Mercury Trucks... 57 70 65 66 66 63
Jaguar, Land Rover and Volvo*...... 61 53 54 43 45 51
Other.............................. 54 55 55 50 60 69
Total North America Segment..... 64% 71% 69% 63% 62% 63%
----------
* We first reported placement volumes for Land Rover in 2001.
In the first quarter of 2004, placement volumes were up 3,000 units compared
with a year ago. Termination volumes were down 60,000 units compared with a year
ago, largely related to lower contract placement volumes in 2001 and 2002. In
the first quarter of 2004, return rates were down seven percentage points
compared with a year ago, reflecting primarily higher residual values, lower
contract lease-end values and lower termination volumes. Specifically, the
return rate improvement largely was related to Ford, Lincoln and Mercury trucks,
as the residual values of this segment improved more significantly than the
other vehicle segments. As the economy continues to improve and termination
volumes continue to decline, we expect continued stabilization in residual
values. As a result, we expect return rates to remain constant or decline in
2004.
-18-
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 April 2004, Moody's and DBRS, and in May 2004, S & P, each confirmed our
long - and short-term debt ratings, and their outlook or trend. Also in May
2004, Fitch affirmed our long - and short-term debt ratings, and revised the
outlook to stable from negative. The following chart summarizes our credit
ratings and the outlook assigned by the NRSROs since 2001:
DBRS* Fitch Moody's S&P
- --------- -------------------------------- ------------------------ ----------------------- ------------------------
Short- Long- Short- Long- Short- Long- Short-
Date Long-Term Term Trend Term Term Outlook Term Term Outlook Term Term Outlook
- --------- ------------------------------- ------------------------ ----------------------- ------------------------
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
-19-
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:
March 31, December 31,
------------------------------------------
2004 2003 2002 2001 2000
--------- ------ ------ ------ -------
(in billions)
Debt
Commercial paper--unsecured............... $ 6.8 $ 6.1 $ 8.2 $ 15.7 $ 42.3
Asset-backed commercial paper (FCAR)...... 10.2 9.0 -- -- --
Floating rate demand notes................ 7.7 7.3 5.1 4.0 3.7
Other short-term debt..................... 2.2 2.3 2.9 2.9 3.9
-------- -------- ------- -------- -------
Total short-term debt................... 26.9 24.7 16.2 22.6 49.9
Long-term debt (including notes
payable within one year).................. 115.5 125.0 124.1 123.2 95.7
-------- -------- ------- -------- -------
Total debt.............................. 142.4 149.7 140.3 145.8 145.6
Securitized Off-Balance Sheet Funding
Securitized off-balance sheet portfolio... 48.4 49.4 71.4 58.7 28.4
Retained interest......................... (13.4) (13.0) (17.6) (12.5) (3.7)
-------- -------- ------- -------- -------
Total securitized off-balance sheet
funding................................. 35.0 36.4 53.8 46.2 24.7
-------- -------- ------- -------- -------
Total debt plus securitized off-balance
sheet funding........................... $ 177.4 $ 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.................................... > 100% > 100% > 100% > 100% 57%
Securitized funding to managed
receivables.............................. 25 25 27 23 13
Short-term debt and notes payable within
one year to total debt................... 41 36 28 30 43
Short-term debt and notes payable within
one year to total capitalization......... 38 33 25 28 40
At March 31, 2004, unsecured commercial paper was up $700 million compared
with year-end 2003, reflecting increased investor demand. At March 31, 2004,
total debt plus securitized off-balance sheet funding was down $8.7 billion
compared with year-end 2003, reflecting repayment of debt maturing in the first
quarter 2004 and lower asset levels, which reduced our funding needs.
During the first quarter of 2004, we issued $3.4 billion of long-term debt
with maturities of one to 10 years, including $1.4 billion of unsecured
institutional funding, $1.3 billion of unsecured retail bonds, about
$500 million of on-balance sheet securitizations and about $200 million of
other long-term debt.
We expect our full-year 2004 public term funding requirements to be between
$16 billion and $22 billion. In the first quarter of 2004, we completed about
$3 billion of public term funding transactions, or 14% to 19% of our full-year
requirements.
-20-
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. 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 March 31, 2004, our cash and cash equivalents
totaled $12.5 billion, compared with $15.7 billion at the end of 2003, down
$3.2 billion primarily reflecting first quarter 2004 debt maturities greater
than new debt issuance. 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. This is an extremely liquid funding source, as
we are able to access funds in two days. These agreements have varying maturity
dates between June 24, 2004 and October 29, 2004 and, in the past, have been
renewed on an annual basis. As of March 31, 2004, we had utilized approximately
$4.5 billion of these 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 levels. None of these arrangements may be terminated based
on a change in our credit rating.
-21-
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:
March 31, December 31,
------------------- -------------------------------------
2004 2003 2003 2002 2001 2000
------- -------- -------- ------- ------- -------
(in billions)
Back-up Credit Facilities
Ford Credit.................................. $ 4.4 $ 8.8 $ 4.3 $ 8.6 $ 9.0 $ 20.0
FCE.......................................... 3.4 5.2 3.4 5.3 4.6 4.7
Ford bank lines (available at Ford's option) 6.8 7.1 6.8 7.6 8.4 8.4
Asset-backed commercial paper lines.......... 18.6 13.6 18.6 13.6 12.5 1.4
------- ------- ------- ------- ------- -------
Total back-up facilities............... 33.2 34.7 33.1 35.1 34.5 34.5
Drawn amounts................................ (1.2) (0.8) (1.0) (0.9) (0.7) (0.9)
------- ------- ------- ------- ------- -------
Total available back-up facilities..... $ 32.0 $ 33.9 $ 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
$7.8 billion at March 31, 2004. This includes $3.3 billion and $3.2 billion of
global credit facilities at Ford Credit and FCE, respectively, and $1.3 billion
of non-global credit facilities with varying terms that support local financing
needs. Approximately $1.2 billion of our total facilities were in use at March
31, 2004. These facilities have various maturity dates. Of the $7.8 billion,
about 44% of these facilities are committed through June 30, 2008. 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 $6.8 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 $543 million
to FCE.
Additionally, at March 31, 2004, banks provided $18.6 billion of
contractually committed liquidity facilities that supported two asset-backed
commercial paper programs; $18.2 billion supported FCAR 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 March 31, 2004, about $16.3 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.
-22-
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:
First Quarter Full Year
-------------------- -----------------------------------------
2004 2003 2003 2002 2001 2000
-------- -------- ------ ------ ------ ------
(in billions)
Net Proceeds from Receivable Sales
North America Segment
Public retail............................... $ -- $ 5.7 $ 5.7 $ 15.5 $ 16.6 $ 18.8
Conduit..................................... 0.7 0.6 1.8 2.5 6.2 --
Triad....................................... 0.6 0.8 1.7 1.1 -- --
Motown NotesSM program...................... 1.0 1.0 1.0 4.8 -- --
FCAR........................................ -- -- -- 8.3 12.1 --
Public wholesale............................ -- -- -- -- 5.0 --
Canada and other............................ -- -- 1.4 1.2 -- --
------- ------- ------- -------- -------- -------
Total North America Segment............... 2.3 8.1 11.6 33.4 39.9 18.8
International Segment
Europe
Public..................................... 0.4 0.4 1.5 2.2 0.7 0.7
Conduit.................................... 0.1 -- 1.1 0.3 -- --
------- ------- ------- -------- -------- -------
Total Europe.............................. 0.5 0.4 2.6 2.5 0.7 0.7
Asia Pacific................................ 0.4 0.5 0.9 0.5 0.2 --
Latin America............................... -- -- 0.6 -- -- --
------- ------- ------- -------- -------- -------
Total International Segment............... 0.9 0.9 4.1 3.0 0.9 0.7
------- ------- ------- -------- -------- -------
Net proceeds............................ 3.2 9.0 15.7 36.4 40.8 19.5
Whole-loan sales........................... -- 2.0 5.4 4.9 -- --
------- ------- ------- -------- -------- -------
Total net proceeds...................... 3.2 11.0 21.1 41.3 40.8 19.5
Retained interest and other.................... (0.7) (0.4) 0.2 (0.6) 11.7 2.1
------- ------- ------- -------- -------- -------
Total receivables sold.................. 2.5 10.6 21.3 40.7 52.5 21.6
Prior period sold receivables, net of paydown
activity...................................... 52.3 69.0 35.4 35.6 6.2 6.8
------- ------- ------- -------- -------- -------
Total sold receivables outstanding at the
end of the relevant period............. $ 54.8 $ 79.6 $ 56.7 $ 76.3 $ 58.7 $ 28.4
======= ======= ======= ======== ======== =======
At March 31, 2004, outstanding sold receivables totaled $54.8 billion, down
$24.8 billion or 31% compared with a year ago. This decrease primarily reflected
lower funding requirements and the on-balance sheet reporting of receivables,
beginning in the second quarter of 2003, that supported our FCAR asset-backed
commercial paper program. The amount of receivables sold in the first quarter of
2004 was $2.5 billion, down $8.1 billion from the first quarter of 2003,
reflecting our lower funding requirements.
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:
First Quarter Full Year
-------------------------- ---------------------------------------------------
Receivable Type 2004 2003 2003 2002 2001 2000
- --------------------------- ------------ ----------- ------------ ----------- ----------- ----------
(in billions)
Retail....................... $ 2.2 $ 8.0 $ 14.7 $ 31.6 $ 32.3 $ 19.2
Wholesale.................... 1.0 1.0 1.0 4.8 8.5 0.3
----------- ---------- ---------- --------- ---------- ---------
Net proceeds............... 3.2 9.0 15.7 36.4 40.8 19.5
Whole-loan................... -- 2.0 5.4 4.9 -- --
----------- ---------- ---------- --------- ---------- ---------
Total net proceeds...... $ 3.2 $ 11.0 $ 21.1 $ 41.3 $ 40.8 $ 19.5
=========== ========== ========== ========= ========== =========
-23-
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 or loss on sales of finance receivables,
o Servicing fee income from sold receivables that we continue to service,
o Interest income from retained securities, including from our undivided
interest in wholesale receivables, and
o Excess spread and other income.
The following table summarizes the activity related to the off-balance sheet
sales of receivables reported in "Investment and other income related to sales
of receivables" for the periods indicated:
First Quarter Full-Year
----------------------- --------------------------------------------
2004 2003 2003 2002 2001 2000
---------- ---------- --------- ---------- ---------- ----------
(in millions)
Net gain on sales of receivables............ $ 61 $ 233 $ 436 $ 529 $ 412 $ 14
Servicing fees.............................. 119 197 677 700 456 190
Interest income from retained securities.... 139 210 679 606 379 152
Excess spread and other..................... 230 251 973 775 186 201
---------- ---------- ---------- ---------- ---------- ----------
Investment and other income related to
sales of receivables.................... 549 891 2,765 2,610 1,433 557
Less: Whole-loan income..................... (24) (61) (234) (79) -- --
---------- ---------- ---------- ---------- ---------- ----------
Income related to off-balance sheet
securitizations......................... $ 525 $ 830 $ 2,531 $ 2,531 $ 1,433 $ 557
========== ========== ========== ========== ========== ==========
Memo:
Finance receivables sold.................. $ 2,452 $ 10,582 $ 21,321 $ 40,712 $ 52,533 $ 21,618
Servicing portfolio as of period-end...... 54,807 79,609 56,705 76,346 58,748 28,366
Pre-tax gain per dollar of retail
receivables sold......................... 2.5% 2.2% 2.0% 1.4% 1.2% 0.1%
Investment and other income related to sales of receivables decreased
$342 million or 38% compared with a year ago. Lower gains in the first quarter
of 2004 resulted from lower amounts of retail finance receivables sold, down
about $8 billion compared with the first quarter of 2003, reflecting primarily
our lower funding requirements. Lower amounts of other receivables sales income
primarily reflected lower levels of outstanding sold receivables compared with a
year ago. Outstanding sold receivables declined about $25 billion reflecting
primarily lower funding requirements and the re-acquisition of FCAR receivables.
Excluding the effects of whole-loan sale transactions, which totaled
$10.4 billion in the 2002-2003 period, off-balance sheet securitization income
declined $305 million compared with 2003.
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.
-24-
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 had we reported them as on-balance sheet
and funded them through asset-backed financings for the periods indicated:
First Quarter Full-Year
------------------------ ----------------------------------------------
2004 2003 2003 2002 2001 2000
---------- ---------- ---------- --------- ----------- ---------
(in millions)
Financing revenue
Retail revenue.................... $ 702 $ 1,079 $ 3,580 $ 4,040 $ 2,954 $ 1,622
Wholesale revenue................. 267 292 1,080 1,101 499 384
---------- ---------- ---------- ---------- ---------- ----------
Total financing revenue......... 969 1,371 4,660 5,141 3,453 2,006
Borrowing cost...................... (269) (482) (1,491) (2,205) (1,784) (1,242)
---------- ---------- ---------- ---------- ---------- ----------
Net financing margin............ 700 889 3,169 2,936 1,669 764
Credit losses....................... (133) (193) (677) (454) (219) (92)
---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes.... $ 567 $ 696 $ 2,492 $ 2,482 $ 1,450 $ 672
========== ========== ========== ========== ========== ==========
Memo:
Income related to off-balance sheet
securitizations.................... $ 525 $ 830 $ 2,531 $ 2,531 $ 1,433 $ 557
Recalendarization impact of
off-balance sheet securitizations.. $ (42) $ 134 $ 39 $ 49 $ (17) $ (115)
In the first quarter of 2004, the impact to earnings of off-balance sheet
securitizations was $42 million lower than had these transactions been
structured as on-balance sheet securitizations. This difference results 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.
-25-
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 determining 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
Total + Sheet - Sheet - and Cash - Adjustments
Debt Receivables Receivables Equivalents on Total Debt
Managed Leverage = __________________________________________________________________________
SFAS No.133
Equity + Minority - Adjustment
Interest on Equity
The following table shows the calculation of our financial statement
leverage:
March 31, December 31,
-----------------------------------
2004 2003 2002 2001 2000
--------- ------- ------- -------- -------
(in billions)
Total debt..................................... $ 142.4 $ 149.7 $ 140.3 $ 145.8 $ 145.6
Total stockholder's equity..................... 12.3 12.5 13.6 12.0 12.2
Debt-to-equity ratio (to 1).................... 11.6 12.0 10.3 12.2 11.9
At March 31, 2004, our financial statement leverage was 11.6 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:
March 31, December 31,
----------------------------------
2004 2003 2002 2001 2000
---------- -------- ------- ------- ---------
(in billions)
Total debt $ 142.4 $ 149.7 $ 140.3 $ 145.8 $ 145.6
Securitized off-balance sheet receivables
outstanding................................. 48.4 49.4 71.4 58.7 28.4
Retained interest in securitized off-balance
sheet receivables........................... (13.4) (13.0) (17.6) (12.5) (3.7)
Adjustments for cash and cash equivalents..... (12.5) (15.7) (6.8) (2.9) (1.1)
Adjustments for SFAS No. 133.................. (5.2) (4.7) (6.2) (2.1) --
--------- -------- ------- -------- --------
Total adjusted debt........................ $ 159.7 $ 165.7 $ 181.1 $ 187.0 $ 169.2
========= ======== ======= ======== ========
Total stockholder's equity (including minority
interest)................................... $ 12.3 $ 12.5 $ 13.6 $ 12.0 $ 12.2
Adjustments for SFAS No. 133.................. 0.2 0.2 0.5 0.6 --
--------- ------- ------- -------- --------
Total adjusted equity...................... $ 12.5 $ 12.7 $ 14.1 $ 12.6 $ 12.2
========= ======= ======= ======== ========
Managed debt-to-equity ratio (to 1)........... 12.8 13.0 12.8 14.8 13.9
-26-
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 credit
losses, 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 the 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 March 31, 2004, our managed leverage was 12.8 to 1, down from 13.0 to 1
at year-end 2003. Our dividend policy is based in part on our strategy to
maintain managed leverage at the lower end of the 13 - 14 to 1 range. As a
result of improved profitability and lower managed receivable levels, we paid a
dividend of $900 million in the first quarter 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.
-27-
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 Increased safety, emissions, fuel economy or other regulations resulting
in higher costs and/or sales restrictions;
o Work stoppages at key 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 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 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;
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;
-28-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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.
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 March 31, 2004, all else
constant, such an increase in interest rates would reduce our pre-tax net
interest income by approximately $155 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.
-29-
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Michael E. Bannister, our Chief Executive Officer, and David P. Cosper,
our Chief Financial Officer, 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
March 31, 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 March 31, 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
You can find additional information about Ford in Ford's Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 2004, which has been included
as an exhibit to this Report (without Exhibits or Financial Statements).
ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits: please refer to Exhibit Index on page 33
Instruments defining the rights of holders of certain issues of
long-term debt of Ford Credit have not been filed as exhibits to this Report
because the authorized principal amount of any one of such issues does not
exceed 10% of the total assets of Ford Credit. Ford Credit agrees to furnish a
copy of each of such instruments to the Commission upon request.
(b) Reports on Form 8-K
Ford Credit filed the following Current Reports on Form 8-K during the
quarter ended March 31, 2004:
Current Report on Form 8-K dated January 6, 2004 included information
relating to Ford's December 2003 U.S. sales results.
Current Report on Form 8-K dated January 9, 2004 included information
relating to Ford's 2004 financial milestones.
Current Report on Form 8-K dated January 22, 2004 included information
relating to Ford Credit's and Ford's fourth quarter 2003 financial results.
Current Report on Form 8-K dated February 4, 2004 included information
relating to Ford's January 2004 U.S. sales results.
Current Report on Form 8-K dated March 2, 2004 included information
relating to Ford's February 2004 U.S. sales results.
-30-
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)
Executive Vice President,
Chief Financial Officer and Treasurer
Date: May 10, 2004
-31-
REPORT OF INDEPENDENT ACCOUNTANTS
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 Subsidiaries as of March 31, 2004, and the related
consolidated statements of income and cash flows for each of the three-month
periods ended March 31, 2004 and 2003. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. 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 generally
accepted auditing standards, 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 auditing standards generally accepted
in the United States of America, the consolidated balance sheet as of
December 31, 2003, and the related consolidated statements of income,
stockholder's equity, and cash flows 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
April 21, 2004
-32-
FORD MOTOR CREDIT COMPANY
EXHIBIT INDEX
Designation Description Method of Filing
- --------------- --------------------------------- ---------------------
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,
Independent Accountants,
dated May 10, 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 Filed with this report
Exhibit 32.2 Section 1350 Certification of CFO Filed with this report
Exhibit 99 Items 2 and 4 of Part I and Items 1, Filed with this Report
2 and 6 of Part II of Ford Motor
Company's Quarterly Report on Form
10-Q for the quarterly period ended
March 31, 2004
-33-